understanding the psychology of behavior

Simply proves the market is thirsty (really really thirsty) for certainty.

Obama made public his unvailing on Monday, and the market rallied.

It was, and still is, so hungry for certainty.

Here is a long-term chart of the SP500:

So, here we are, a clear double top.  So… whats it going to be? A complete collaspe of the world as we know it, or are our leaders going to get some balls and step up to the plate and save our society?

If the market is to forecast, it is forecasting a decline in society if it continues to decline. Dramatic… yes… Is it true… i hope not.

During the great depression, the GDP decline some 25%, from around 800B to 600B. (Good write up on the Great Depression) Ultimately this caused an approximate 80% decline in the stock market.  From intra day highs (1575)  to today’s low (776) the SP500 has declined 50%.

questions that remain, and what I will try to look into…

1. Are we still flushing out leverage excesses within the market?

2. By how much will GDP contract this go around? (If it is below 25% does this mean the market will stop its decline? In relation to GDP, is the market inexpensive or expensive assuming a reasonable decline in GDP?) 

3. Or will the market continue to decline, signalling the World is going to collapse? (If America collapses so goes the world. I am serious about this. American corporation are indicative of the rest of the world activity. Whether it be sudden or a slow deterioration.  After all, 2012 is an important calendar date w/respect to the ancient calendars concerning the end-of-days or representing a major shift.)

I maybe taking a bit dramatic look at things since today was not a good day in general.  Layoffs and reorganizations were announced at my company, and the market was not kind to me today. (I was safe, but witness the coldness of corporations and the relative stupidity of mid-tier management yet again.)

Anyway, the only thing I want to convey here is that our leaders have to step up and grow some balls. To do whatever needs to get done to save the most productive and functioning society history has ever witnessed, and to continue the path our previous leaders set forth.

I saw an article concerning Zinc, and its potential in the alternative energy space, so it got me interested in Zinc as an investment. (article)

Looking into Zinc as an investment I came across an interesting company… Horse Head Holding corp. symbol (ZINC), which mines Zinc.  I have not done a thorough analysis yet on it w/respect to production cost versus the price of Zinc, but a quick look at its books suggests it is trading far below asset value. (latest earnings report)

Cash value at the moment is 2.27

Tangable assets (cash + equipment, property and plants) - all liabilities is 3.55.

It looks interesting at current levels (trading around mid 2), but I just have to see if it can sustain a postive cash flow with depressed Zinc prices for a few years.

Thought this was a really good article concerning the potential investments within the Electric Grid Smart Grid build out.  Touches on key companies like Gridpoint, and the type of batteries being tested with respect to energy storage from Alternative Energies. The energy storage could be a huge market, and the article gives numbers concerning its potential, but also realistic near future estimates. (in other words, no rush.)

Its a good starter article for anyone interested in the next major infrastructure buildout.

article (Gridpoint to manage Wind Power Battery Storage)

Here is article 2 (Investing in Purification)

So a firm ‘Monnes, Crespi, Hardt and Co’ issued a Sell rating on Google today.  I do not have the report, just got the DJ News Headline (as I was wondering why it is not going up with the market).

A sell rating… really?  At this price?  I mean, I can see a sell rating on GE, GS, JPM and many other stocks and a valid arguement can be made concerning their debt going into 2009 with the consumer and rising unemployment.  But to issue a sell on GOOG now?!?

At 700, 600, 500, even 400 I can see the sell rating as being very valid.  At the elevated prices GOOG had a high multiple that could not really be justified with the rising unemployment level. But now, at 300, it has a PE of 18, trailing earnings were about 16.1 eps, and most importantly was that the last quarter GOOG proved it can control costs.

To me a sell rating suggests a contraction.  Will GOOG contract EPS despite its ability to control costs? 

At the moment I have no short term plays on GOOG, so I can careless about this sell rating.  But a sell rating here suggests a multiple contraction that, imo, is not justified by a market leader.

If GOOG breaks the 270 wkly support, the chart suggests around 220 to be seen.  The charts suggests this, but does it make sense?  Assuming a zero growth EPS from the last 4 quarters (16.1), at 270 the PE is 16.7; and at 220 the PE is 13.6.

The only way a sell rating is justified here is if they are expecting a severe contraction in EPS.  Now to be fair, I have seen online estimates that merit concern, obviously, with the biggest contraction being in display ads. But are these analyst taking into account the cost cutting ability at GOOG?

Greentechmedia.com is running an interesting ‘Water’ series. Here is the first part…

article 1 (A Guide to World Water)

Good stuff, especially if water (as an investment) is of interest.

There is no comfort in this market.  Nor is it fun.

I have made my plays, and depending on how some of these puts I sold play out this week, I may end up being invested with the majority in stocks. (Except for some cash I will maintain for trading/protection.)

The only comfort we have is that valuations are really really good. But I can see why others may get really really scared here, as there appears to be no hope for a recovery.  I just have to keep reminding myself, at the end of the day, valuations do matter.  A stock, as a function of earnings and assets, have value.

And I do understand the situation, really I do. I understood the situation well before others did being short the market for about a year on and off, being negative on oil at its highs, and seeing the negativity of a major disruption before the disruption (LEH going under) took place.

The market is no fun when everyone and there mother is happily calling for the market to go lower, just because that is the trend. (Those are the people that usually get killed in the market.)  Anyway, I am not dillusional, I just think valuations still matter. And that is the only way we can play this market. 

Wait for valuations to get too low, buy.  When the stocks pop, sell or protect against the positions.

Valuations are the only truth to this market.

When I use the term valuation, I refer to discounted cash flow method.  Normalizing earnings/growth over the next 5yrs.  But at the individual level, if we were to look at potential PEs over the next few months, we see multiples of high growth stocks that would normally make people drool.  GOOG w/a PE of 16. Even if there is ZERO growth in 2009, meaning GOOG makes 19 eps this year and next, is that still not a good price for it?  Same goes for MA, AAPL, PG, BNI… and others that are seeing industry trends that allows them to not contract as much as the economy contracts.

In this utterly crappy environment, I am just trying to be realistic.

I understand why Buffett made his play on GS at 115.  Seeing how his favorite valuation tool is valuing via discounted cash flow, I ran a few numbers on GS…

Lets say GS produced, with its loss, produces $5 eps, and we normalize that for 5 years.  Now assume a growth rate of 1… yes… 1.0%, and a terminal PE of 5.0, the value to GS is…

$98 per share.

Yet it is trading at 67, which is drastically below book value.  One can argue the bookvalue is impaired, which can be true, but to this severe degree?

The one thing I will say and know, the Nov Puts are selling for a nice premium (yet expire next week), and if you do not mind owning GS here, look to sell some out of the money puts to capture the high premium. Or if you want to own GS, sell the 70 Nov Puts today, and you will be purchasing it for 63 a share (if it stays below 70 on 11/21). Or the 75 Put, and you’ll most likely get the common and only for 65. (This of course takes into account the premium you’ll be paid for the sold puts.)

818 of the SP500 indicates a monthly support via a 6yr monthly chart.  Could mean something, especially since I am noticing some buying insterest here.

Then again, it could mean jack-shit.  At the moment the market is too difficult for me to guage.  I have my positions, and am waiting. I know the price I paid for what I have are good, so I am not scared, but am more sad.  Sad to the state of affairs America currently is in. I just don’t want to see people giving up, to which I have read plently of ‘giving up’ articles over the past few days.