Trading and Investing

RIMM is the stock symbol for Research in Motion, and I’m thinking of buying some put options. Let’s see if I can make a convincing case for it.

For those unfamiliar, Research in Motion sells the ever-famous “Crackberry”, as well as a variety of other portable communication devices. They recently released the Blackberry Pearl, which is a portable phone, email, organizer, web browser, instant messenger, etc.

I don’t consider myself much of a tech person, but from a financial standpoint, the company looks like it might be way overvalued. Consider the following:

[] In the last year, RIMM stock has increased over 100%. Yes, 100%! Check out the two year stock chart below from Yahoo! Finance:

[] The stock now trades around $135. The earnings per share? $2.45. That’s a P/E ratio of 55. They’ve had decent earnings growth, but how much are they really going to earn? Even if they quadruple current company earnings, they’ll be making at much as Google. And that would only bring the P/E ratio down to 14.

[] The market beta, the extent to which the stock price varies with the market index, for RIMM is 2.58. A stock that moves one-for-one with the market has a market beta of 1. That means that in a market downturn, RIMM is going to get smashed.

[] There’s going to be stiff competition in this market moving forward, including solid tech companies like Apple, Verizon, Sprint, etc. How long is Research in Motion going to keep their monopoly with the Blackberry?

[] Market value to book value: 10.98!

[] 18 of the top 20 scorers on Motley Fool are picking this stock to underperform the S&P 500.

[] The stock’s previous high was $150 in March 2000, right at the peak of the tech boom. Then it dropped to a low of $6 as recent as February 2003. Now it’s back up to $135. I wonder if any stock holders are getting nervous… It might be a good time for them to cash in on some profits and send the stock back down to earth.

Then again, if you had showed me all the numbers 8 months ago, I probably would have said it’s overvalued then too. And it’s increased over 100% since! So how do you know when it’s going to move down?

Just looking at the chart and the basic numbers, my gut tells me that this stock is due for a major correction.

Any thoughts? I’d especially like to hear from people who know more about wireless devices than I do..

– defo

A friend of mine was asking me what I’ve been reading lately, probably because I’m so doom and gloom lately. Here is a list of some of my favorite columnists:

Peter Schiff, EuroPacific Capital
www.europac.net

They call him Dr. Doom because he’s one of the biggest bears on Wall Street. He writes a weekly column and has hours worth of video interviews on his web site. I listen to his weekly radio show and recently read his book, Crash Proof. Much of my views about the US economy stem from his point of view. Although even he is still a bit too bearish, even for me.

John Rubino
www.dollarcollapse.com

John Rubino is another big dollar buster writer. His website, www.dollarcollapse.com, is titled to be “Your ringside seat for the global financial crisis!”. His web site is excellent because it points you to some of the best articles on the web for housing, precious metals, and the dollar. I’ve also read his book, “The Coming Collapse of the Dollar and How to Profit from it”.

Robert Kiyosaki
finance.yahoo.com/expert/archive/richricher/robert-kiyosaki/1

Author of Rich Dad, Poor Dad, Kiyosaki is a dispenser of practical financial advice in his bi-weekly column for Yahoo Finance. He has an overall bearish tone, especially on housing, and offers practical advice about investment strategies.

Eric Janzsen
www.itulip.com

Creator of the web site, ITulip.com, Janzsen is a bubble-expert, calling both the tech bubble and the housing bubble. He’s not a traditional gold bug, but he has a hunch that gold may be the next bubble in years to come. Hint: go to his web site and click on “ITulip’s Record” at the top to read some of his best predictions in the last decade.

John Hussman, Hussman Funds
www.hussman.net/weeklyMarketComment.html

Hussman is overall weary of the US stock market and writes a data-heavy weekly newsletter supporting his positions. And he’s a Ph.D.! Maybe there’s hope for me after all…

Mark Hulbert
www.marketwatch.com

He’s a level-headed investor who writes from the basis of his Hulbert Financial Index, which is a sophisticated index that tracks general financial newsletter sentiment. You’ll have to search marketwatch for his columns.

Also from www.marketwatch.com: Irwin Keller, Peter Brimelow, Paul Farrell, David Calloway, Todd Harrison

All of these guys have regular columns that RSS feed into my Google homepage. You’ll have to search Marketwatch to find them.

Jeremy Siegel
finance.yahoo.com/expert/archive/futureinvest/jeremy-siegel/1

Siegel is a professor of finance at Wharton. His bi-weekly column for Yahoo Finance covers a range of issues but mostly just tracks and comments on the US economy.

Gary North
www.lewrockwell.com/north/north-arch.html

North is a bit of a wacko, but I think he writes intelligent pieces sometimes.

Aubie Baltin
www.gold-eagle.com/research/baltinndx.html

Like North, this guy is a bit eccentric. But both of them have Ph.D.’s (I guess this doesn’t contradict eccentric, does it?) and write good articles. Read with caution.

Ben Stein
finance.yahoo.com/expert/archive/yourlife/ben-stein/1

Yes, this is Ben Stein from the movies. This guys is a Renaissance Man. He has done acting, law, personal finance, government…you name it, he’s done it. He has a lot of life experience and has good practical advice for investors.

Caroline Baum and John Berry
www.bloomberg.com/news/commentary/baum.html
www.bloomberg.com/news/commentary/berry.html

I mostly just read these two writers from Bloomberg to balance out all of my gloom and doom columnists. I don’t totally agree with their view of the world, but I follow their writing, which can be good sometimes.

Most of my day-to-day coverage of the market comes from Marketwatch and Bloomberg. I’m still trying to learn and read as much as I can.

– defo

All in all, I just can’t justify buying into the US market these days. US stocks are not going to be the place to be for at least 5 to 10 more years. We may see new nominal highs, but remember that the inflation-adjusted stock market indexes have not even reached their 1999 peaks. My assessment is that we can only expect more of the same sideways market moving forward.

Some thoughts and references to consider:

[] Peter Schiff on the current bull market:

Yes, they call him Dr. Doom, but he makes some great points. Consider this excerpt from his weekly column last week:

“…On a somewhat related note, the current Wall Street bull market hype ignores the fact that all the major stock market averages are underperforming the price of gold. For example, year to date, while the Dow is up about 1.5%, the price of gold is up about 8%. Going back to January of 2000, while the Dow is only up about 15%, the price of gold price is up 150%, literally ten times as much. Even if you compare the Dow to gold starting from the Dow’s October, 2002 low of about 7,200, the Dow is up about 75% verses 125% for gold. Call me crazy but how can we be in a bull market if investors are making more money owning gold than owing stocks?” (bold: mine)
(source: www.europac.net, “Is the Fed Finally Losing its Credibility?”)

[] “Mr. Practical” at Minyanville.com

“Years of debt accumulation are not cured by a 5% correction in stocks as Wall-Street wants you to believe. A major debt correction, one that the market has been trying to accomplish for years but is rejected time and time again by Fed policy, is necessary to correct the huge imbalances that exist. To deny the necessity of this eventuality is human.

Total U.S. debt is now 3.6 times GDP and continues to grow. But new debt is having less and less effect in driving economic growth: more income is going to service that debt and less to creating production, the stuff that generates income. The second highest U.S. debt has ever been was 2.9 times in 1929….

…It now takes $7 of new debt to make $1 of GDP where it only took $1 in 1980 and $3 in 2000.

And the consumer, which is most of the economy, is in trouble too. Today household debt is now 130% of income. That is up from 100% just in 2001, 70% in 1986, and 40% in 1953….

… The US’ problems are not solved by a 5% correction in stocks and the coming debt correction won’t take a week and then go away. We do not know how it manifests nor do we know the timing of it. But you should know the nature of the beast and the only way to fight it: reduce risk before everyone else does.” (bold: mine)
(source: http://new.minyanville.com/articles/index.php?a=12314, “Perspective”)

[] Historical Dow to Gold Ratio (1900-2005)

(source: www.sharelynx.com)

I just can’t imagine anyone looking at this chart without at least wondering what is in store for stocks versus gold. This chart goes until 2005, so the current ratio is slightly lower at 19.

The previous two bottoms went to 2 in the 1930s and to 1 in 1980. Let’s be conservative and guess that we see the Dow-gold ratio drop to 5. This means either gold rising to $2500 or the Dow falling to $3250, or some combination thereof. My guess is that the Fed won’t let the Dow drop that far (they’ll just keep cutting rates), so I’m expecting the move from gold rather than the stock market. But you never know.

It’s not a certainty that this historical relationship is set in stone, but it sure makes you wonder.

Conclusion:

There are many reasons to think that US stocks will underperform in the next 5-10 years. There are a few reasons to think there might be a much bigger correction coming. All in all, I think it’s worth staying out of the game for now.

– defo

So, I suppose it takes a market plunge to draw me from my blog trolling.  I feel compelled to share my thoughts on whats happening right now in the market.

This is normal.  I know it may seem a bit unusual, but this is a normal market movement.  Consider the following:  In the last 2 years or so, the Dow has had  4 weeks with a loss of 300 points or more.

Last week we experienced a drop of about 550 points on the Dow for the week.  Granted,  this was a bigger drop than normal; however, you must also consider that this is uncharted territory for the market.  People don’t know what to think of the massive gains we’ve experienced over the last year and a half nor the fact that we’ve been consistently posting record high closings.  This uncertainty seems to be making investors nervous.  Give them a potential reason to cash out of their holdings and they will likely take their profits.  A typical market pullback occurs in thirds… 33% of the move or 66% of the move.  What we are currently experiencing could just be a pullback… Given the 2000 point move that we’ve been in since July 2006, our pullback could be 600 to a 1000 points without being “unnatural.”

Last week we had the worst market day since 9/11.  Take a look at the following Weekly chart from around 9/11.

There were a number of significant down weeks during that period.  I want you to take two things away from this chart:

1. Many of the down weeks were substantially larger than any of the down weeks we’ve experienced recently

2. Even when the market was in a significant downtrend, each massive down week was recovered from in an amount of time proportional to the down trend duration.  The market had fully recovered from 9/11 only 6 months later.

Whenever people pull their money out of the market rapidly, they have to do something with it.  Most of the money driving the market is not going to leave and never come back when something bad happens.  Those people will put their money back in.  The smart ones will wait until the market hits bottom and then capitalize on the prevailing bad sentiment.

This is what I’m challenging you to do right now.  Pay attention to the DOW and the news.  Look for the bottom.  Make a note somewhere the day you think the market hits bottom and then see how long it takes for the market to recover.