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Author: Mike Celeste Editor: Tony Ponzo March Circulation:

Stat Sheet Week Ending March 17th 2007

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow-166.0-1.4%-353.0-2.8%
S&P-16.0-1.1%-31.0-2.2%
NAS-15.0-0.6%-42.0-1.7%
Splitmaster Strategies
Basic...............0.0%
Big Dipper..............0.0%
Option Calls..............0.0%
Option Puts..............0.0%

Highlight of this past week: Chart Indicator continues to save us a lot of money.

In this Issue--- SplitMaster Basic System---
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We are working our way thru the Basic list of splitters, and looking forward to the return to normal conditions in the split world. Nobody needs to tell us that the markets have been treating stocks in general with unkind results. The major swings in the indexes are taking their toll on everyone.

Big Dipper System---
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We had 2 new entries this week, and the reason isn't hard to figure out. So many stocks have taken a tumble that it was inevitable that some of those on our list would reach the targeted buy price. We have 2 above the entry price and 2 a few cents below--and GROW, still mired deep in the lower levels.

 Options---
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The Volatility Index has been all over the place recently, and for the last 2 weeks there has been hardly any time value in the options. That's a long time---and we wonder if that is any indication of a direction that the market wants to move toward. In other words, with little time value, does that mean that the market is not going to advance? At least that is in regard to CALLs. To be truthful, I haven't paid attention to the PUTs outside of the Momentum plays, so I don't know what time value they carried. When playing the Momentum play, it is desirable to have as little time value as possible, so that the option moves almost dollar for dollar with the stock price--and there lies leverage, as we have discussed before.

One of our long-term team members had an interesting question of us this week---Leece asked about the results if we had bought PUTS on stocks instead of CALLS--or PUTs instead of avoiding CALLs. It's easy to see that the profits would have been good. Go figure---

 Momentum Strategy - This Week
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We've talked many times about the cycle of this Momentum Strategy. Two weeks into a new quarter the number of stocks announcing their earnings start pouring in. Once we get going, there are often as many of as 15 pages of announcements to go through each day. Each page has 40 stocks so that is 600 announcements to go through everyday. We narrow it down to a maximum of five potential plays a day. But as the quarter comes to an end, like it is now doing, the number of announcements drastically reduces. We are now getting less than two pages of stock announcements to go through each day. In a couple of weeks they will dwindle to nothing. Then in the second week or so of April, it all starts over.

Therefore, there were only two plays this week. We had one nice win with GS and one devil of a play with PLCE. (Momentum Play Past Results) Unfortunately, this stock was such a devil that it gave us our first net dollar loss for a week since we began testing this strategy last year. Everything about this stock gave the impression it was going to be a nice winner.The past announcements that we studied showed very nice moves and all good endings. The company postponed their last announcement by one month to work on an investigation into their stock option practices. But then in January they announced and the stock had a very nice $6 move to the upside. So it appeared that any problems with this investigation was over. We entered the PLCE play with confidence and high expectations. It actually moved exactly as expected after the open. We watched, picked our spot and jumped in. After we were in, it started to move up nicely then bam. It fell apart. WHY? Well, later on we saw a news release that came out in the middle of the play and it mentioned that the company was going to have to restate their earnings due to this investigation and that it will affect their bottom line significantly. If only that news came out 30 minutes later, we may have had time to get out with a nice profit. But that was not to be and we have a play we would just as soon forget about. A new lesson learned - we will no longer consider a stock that has an investigation going on unless it is completely over with and well in the past. That is, if there is the proper news to make that decision.

Logic says that this strategy has a good winning formula and overall, it will continue winning. Some of us are better than others about this logic and some of our members are better than us here at SplitMaster. But in order to be a successful trader, it is important to overcome emotion and stick to logic. Jim Cramer often talks about this on his show. We know overcoming emotion is necessary but we have say that it is easier said than done. So we will always continue to work on improving our win rate with the goal of someday getting to the point in which the win rate is so great that the only emotion we have is positive and confident.

Chart Indicator---
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The CI continues to more than earn its way in our strategy planning. It is negative, it has been negative, and the question only is, how negative can it get before it again gets oversold---as it was a short time ago and gave us an opportunity to take advantage of a little bounce before heading south again. In looking over stocks, it has helped sway decisions to buy or sell, and it has been right on the mark. We hope that you are using this tool, as it has proven itself time and time, again.

 Stock Split Comments---
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It is definitely not surprising to see that split announcements have pretty much dried up in the last several weeks. With this market, it seems to be the proper move to make until there is some stability.

 New RSI System---
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The RSI study has had its good points and its bad points in the past week. That all means that we need to continue to study this tool and see if there is a program that can be worked out that is highly successful--not just successful, but highly successful. Winners need to make up for the losers and result in a net, net ratio that makes it worthwhile. At this point in time, many indicators have to be thrown out with the dishwater, as these are not normal times---much like last May-July was.


The Economy & Commentary---
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This past week brought home to roost one of our major concerns---the real estate sector. I know we hammer away at it, but we feel it is such an important part of the economy that we want to make sure you keep on top of the situation. What was the big story this week? The collapsing of the sub-prime mortgage lending business. It is by no means over, and it just came to be noticed that the real estate industry has not hit bottom--not by a longshot. I would like to refer back to our Newsletter Archives, which you can browse thru and read all of our past newsletters. I like to go back, myself, and see if what was said then held up later on.

The 1st of September, 2006, was of particular interest to us this week, as the story of New Century Financial's sub-prime lending results came crashing down on the national news. The company relies on lenders supplying them with funds to make loans. The lenders are most of the big investment houses and other major corporations, like GM. These lenders notified New Century that they will not issue any more funding. The news said this might force the company into bankruptcy. It MIGHT force them? Tell me of any company that has to borrow money to survive when there is no more money being funded to them? What a bunch of baloney. Not only that, it appears that New Century has to make good on loans that have gone bad--and they appear to be unable to do that.

In that September newsletter we pointed out that one of our partners had another business involved in database information on public records. He had a big case (still ongoing) that involved a professional appraiser that was making a series of real estate transactions that resulted in mortgages that were issued that were for more than the price paid for the property, on properties for himself or his associates. And guess which lender was involved in a number of those transaction? You guessed right--New Century Financial. Remember--this was the 1st of September, 2006, that we were pointing this out.

We have been stressing how important this is to the economy and it came to the forefront this week when the markets took a steep swan-dive because of the developments in the sub-prime mortgage markets. We checked the past newsletters and went back to June 3rd, 2006 and read that we were concerned at that time, and even earlier. That's 9 months ago--and it just reaches national news now. I want to ask you a question. Is it really a surprise when 100% loans are being issued on houses, and they are also being loaned to people that don't have to show any proof of income or ability to pay? How can it possibly be a surprise that this type of financial programming would fail. GM has to issue 1 BILLION dollars to its finance subsidiary to shore it up--and that subsidiary was a golden goose for GM for many, many years. As we stated, most of the big brokerage houses have subsidiaries for this type of business, also.

Relating the problem to an exact stock, LEND was a consideration on 2/14 for the Momentum play, based on their earnings announcement. The report was not good and the stock opened down at 23.27, but then the company had a conference call and it appeared that they righted the ship and had their problems behind them. The stock rallied to 27.00 that same day, and I couldn't understand it. I bought a PUT on the stock with a strike price at 25, and this past Tuesday, Mar. 13, one month later, the stock traded at a low of 3.78. Then the company announced that
it sold over 2 billion in loans at a substantial discount. The stock soared back by the end of the week to close Friday at 10.90--almost triple the low, but still way down from that 27.00 level. What a wild ride and more to come--stay tuned.

This reminds me of the savings and loan fiasco of the 1980's, when lending rules were loosened so that company insiders could receive loans and didn't have to stand up to the previous requirements. That collapsed, just like the sub-prime market, and how was the problem solved? We, the taxpayers, bailed out the situation to the tune of about 500 BILLION dollars. Isn't it amazing that we withstood that hit and went on to higher levels for our citizens?

My guess is that there is going to have to be another bail-out for this sub-prime problem, and we again will have to bear the brunt of it. Meanwhile the majority of crooks that raped the system will most likely go unpunished. At this time there are criminal probes going on all over the country. The very sad part of this is that this is not something that was just uncovered. People with knowledge have been saying that the fox was let loose in the hen-house a long time ago. No one wanted to do anything about it until all these forfeits on the loans built up to an untenable level. Foreclosures, which we also predicted long ago, are rising to RECORD levels---and--this is just the start. Just a short time ago it was noted that foreclosure notices were increasing, but not a major concern. Boy, that little concern didn't last long, did it? From that to RECORD levels.

We see how this affects the economy by the fact that there is concern about retail sales already showing some warning signs. People that are facing foreclosure aren't out there buying a whole lot of non-essentials. Those that aren't facing foreclosure are worried about their home value and are disinclined to spend very much, as a result. Those that would like to buy a house are going to be shut out, due to tightening of loan standards. And so it goes, right down the line. The economy will withstand all this, we believe. It has its ups and downs but it has always pulled through. The good companies that have worked hard to place themselves in proper financial condition will be the leaders and their stock will most likely show that investors will reward them. And hopefully the percentage of sup-prime loans to the overall is not too significant.

Just don't be led down the path by politicians and soothsayers that say nothing is seriously wrong. We will come out of this, and we want our readers to be ahead of the game. We are happy to report that another team member has been selling off his real estate holdings, and thankful that the market has allowed him to get decent prices over this time frame, as he, too, firmly believes there is more pain to come in the industry--and he has been in it for almost his entire adult life. Then, he will be in a great position to take advantage of the bargains that he expects will abound. Good luck to all of us and may our plans come to fruition.

Happy St. Patrick's Day---eat lots of corn beef and don't forget to wear your green.

 Today's Thought---
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When obstacles arise, you change your direction to reach your goal, you do not change your decision to get there......Zig Ziglar


Mike

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