Monday, January 31, 2005

AT&T Investment

It is time to take profits on the AT&T trade, if you purchased any shares. On my recommendations you wouldn't have.

If you own shares, the end game is here. AT&T is being acquired by SBC Communications for $19.71/share.

Best Regards,

The Soothsayer of Omaha

Sunday, January 30, 2005

A Blue Light Special

Last week I wrote about AT&T (NYSE: T) and the value that I saw in the company. A few days later SBC Communications came in and said they see the same value. They want to buy AT&T. AT&T shares jumped around 7% on the announcement. T did not however jump above the resistance level of $21.00-$21.35. So, this resistance level still holds and is still valid.

The above is all just speculation. I don't know if the deal will go through or not. It's difficult to see how the anittrust regulators would allow this deal to go through. I have seen crazier things happen. This could however bring in a buyer on a smaller scale that the FCC would allow to go through. There could even be a possible bidding war.

This week I will bring another large cap name to your attention. The company is a member of the Dow 30 and the largest retailer in the US. I'm obviously talking about Wal-Mart (NYSE: WMT) with a market capitalization of over $220 billion. The operations of Wal-Mart are split up into three segments: (a) Wal-Mart Stores (b) Sam's Club (c) International. Wal-Mart is huge and everywhere.

Wal-Mart supercenters are popping up all over the place. Value line indicates that these new supercenters now account for 60% of it's domestic selling space and will increase to 70% by 2007-2009. WMT is creating 240 to 250 new supercenters by FY 2006. Wal-Mart has already taken care of K-Mart and other shopping centers and now they want the grocers business as well. They are now succeeding in taking some market share from these supermarket companies. I've even seen Sam's Club gas stations. Watch out OPEC! Wal-Mart's coming for you!

Operating income from international business increased 39% given the favorable impact of foreign currency rate changes. Wal-Mart has also continued it's acquisitions of foreign companies to continue their growth into these countries.

Nobody wants to mess with Wal-Mart. Let's take a look at some of the fundamental data:

P/E 22.9 = No, according to Benjamin Graham the P/E should be at least below 20

Price/Book 5.01 = No, BG criteria necessitates a P/B value below 1.5

Current Ratio 0.872 = No, the CR should be above 2.0 according to BG criteria

Revenue Growth 13.50 (10-Yr Avg.) = No, BG would look for RG of at least 15%

Intrinsic Value $62 (S&P Valuation) = Yes, BG would like the possible 19.23% appreciation

Yield 1.00%

WMT passes only one of my Benjamin Graham tests. That doesn't bode very well for the value investor. The revenue growth and P/E ratio were pretty close to passing, but no cigar. The Guru Analysis page over at gives WMT a Benjamin Graham value score of 43%. The strict value investor should look elsewhere. I believe serious long-term investors should take another look.

Value Line gives WMT share price projections of $95-$115 for 2007-2009. I would tend to agree. Being a long-term investor, it is always a good idea to keep an eye on the "big boys". The Dow 30 contains a lot of these top dogs. Value Line Research covers these stocks for the public for free. They provide an invaluable service. You should definitely look over their free reports. Your local library should have the all of the Value Line research reports.

Looking at the long-term fundamental picture for Wal-Mart should make many investors excited. My readers will be happy to know that the technical picture looks just as good. As always we will first take a look at the monthly view to see the long-term trends that are taking place.

Click to Enlarge Monthly Chart Posted by Hello

The standout formation on the monthly chart is the assymetrical triangle that has been forming for the past four years. Wal-Mart broke out in 1997 at around $14.30/share. On 1/28/2005 WMT closed at $52.43, but the top of the triangle was at the very end of 1999 at $68/share. The current breakout area of the triangle is at around $55.50. So, taking a breakout from this region and using pure technical analysis; we could project a future cycle high of around (($68.00-$14.30)+$55.50) = $109.20. This technical analysis would conicide with the Value Line research.

Click to Enlarge Weekly Chart Posted by Hello

The weekly view doesn't really shed any more light on the situation. The only thing I can really spot is the triangle within the triangle that began at the beginning of 2004. Bot triangles currently have the same breakout point so it doesn't change my view at all. We should check out the daily moving averages to see if we can see any support or resistance anywhere.

Click to Enlarge Daily Chart Posted by Hello

Looking at the short-term daily chart we can see that the 50 and 200-day moving averages are both above the current stock price and relatively close together. When the 50 and 200-day are consolidating in the same region, that region is pretty strong. So, WMT might see some weakness for a while and could come back down and touch one of the support areas. You must always keep in mind that the longer term views always carry more weight.

In summary, I believe WMT is in a very good position for long-term capital appreciation. Any long-term investor should wait for a breakout to the upside of the assymetrical triangle.

Tomorrow I will describe how to correctly position WMT and all holdings within an entire investment account so that you are not taking extreme risk with any one position.

Taking a look over at GalaTime also gives us a clue that might help you make the decision to take a position in WMT. It seems that option activity has gotten pretty one sided. There are an increasingly large amount of calls from the professionals being bought for the Feb $50 calls. Hmmmmmmm.

As always this report is just for educational purposes. This report should only be part of your research. Do your own due diligence.

Best Regards,

The Soothsayer of Omaha

Thursday, January 27, 2005

Not The Only One...

It seems I'm not the only one who finds value in AT&T. It seems SBC Communications is in talks with AT&T for a possible acquisition.

Would this be good or bad? I'm not really sure since there are so many assumptions that one would have to make to answer that question. The market sure seemed to like the news. AT&T was up 7%. We'll have to see how the stock does through the day and the next few weeks.

This does not change my previous technical analysis of support and resistance levels.

Best Regards,

The Soothsayer of Omaha

Tuesday, January 25, 2005

Market Not Ripe for Buy and Hold

Here is an interesting comment from the portfolio manager for the Concierge Investing service of Raymond James,

"With these considerations, we believe that the two main themes that we will follow throughout the year are 'Err on the Side of Caution' and 'Active Investing.' No longer will a buy and hold strategy suffice in a world where companies are as dynamic as the economy and world conditions. Nothing stays static and we have to be nimble enough to move toward opportunity. Technical analysis will be of paramount importance. We must avoid the 'chatter on the street' as it is becoming more evident that their role is not to make YOU rich, but to make themselves richer!”

This statement goes along with the consensus that this year will be another year for stock pickers and not the buy and hold crowd. While this site is not trying to teach day or swing trading, I am not also trying to teach the buy and hold method. If you are a value investor, you do not have to hold your positions forever. That practice has been recommended by a few, but definitely not by all value gurus.

Take my last article on AT&T for example. I recommended purchasing shares, for the risk adverse investor, once the stock price broke out of its current range at around $21.38 or for the risk takers at around $15.20. Let's then say that AT&T came down and touched $15.10. Then, the stock shot up with a few minor corrections along the way to around $32 per share in a three month time span. Would I write another article declaring that my readers are value (read: buy and hold) investors and wouldn't think of taking profits at this juncture?


I would probably tell you to that it is time to take profits and tell you where to take them at, which would most likely be at the break of an uptrend line. A 50%-100% gain in three months is nothing to scoff at and that trend is highly unsustainable.

The point is that you have to be ready to take profits when they are given and not get into the mind-set that you have to do something because it is what others told you you should be doing. If you have learned nothing else from the end of the internet bubble, you should have at least learned that most proclaimed "experts" are nothing of the sort. Learn all you can about investing and that also involves learning to listen to your own internal "investing guru".

P.S. I also liked the last sentence of the above published quote...for obvious reasons.

Best Regards,

The Soothsayer of Omaha

Sunday, January 23, 2005

Some Fundamental Analysis...Finally

Enough is enough...let's face it; finding great value companies to buy right now is difficult. I was trying to give you timely buys, but this "value" drought could go on for quite a while. So, instead of waiting forever, let's take a look at one of the companies I was waiting for to get in a good position technically as well as financially.

The company is AT&T (NYSE: T). I have been watching this company ever since it got absolutely creamed in November 2002 and then again at the beginning of 2003. It has been trading in a range ever since.

With this post, I am not telling you to purchase T shares right now. I think AT&T will be a good buy soon, but not exactly today. I will explain this logic later in the post.

What this site aims to do is show the average investor how to invest for the long-term. I believe that most individual investors will be best served through a long-term "value" approach. That is what I am going to show on this site. I personally do a lot of different types of investing, but here I am strictly long-term value with a technical analysis twist.

In pursuit of the great "value" investment, fundamental analysts need to first take a look at the income statement. Then, peruse the balance sheet. Thirdly, FA's will gander at some cash flow statements. (I'm all out of synonyms for "look" now. Wait, there's probably a few more.) Lastly, I like to glance at the technical picture for areas of support to purchase long-term holdings.

The easy way to check on the fundamental picture is to mosey on over to, and take a look at what their guru analysis program says about AT&T. It seems they believe AT&T only passes 43% of their Benjamin Graham criteria. Here the lazier of investors would quit looking, but a further analysis might be necessary in this case.

The problem with programs such as the guru analysis is that they get their numbers straight from places like Yahoo Finance. This is usually fine to do, but in fundamental analysis sometimes you need to look at the seperate line items to get a better idea of the financial strength of a company. For example, the guru analysis doesn't know that AT&T had a rather large non-recurring item in the third quarter of 2004. These non-recurring items should not be taken into consideration when figuring a companies long-term earning power.

It seems to all of these programs, such as the guru anlysis page or even, that AT&T doesn't have any earnings for 2004 and therefore doesn't have a P/E. Many individual investors will pass on a stock without a P/E, especially value investors. A little detective work will give you a better understanding though.

With the large non-recurring charge AT&T has earnings per share for 2004 of -7.68. Now, let's take out that non-recurring charge of $12.5 billion to see what the long-term earnings power actually is. I have figured a per share earnings of $2.01 when taking into consideration the one-time charges, restructuring charges, stock option expenses, and pension adjustments. The new EPS would give AT&T a P/E of 9. This is a definite change in perception. All of a sudden AT&T is on the value investors radar screen.

Now let's see if AT&T passes the rest of Benjamin Graham's value criteria:

  • P/E 9 = Yes, the P/E should be below 20 according the BG criteria
  • Price/Book 2.24 = No, the Graham criteria requires a P/B below 1.5
  • Current Ratio 3.68 = Yes, BG criteria says the CR should be above 2
  • Revenue Growth -7.21% (10-Yr Avg.) = No, according to the Graham criteria RG should be greater than 15%
  • Intrinsic Value $17.20 (S&P Fair Value) = No, BG criteria looks for IV's that would allow for at least 15% growth
  • Dividend Yield 5.25% = Yes

AT&T passes 50% of our Benjamin Graham criteria. A strict value investor would move on and look for other values, but I believe AT&T deserves another look. That dividend alone is making my mouth water. There is even talk about them raising it.

AT&T is putting in a compelling bottom at a time of heavy negative sentiment (See here and here for examples). A lot of the time value investors and contrarians are looking for the same thing. This extreme negative outlook is overblown and the reasoning is short-term. AT&T is restructuring to fit what they believe is the future. They are not worrying as much about the present as the naysayers.

The large restructuring that occurred in the third quarter of 2004 was due to AT&T getting away from the consumer part of the business to focus more on its business customers. I believe this is a good idea because the consumer part of the communications business is moving to low or no cost. With the advent of VOIP, communicating anywhere in the world is free. How can you compete with that? If you can't beat them, join them. That's what good 'ol Ma Bell is doing, and that's why I'm not worried about these naysayers.

I believe AT&T is a compelling long-term purchase; so let's take a look at the technical picture to find points of support for purchase. As always we will be looking at the monthly chart first.

Click to Enlarge Posted by Hello

From the monthly chart, the biggest standout is the trading range that T has been in since around the end of 2003. The more risk adverse investor/trader should wait until T breaks out above that resistance line at $21.38. Those who are not so risk adverse could purchase closer to the support line at $12.08. I'm not so sure T will see those levels again, though. My clue to that is the break of the downtrend line that began at the beginning of 2001 and was just recently broken in December. We'll be able to tell more with the weekly and daily views.

Click to Enlarge Posted by Hello

There's not really anything new that we can see by looking at the weekly view. The only new piece of information we get is by looking at the Relative Strength Index (RSI) and Stochastics. Looking at these two technical indicators tells us that T is currently at overbought levels and should next come back down to oversold levels.

Click to Enlarge Posted by Hello

The RSI and Stochastics in the daily chart are showing more oversold levels. I always put more faith on the longer time span since I am a longer-term investor; so these daily technical indicators don't really tell me much. What does tell me something is the RSI uptrend that was broken on January 19th. This shows that T will head lower.

Looking at the daily price chart for AT&T can be confusing. There seems to be support, resistance, and trend lines going everywhere. This is where technical analysis can be seen as more of an art than science. When there are this many lines going every which way, I first look to see if any of the lines are converging towards the same spot. That can sometimes be a huge clue to the technical analyst for support and resistance levels.

The only converging lines I see are the trendline I colored purple and the 200-day moving average at around $16.15. This might be your set-up price where you would want to begin accumulating your positions. You will know more once T approaches that price. The point being that the time to accumulate is not today or probably not even next week. If the $16.15 level doesn't hold, then look towards $14 and then to $12. I don't think T will break $12; so if it hits those levels, I would load up (but in a safe and responsible way).

In summary, I believe the sentiment with regards to AT&T is overblown. I think T would be a good addition to a long-term portfolio, but at an "intelligent" price. I have shown above where I believe those "intelligent" price levels are at. As always, this report should only be a part of your analysis and not the only reason for your purchase of AT&T shares.

P.S. The other Investment Roundtable contributors have their AT&T analysis over at Sixthworld Management and Commentary. You should definitely check out what they have to say here.

Best Regards,

The Soothsayer of Omaha

Friday, January 21, 2005

Got To Love Wall Street

Those of us who join together once a week to write about an investment idea got Ebay exactly right. Most of us told you to stay away. You can see the proof here.

Let's see how Wall Street handled EBay:

January 20th, 2005 Deutsche Securities: Downgrade
January 20th, 2005 Piper Jaffray: Downgrade
January 20th, 2005 Friedman Billings: Downgrade
January 20th, 2005 AmTech Research: Downgrade
January 20th, 2005 Marquis Investment Research: Downgrade
January 20th, 2005 Caris and Company: Downgrade

A little late guys!

Here is an excerpt from the downgrade given by Marquis Investment Research, "The lower-than-expected guidance coupled with the increase in fees is likely a harbinger of bad things to come. This is certainly the main reason for our downgrade."

Yeah right, and I'm having dinner with Saddam and his lover Osama (It's true...I read it in the Enquirer). I'm sure the downgrades had nothing to do with eBay's stock dropping over 19% on January 20th. Wall Street telling the investing public that eBay might not be as good as they once thought after eBay loses 19% of its per share value, does nothing for the investor. But what do they care? They've already received their huge bonuses for the year.

P.S. The downgrade from Marquis Investment Research is especially humorous since they just upgraded eBay to a buy on January 6th, 2005. Could that much really change in 14 days?

P.P.S. It's not all bad. Legg Mason recently upgraded eBay to a Buy from a Hold on the 21st of January. At least that is a little more reasonable.

Best Regards,

The Soothsayer of Omaha

Wednesday, January 19, 2005

Interesting Read

I thought I would post another interesting article for you to peruse. This one comes from Dr. Doom himself, Dr. Marc Faber. He is and has been pretty bearish on the US economy for quite a while now. I agree with many of his points, but you should be aware. Very rarely do such extremely bearish (or bullish) people get everything exactly correct. That doesn't mean you should not pay attention to his very well thought out predictions. You can check out the article here.

Best Regards,

The Soothsayer of Omaha

Monday, January 17, 2005


The Investment Roundtable this week was replaced with posts by the other bloggers who participate with results on what our recommendations accomplished in our previous lives over at

Keep in mind that each of our styles of investing differs so each of our recommendations is for different styles. My style is long-term investing where as Kaushik's style is based entirely on options. You get the idea...

Click here for Ron's view
Click here for Tom's view
Click here for Kaushik's view

I will work on a more comprehensive list when I have more time.

Best Regards,

The Soothsayer of Omaha

Friday, January 14, 2005

Hard to Believe

I find it very hard to believe that I am the only person who has seen the very strong resistance in the Dow Jones Indicies. I have not seen it mentioned anywhere else, though. So, I am either way off the mark or I'm so right without anyone else noticing that it is scary.

Take a look at the charts of the DJIA, DJA, and IXIC I provided below (at the very bottom of the page). It seems they are the exact tops of the indicies right now. Scary...

Best Regards,

The Soothsayer of Omaha

Thursday, January 13, 2005

Article of Interest

I have posted below a replication of a newsletter I received today. It describes some of Warren Buffett's investment thoughts. It is a good read. Here you go:

"Dear Investor,

It's a New Year. Let's resolve to make it the best year ever for our investments.

I have already made one investment resolution for myself this year. To read the biographies of the most successful investors and learn from their commonalities.

I've already started...

I read a book on George Soros, which I told you about, and just completed Roger Lowensteins book on Warren Buffett last night.

Buffett's Punch-Card

Buffett told a story that I'd like to share with you. He suggested to imagine your investment lifetime as a punch card with twelve holes on it. Those twelve holes represent the 12 best investments that you can make during your life. If you punch those twelve holes you'll end up rich beyond your wildest dreams.

Buffett has been punching his punch card by buying stocks when they were cheap and undervalued and then selling them when he thought the market became frothy.

He opened up a hedge fund in the 1950s and bought stocks when they were cheap and undervalued and then closed it and returned his money to his partners in 1969 when he thought the market was dangerously high and he could no longer find undervalued stocks.

He then stayed out of the market until 1973 near the bottom of the 1970s bear market. Imagine, 4 years of waiting for a man who's life was the stock market.

He bought back into stocks and held through the 1980s and 1990s. He has since trimmed back on his stock holdings holding the highest cash position since the 1970s and has made giant bets against the US dollar.

The key to this is patience.
Buffett had an investment method that required him to buy stocks when they were fundamentally undervalued. This wasn't always the case. So, when stocks were overvalued he stayed away from the market and waited patiently.

He was not simply a buy and hold investor like Wall Street tries to portray him. He didn't just buy some mutual fund or index fund and expect it to go up forever.

He had a method and a plan and stuck with it. 12 punch holes. And all he did was wait patiently until an opportunity to punch one of those holes came.

He didn't lose his hole puncher lose his equity by being impatient and buying stocks just to make a trade. He waited until the market came to him. And he knew when to get out. He didn't sit and let his stocks fall to nothing in a bear market.

He acted as the opposite of the 1990s Internut investor who bought overvalued stocks and then was misled into holding on to them by the Wall Street hype machine.
Make it Work for You
The key to this is that every successful investor and even the moderately successful have a method that works. That is the punch card and the holes in the punch card represent the best investment opportunity every two years that matches all of the criteria of your method.
Now the problem is that people aren't patient enough to wait and deploy their capital only for those best opportunities. To buy low and sell high you have to wait until things are low. You cant just buy because you're bored.

When one of the punch card holes comes, most people fail to take advantage of it. Why not?
More often than not - they simply cant. Their money their hole puncher is tied up in other investments that aren't as good or even worse has been lost to a bad investment that never should have been made in the first place but was made because of boredom or a need to be involved in the market. They lose the opportunity because, like a gambler, they have to always be in the game.

It's all about patience. It is just that simple. My investment method involves looking for dominant market trends and then taking advantage of them when they line up.
Right now, I think the most important trend in the market is a falling dollar and subsequent bull market in gold. This is going to be one of those punch holes in my investment lifetime this is why I have been talking about gold so much.

However, at the moment gold is in a correction and the dollar has had a temporary rally above its 30-year support level. This correction will lead to an incredible buying opportunity in gold but it requires patience to let it run its course.

So, in true Buffett fashion, I'm just sitting back and letting it come to me.
The broad market is also undergoing a correction. The Nasdaq and DOW have been falling since the beginning of the year. It is time to step back and let the market fall. Don't try to time bounces or put on investment positions now. We are likely to see the market digest last years gains this quarter. Be patient here too.

Perhaps you should spend this time planning ahead. Planning out how you are going to buy gold or other sectors in the market. Find out which stocks you like and plan out how much money you want to put in them. Then let them come to you."

I don't' agree with everything the writer said, but the main part about my arch nemesis was good enough to pass along. The fact of the matter is that a value investor has to wait for his/her stocks to come to them. Don't chase a stock upwards. Wait for "intelligent" points of entry, which will usually be around support areas.

Best Regards,

The Soothsayer of Omaha

Wall Street Is Not Your Friend

I just came across another event that proves that Wall Street is not the friend of the average investor. It is a news story in the Wall Street Journal. Most will not be able to access the story since it is for subscribers only, but here is the gist from the first paragraph:

"The Securities and Exchange Commission is preparing to charge the New York Stock Exchange with failing to police its elite floor-trading companies, known as specialist firms, and for ignoring violations that cheated investors out of millions of dollars, according to people familiar with the matter."

What we finance/investment bloggers are trying to get across to you, the average investor, is this one simple fact. Wall Street is not here to make you wealthy. They are here to make themselves wealthy at the expense of you. If a few other investors get wealthy as well, they don't mind. But, they think about themselves first always. Do not be fooled by those nice older "grandpa-ish" gentlemen on the commercials.

Here is my previous post about Wall Street and the "higher-ups" abuse of the little guy.

Best Regards,

The Soothsayer of Omaha

Monday, January 10, 2005

Thoughts About 2005 - An Investment Forecast

I don't particularly like making upcoming year predictions. I also don't put much stock into most that I read. I like the markets to let me know what is going to happen within a predictable range a safe time frame ahead of the actual happenings.

I also know that a lot of people do enjoy upcoming yearly predictions. So, I thought as a service to my readers who do enjoy these types of musings, I would let you know what two sources (that I trust) are saying.

The first source is a highly reputable research firm known as the Bank Credit Analyst (BCA). They are the best research firm I have ever come across. The second source is John Mauldin (JM). I have a link to him on my sidebar. He is very intelligent and knowledgeable about the markets. I look forward to and read his newsletter each and every week. Let's see what they have to say about the investment world for 2005.

The BCA and JM believe that the economy will grow around 3-3.5%. They both believe we will not see a recession this year, but one is looming in a year or two. John states that the yield curve will advertise before the recession and I definitely agree. Our economy still needs to re-balance, but this will not happen until it has to because too much is at stake to the higher ups in the US. Predicting when "it has to" is a very difficult game to play, but my trusted sources tell us that it will not happen this year. This is of course unless another tragedy occurs on our soil. Then, all bets are off in the prediction business.

John and the BCA believe that the dollar will continue its decline this year, but there will not be a crisis. The fall will be more organized. You definitely do not want to see a currency crisis. If the dollar has to re-balance (not fall), then you want it to be more organized. Since gold is basically a neutral currency, you will see it rise more this year as the dollar continues its decent. As always look for "intelligent" points of support to add to positions on the long (gold) or short (dollar) side. See my past Investment Roundtable contribution on the Gold ETF (GLD) here.

Both sources are concerned about the Fed raising rates too high. This is an easy concern since cycles almost always carry on too long and further then most suspect. Nobody knows with 100% certainty the correct interest rate. Therefore, the rate is always going to be either too high or too low (except when passing the correct level by). Since the Fed is in a rising rates cycle, the rates are probably going to increase too much. Here's what John says about the situation, "Their (The Fed's) history is that once they get started, they do not stop until there is some pain. Since the signals of 'pain' tend to lag, it is quite possible the Fed tightens too much before it stops."

In the coming year JM says that stocks have "issues" and the BCA believes the stock market will be up, but only in the single digits. They are correct in their assumption that currently the stock market is priced for perfection. Any bad news that actually sticks in the headlines for more then a day could send this market downward. Optimism in the market is way too high! John believes we will see a high this year that will not be overtaken for many years to come. I tend to agree (look into past equity cycles). The BCA tells it's readers to look elsewhere in the investment world for higher returns. They recommend European stocks, especially UK and French equities. This means that it will be a stock pickers market again this year just like in 2004 and you buy-and-holders out there are not going to be happy.

Looking for cheaper oil? The Bank Credit Analyst does not believe this will be the case. They claim that the new floor is $40 and the ceiling is unknown. John tends to believe that the floor is more in the mid-$30 range. I tend to agree with the BCA. I don't think we will see under $40 for quite a while, if ever again. Take a look at this chart:

Click to Enlarge Posted by Hello
(Thanks to the Big Picture Speculator for the graphic!)

As you can see the resistance line at $40 is now the support line that has recently been tested. There is no need to wonder about the oil markets when the charts let you in on the secret.

So, this year is going to be a lot like 2004...that's not so scary. Is it? Trouble is looming in the future, though. The BCA warns of very dire economic and financial times ahead. They claim that the next recession could cause a global meltdown. That is not something I really want to experience, but I will be prepared for it. John Mauldin thinks the next recession will occur in the next two years unless another terrorist attack occurs, which means the recession will occur at that point. The average stock market drop during a recession is 43%.

This is a short summary of many pages of reading. You should definitely read the rest of the information yourself. Like I stated at the beginning of this article, these are two sources I put much faith into. I hope you enjoyed reading about these two 2005 investment forecasts.

Best Regards,

The Soothsayer of Omaha

Sunday, January 09, 2005

Weekly Investment Roundtable

This weeks Investment Roundtable is hosted over at GalaTime. We analyzed the investment merit of Dell, Inc. Go check out what all of us had to say!

Best Regards,

The Soothsayer of Omaha

Saturday, January 08, 2005

How to Turn $5,000 into $25 Million

For the new year and my new readers I thought I should state what this blog is all about once again.

You are probably pretty skeptical about the title above and you should be. Some people might not even read past the title. They, and a lot of people, would just assume that below the title of this post would be some hair brained scheme to make millions from selling ornamental hockey sticks to the new up and coming Chinese middle class (You could have inserted any foolish idea in the place of the hockey sticks). For those of you who have had the faith to read past the title you will find that this article and my presence on the web have nothing to do with getting rich quick.

I’m not saying that I should have changed the title of this post. Turning $5,000 into $25 Million is actually one of my goals on this blog. I want to take over the title of “best investor from Omaha”. To do this I will need to do exactly what the title of this article says. Is this possible? Yes, but it will take time, patience, desire, and more patience.

Most people that would read a normal article with this title are the type that want the money now. They somehow want to make 100% on every investment/trade and believe that they can do this without any risk. This is inherently wrong and impossible. The attitude I am taking on this blog is the slow route to riches. You save some money ($5,000 for example), learn everything you can about investing, invest wisely and regularly, and let the most powerful force in the world take control. That most powerful force is known as compounding.

My objective is to invest for the long term in value oriented stocks. So, I look for low P/E’s, low price to book ratios, high current ratios, and an intrinsic value that is substantially higher than the current stock price. Not only am I looking for value stocks, but I am looking for technically sound stocks as well. This means I also look at support and resistance, the relative strength index (RSI) of a stock, the MACD, volume, and a slew of other indicators. I use all of these variables to make my buy/sell decisions. Sound complicated? That is where the “time, patience, desire, and even more patience” comes in.

This is not going to be an overnight process. For me to take the “best investor from Omaha” status from you know who, I will have to accomplish this feat in less than 38 years. So, I will have to make more than 25.15% in gains each and every year. This is not an impossible task. It can and will be done.

If you are still reading now, you are the type of investor I am looking for to go on this journey with me. It will not be easy. There will be many trials and tribulations along the way. Interest rate increases, global supply shocks, population implosions will all surely be in our way. Accomplishing our goal and relieving the Oracle of Omaha of his status will be worth it. We probably won’t even care at that point since we will have over $25 Million, but we will surely be laughing all the way to the bank.

So, come and check out this blog frequently. We will be turning $5,000 into $25 Million, but we won’t be doing it by selling nuclear resistant hard hats to the enemies of Iran. We will be making our millions through hard work, diligence, and dedication in the markets.

Best Regards,

The Soothsayer of Omaha

Wednesday, January 05, 2005

Mixed Signals

For the long-term investor I have been looking at the different indices. The Dow's are all looking toppy, but take a look at a monthly view from the NASDAQ.

Click to Enlarge Posted by Hello

Why are the Dow's showing resistance while the NASDAQ has the making of an inverted head and shoulder pattern? The pattern still has to breakout convincingly, but the market is definitely not making it easy on investors right now.

Best Regards,

The Soothsayer of Omaha

Tuesday, January 04, 2005

The DJIA Is Also Feeling A Little Toppy

The DJIA has now told us how it feels about there being a toppy market. Take a look at this monthly view below. Long-term investors (and everyone else) should be looking for ways to position themselves in this topping atmosphere.

Click to Enlarge Posted by Hello

Maybe that involves selling out and sitting on the sidelines for a while? Maybe that just involves tightening your stops? Whatever you do when things look "hairy" you should be looking at doing now.

This is an analysis of the overall market. There are stocks that can still go up during a sideways or bear market. It is just much more difficult to beat the market being on the opposite side of the trend.

Best Regards,

The Soothsayer of Omaha

Monday, January 03, 2005

Good Times Again???

Take a look at the Dow Jones Composite Index (Not the Dow Jones Industrial). It appears that the DJA is right at the resistance level it was at during the late 90's. Will it break through to new heights or get trampled back down again?

Click to Enlarge Posted by Hello

Long-term investors (and everyone else) should pay attention. This could be a sign for what's to come with the other indicies.

The DJA is not looked as much as the DJIA or the DJU. The Dow Jones Composite Average is a price-weighted average of 65 U.S. stocks. The average is a combination of the Dow Jones Industrial, Transportaion, and Utilities Averages.

Here are the components for the DJA

Best Regards,

The Soothsayer of Omaha

Sunday, January 02, 2005

Weekly Investment Roundtable - EBAY (NASD: EBAY)

This week's Investment Roundtable will be discussing eBay. We have brought together many great writers with many great opinions. I know these roundtables can be long to read, but every word is important. As always, these articles are for educational purposes only. This roundtable should only be a part of your own investment research process.

This might be the first time that some of you have visited my investment site. I hope you take a look at some of my other articles after you have read the roundtable.

This "blog" is my way of helping individual investors learn to invest with the long-term in mind. To make it fun to learn along the way, the individuals who visit my site regularly and I are taking on the Oracle of Omaha. Mr. Buffett is currently the most famous investor to come out of my home town, but I want to change that. So, please come back often to see how my progress is coming along. I have put together a real portfolio with real money to make things more interesting.

So, if long-term investing is something you want to learn more about, come back often and I'm sure you will learn something. Thanks for stopping by and enjoy this week's roundtable discussion of eBay.

Best Regards,

The Soothsayer of Omaha


Dr. Ron Sen for the Investment Roundtable
Ron's Stock 'n Stuffer World

Disclosure: my son is an EBAY employee. To my knowledge, I have no inside information that could affect my ability to buy, sell, or hold EBAY stock.

EBAY has largely become an Internet icon. The company, based in San Jose, California, apparently hopes to become a middleman in as many global transactions as possible. They receive a fee for providing the framework for online sales of a variety of merchandise.

As always, my trading analysis comes from a graphical analysis.

Market conditions: the NASDAQ is above the 200-day average (extended at over 10 percent above at the time of this writing). HHH, the Internet Holders Trust is over 18 percent above its 200 day average. EBAY specifically is 24 percent greater than its 200 day moving average.


Price: EBAY has just made a closing high on Wednesday December 29, 2004, at 117.57. Although EBAY, the Internet sector, and the NASDAQ are all extended, that is not necessarily a reason to sell or to sell short a stock. As we all witnessed during Mania One and again are witnessing during Mania Two, stock market moves can proceed much farther than we might imagine. Stock market manias are well chronicled in Edward Chancellor's Devil Take the Hindmost.


Pattern: EBAY hasn't shown anything to suggest a reversal pattern (e.g. double top, head and shoulders, exhaustion gap/island gap). Sometimes on a daily chart (particularly noticeable on Equivolume charts) a stock will suddenly top with heavy volume. Generally, as I have noted before, short positions are better considered from after a period of stagnation, sometimes after a transition pattern or first thrust downward as described by Dave Landry. Note how on the weekly chart that volume has declined.

Trend: EBAY has remained in a very lengthy uptrend over the past two years, emerging from a base during most of 2002.

Time: EBAY has made relative lows at about nine month intervals, of which the next would be due about the beginning of the second quarter 2005 (presumably meaning a relative top would come prior to that.

Note that using 10 period ADX on the weekly chart, that the stock is trending with extreme strength (trending stocks are usually > 25, with strong trends over 30) meaning that oscillators have less application here.

Structural factors: EBAY has an extensive Trust and Safety division devoted to attempt to detect and prevent fraud. Online fraud, identity theft, and computing security issues are the greatest barriers to entry in the online sales industry. EBAY's massive security program gives it a substantial advantage over competitors seeking entry into the online auction business. EBAY presumably seeks to make their PayPal division the principal transaction processing mode for worldwide Internet commerce.

Potential issues: EBAY has a very large number of options outstanding. Heretofore, generally accepted accounting principles have not required companies to treat these options as compensation, i.e. as an expense versus earnings. As of June 15th, 2005, the current plan of the FASB is to require companies to treat options as an expense. I do not know the impact of EBAY's options on earnings, but presume that it will be material to their reporting.

EBAY is one of the great growth stories available. EBAY investors have bought growth, and prospered with the growth. One has to wonder whether the growth occurs at reasonable prices.

According to YHOO, EBAY's free cashflow is about 865 million dollars, and the book value is about 9.2 dollars per share. Diluted Earnings per share are reported at 1.056 dollars, but there’s the rub. What impact do options have on EBAY and what are its core earnings? Core earnings are earnings teased out after the effects of one time changes, options, and pensions are discarded. According to BusinessWeek Online: S&P Core Earnings for the trailing twelve months to October 2003, EBAY has core earnings of 31 cents versus 61 cents reported. BW Online February 24, 2004 eBay: Where the Action Is Online estimated core earnings for EBAY 2004 of 67 cents. They estimated 53 percent cash flow growth to 2006.

If we estimate 60 percent core earnings growth for the next three years, then EBAY would have core earnings of $2.74 for 2007 and a multiple of 50 would make the stock price $135 at that point.

If we estimate 50 percent core earnings growth for the next three years, then EBAY would have core earnings of $2.26. A multiple of 50 would price the stock at $113 in 2007.

I remember seeing CSCO at 70 dollars, and a five-year growth analysis carried out (estimating 25 percent quarter over previous year quarter) with a multiple assigned (as a mature company) of forty. The stock price would have been about 65 dollars a share. EBAY is a great company and technically strong, but I have no way of calculating the risk relative to the growth assumptions, so I'll pass.

If I were a single stock millionaire on EBAY, I'd definitely sell January 2006 140 calls at around 7.60 and buy January 2006 95 puts at 5.50. I should be so lucky.


Tom Ott for the Investment Roundtable
Sixth World Management and Commentary

Happy New Year fellow Roundtable readers! It's 2005 and I have a feeling that this year the markets will be in for a wild ride. As you know, we have so many macro-economic "problems" out there that is sure to give some us sleepless nights. Enough of this gloom and doom for now let's turn our attention to today's Roundtable stock EBay (EBAY). What can I say; I love what this company has done for e-commerce. Take the simple concept of auctioning, put it on the web, and you end up revolutionizing the way e-commerce. Under CEO Meg Whitman's leadership, EBay has grown to be the 800lb gorilla of online auctioneers and no one can even compare. Above all EBay was profitable from day one (well not exactly on day one but you catch my drift). Perhaps that's one reason that EBay has stood the test of time when so many others have imploded during the Dot Com bust.

The question that all of you are probably asking right now is, "should I buy EBay?" The answer is NO, not right now but soon. Our first look is at the weekly chart for the period between March 2003 and December 2004. What you'll surely see is that EBay has rallied long and hard since October 2003. The smart money piled in then and EBay took off like a rocket. It's in a nice upward trend and it clearly looks like an Elliot Impulse wave. The only thing that we don't know quite yet is where Wave V will end up but there are clues here that lead me to believe EBay's run is almost over.


It's clear to see that volume is drying up over the course of the months since October 2003, STO is oversold, MACD & OBV seems to be peaking and the big money inflow seems to be ebbing. Although the MMA's are flashing bullish signs, the Bollinger Bands are narrowing signaling a decrease in volatility and a potential violent move in either direction. I believe that EBay is running out of steam. I'm placing a SELL rating on this stock if you're long. It's time to take profits. Why? The compelling reason why I say sell is that a WAVE V wants to form at the top of the trend channel. So folks, it looks like to me that EBay's run is over.

Let's zoom into a daily chart.


I think EBay has hit its resistance level at about $118.35. Why do I call it resistance, just look at all those spinning tops and doji’s at that level on Dec 3rd and 6th. Then see them form again on Dec 15th and 30th? Now, taking the possibility that WAVE V is forming, I feel that EBay is going to correct. How far could she correct? A good guess would be a retracement of 38.2% of the full impulse wave or (118.35 - 25.11) * 0.382 = $35.61. Wow that’s a big retracement but it could happen. I've seen so many violent price swings in this market. A retracement of that magnitude would put EBay at a price target of $82.73. Now that would make a real attractive buying price for this author!


Levi Bauer for the Investment Roundtable
The Soothsayer of Omaha (No Link...You are already here)

As with all of the stocks the Investment Roundtable has analyzed so far, eBay is not a value stock. eBay is a growth story and will continue to be for a few more years if not many more years. I don't even have to look at the criteria to determine this, but I will just so you know what sort of metrics Benjamin Graham was fond of.

P/E 136 = No, the Graham criteria requires a P/E below 20
Price/Book 12.82 = No, the Graham criteria requires a P/B below 1.5
Current Ratio 3 = Yes, the Current Ratio should be above 2
Revenue Growth 116.76% (Past 5-Yr Avg.) = Yes, Revenue Growth should be above 15%
Intrinsic Value $92.50 (S&P Fair Value) = No
Dividend Yield 0% = No

eBay difinitely has its debt under control and is still currently in the growth stage as witnessed by revenue growth in the triple digits. The only reason eBay is not a value stock is because of it's current share price, which is a symptom of growth companies with growth stories.

Guru analysis over at gives eBay a grade of 57%. eBay passed 57% of the value criteria that believes Benjamin Graham would have used.

The company is in good shape with regards to its fundamentals and key business areas. The value of the company's shares takes eBay away from the value investor.

eBay has turned itself into a powerhouse. The company went from selling Grandma's old Scandanavian dolls that you just found in your garage to selling overstock items from name brand companies. You can now honestly find anything you could ever think of on this one website. No wonder they are swimming in cash.

eBay currently has $1.72 billion in cash with free cash flow at $865 million, which is a 70% increase over the prior year. Having a lot of cash sitting around helps out, but so do 80%-plus gross profit margins.

eBay is not a value play. If you are looking for value stocks, stay away from this one. For those of you who are still interested in eBay as an investment, here are my two cents about the technical picture. As always I start out with the long-term picture and whittle my way down.


Looking at the weekly chart I see nothing but trend strength. As you can see, eBay is in an uptrending channel that began in 2003. eBay's share price is currently at the top of this channel and will most likely come down to test the bottom once again. The 50-Week Moving Average will also provide support at the bottom of the channel.

The upward trend is not only pretty strong, it is also wide. A more risk adverse trader/investor could make 15%-plus by purchasing at the bottom of the channel and selling at the top (30%-plus if you would sell short as well).

It's been said before that trends are made to be broken. This is true. Every trend is broken at some point in time. You have to be aware of the signs of the impending top. Currently I do not see any significant signs of a topping area in eBay's long-term outlook. One clue might be the decreasing volume, but that hasn't been a very good indicator with this particular stock.

When the uptrending channel is broken, eBay will still be in a long-term uptrend and will continue to be until the uptrend line that began in 2001 is broken. This area also finds support from the 200-Weekly Moving Average. The long-term technical picture looks quite strong for eBay. You always have to make sure that you are buying at support (bottoms) and not at resistance (tops), though.

Now that we believe eBay is in a strong long-term uptrend. Let's look at what the shorter term chart is telling us.


According to the daily chart eBay is finding support along the uptrend that began in August of this year. This trend line would have to be broken before you would even consider selling. If you are considering jumping on the eBay stock train, I wouldn't look to purchase shares until they come back down to the bottom of the trading range. The bottom of the channel is currently at $90.

You should have noticed that eBay's share price is currently outside of my drawn channel. The upper part of the channel is called the secondary trend line. The bottom part of the channel is the primary trend line. You will notice as you become a more aware trader/investor that secondary trend lines do not hold very often. That is why I would wait until eBay's share price comes back down to the bottom of the range. My experience has shown me that the secondary trend line is not going to hold.

Helping out my theory that the secondary trend line is not going to hold is the bearish divergence occurring currently with regards to the RSI and share price. You will also notice the lack of volume during this last upward push.

There is a wild card with respect to the uptrend line that is moving through the trend channel. You could definitely see some support at this line in the future. Make sure you watch for it.

In summary, I would not purchase the stock as of right now. I would look for lower levels of support to add positions in eBay to my portfolio.


Bill Cara for the Investment Roundtable

There is a concept in the stock valuation biz called "perfect pricing". To some of us, that's a black flag; the race is over. To others, however, it merely means that conventional investment analysis based on Graham and Dodd can be dismissed on account of overriding Quality considerations.

I think we can agree that EBAY is perfectly priced; however, if you are seeking Growth At a Reasonable Price (GARP) or good Value, then you are likely not interested in EBAY (the stock). Perfect pricing suggests that in order to stay invested the investor is willing to take all the risk. For buy-and-hold investors, that's probably not a good idea.

Now you know risk can be an open-ended subject. There are risks related to the stock market prices, credit/solvency, independent business valuation, and management performance, among others. In fact, if you are a classic worrier, the list of risks becomes endless.

But the skinny on risk is that the more of it, the shorter ought to be your hold period.

Since I like EBAY's biz model, and I know EBAY has millions of happy customers, I am prepared to trade the stock. However, in my book I cannot find it in me to more than day trade a stock that has a price-to-earnings multiple north of say four times the S&P multiple.

Since EBAY trades at something like a 111 PE, my time horizon for long trades is measured in minutes, possibly hours. Even with short trades, my window would be hours to days, but never weeks.

Simply put, the risk of "news" is too great for me to accept. A lot of market news, you know (or ought to in case you don't), is fabricated in order to cause you to buy or sell stocks.

Since I'm not in the room (with this "news" creation), I'm out of the deal. In that regard, I'm just like you; when the spin begins, you and I are not privileged to know which way the stock is headed.

I've always been impressed with one of Wall Street's classic worriers, Marty Zweig, and I know him to be a Growth-oriented investor, so when I saw him Friday evening in the CNBC Tribute to Louis Rukeyser, it came to mind I should look up his Guru criteria for EBAY, which is on the site.

According to the Nasdaq profile: "Martin Zweig is a growth investor with a serious conservative streak. A renowned money manager, newsletter writer and frequent guest on the PBS television series 'Wall Street Week,' Zweig knows that money lost is money that's hard to recoup. Accordingly, he searches for stocks that meet a long host of earnings criteria. Quarterly earnings, for example, should be positive and growing faster than they were (a) a year ago, (b) in the preceding three quarters, and (c) over the preceding three years. Annual earnings should be up for at least the past five years. And sales should be growing as fast as or faster than earnings, since cost-cutting and other non-revenue-producing measures alone can't support earnings growth forever. Finally, Zweig suggests that companies have a price-to-earnings ratio of at least 5 'to weed out weak companies' but no more than three times the current market p/e or 43, whichever is lower. His strategy makes sense for investors who like the potential of growth companies but aren't willing to pay premium prices for them."

BTW, I once met Marty Zweig, at an investment conference in New Orleans, and he told me he hated to travel, where he had to get on a plane and leave his (then young) family at home. He struck me as being one of the real nice guys on Wall Street, of which, in spite of my rants, I know there are many. And honest ones, too.

For EBAY, here is the Nasdaq Guru Report Card for Martin Zweig:


Detailed Analysis
Guru Score: 62%

P/E RATIO: [FAIL] The P/E of a company must be greater than 5 to eliminate weak companies, not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. EBAY's P/E is 111.52, based on trailing 12-month earnings, while the current market P/E is 24.00. Therefore, it fails the first test.

REVENUE GROWTH IN RELATION TO EPS GROWTH: [PASS] Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. EBAY's revenue growth is 79.01%, while it's earnings growth rate is 112.94%, based on the average of the 3, 4 and 5-year historical eps growth rates. Sales growth is not at least 85% of EPS growth so the initial part of this criteria is not met, however, since both sales growth and eps growth are greater than 30%, that requirement is waived and the company passes this test.

SALES GROWTH RATE: [FAIL] Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (51.8%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (51.9%) of the current year. Sales growth for the prior must be greater than the latter. For EBAY this criterion has not been met and fails this test.The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.

CURRENT QUARTER EARNINGS: [PASS] The first of these criteria is that the current EPS be positive. EBAY's EPS ($0.27) pass this test.

QUARTERLY EARNINGS ONE YEAR AGO: [PASS] The EPS for the quarter one year ago must be positive.
EBAY's EPS for this quarter last year ($0.16) pass this test.

POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: [PASS] The growth rate of the current quarter's earnings compared to the same quarter a year ago must also be positive. EBAY's growth rate of 68.75% passes this test.

EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: [FAIL] Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for EBAY is 56.47%. This should be less than the growth rates for the 3 previous quarters, which are 50.00%, 87.50% and 100.00%. EBAY does not pass this test, which means that it does not have good, reasonably steady earnings.This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.

EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: [PASS] If the growth rate of the prior three quarter's earnings, 79.55%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 68.75%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for EBAY is 68.8%, and it would therefore pass this test.

EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: [FAIL] The EPS growth rate for the current quarter, 68.75% must be greater than or equal to the historical growth which is 112.94%. Since this is not the case EBAY would therefore fail this test.

EARNINGS PERSISTENCE: [PASS] Companies must show persistent yearly earnings growth. To fulfill this requirement a company's earnings must increase each year for a five-year period. EBAY, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 0.02, 0.09, 0.16, 0.43 and 0.68, passes this test.

LONG-TERM EPS GROWTH: [PASS] One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. EBAY's long-term growth rate of 112.94%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.

TOTAL DEBT/EQUITY RATIO: [PASS] A final criterion is that a company must not have a high level of debt. A high level of total debt, due to high interest expenses, can have a very negative effect on earnings if business moderately turns down. If a company does have a high level, an investor may want to avoid this stock altogether. EBAY's Debt/Equity (2.00%) is not considered high relative to its industry (85.33%) and passes this test.

INSIDER TRANSACTIONS: [PASS] A factor that adds to a stock's attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For EBAY this criterion has not been met (insider sell transactions are 20, while insiders buying number 3). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.

As for me, if you wish to delve right into the investment analysis, here is the info I have on EBAY. I am impressed with the profit margins, etc, but I cannot overlook the almost 1500 times price-to-free cash flow multiple, and the fact that sales and earnings growth in recent quarters is not up to historical averages.


EBAY is a super company, but at any time, investors could get hammered by a change in tactics by a large Wall Street capital trading pool (say five or ten houses working together).

What I might do, if I was long the stock is to write short-term (3 to 4-month) calls whenever I thought the stock was technically over-bought, and to write short-term puts (prepared to buy the stock at much lower prices if the stock was put to me) whenever I thought the stock was technically over-sold.

After a big run up on Dec. 28 near the close, and at the open on the 30th, the %K STO and MACD rolled over. That would have been a good time to write the calls.


Unfortunately trading is not a matter of "woulda, coulda, shoulda", so you have to know in advance what your position is, both strategically and tactically, and then wait for these conditions to present themselves in markets.

That's the only way you are going to outwit the brilliant minds and computer programmed trading models on Wall Street.

One thing is for sure; when you see an average trading daily volume of greater than 9 million shares (in the $100 price range), which means the average daily trading value is close to $1 billion, then you know Wall Street is all over the stock.

And if you think you are going to beat Wall Street, you had better be pretty good at the trading business.


Kaushik Gala for the Investment Roundtable

E-bay has been in a strong uptrend during the latter half of 2004, and is trading at all-time highs near $118. There have been repeated concerns about valuation, but the stock has been risen steadily amid all the pessimism. With low short interest, analyst opinion, and a moderate put-call ratio, there's not many catalysts for large moves in the stock price. Here's the 3-month chart for Ebay:


Most indicators (OBV, Money Flow, etc.) are in positive territory, although some are showing signs of decline (MACD, RSI). The ADX at ~30 shows a pause in the steep up-trend - Ebay has been consolidating for much of December, stuck in a range between $110 & $118. This has caused the volatility to drop towards the lower end of its 52-week range. I also looked at option volume data for the past two months, but there's no signs of unusual activity.

Since the stock remains in a bullish trend (and above its 50-dma and 200-dma), I wouldn't consider an outright bearish position. However, with earnings due on Jan 19th, there is a good chance for the stock to breakout of its short-term range, and test its all time highs. I think a call ratio backspread strategy is appropriate for my bullish outlook on Ebay - the best scenario being an upside breakout to the $130 - $150 range.

Sell 1 Apr '05 $110 Call @ $1180 / contract

Buy 2 Apr '05 $120 Calls @ $640 / contract

Net cost to enter the position = $1180 - $1280 = ($100). This backspread has a break-even price at $131, maximum loss of $1,100 and unlimited profit potential.

Risks: A further decrease in implied volatility would increase the losses, as would accelerating time decay. And of course, if Ebay cannot break the $130 level, this position wouldn't make profits. However, the loss can be significantly reduced by closing the position well before expiration (late February/early March).

Exit Strategy:

If EBay is below $125 on Feb 28, close the entire position at a loss.

If Ebay hits $140 at any time, close the entire position at a profit.