Watch List: 7/31/09

The market continued to march higher this week. The Dow gained 78 points, a gain of 0.86%. My watch list now contains 9 companies compare to 11 of last week. Important introduction to this list is Pitney Bowes(PBI). The company fell 12% on Friday after announced earning of $0.55/share and the consensus was for $60/share. A missed of 8%. Read this post for some detail on the stock. Here are the companies on my watch list as of July 31, 2009.


Market Commentary

It has been an amazing market for those on the long side. The Dow Theory buy signal ,which not many investors follow, had given this market a run. With a big extension to the upside and a big overbought condition, many traders are beginning to build short positions. But Keynes once said "The market can stay irrational longer than you can stay solvent" and so the market could head higher, triggering the shorts to cover. It doesn't matter what the underlying fundamental are, we can't predict or explain the market's movement. The market is forward looking but human are typically backward looking.

Coppock Curve

The end of the month gives me an opportunity to revisit the Coppock Curve or Coppock Index. July was a strong month and my indicator rose 18.7 points to -357.8. Below are figures of the indicator since April 2009.

4/30/09: -386.0

5/31/09: -380.5 (change +5.6)

6/30/09: -376.5 (change +3.9)

7/31/09: -357.8 (change +18.7)

The buy signal was given at the end of May which mean you could buy on June 1st. Let's examine what happen if you did just that. The Dow was at 8,501 and is now 9,171. This is a good 7.8% move. I wrote about the changes at the end of May.

Recent Analysis and Commentary

Secular Bear: Understand the Market

Stock Checkup: Automatic Data Processing, Inc. (ADP)

I took a position in H&R Block this past week and would like to acquire Automatic Data Processing at the right price.

Art

Stock Checkup: Automatic Data Processing, Inc. (ADP)

I brought Automatic Data Processing (ADP) to your attention on July 15th. Since then, an important market development occurred. The Dow Theory confirmation gave us a buying signal on July 23rd. ADP was trading at $35 on the 15th. The price was a little to far from where I would like to acquire the shares for and thus I watch and wait for a better opportunity to buy. The market didn't give me a chance and I watch ADP rose above $37 and is currently trading north of $36. Some important elements developed in ADP charts and I'd like to share that with you.

If you look at the chart below, the red line is the 200-day moving average which I correlate it to a long-term trend. The blue line is the 50-day moving average which I correlate it to a medium-term trend. Two important things I would like to point out.

1.) The slope of the red line appears to be less steep to curving upward signify a change in the long-term trend from down to up.

2.) The blue line crossing red line or "golden cross" signify and change in momentum. Although this pattern happened back in August 2008, it occurred on the back of a downward 200-day moving average. This time around might be a change in direction.

As a result, I will be taking a position in ADP around $36. ADP is considered fair value at dividend yield above 2%, yield is currently at 3.5%. I retain my fair value of $52 and reiterate that it is a bargain below $41. This doesn't mean that I expect ADP to reach $52 in few days or weeks. My investment strategy simply allow me to buy shares of a company when I see that risk are limited.

Art

Secular Bear: Understand the Market

Over the past few months, I have been developing a thesis on the current market. With some research and knowledge of the Dow Theory, I've concluded that we are in a long-term or secular bear market. The current environment may feel like a bull market, but it is only a short-term or cyclical bull market. You can make good profit in this environment but you must be award of the changing tide that can occur abruptly.

The Decline and Rally

The market (Dow) reached a record high of 14,164 on October 9, 2007 and reached a low of 6,440 on March 9, 2009. A 50% retracement of this two number ([14,164 + 6,440]/2) is 10,300. That is my next Dow target for the rally. Right now, the rally have not even taken us to 38.2% (9,391) retracement level. You cannot call this a bull market just yet. Look closely at the chart below. After the Dow break below the 50% mark, it collapsed. Short-term picture is very bullish.

Historical Statistic

I've obtained this figure from Dow Theory letter #1320 published on June 21, 2001 (post dot-com bubble). It is an observation conducted by David Armstrong Poole of Briarcliff. This information will give you perspective on time and cycle.

The Dow from 1914 to 1929 was up 620% over 15 years.

The Dow from 1929 to 1949 was down 58% over 20 years.

The Dow from 1949 to 1966 was up 520% over 17 years.

The Dow from 1966 to 1982 was down 22% over 16 years.

The Dow from 1982 to 2000 was up 1400% over 16 years.

Mr. Poole estimated that the Dow will be down 30% from 2000 to 2016. The average cycle of down market is 16.8 years.

The Dow is currently down ~20% over 9 years.

Dow Theory Perspective

From the Dow Theory view, Richard Russell stated in his daily remark on July 23, 2009 that this past bull market expanded from 1980 to 2007, 27 years. Most bear markets tended to last from 1/3 to 1/2 as long as the preceding bull market. With this, you can almost calculate when bear market will end. 27/3 + 2007 = 2016.

Fundamental Perspective

Jeremy Grantham, well known institutional investors, gave an interview back in June 2009. The title is 'Seven Lean Years' Hypothesis. Seven years from now, it'll be 2016. How ironic.

Summary

If the preceding assumptions are to come true, the Dow true bottom should be in or around 2016. This doesn't mean you can't invest. Smart investors must understand the anatomy of the market and accept it. Invest in the market you have and not the one you want.

Art

Watch List: 7/24/09

This week market took me by surprise. The Dow rose 4%. My watch list shrank from 15 companies to 11 companies. Here are the companies on my watch list as of July 24, 2009.

The companies that are within 10% of the low offer a great opportunity.

Market Action

The biggest development was the Dow Theory confirmation that occurred on Thursday. The transport confirmed the Dow with a big move (see charts below).With this action, Richard Russell recommended people to buy Goldman Sachs (GS). I would suggest you buy either the name I recommend on this blog or the Dow index (DIA) or S&P 500 index (SPY).

Recent Analysis

On 7/22/09, I wrote something about the market now with comparison to the 80's. It also contains some information and important news on real estate. Also, I did a checkup on Carlisle (CSL) on the following day. It was a great position for those who followed my advice.

News & Video

California Pension Fund Hopes Riskier Bets Will Restore Its Health.

U.S. Home Vacancies Hit 18.7 Million on Bank Seizures

Signs of life in US housing market

Grantham: Value Matters in Everything

Art

Stock Checkup: Carlisle Companies Inc. (CSL)

I began my coverage of Carlisle Companies (CSL) on May 13, 2008 when the Dow closed at 12,832. My analysis of CSL may be a bit premature then, but I never give up on the stock. I revisit the stock again on April 2, 2009 and urged people to watch this stock closely and take a position at $18 or above $22. Sure enough, CSL broke above $22 and never look back. CSL closed today near $31 implying a 40% profit. I would like to revisit the charts of CSL so we can learn a thing or two about investing with help from charts and fundamentals.

April 2, 2009

Recap: I said to watch this stock and buy it near $18 or above $22

April 29, 2009

Recap: I bought the stock at $22.30. I also pointed out that underneath a trading range of 18 to 22, investors or institutions have been accumulating the stock. This is seen by the accumulation/distribution line below the price chart.

May 4, 2009

Recap: I sold the stock at $24 (8% profit) after holding it for 3 days! You can refer to the chart below where price hit $24.17 peak.

June 4, 2009

Recap: I re-entered at $21.80 as I have suggested on my previous blog "Although I closed my position, I will continue to monitor Carlisle closely and would like to re-purchase the stock near $22 or 2.8% yield (previous resistance)."

June 11, 2009

Recap: I actually sold my holding on June 5, 2009 at $24.54 and rolled that investment into another stock. I still have conviction in the name and did a check up on it.

June 19, 2009

Recap: I wrote about value and use CSL to compare to the Dow. Stock is still in great shape.

Today (July 23, 2009)

Carlisle reported their earning on July 22, 2009 and shares rose 13%. A follow-through today pushed the stock up close to $31. If you are holding on to the stock, I would suggest selling it and move your money into another undervalued name. Although the Dow Theory confirmation occurred today, the risk-reward has changed for CSL. Given my target entrance of $22, taking profit at $31 gives you a 40% gain excluding dividend. The chart below summarize the position.

How did I do compare to other? Let's compare Carlisle to Apple (AAPL), Goldman Sachs (GS), Bank of America (BAC), the Dow, and S&P 500.

CSL +43.88%

BAC +55.34%

GS +37.13%

AAPL +27.42%

S&P 500 +14.16%

Dow +13.13%

Even though BAC out performed CSL, CSL out performed everything else.

Worse case scenario

May 13, 2008 - You bought at $31, you would be breaking even or up fractionally (2.5%) because of the dividend. At the same time, if you buy the Dow index, you would be down 30%.

Summary

Carlisle has been in the dividend achiever list for 32 years, since 1977. Despite a crash in 1982, 2000, and 2008, it remains a high quality investment. Using technical analysis, I was able to make an educated guess that this stock has bottomed. Only time can tell if I am right. For now, I just gave you 40% profit.

Art

What Do People My Age Know About Hard Times? Nothing

People my age have been living a relatively easy life in comparison to our parents who lived through the currency crises in the 60s, oil crisis in 70s, and "the crash" in 87'. Many young professionals are able to purchase their first home with help from their parents along with historically low financing. My parents took out a 9% mortgage back in the 90s because of high inflation in the 70s (30yr mortgage was 17% then). The Dow sat at 852 around the time I was born (1981). Anyone born after 1981 lived through one of the largest and longest bull market ever. The bull market started in 1982 when dividend yield of the Dow stood at 6.1% and ended in 2000 when the industrial and the transport didn't confirm one another. Dividend yield dropped to 1.6%. My analysis is based on what I learn from Richard Russell, the author of the Dow Theory Letters. The chart below shows my life span in stock market term.

My parents lived through a different market. The market returned 280% in a 30 year span from 1950 to 1980. Investors could have earned the same return after 15 years because the market traded in range from 1965-1980. A new bull market started after 1980.

So what do I know about hard times? Nothing. I was born right into the beginning of a secular bull market. The point I am trying to make is that, many young investors are very bullish about this market without implication for the past. Ignoring the fact that the market can stay sideways for years may be costly in the long run.

The Housing Market and Mortgage-Backed Security

The housing market is in a very strange place. Unlike stock market, sellers of real estate can hold off the supply, wait until a higher price, and then move into the market. Banks foreclosed many properties in my area and are holding that inventory. Article by Diana Olick on 7/8/09 says it best, "Bank-owned Inventory: Move it!" Another article from WSJ tells the same story. I expect more supplies to come onto the market as price rise and banks are eager to dump their "performing" assets. Many experts predict that option arm (Alt-A) will be the next hurdle for the housing market. Read more about it here. Wells Fargo, now parent company of Wachovia, one of the largest writers of these loans, reported their earning today. The details are less than encouraging. Bad loans jumped 45% to $18.3 billion from the first quarter. If Wells Fargo can't modify these loans, we will see these properties come to the market as bank-owned.

The Federal Housing Administration (FHA) is gaining market share in the agency backed mortgage. They guaranteed nearly 186,000 mortgages in June, the most mortgages by the agency in 75 year history. My understanding is that as long as you have 3% for down payment and meet some standard, you are eligible for a loan. FHA is a source for low down payment mortgages. In return, borrowers pay higher monthly mortgage. FHA doesn't guarantee borrow against default and thus delinquent FHA loan rose in May to 7.42% from 6.47% one year ago. I don't have a positive view of FHA loan and see it as a government sponsored sub-prime loan. Read more about it here.

Could this be why Bill Gross, a managing director of the largest bond funds in the world, is selling mortgage-backed securities? The excerpt below was taken from Bloomberg.

"Gross has been selling mortgage-backed securities over the past few months after loading up on them last summer in the midst of the financial crisis, which started with the collapse of the U.S. property market in 2007. The meltdown triggered $1.51 trillion of writedowns and credit losses at banks and sent the global economy into its first recession since World War II. U.S. unemployment increased to 9.5 percent in June, the most since 1983."

In his latest July Investment Outlook, he suggested that "Investors should stress secure income offered by bonds and stable dividend-paying equities."

The chart below is a one year real estate investment trust (REIT) chart. I use this as a proxy for where we are in the housing market as a whole. I understand that real estates are location specific, but I've been hearing that since the market topped in 2007. Charts don't lie, people do. Let's listen to what this chart has to say.

There's a clear trading range for the housing index. Unfortunately, it is a downward range. If and when the market can break above the top blue line, I would be willing to say that the housing market has corrected. In my view, housing market escaped the "panic sell" mode. The next selling may be a result of long and high unemployment.

I wrote on February 17, 2009 about bear market. The second phase may be behind us. This recent rally could be the separation between the second and the third phase.

Art

Watch List: 7/17/09

It was the start of the new earning season and the Dow Jones Industrial Average was eager to move up. The DJIA opened at 8,146 and closed at 8,743. That's a 7.3% move for one week! My watch list went from 22 to 15 companies at the end this week. One of the worse performers was Abbott Lab (ABT) which fell 2% after profit slipped 2.6% as sales missed estimates. Here are the companies on my watch list as of July 17, 2009.

Market Action

The market (DJIA) is approaching a critical point. If the DJIA can break above the blue line, I would be more encouraged. Confirmation of the Dow Theory will be more convincing.

Next week will be an interesting week for the market.

Bear Market Correction

The last bull market started in 1982 and lasted until 2007, 25 years run. Based on Dow Theory, bear market runs about 1/3 of the preceding bull market. The market may continue to decline or stay side way. I believe the market will move side way until 2015. This doesn't mean you cannot invest.You may have to lower you expectation for the return and be willing to take profit when opportunities arise.

Recent Analysis

On July 15, 2009 I wrote about Automatic Data Processing (ADP). I said it was a buy under $41 but I would prefer to buy it at or near its yearly low. The stock is also on my watch list this week. It rallied about 5% this week and sitting 14% above the yearly low. Click here to read the article.

I said last week to be aware of your investment because the market appeared to be bearish. Obviously I was wrong with that assessment and the market rallied 7%. If both the industrial and transport can rally pass the blue line, I would recommend investors adding to their investment with the next upside target of 10,000.

Art

Stock to Watch: Automatic Data Processing, Inc. (ADP)

Automatic Data Processing (ADP) provides technology-based outsourcing solutions to employers. It operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. One of the major risk to their bottom line comes from auto dealer services division. In fiscal year 2008, 16% of their revenue came from that division. Some of their main competitors are Paychex (PAYX) and Administaff (ASF). ADP and PAYX are part of the dividend achiever. ADP has been there for 33 years and PAYX has been there for 20 years.

Fundamental Analysis

The table below shows a comparative analysis between the three companies.

My analysis shows ADP is undervalued when dividend yield reach 2% or higher. My conservative fair value is $52. Morningstar and Valueline has fair value at $51.

ADP is closest among the three companies to the 52 weeks low and that attracted my attention. After some analysis, I see that at $35, the stock is yielding 3.76%. As one of the dividend achievers since 1976, their prestige dividend record sets them apart from ASF and PAYX. Since 1993, ADP increased their dividend by 16% compound annually. As a result, if you invested $10,000 in ADP at its 52 week high in 1993 ($12.77), you would be sitting on a 10% yield or a yearly income of $1,000. Using a conservative scenario, if you purchased the stock at 52 week high in 1993 ($12.77) and sell it at 52 week low in 2009 ($32.03), you would have gained 150% profit excluding dividend. Including dividend, your $10,000 would be $27,140 or 171% gain. That is not bad considering 2000 and 2008 crash in the market.

Unemployment is one of the reasons the stock is deeply discounted. I took a look at 1982 when unemployment reached 10.8%. Shortly after, ADP reached its high of $2.50. How could this be? How can a company which deals directly with the employment market be reaching its peak corresponding to the peak in unemployment? The answer is, the stock discounted all the bad news. Please see the chart below.

Our employment is at 9.5% and I expect that figure to go higher. The stock at this price should have discounted most of the bad news. The dividend yield has never been this high. The same goes for payout ratio which sits at 56%. Based on the lowest analyst estimate, their earning should not fluctuate much so I am fairly confident that the dividend is safe. Another highlight is ADP strong balance sheet. Debt due in five years is $16.9 million. They hold $1.4 billion in cash. They reduced their debt level by 70% since 1999 (from $145.8 million to $45 million). Fundamentally, I believe ADP should be able to weather this downturn relatively better than their competitors and should come out of this with higher market share.

Technical

Immediate term (1 year), there are mixed signal in the chart. Bearish sign is from the chart trading below its 200 day MA. It's been unsuccessful at breaking and remaining above that trend line. The higher-low indicated by the blue line is a bullish pattern.

Longer term chart (5 years), shows a trading range from $34 and $42. Technical analysis shows a downside risk of $28.

Summary

I see ADP as a bargain below $41. Keynes once said "The market can stay irrational longer than you can stay solvent" and thus I must be very particular about my purchase. As a result, I wait until the stock is 10% within the yearly low.

Watch List: 7/10/09

The market is deciding which way to go. The Dow could be retracing but the S&P isn't confirming. At the end of the week, here are the stocks that I have on my watch list.

This list grew from 18 companies to 22 companies. The market action is telling me something. On the bright side, it could be a great time to accumulate. One of my favorite on the list this week is Automatic Data Processing (ADP). The stock is now within 10% above the low. I'll follow up with a research later in the week.

I'd like to check up on some stocks I considered to be the mainstream stock. Some may consider them as leading indicators to the consumers. The first company is Apple (AAPL). It is not stranger that Apple is one of the most innovative companies with great product lines. The stock is trading at 25x P/E and earned $5.56 over the past twelve months. The chart below shows the technical trading of Apple. This is a weekly chart going back three years.

The stock hit an all-time high during the Christmas shopping season in 2007. Since then, it is making a lower highs and lower lows. At $140, it is 30% below the high saw in 2007. Despite all the talk of bull market, the consumer is deleveraging. The red line trading band is showing a long-term down trend. Fundamentally, the company appears to be priced for perfection and trading at fair value of $140. Gross margin sits at 35%, a ten year high. How much more can Apple expand their margin is the next question investors must ask.

My next stock is Google (GOOG). I'll use Google as a proxy for corporations' spending on advertising. Trading at 30x is by no mean "cheap". With EPS of $13.68, no dividend, I have to wonder where all these money is going. With crazy cash on hand ($17.8 Billion) and no debt, the stock demands a premium. Microsoft, Google's competitor, also has no debt and $23 billion in cash. It is trading at half the price of 13x. Amazing value if you ask me. In addition, they also pay a nice 2% yield. Let's forget about Microsoft and focus on Google. I consider them to be one of the leading indicator for where out economy is going so let's take a look at what the chart is discounting. This is a weekly chart going back three years.

I drew a Fibonacci retracement and analyze how strong this rally is. From the peak to trough, the stock rallied back to the 38% line or $440. The 50% line or $494, is consider the tipping point for technical analysis. Coincidentally, Morningstar has Google fair value at $500 (based on research note on 4/17/09). If Google can rally pass 50% line, technically analysis suggests it is poised to rally up to its previous high of $723.

This chart shows Google trading in a similar pattern to Apple. It is a long-term downward trend. Because both stocks demand premium, I do not like it at this price.

Let's take a look at the stock that I do own, Cardinal Health (CAH). Fundamentally, the stock is trading at deep discount of 8x. Its debt level of $3.7 billion isn't good. Their cash level of $1.4 billion isn't going to cover it. The good thing is only $1.4 billion is due in five years. Because of that, it deserves this multiple. The chart tells a different story.

A three year weekly chart tells a different story. After reaching $74 in 2007, the stock hit a low of $29. 50% retracement is $51.7, Morningstar fair value is $52. More important than anything, the stock appears to stop going down. Everytime it fell to $27 range, buyers stepped in and purchase. Below is a daily, one year chart.

The blue trading range is what attracts me to the stock besides the discounted price. Both long-term and intermediate-term is telling me to get bullish.

One again, the market is turning bearish. I be award of adding to the market right now. If you invest in mutual funds or ETFs, be aware of your investment.

Art

Minimum Wage Law: Get Rid of It

Starting July 24th 2009, 29 states will raise their minimum wage floor from $6.55 to $7.25. That is a 10.7% rise in income for some. But for some, it will mean pink-slip. While jobless rate is rising and pay-cuts are spreading, government best strategy to increase wages is to raise the minimum wage. This is going to put tremendous pressure on corporations which are already facing the biggest headwind since the great depression.

Matt Goldberg, a staff attorney at the Legal Aid Center, stated that "Higher wages increase worker productivity, reduce costly turnover and reduce dependence on government assistance" I reckoned this is true. Instead of higher wages increase worker productivity, it should be productivity that leads to higher wages. In a free market economy, there would not be wage ceiling or floor. Business owners and workers would determine their own wages and costs. I truly believe that minimum wage can make workers less productive. Think about it, why would you work harder if you know that next year, you will receive a raise because the government.

The Fair Labor Standards Act first set a national minimum wage in 1938. It set out to assure "the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers." I believe most efficient way to determine wage is to allow the market to adjust. Minimum wage did not lead to increase in standard of living. Better standard of living came from innovations and productivity gain.

Art

AIG Reverse Split: Why?

On May 21, 2009, AIG announced that they will do a reverse split (1:20) on July 1, 2009. What this mean is that, if you own 100 shares of AIG, you will now own 5 shares of AIG. This doesn't change the value on your portfolio because if you own 100 shares at $1, it will now be 5 shares at $20. The same $100. The simplest way to think about split is, for example, you have 20 x $1 bill. You head to a bank and exchange it for 1 x $20 bill. The opposite is true for stock split.

Let's get back to AIG case. They gave the following reason for the reverse split.

The primary purpose of the reverse stock split is to increase the per share trading price of AIG Common Stock. AIG believes a reverse stock split will increase the price of AIG Common Stock, and thus allow a broader range of institutional investors to invest in AIG Common Stock, increase other investor interest in AIG Common Stock and help ensure the continued listing of AIG Common Stock on the NYSE.

Many investment funds and institutional investors have investment guidelines and policies that prohibit them from investing in, or holding in their portfolios, stocks whose price is below a certain threshold, which, at current AIG Common Stock market prices, reduces the number of potential investors for AIG Common Stock. AIG believes that brokerage firms are reluctant to recommend lower-priced stocks to their clients. Also, other investors may be dissuaded from purchasing lower-priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks. The reverse stock split could address these concerns by helping to ensure that the price of AIG Common Stock attains a level that would be viewed more favorably by potential investors.

The share price of AIG Common Stock has declined significantly since the third quarter of 2008, and, during February and March 2009, and occasionally since then, it has closed below $1.00 per share. With the shares trading at this level, small moves in absolute terms in the price per share of AIG Common Stock translate into disproportionately large swings in the price on a percentage basis.

Click herefor the actual filing.

You should pay particular emphasis to the following phrase, "... and thus allow a broader range of institutional investors to invest in AIG Common Stock" This action tells me that AIG, once the world largest insurance company, cannot and will not earn their way out of the trouble. They no longer have the capability to bring their share price from $1 (if that) to $20. As a results, they have to manipulate their share prices.

You should be mad right about now. Why? Because $80 billions dollar of our hard earned money went to AIG in a form of a bailout and the best they did was try to lure institution investors. On top of that, institution investors are guys from Harvard B-School, I doubt they would fall for such scheme.

The list below are companies, randomly selected, that did a reverse split and their performance since.

AIG 7/1/09 1 for 20 -59%

BTH 2/2/09 1 for 4 +92%

RBS 11/7/08 1 for 20 -48%

BFLY 4/4/08 1 for 10 -75%

VION 2/21/08 1 for 10 -55%

CIEN 9/25/06 1 for 7 -70%

LENS 11/21/06 1 for 5 -20%

The fact that AIG mentioned that they can attract institutional investors should tell you how "smart" the soul call institutional investors are.

Good try AIG, I hope the next time your stock hit $1 that you don't do the same again. If you do, I'll find ways to short it.

Art

Financial Education: Leverage Part 2, Using 401(k)

Don't listen to soul called guru when it comes to investing. I refer to someone like David Bach, the author of "Automatic Millionaire", Robert Kiyosaki, the author of "Rich Dad Poor Dad", and Donald Trump, the author of "Why We Want You to Be Rich". Read a review here of Donald Trump's book by WSJ and you might understand why. I would rather recommend shows of Suze Orman or Carmen Wong Ulrich for their financial advices. It is easy to write about how much money you could make. I can also write a similar book about how options can make you rich, but I will also tell you it can make you homeless. After reading it, you would be scared and I won't make the best-selling list.

Robert Kiyosaki said in 1996 that he started an oil company, a gold-mining company, and a silver-mining company. Big question mark popped in my head when I read this. The reasons are all three scenario required massive amount of capital to get started. It isn't every day Exxon, Shell, or Conoco Phillips see a new competitor. The same goes for gold and silver mining company where cost of a Caterpillar machine runs in a million. On top of that, there are political unrest in gold and silver mining countries. I am not calling Mr. Kiyosaki a liar, but I am skeptical. Mr. Kiyosaki called himself as an investor and talk of writing put options on gold, but when I searched for his name on Bloomberg there was no result.

The truth about money is, it's hard to make and easy to spend. Anyone trying to tell you otherwise is attempting to sell you something. Two ways of making money: use either sweat it (physical) or think it (brain). There are some concepts to take away when reading investment books, but I see it as motivational speech.

Kiyosaki stressed the importance of leverage or using someone else money. I urged you to read my first posting on leverage.

For people who have the 9-5 job with 401(k), the path to wealth isn't as hard as the "guru" suggested. It takes discipline but it can be done. Let me demonstrate.

Let's say you work for a company that match 30% to your 401(k) contribution. Let's assume you contribute $100 every month and invest that in a relatively safe 5% AAA corporate bond. Given this scenario, you would have $1,602.90 after one year. Your return on equity after one year is 34% because contributed $1,200 which returned $1,602.90. The leverage here is from your company matching of 30%! If you calculate the return on capital, it would be only 3% (1602.90/1560 - 1).

After five years, you would have invested total of $6,000 and received $1,800 from your company matching. Given a 5% rate of return, you would have $8,877.63 or 48% return on equity.

Unlike real estate which allow you to leverage up 80%, 401(k) matching is limited to certain amount. Take advantage of what is available to you and don't be greedy. Remember the old story of "The Rabbit and the Turtle"? Investors are equivalent to the turtle. Gamblers are equivalent to the rabbit.

Art

Market Checkup: Head-And-Shoulder Breakdown

The market action today got me really bearish. The market closed down -1.94% today. What I worry about is the completion of the head-and-shoulder pattern. Unfortunately, it is bearish. I expect the Dow to fall back to 7,500 (red line) for the next support. Although few follow the Dow, I consider the Dow to be the quality representation of the overall market and a good leading indicator for where our economy is heading to.

Here is the S&P500 chart. Most institution investors benched themselves to the S&P500 and not the Dow. As you can see below, the S&P500 also developed a head-and-shoulder pattern. Unlike the Dow, we don't have a breakdown in the chart yet. I assume that the Dow often leads the S&P, and if that assumption is correct, we may see another panic selling from the institutions if the S&P can't hold above the neck line (blue line).

If you invest in mutual funds and/or ETFs, be aware of the market bad behavior. The bear appear to be winning the fight against the bull.

Art

Watch List: 7/2/09

At the end of this short week, here are the stocks that I have on my watch list.

The big change to this week list is the removal of H&R Block (HRB) which rose 9% after reporting their earning. H&R Block also will keep their dividend going steady into fiscal year 2010. H&R Block is now 23% off its low.
More companies were added than removed which tells me the market is turning bearish.

Let's take a look at the market.
The market closed the week lower by 2%. Upside momentum appears to be topping out and can't stay above RSI of 50. A head-and-shoulder pattern (bearish pattern) has formed and this week watch list confirms this bearish pattern. We'll have to see if I am right.


On May 18th, I wrote an article call "Quantitative Reasoning Behind Bear Market Rally" We may be in the resumption sell-off stage but we'll have to wait and see. For now, build up cash and begin research those companies on the above list. The market will give you an opportunity to acquire them near their low.

Art