Timeframe is Everything

It was 11:31 on October 20th and I was blown away. Yesterday we were down over 200 points in the DOW and the Bears jump out of every corner they've been hiding in and tell us that the world is going to burn to the ground.

The same news stories get trotted out over & over in an attempt to level the banks to the ground. TV analysts, uninformed news casters, and nay-sayers blast negative press via every avenue they can think of to get the market to fall off a cliff.

At the end of Oct. 19th, the DOW finished down 166 or so. The day looked rough, but the market closed up 60 points above its lows with earnings from the likes of Wells Fargo, Westerm Digital, CREE, and others due out after the bell or the next morning.

All that really matters in the price of a stock (eventually) is the earnings. It's a simple math problem. Figure out what the "market" will pay for a particular stock, multiply by the full year EPS and anyone with a calculator can figure out a price target for a stock.

While there are an endless number of macro news stories, rumors, economic readings that can and will move a stock...they are ultimately irrelevant. In fact, almost (and I stress almost as the financial sector, especially the banks, have been obliterated thanks to endless negative press) everything BUT earnings is irrelevant. As a trader, or rather, a value investor who is willing to participate in the markets intraday and refuses to accept a terrible price for what I want to own; the wild swings (especially at the open) give me a chance to buy good merchandise (stocks & options) at great prices...if you're watching.

So, while I think that the wild oscillations of the market are quite overblown over the short term...I would never wish them away for anything.

Take NetFlix for instance. The stock ran up to $127, only to pull back to $98 because earnings were "bad". Well, I was on that conference call when they reported in July and we doubled down on our short put spread trade...should have added calls to it, and the stock rallied from $98 to the current level of $171. The endless negative stories on the stock were vastly overblown & the stock is up near 100% from that recent low. If you didn't do your homework on the stock, you probably were one of the sellers when the stock broke $100 to the downside & you are still kicking yourself.

How about Salesforce.com. The company reported and the stock went from $123.77 to $97.92. Again, the cloud had burst, all these stocks were going to zero, and you were supposed to hit the sell button (according to the "talking heads"). The stock is now back up above $110 and you could be up over 10% from those recent lows...or at least sold 85/75 put spreads when the stock broke $100 to take advantage of the elevated volatility in the stock.

I can go on. The Wells Fargo Conference Call was terrific because it told us that the formula is really 8 to 1; meaning that for every $8 Billion in mortgages someone tries to make a bank take back, only $1 Billion in actual real losses results. This told you that Bank of America, Citigroup, and all sorts of other banks had a MUCH lower liability than the news media has stated.

Bottom line, there is no substitute for doing the homework. Knowing your stocks, listening to the conference calls, and watching the markets often means that you are much less likely to fall prey to the endless negative news that executive producers believes is why people tune in to watch one trainwreck after another.

If you want to watch endless trainwrecks, watch the first few weeks of American Idol or go pick up an issue of US Weekly. There should be plenty of "news" that no one needs to know that "everyone" will be talking about the next day at work. But as for stocks, ultimately, the only thing that matters is what they earn & what multiple the market will let them trade with.

Anyone remember Goldman Sachs at $133 when the Government was going to erase them? Probably not because you never went long down there and missed it. Well, consider Bank of America your 2nd shot at glory...but keep in mind, time-frame is everything ('cause this story wont turn around overnight). The book value of the stock is closer to $13 and they have about $70/share of cash on hand and do business with about 50% of America's Households. I'm not saying that I'll be right tomorrow, or next week. But eventually, earnings are all that matter and BAC will have them.

Going According To Plan

So far, everything has gone according to our plan that we've had for the last 6 months. If you've had a chance to catch our Taking the Market Temperature and Lunch @ the Market Segments (listen to all the posts here: http://tweetmic.com/p/ox22alezwbd), then you know we have called this market almost step by step. We were a little thrown off when the DOW jumped above 10,000 on the 2nd day of earnings and then failed twice at 10,000. Our goal was the 2nd week of November for the DOW to find itself above 10,000...and on Monday, we should open there. Defending it may have become a tougher job than we first thought though.

Unemployment has not been a surprise. I know Meredith Whitney was on Squawk Box months ago and said 12-13% was not out of the question. We'll take 12%, but I don't know that we'll get all the way to 13%. Honestly, it's a relief that we've printed over 10% unemployment. Lets face it, everyone has thought we were there at 10% for a long time now...we were just all waiting to see the number printed. I think the fact that the market not only held it's gains in the face of that number, but we actually finished in the green...means that it really was already priced in.

We have heard MASSIVE amounts of Bullishness from CEOs like Cisco. People have called a bottom in their industries. The banks and tech have pulled back, leaving more room to run above 10,000 in the DOW. Frankly, owning Wells Fargo, JP Morgan Chase, and Goldman Sachs here makes a ton more sense than owning them at much higher levels before earnings season. We have heard over and over that normalized earnings are a joke for the banks, that real estate is horrible, no good, and very bad. I hate to point out...but the bank reserves are massive and the bank failures we're seeing now need to happen to weed out unhealthy banks. Tell me what happens to bank stocks when they start talking about net interest margins and loan growth (normalized earnings)? They are going to soar. You just wait until Jamie Dimon puts his dividend back and Wells Fargo and Bank of America return the TARP (which they will, probably in a move that will surprise everyone but those with insider information; which you will probably see play out in options). Honestly, does any one have the Vegas Line on Bank of America or Citigroup going under? For gosh sakes, AIG is profitable and look at The Hartford and Travelers...they are soaring. Don't confuse my realistic attitude with outright exuberance or that I'm sounding the all clear or that things are great. But all the negativity is a bit much. As I think about it though, all the negativity is why we've been able to keep this rally alive. As the Bears finally realize that the world will not end, and that people can make money in stocks because truly great companies will find a way to be profitable. We need someone to sell my stock to after we make all that money.

That may be the moral of my story. The terrible companies, the really bad ones that no one should own...most of them already trade at that price and you should be able to pick them out because they're low single digit stocks, or worse, less than a single dollar.