Last Thursday’s Wall Street Journal ran a cartoon (Salt and Pepper) illustrating two investors studying a stock chart. The chart was illegible, squiggles and curves, with one investor describing the current stock market as 3 ½ somersaults with a tuck…and that about sums up the week.

For all the intraday turmoil and day-to-day swings, the Dow Jones Industrial Average (DJIA) finished this holiday-shortened week up 389 points, up 3.2% from last week, to close at 12361. Thus far in March, the DJIA has traded up or down 2% or more in a day 4 times—March 11th and 3 days this week.

To place that volatility into perspective, the DJIA moved more than 2% in a day only twice in February (the 5th and the 29th). For the exceptionally curious, in March 2007, there were zero days when the DJIA clocked in with a one-day change of 2% or more.

The S&P 500 advanced 41 points for the week to close at 1329, and the NASDAQ Composite closed up almost 46 points, closing at 2258. These indexes mirror the intraday volatility…for example, the S&P 500 advanced 54 points, or 4.2%, on Tuesday alone (when the DJIA was up a stunning 420 points).

Volatility Likely to Continue

When double-digit declines in stock prices and stock markets emerge in the public’s mind, thoughts inescapably revert to 1987 and 1929 when the Dow contracted by 25% and 24% respectively. Technically, the 1929 contraction of 24% consisted of 2 days at 12% each, but the memory of its impact, and the 1930s to follow, makes people worry needlessly about the correction we are currently experiencing.  Here’s why:

First of all, this is not your grandfather’s stock market. The magnitude of recent percentage declines in the stock prices of companies making news renders these historic percentages of 1929 and 1987 anemic, even bush-league, by comparison.

• The week started off with JPMorganChase (JPM: $45.97) announcing its intention to purchase Bear Stearns (BSC: $5.96) for $2 per share. Bear Stearns closed the previous trading session at $30/share. This represents a reduced market value of 93%, in a day.


• CIT Group (CIT: $9.63) announced that it was “materially constrained” (also known as being “broke”) and that it had to tap $7.3 billion of credit facilities. The stock tanked 17% in a day to close at $9.63 a share. Our guess is that this is just the start, with more selling in store on Monday.


• Borders (BGP: $5.07) is also looking for capital…even a buyer, here’s the link: http://jacksonville.bizjournals.com/jacksonville/stories/2008/03/17/daily25.html?ana=yfcpc. Before this news, the stock closed at $7.10, finishing down 29% on the day of the announcement.

The clear conclusion from these cited market-based realities is that memories of 1929 and 1987 are basically irrelevant. To paraphrase Jack Nicholson in the movie A Few Good Men, “Your grandfather couldn’t handle this market.”

One interesting sideline in the Borders’ news link is that JPMorganChase was hired as an investment bank to “explore strategic alternatives.” In the event JPMorgan decides to write a book on how it persuaded the U.S. Government to finance its buyout of Bear Stearns, the bank is assured of a spot on the Best-Seller List (though we think the Best Buyer List, Ever, would be most appropriate...!) 

Even more interesting is this link to Borders’ past four quarterly income statements: http://finance.yahoo.com/q/is?s=BGP.

Borders accumulated at least four consecutive quarters of losses that totaled $163 million. The real questions are (i) why this stock ever sold at $7/share, and (ii) how many hours on Monday will it still be selling over $5. There are 6 analysts/brokerage firms that claim to follow Borders (http://finance.yahoo.com/q/ae?s=BGP).

Getting Positive on Google (GOOG)

(GOOG: $433.58). To recap our SWAG Investment Strategy #1 Rule: When the number of analysts covering a stock increases by more than 10% and when this event coincides with that stock setting new highs…SELL.

When the price of Google soared past $600 a share, the number of analysts covering the stock increased to 30 in January (GOOG peaked at $710/share in December 2007).

Just recently, the Analysts Google-Meter has improved to BUY territory…the number of analysts covering the stock has declined by 13%, triggering a BUY…fyi…here’s the link:
http://finance.yahoo.com/q/ae?s=goog.

As illustrated in the above graph, if our SWAG strategy is correct, Google could be poised to resume its premium valuation to the NASDAQ Composite.

We direct your attention to www.InvestorPlaceBlogs.com, which presents a well-balanced dialogue for the Bull and Bear case on GOOG.

Here’s that link:
http://www.investorplaceblogs.com/2008/03/bullbear_report_google_stock_t.html

On the topic of volatility, we called S&P and spoke with Howard Goldblatt, Senior Index Analyst. He said, “Volatility in this market is the worst I have seen it in 30 years. The principal reason is fundamentals…companies earnings are coming in at variances wide of earnings expectations, and the stock prices get socked in the process. This won’t change, in my opinion, until companies get a handle on their guidance to the street.”

In fact, Toby Smith at ChangeWave lends reinforcement to this notion of fluctuating valuations, rather than liquidity, causing the current volatility. Here’s the link: www.ChangeWave.com and his quote: “The problem (sic: with this market) is the genuine uncertainty about the underlying value of assets, and that’s a solvency problem, which is exacerbated by the fact that many of the entities that own these bad assets are financial companies with 20- to 30-to-1 leverage.”

Here’s the link to the entire article:
http://www.changewave.com/freecontent/2008/03/dont-be-trapped-by-bear-market-rallies-03-19-08.html

The world’s largest credit card proceesor, VISA (V: $64.35) went public at $44 per share last week.

Here’s the news link:
http://community.investopedia.com/news/IA/2008/Visa_Debuts_At_No.1.aspx?partner=YahooSA.

Georges Yared at www.InvestorPlaceBlogs.com has some good things to say about this IPO.

Click here to read the article.

Based on the market performance of MasterCard (MA: $222.09) since it went public in 2006, we suspect this is a good call. As credit card processors, VISA and MasterCard do not assume the credit risk. Here’s the graph:

Helpful Hints

• Want to raise cash by selling those used books? Amidst the news of a Borders sale last week, the owners of New York City based Strands Bookstore made known their interest in buying used books. (Website: www.strandbooks.com)


• Planning to start a business using your 401(k)? Check out www.dolans.com There is an article that deals with this very subject, and you’d be doing yourself a disservice by not reading it.


• Also at Dolans.com, quoting the American folk hero Will Rogers: “We aren’t worried about the return ON our investments, we’re worried about the return OF our investments!”  Here is our favorite Will Rogerism, on the stock market: “If you buy a stock and it goes up, sell it. If the stock goes down, don’t buy it.”


• If you are starting a new business, remember this from Poor Tom’s Almanac Rule # 2: Money never comes in when you expect it…and when it does arrive, it is never as much as you expected.

Research Lab

Now, let’s move to the Research Lab. Below, we reproduce the components of the DJIA. The market value of the entire 30-company index is just over $4 trillion.

Source: http://finance.yahoo.com

Before euphoria resumes about the week ahead, what stands out in this analysis is the positive impact the rally in financial stocks had on the DJIA alone. Three bank stocks, Bank of America (BAC: $41.86), Citigroup (C: $22.50) and JPMorganChase (JPM), and General Electric (GE: $37.49)…just 4 stocks…accounted for over 50% of the gain in the DJIA last week.

Old adage: In Bull Markets, BUY on dips; in Bear Markets, SELL on rallies. We cannot improve upon this adage.

When studying the above table, one has to wonder why General Motors (GM) remains in this Index. At a market value of $11 billion, it is dwarfed by Toyota (TM: $103.16) with a market value of $163 billion; even # 5 auto maker, Honda (HMC: $27.80), has a $100 billion market value. We use these auto stats to reinforce the notion that any investment strategy that does not include overseas stocks is an incomplete strategy.

One honorable mention: Nissan (NSANF.PK: $8.35). Here’s the link to otherwise difficult to find financial info: http://www.nissan-global.com/EN/index.html. At current stock price, Nissan is selling for only 10-times trailing Earnings Per Share. In a market like this, that’s a defensible downside.

One surprise in the component table: Wal-Mart, (WMT: $53.23) gaining $14 billion in market value. We think its majority-owned Mexican subsidiary, Wal-Mart de Mexico, may be a better bet. Moreover, there is a pretty high short interest, that could represent buying power in the months ahead.

Source: www.pinksheets.com

In closing, we leave you with this thought. According to Mark Twain, “Everyone’s your brother, 'til the rent’s due.”