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Wednesday, July 07, 2004
Good evening friends,
Market Recap
It was a flat, boring day in the markets with a feeble attempt at an early rally that faded into the close. The Dow was up +19 points and the NASDAQ gained +2 points. After three hard days of selling, you would think we could muster up a little more bounce, but it did not happen. I am afraid the news after the bell will not help much tomorrow.
Yahoo reported earnings after the bell, and they were superb. Yahoo had a second quarter net profit of $112.5 million, doubling profit of $50.8 million for the same quarter last year. Great numbers except for one thing - they were inline with what analyst had expected. In this market, if a company does not exceed expectations, we can expect selling. I was betting on good numbers from Yahoo; they were good, but just not good enough. It just goes to show how illogical the market can be at times. Double the profit from the same quarter last year and the stock sells off? Amazing.
This will not be good for tech stocks tomorrow on the NASDAQ. Several other tech stocks warned after the bell including SEBL and BMC software. Also, the big Dow component Alcoa missed their estimates by a penny so that should bring some selling in the Dow tomorrow as well.
Not a pretty picture if you are long stocks. Cash is still king as it has been for the last six months. Please remember that over the last six months there have been very few times that we have had an over weighted amount of long positions. We have been hedging our longs with shorts. In a sense, we have been as close to cash as you can come while still trading.
The Road to Wealth?
Someone sent me an article the other day talking about the road to wealth building. It gave four strategies to “turbo charge” your wealth: http://money.cnn.com/2004/07/06/pf/speed_savings/i...
The article brings up some good points but I do not necessarily agree with the way most planners think. The strategies are very good for the common person who does not know about stock trading. But for those who have the ability to learn how to trade stocks and apply what they have learned in the stock market, these strategies will just slow down their wealth building efforts in my opinion.
The four strategies listed were:
1. Invest in your 401K,
2. Pay off your credit cards,
3. Pay off your house, and finally
4. Put money into short and long term goals
I could write whole commentary on paying off bills vs. trading, but for now, let's take a look at each of the four strategies in some detail.
The 401 KO
Investing in your 401K sounds pretty smart for most individuals. You put money into a mutual fund or into your company stock and let it ride for 40 years. In the mean time, your company stock will go up and down on a roller coaster over the course of the 40 years. If you trade the peaks and valleys, you would have a much greater return.
Or even worse, your company goes bankrupt and your 401k becomes a 401 K.O. and knocks your portfolio out cold like in the case of employees working for World com and Enron.
If you diversify your 401K like you should, you turn over control of those assets to a so called “financial guru” who invests in stocks that you could easily do yourself.
The spike in volume and in share prices that we saw last week is indicative of the games these fund managers play with YOUR money. It was the end of the quarter and those gurus want their funds to rank at the top for average returns. So they bought shares on the last day of the quarter and artificially inflated prices. Unfortunately, this is still a legal practice. By doing so, the quarter ends and it will only show the stocks they owned and more importantly the stocks they want YOU to see they owned with the percentage gains.
Don't get me wrong, putting your money into a 401K or even an IRA is a good way to invest depending on how you invest it. It is not so good if it is all in one stock or a mutual fund. Of course, being stock traders, we know better than to do that.
Credit Cards
Paying off your credit cards is always a good thing. The interest rates on some of those cards are outrageous. Of all the advice in the article, this one may actually have some merit to it. If you are overextended on your credit cards, paying those down is a very smart move. If you pay 15% interest on your credit card, then you would have to make 15% in the stock market just to break even. You would have to earn around 20% to justify carrying a balance on a card in this case.
Anyone following TWPD trades this year is up 20% so you would be justified carrying a balance in my opinion. However for most investors, this year has been flat so it would be better to pay off their credit cards instead of investing. Again, these are people who do not know any better and do not know how to trade stocks. If you are an effective stock trader, then you are better off putting your money to work in the market and paying down your debt with the profit from your trading.
Mortgage Payoff
Paying off your house makes sense. It is usually the largest single debt you will have. The only problem is that, in my opinion, you are not making the best use of your money. If you have refinanced over the last year, you should have the lowest interest rates in many years. I would love to borrow money at 5% and use it to make 20% in the market so far this year. Borrowing money at 5% is very cheap money and you can use that to make well over 5% in the markets. You would only have to earn around 8% to make it worthwhile. We posted gains of over 400% in just seven months last year. This year is a rough market and it has not presented opportunities like last year. But it will again, and when it does, I would want to have that cash ready to work for me.
I have had emails from subscribers last year who told me they wanted to pay off their houses with the profits they made trading with TWPD. I do not know if they did or not, but my advice at the time was not to pay it off if the loan rate was less than 7%. They would be much better off trading and using gains to pay off debt, than to stick the money you could be trading with into paying bills. This is just my opinion and I am by no means a money manager or financial counselor. I did not go to school to learn to advise people about their finances. I do manage my own money, and I do not believe I need to pay someone else to manage it for me.
Long and Short Term Goals
Spending money on long and short term goals is really a bit too wide to even begin considering here. That sounds like an expense, rather than a way to save money. Short term goals are typically saving money for a plasma TV, or a new grill for the deck. Longer term goals might be saving for a new car. In the end, you might be building “wealth” in the form of net worth, but those are depreciable assets. So, that part of your net worth will decline over time.
New cars are about the worst “investment” anyone can make. I always buy used cars that are one or two years old. This way someone else has paid down the bulk of the depreciation and I still get all the warranties. This way I know the car is worth what I am paying for it. A new car is never worth what you pay for it. If you do not believe this, the next time you buy a new vehicle, five minutes after you buy it just drive it to the dealer across the street and see how much he will give you for it on a trade.
You do not need a financial manager to figure this stuff out for you. I think a better long term goal is to set a figure on your portfolio and try to gain that much money over time. You can then meet both your long term and short term goals if you use short term profits to satisfy your short term goals. Then use more short term profits to satisfy long term goals without waiting 40 years to satisfy them. All this while keeping your capital to trade and make even more profits.
Once again, we hear these “financial gurus” talking about how to build wealth. Once again, we see just how far off a lot of these “professionals” really are. Reducing credit card debt is a sound strategy to protect wealth, but the only real way to grow your wealth is through a sound investment strategy that (in my opinion) is overweighed on technical trading.
Individual Indexes
Since the markets are not doing well, I decided to take a peak at some individual Index charts to see where the weaknesses are, along with some big cap leaders. These charts may explain why the markets are not going anywhere. The market will stall when these big indexes and leaders stall. As you may imagine, there are no new stocks tonight. Tomorrow we will see the damage in the tech sector and we can better evaluate charts for shorting.
OTC BB Watch List
- AVCA listed last night and still looks good.
Please tell a friend about our service. We would like to become a referral service only. With your help, we can be. As always, thank-you for your support past, present and future! Have a great night everyone; we will see you all Tomorrow evening.
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