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Oct 9, 2006 - Issue #027



Bailing Out?



Dow score card for the week ending 10/6/06.

DJ-30: 11850.21 +171.14 +1.47%.

UP: 22 (-5), Down: 8 (+5).

Trends (weekly): This is the subjective part.

Rising 21 (+3):

AIG, AXP, +*C, +*DD, DIS, GE, HON, HPQ, +*IBM, INTC, JNJ, JPM, KO, MCD, MO, MRK, +*MSFT, PG, T, +*UTX, VZ.

Consolidating 5 (-4):

CAT, -*GM, -*PFE, WMT, XOM.

Declining 4 (+1):

AA, (?)BA, -*HD, -*MMM.

* denotes change of category.

+/- denotes change of direction.

First, a comment on (?)BA above:

BA rose the most points (+4.83) and had the highest percentage gain (+6.13%) of any of the Dow components so why is it in the declining category?

The answer: Although it is classified as rising on the daily chart, the weekly chart displays the lower-low, lower-high pattern which is the classic definition of a stock in declining mode.

As for the week past, did you cheer, along with the crew on CNBC and everyone else, at the Dow's performance? Do uou feel any richer?

Just to show how misleading the Dow really is, as the so-called "average" was scoring new highs, comparing charts of the individual components with a chart of the Dow-Jones Industrial Average (over any time frame you choose) reveals an entirely different picture altogether. For a real shocker, compare everything on monthly charts. Make sure you're sitting down first!

As the scriptures are want to say, "Let those with eyes see." It's not a pretty sight, is it? Only a handfull of stocks are anywhere near their highs.

If you owned equal dollar amounts of every stock in the Dow, you might wonder (justifyably so) how this could be? Good question. The best answer I can come up with is the cynical saying, 'there are lies, damned lies, and then there are statistics'! Figures don't lie, but liars figure! (See Inside the Dow).

As for me, I was fascinated with the drama going on at the GM trading post.

Although Mr. Kirk Kerkorian does not consult with me regarding his affairs, I could not resist fantasizing (intellectually, of course) over the problem of how to go about extricating oneself from such a huge amount of stock, should one wish to do so, without hammering the price into the ground.

Let's say that you're Mr. Kerkorian (nice, huh?). Through your holding company, Tracinda Corp., you control 55 million shares of GM stock. Big enough to have your own man on the Board of Directors, but not enough to force things your way.

You would like to see GM partner up with Renault-Nissan in a deal.

Your man on the board, Mr. Jerome York, informs you that things are not going well.

Let's further say that, should this deal not go through, you see no reason to continue owning the stock.

What to do? You can't just go online and dump 55 million shares of stock and expect to get a decent price.

Days before a decision is expected on the deal, you decide to hedge your position. If the deal goes through, you plan on lifting the hedge. If not, you plan on liquidating.

There was a time when the services of specialists, block trading houses, exchange offerings, etc. would be engaged to help with the distribution and they still may. But while you're putting on your hedge, the fewer people that know about it the better. Word will get out soon enough. The best kept secret on Wall Street is having a half hours' head start. You might even announce your willingness to increase your holdings, if the deal is approved.

If the deal falls through, like a nation going to war, you'll tell Mr. York to resign (break off diplomatic relations and burn the code books!).

You will announce that you are no longer interested in buying more stock. CNBC will go bananas saying, "What does this mean? Everyone we've talked to says there is no sign of Kirk Kerkorian selling!" They can't ask you because you don't grant interviews. The stock takes a hit. Someone, sure as hell, is dumping but nobody knows who or won't say. And so it will go.

When hedging, one possibility: Buying put options to hedge the position. This not only requires the paying of a premium but you run into the problem of position limits. Your position, unfortunately, is over the limit. Bummer!

However, a new tool is now available that was not available before and has to make the job so much easier: Single Stock Futures (see my page).

Just as farmers, grain elevator operators, and manufacturers purchasing raw materials inventories use the commodities futures markets in their daily hedging activities, so too can investors of all types (individuals, corporations, etc.) utilize the new single stock futures in their legitimate hedging activities without limit.

And guess what? Position limits only come into play during the last 5 days of the life of the contract. What does that mean? It means that if you haven't flattened your position by then, simply roll the remaining position forward and continue with what you were doing. As you sell stock you buy back futures until both positions are "flat" (down to zero). Any loss on the stock is offset by the profit on the futures.

Also, when selling futures you take in premium. How 'cool' is that?





Comments? Ideas? Feedback? Let me have it, right between the eyes! I'd love to hear from you. Just reply to this zine and tell me what you think!

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