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10/20/2008 - Jim Cramer Retreats Along With the Dow - What I gleaned from this article is that Jim Cramer is not sure what to do in this market at this time except to sell. I'm not sure, either, except that I think it is a good time to buy stocks. Warren Buffett has already taken my advice—just kidding! If you already own stocks, just hold onto them; else you'll be selling at the bottom. The market is not likely to drop further, and October has traditionally been a volatile month—remember the stock market crashes in 1929 and 1987 were both in October, and we just had another one. Furthermore, the market is frequently down in mid-October, even when there are no crashes. However, it starts to rise toward the end of the month and into November and December, with December being the best month historically for stocks. The market probably isn't going to zoom up, since it will take time for the market to start growing again, however, there is ample evidence that the government intervention is working: the TED spread is now at 2.95, down from a decades' high of 3.65, and the 3-month LIBOR is also down from a recent high—both are indications that credit is starting to flow again, which should certainly help the markets.

Do Companies that Announce Stock Buyback Programs Outperform the Market?

Researchers have noted that, in the 1990's, companies that bought back their stock outperformed the market for up to 4 years after the announcement of the buyback program. The most significant reason for this increase is that managers buy back stock when they believe that it is significantly undervalued, and, of course, buying back the stock increases its demand and therefore its price.

However, a recent study by Standard & Poor seems to contradict this commonsensical notion. They found that 320 out of the 423 companies in the S&P Index that repurchased its shares between January 1, 2006 to June 30, 2007 would have done better by taking the money and investing it in an index fund benchmarked to the S&P 500.

The conclusion is that, while most managers don't try to mislead investors, many buyback programs do not specify how many shares will be repurchased nor the time of their repurchase, and, often, the buybacks don't occur—and sometimes, the stock buyback program can be bogus, announced to increase the stock price at least temporarily!

The study has found that those managers that heavily use discretionary accruals—which are revenue or expense items that managers have large discretion in deciding when they will appear in the company's financial statements, and what their value will be—generally perform worse than companies using less discretionary accruals. Managers using discretionary accruals aggressively can only bolster the share price temporarily, because eventually such items will have to appear in the financial statements.

The finance professors who conducted the study reasoned that managers that announced bogus stock buyback programs would be more likely to use discretionary accruals. They conclude that the stocks of companies that announce a buyback program, but don't use discretionary accruals aggressively, generally outperform the market.

Strategies- Are Buyback Stocks Still Good for Investors

Stock Buybacks—Manipulating Earnings for a Bigger Post-Buyback Increase in Stock Price

SSRN-Earnings Management and Firm Performance Following Open-Market Repurchases by Guojin Gong, Henock Louis, Amy Sun

This study found that many companies that buy back a significant amount of their own stock may be manipulating the company's earnings downward right before the buyback, which is then adjusted upward after the buyback is completed, resulting in better than average performance.

Best Time to be Invested in the Stock Market—November to April

The most lucrative months to be in the stock market, according to the Stock Trader's Almanac 2007, is from November to April. Over the past 57 years, the Dow Jones Industrial Average gained only 174.61 points over the worst 6 months of the year, from May to October, but gained a total of 12,850 points over the best 6 months, from November to April. That's almost all of the Dow's gain. (Closing value on 5/15/2007: 13,383.84.)

If you had invested $10,000 in the stock market, but only kept your investments during the best 6 months, from November to April, over the past 57 years, you would have $588,000 today. However, if you had kept your investments in the market for only the worst 6 months of the year, from May to October, the value of your investment would only be $10,341—barely more than you had invested 57 years ago!

Reasons given for the increase in the best months are that people invest year-end bonuses and tax returns, and make 401(k) contributions.

The video did point out, however, that May was the best month, for 13 straight years, from 1985 to 1997, for the S&P 500.

One thing that I have observed is that the 1st half of May is often good, as it has been this month, but then it starts declining toward the end of the month. I also believe that one could do better by beginning the investment period in mid-October, after the stock market reaches its low point, rather than waiting until November. The stock market usually starts rising toward the end of October, especially after the 3rd Friday of the month, when October options expire, then the rise simply continues into November.

Private Investment in Public Equity Securities (PIPES)

SEC Slows Flow of PIPE Deals to a Trickle - WSJ.com

Private investment in public equity securities (PIPES) are unregistered securities, which can be stock or convertible debt, issued by small-cap, high growth companies that are sold in a private placement to institutional investors at a 5% - 15% discount to the issuer's common stock. The company then tries to register the PIPES with the SEC so that they can be sold to the public by the original investors. PIPES allow a small company—which cannot get loans or more traditional financing because the company is too small, unproven, or too heavily in debt—to avoid the time and expense of a public offering, and receives immediate cash.

Although PIPES have surged recently, the SEC has significantly slowed the registration of these securities because of the risks, which include insider trading and the significant dilution of the common stock, which can lower stock prices. Often, the number of shares issued as PIPES is more than the number outstanding, so the SEC has been reluctant to register more shares than 33% of the public float—the number of shares held by the public, to prevent significant dilution and the consequent undermining of the common stock price.

The SEC is also leaning toward treating the resale of the securities as a more heavily regulated primary offering rather than as a secondary offering. The SEC may provide more information, in 2007, as to when the resale of PIPES can be considered a primary offering or a secondary offering.

Nominated Advisers (Nomads) — Overseers of Small Companies Listed on AIM

Uncertain AIM: A Hot Market In London Has Its Risks, Too - WSJ.com

AIM (Alternative Investment Market), launched in 1995, is part of the London Stock Exchange for new companies, that requires less money and less disclosure to get listed than it does on an American exchange, leading to more new companies being listed than for the New York Stock Exchange and NASDAQ combined. Half of AIM's 1600 companies have listed since 2005, with almost 300 companies outside of the U.K. 90% of the companies have market values of less than £100 million (about $197 million).

To get listed on the London Stock Exchange, the Financial Services Agency of Britain reviews listings to prevent fraud, much as the SEC reviews listings for new companies before they can offer shares to the American public. AIM uses nomads, instead.

Nominated advisers, or nomads, who typically work for a stock brokerage, reviews the company's documents to learn about management, financial controls, and growth potential, to decide if it should be listed on AIM. If approved, then companies must pay an annual fee of $7,595 to the exchange, and $40,000 to $100,000 to their nomad. To contrast, the annual cost of an NYSE listing ranges from $38,000 to $500,000, and NASDAQ, $21,225 to $75,000.

Once listed, the nomad provides advice on handling news and is supposed it ensure that the company is serving shareholders well. Because many nomads tout the companies under their watch, they have a vested interest in presenting the company in the best possible light, making any information they provide about the company suspect. The London Stock Exchange has 14 people monitoring nomads and any unusual price movements in any stocks. An external committee handles any discipline deemed necessary. If a nomad, who cannot sanction the company for violations, has any qualms about its company, the nomad is required to contact the London Stock Exchange.

There are a few conflicts of interest in using nomads as overseers. If a nomad resigns, for instance, trading of the company stock is halted until a new nomad is found. Another conflict of interest arises because the listed company can dismiss its nomad, whose brokerage would lose the fees paid for nomads, which could cause nomads to overlook irregularities.

In general, companies listed on AIM have not done well. The FTSE AIM Index is down slightly, compared to the 16% growth in the Russell 2000 Index, which is composed of companies similar in size, for the same period.

Pink Sheets, LLC, is planning a similar service in the United States, referring to the nomads as the Designated Adviser for Disclosure, or DAD.

Stock and Option Conditional Orders Tutorial

Conditional Orders Tutorial

This is an excellent tutorial about the different stock and option limit orders that can be placed on E*Trade, including trailing stops, hidden stops, contingent orders, bracketed, One-Cancels-All, One-Triggers-All, and One-Triggers-OCO (One-Cancels-Other) orders. It not only explains how each order works, but also shows how to implement the orders using either E*TRADE's website, or the Power E*TRADE Pro software.

CAPS — Motley Fool's New Stock Rating Forum

Motley Fool Site To Evaluate Gamut Of Stock-Pickers - WSJ.com

CAPS is a free stock-rating forum just introduced to the public by the Motley Fool, that rates stock pickers from individual investors to big brokerages, research boutiques, and stock-picking mavens like James Cramer.

Participating investors predict how a particular stock will do compared to the S&P 500 over a specific interval of time. They are then rated in proportion to how correct their predictions were, and how the returns fared against the index. A participant is assigned a rating after predicting the performance of at least 7 stocks.

Individual stocks are also ranked, using a 5-star metric, by the participants. Only participants that have a rating can influence the rating of a particular stock, and the effect on the stock's rating will be proportional to the participant's rating.

To rate the predictions of Wall Street firms and famous mavens, the Motley Fool relies on data provided by Briefing.com for analysts' recommendations, and compares them to actual performances.

Thus, individual investors can see how well they've done compared to the big boys, and how well the big boys actually do.

Program Trading using Quantitative Strategies

Your Portfolio on Autopilot - WSJ.com

Program trading is allowing the computer to trade stocks in your account according to some algorithm that someone has conceived to hopefully make money automatically. Naturally, program trading is predicated on the fundament of technical analysis—that profits can be made simply by observing patterns in market activity that can forecast future price movements. The most sophisticated of these can trade stocks, options, and currencies in the same portfolio.

Program trading was restricted to big investors, but several brokerages are now offering program trading software for small investors. TD Ameritrade Holding Corp. is planning on providing automated trading to its customers very soon. Fidelity Investments provides Wealth Lab Pro software where investors can program their own algorithms based on historical data and 600 market indicators, or choose from about 1,000 quantitative strategies already programmed into the software. TradeStation claims that investor interest is high and growing. Interactive Brokers provides forums where program traders can exchange ideas for new algorithms, or provide their ideas to new investors. Some brokerages are offering a less risky strategy by simply sending alerts based on preset market parameters. Most brokerages prudently allow only active investors with a substantial minimum in their accounts to program trade.

Naturally, the brokerages like program trading, because computers trade without worrying about how much money the trades are costing the investor in brokerage commissions. Other risks to the investor include the possibility that the trading algorithm will have significant flaws that may only come up in unusual market conditions, especially since it is impossible to test this kind of software under every possible scenario, but these flaws could cost the investor a significant amount of money, for which the investor will be legally liable. This is especially true for new algorithms being submitted by other investors in forums.

Alas, program trading, like technical analysis, and throwing darts at a list of securities, only works some of the time for the lucky few. Since program trading doesn't take into account company fundamentals, it is, by necessity, based on historical patterns, and if one can profit by simply repeating past strategies, then we can all be rich by simply following the most successful algorithms. But this can't work, because trading doesn't create new wealth—it only transfers wealth from 1 trader to another, so in any given trade, somebody wins, but somebody else has to lose, although it may not be immediately evident who is who.

There is one group, however, who will be consistent winners with program trading, and that's the brokerages, as they reap the increased commission income that comes with program trading.

New European IPO Indexes — the Dow Jones STOXX IPO Indexes

WSJ.com - New IPO Indexes To Cover Europe Issues

STOXX Ltd., a European stock-index provider, launched 3 indexes that cover initial public offerings of stocks in Europe, that have a free-float IPO market capitalization between €100 million and €3 billion ($128 million and $3.85 billion).

The Dow Jones STOXX IPO Indexes include IPOs that have been on the market for 3, 12, and 60 months. Each company will be transferred to the longer index as it passes the time limits for the current index. The number of components of each index is necessarily variable, but will not fall below 10.

SEC Requires Executive Pay and Option Grant Disclosures

The SEC adopted new rules on July 26, 2006 that would require companies to:

Check Out Broker/Dealers or Investment Advisers (IAs)

FINRA BrokerCheck enables investors to get information on any FINRA-registered firm or broker, which includes virtually every securities firm doing business in the United States.

Created in 1988 by the National Association of Securities Dealers (NASD), an investor can learn about the professional background, business practices, and conduct of registered firms and their brokers, and other information such as bankruptcies, consumer complaints, or disciplinary actions by the SEC or FINRA, either by going to FINRA BrokerCheck or by call (800) 289-9999 and requesting a report about a particular firm or broker.

On the SIPC Protection page, you can check to see if your broker is a member of the Securities Investment Protection Corporation, which returns money to investors if the broker/dealer holding their funds becomes insolvent.

FINRA BrokerCheck does not include information on Investment Advisers (IAs). Instead, go to the SEC's Investment Adviser Public Disclosure website at http://www.adviserinfo.sec.gov for information about SEC-regulated and state-regulated IA firms. Note that only information about IA firms is provided, not IA representatives, although this will be added in the future.

FINRA Manual — Here's a guide to the complete FINRA Manual Online.

You can also find a list of all state securities regulators at http://www.nasaa.org, the official website of the North American Securities Administrators Association. Click on the Contact Your Regulator link, and then the state of interest. You will also find links to pages within the websites of NASAA members containing information about individual state, provincial, or territorial securities laws, rules and regulations. By clicking on the name of a state, province, or territory, you will be redirected to that jurisdiction's website.