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Author: Mike Celeste Editor: Tony Ponzo March Circulation: 6815

Stat Sheet Week Ending March 22nd 2008

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+410.0+3.4%-904.0-6.8%
S&P+42.0+3.3%-138.0-9.4%
NAS+46.0+2.0%-394.0-14.9%

NOTE: Due to the short week and the fact that there was not much action in the strategies, we have devoted the newsletter mainly to the economic commentary.

In this Issue---
Big Dipper System---
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While investors wonder if the bubble has burst in energy, we had an active splitter drop down and hit the Big Dipper target buy price. SWN, which had been flying high, dropped down and was picked up into the Big Dipper. It wasn't down very long this Thursday and bounced back to close 2.68 points over the buy price. We are going to keep a close eye on this one because of the extreme volatility in the markets and we might put in a sell order fairly quickly, so team members be aware and check your emails.

 The Economy, The Markets & Commentary---
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My favorite general word is "priorities". Whenever or whatever someone does, they set a priority to it--it might be number 1, but it could be further down the list, also. If someone says they will see you tonight, and they don't get there, they had something else as a higher priority--even as to remembering. If it is a high enough priority, you can write it down so you don't forget, etc.

Well, there is a favorite word that has come to me in the investing arena. That word is "credibility"--and it can apply to other people you deal with too, including potential political candidates. We feel the extreme volatility in the stock market of late is caused, to a large extent, by lack of credibility. A little over a week ago, I watched the CEO of Bear Stearns come on TV and say that the company was in good shape, there was nothing to rumors about weakening positions. He said they have billions in protection and billions to invest. Two days later there was a run on their bank and the stock dropped from 57 to 30 in one day, Friday the 14th. It was then stated that the company had a book value of 80/share--so many investors bought in the 30's (it was around 32-34 most of that bad day, dropping to 30 about the last 1/2 hr. that day). They thought it was a bargain. Little did they know. Over the weekend, it was announced that a $2/share value was placed on it and the company was being sold, and the Fed was backing up the deal. Watch the lawsuits come out of that--people believing that what was being told to them was "credible". The CEO didn't say that if there was a run on the bank, they could face bankruptcy--no, he calmed the waters. Then, after that didn't work, the book value of $80/share came out--and no mention of bankruptcy, etc. Boom, the roof fell in on the investors and the bottom fell out on the company sale or bailout at a ridiculous price. I say "ridiculous" because on Monday the stock never traded as low as $2, but hit 4.81 that day and a high of 8.50 the next day--however, even quadruple the 2.00 sale price. We don't know how this is going to turn out, but it appears that the rich are going to get richer (JP Morgan-Chas, which bought Bear at $2) and the average investor is going to be the loser.--Again--

How does this credibility affect us? Let me give you a concrete example. When all this carnage was going on when it was announced that Bear was being sold for $2/share and how it might affect other financial companies, we saw a splitter being affected. GFIG is coming up for a split and the opening price on the 1st Bear meltdown on Friday, March 14, was 71.82 and it closed at 65.12 that same day. Then, on the next trading day the price dropped to 32.66--1/2 the closing price the day before. My partner, Tony, has been pressing that there has to be opportunities in these kinds of markets. Well, I wondered just what was going on, so I called the company and asked. I was told that it was pure panic, there was nothing that related to their company, GFIG--and they were in fine shape. OK, I called and got a positive answer. The stock was 38-39 when I called. Normally, I would take that as being a buying opportunity--1/2 the very recent price. Did we decide to do anything about it, like buying the stock or a call option? No--and why didn't we? The reason was that we had just been told about how Bear was in good shape and that wasn't true. Was this GFIG information credible? We decided we didn't want to take the chance because that information might end up not being credible, either. So what happens to the stock? Two days later the stock hit 61.42, which would have made a huge percentage profit in either the stock or the call option. Credibility or the lack of can do lots of good or bad---this time a bad affected what turned out to be a great opportunity. That's why credibility is so important, we think.

Not as much comment has been made about the Bear Stearn employees. Many, many of them are going to be without a job, and then there is their pension programs---here's a report on that aspect, by Aaron Task, online--

"...But what if your employer forces you to own its stock and/or restricts your ability to sell? That was the fate of many Bear Stearns employees, the biggest losers of the firm's demise. Many Bear employees were subject to lockups preventing them from selling stock for three-to-five years, and the company's scheduled earnings report on Monday was another factor preventing many from bailing out before the bailout.

Bear employees owned about 30% of their firm's stock and the recent drama was "like watching your house burn with your hands tied," in the words of one employee."

It will be interesting to see the results of investigations into the options area, specifically the PUTS that were bought shortly before the meltdown. In that same area, what is going to come out about the actions of top officials of Bear Stearns. Did they sell any options they had, just before the meltdown. In other words, did they sell while many of the other employees were restricted and not allowed to sell their shares????

There has also been a number of mentions of the average income of a Bear employee and that we shouldn't feel too badly for them. Numbers are very interesting, and we have long pointed out the games that can be played with numbers. If a company, for example, had their earnings go from 1 cent to 2 cents, they increased by 1 cent, but it could be reported that their earnings doubled, or that their earnings increased 100%. That can be very misleading. The example can be made in the Bear case, also. It has been reported that the average Bear salary was $600,000 and anyone making that much shouldn't get too much pity. Average is a tricky word, and I much prefer median instead of average. Median means the point at which there are equal numbers both above and below that number. Let's apply that to a situation where 9 people make $20,000 per year and a 10th person makes $5 million per year. Add them all up and you get $5,180,000. Now, there were 10 people in the group and the average income was $518,000. Was that a true indication of what the pay really was? I don't think so. The median income was $20,000, because if you go to the middle, with 1/2 above and 1/2 below, we see the number is $20,000---a more accurate portrayal. In Bear Stearns, the big boys made so much that when put together with the real average worker there, the number was badly observed to be $600,000. Far from reality. We also have to remember that in the Wall St. business, many salaries are purposely kept low (in relation to other sectors) because the year-end bonus made up for that--other sectors don't usually work on a bonus system that ends up being 1/2 or more of the annual income.

The tale has yet to fully unwind--and is there any company that is next in line to face this sort of situation--or even close to it? Keep you eye on the financial news (as well as sports or whatever appeals to you) and finance hits everyone, that's for sure.

Elsewhere in the economy we saw "good news, bad news" about housing in our Southern California area. The latest report of number of homes sold covered Feb. 2008. The good news is that sales improved over the previous month, January, and that was an 8% increase. The bad news is that Jan. was the lowest monthly total since the reporting company began tracking sales in 1988 --- and Feb. was the second lowest since that 1988 beginning. Also not very encouraging was the report that the median (notice--median, not average) sales price in our area was
$408,000 which was down 19.2% (on average--of the median) from the peaks reached last year. So take it as you will--sales are increasing, but prices are dropping. Sometimes it is better to be able to sell and take a higher price than it would be later on--but not get the highest price of the past.

A blast at the political scene---
I again repeat the question about the 3 US senators that are running to be President. They were voted on to do a job as US senator--and they are being paid pretty doggone good for that. Yet, I see nothing that mentions them doing their job--they are just concentrating on the election. How come no one mentions anything in the media about that. Every day I read in the paper that someone in the senate is proposing this or that, so it appears that the senate is in a working session---just no mention of these 3 being involved.

Sort of in the same vein---and this makes me really angry--.
Each of the 3 running for election has answers for making this a better country by changing the way things are being done. My question is this--How come, as senators, they are not proposing any help for us right now !!! The economy, mostly because of high energy costs and a housing crisis, is dropping quickly. If they have all the answers if they are elected president, why can't they propose all this stuff thru the senate? The senate is a lawmaking body. Do it now and do it for real instead of it just being campaign rhetoric. And senators do that, too--many bills have the names of the legislators attached as the title of the bill.

Final comment--Change is the key word, it seems, in this election. Looking back, hasn't our present President made some prominent changes? Once elected they all make changes--are they for the good or do they hurt us? That is something each person has to decide for themselves, and that's why we vote ! --we vote our decision on what has been done and what might be done in the future. However, change is certainly evident and is ongoing, no matter who is in office.

 Today's Thought---
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On a lighter note---If corn oil is made from corn, and vegetable oil is made from vegetables, what is baby oil made from?

Mike

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