Take Three: S&P500 Riding Resistance Line, Super Cycle Theory, & DMND's Cooked Books

Albie's Take:

2-10-12: After having ridden the top of the Resistance line all week, the S&P500 found it's excuse to take profits today and drop downtoward support. Problems with Greece's debt deal is no doubt the 'excuse'. Here was my report from earlier this week:

2-8-12: "The S&P has been riding the Daily Resistance line now since last friday and may continue in same manner or break Daily Resistance if all goes well with the Greek debt deal. But pressure is there for traders to take profit and there is reason to start taking a short position. Personally, I would wait till the high's of the news wears off and there is not much fundamental play before I took a short position."

As to the Australian dollar (AUD), it has reason to hold strong against its other currency pairs - especially the EUR: "Australia Holds Key Interest Rate at 4.25%
"Australia’s central bank unexpectedly kept its benchmark interest rate unchanged as domestic growth withstands Europe’s debt crisis, sending the nation’s currency soaring to a six-month high."
www.IronFX.comMARKETS UPDATE
07 Feb 2012"

However, if news breaks in favor of the Greece debt deal, the EUR will have some new fighting power. Presently, speculation about the results are keeping the EUR strong.


Troy's Take: The Super Cycle Theory: This idea was made famous by famed investor Jim Rogers. This concept says that the investment world goes through 20 yr Bull and bear cycle markets in Stocks and Commodities. This concept goes back at least 100 years but I will start from 1940.

1940-1960’s- Stock/Equities were in a Market Bull. We were just recovering from the Great Deflationary Depression. In the early 1950’s the Dow returned to its pre-Depression price.

1960’s to 1980’s- Equities fell into a major bear market. The market was basically flat and the price of Gold surge and basically equaled the price of the Dow at about 850. There was also high inflation during the 1970’s. Stocks (except commodity stocks) were not a place to be.

1980 to 2000-Things changed again. Equities were now back in a bull market. From 1980 to 2000 the Dow went from 835 to over 10,000. The Gold price plummeted from $800 to approximately $260 per ounce. This is what most average investors remember and hope will return soon. This is what I call “Pathological Nostalgia” because it’s not going to return anytime soon.

2000-2020. Things changed again. We started our major recession after the stock market bubble burst in what year? That would be about 2000. Imagine that… This was when gold, silver and oil and other commodities started to trend upwards. This was kinda when gas prices started to get higher… The price of gold fell to about 250 per ounce to $1660 per ounce now…Silver went from about $5 per oz to $30 as of today. This is one of the main reason why I am very bearish on equities. History may not repeat itself but it does rhyme…

Bryan's Take:

"Since Albie and Troy's comments about the Macro environment, gold, and what China is up to lately don't interest me, and I am therefore completely ignorant on the subjects, I present to you something fun and speculative (not for the faint of heart)

Taking a bite of Diamond Foods: An analysis in behavioral psychology

One thing I learned from Warren Buffett is to take big bets when the odds are in your favor, much like someone who counts cards in Las Vegas. You won’t win every time, but when you do win you win big! I believe such an opportunity may have presented itself here in Debacle that Diamond Foods has gotten itself into. In a nutshell (no pun intended) it looks as if management tried to cook the books (again no pun intended) to a certain extent by not categorizing the money paid to Walnut Growers properly on their financial statements to tune of approximately $60 million. The CEO and CFO were both ousted from their posts yesterday because of it. The stock, having already been hammered this year due to financial misgivings, was given a veritable death blow today as it careened down another 40% today finally settling at $23.13 end of day. Keep in mind this was a $90 stock just a few months ago. This puts the P/E ratio at just over 10 times “earnings”. Now, there are many ways you can look at this. A bear might say that they just found two cockroaches in the kitchen and there are always more. In addition, since this debacle is related to their financials, who’s to say what their real financials are? Both valid points.

Here’s how I see it. Since their financials are obviously unreliable, at least for the last couple of years, I can’t really form a thesis based on them. Therefore, I am switching to the other side of my brain, and I ask myself “what would I do if I were Wall Street?” Since the majority of the money in stocks is institutional (mutual funds, ETF’s, Index Funds, etc), whatever they do is going to dictate the direction of the stock, both short term and long term. This stock is like a nightmare to a fund manager right now because it has been going down off and on for several months. When stocks take a nose dive, it means that the institutional guys are fleeing in mass. I think the stock may be at or near it’s bottom now. Why do I think this? Well, first the stock pretty much flat lined all day today after hitting a low of just over $21 dollars. That means that some value oriented investors were there as a buoy in case the stocked dropped down again, in which case they would pick up more shares. But also, just knowing how Wall Streeters think, they bank on certainty. They will kill a stock that misses earnings, much more one that misstates earnings. They are notorious for way overselling stocks surrounded by controversy, and then coming back in slowly as the smoke begins to clear. Think Johnson Meade, Carnival, Pepsi, Netflix….I could go on and on. So here are the 3 scenarios that COULD play out:
Worst Case Scenario: We find out that this thing is even bigger than we thought. There are more cockroaches in the kitchen, and the result is negative earnings. Wall Street news hits Main Street and people in all cities and towns in the world boycott the company, and stop buying Pringles, Walnuts, Almonds, Chips and everything else from Diamond because they are disgusted with their Shenanigans. Their stock drops to zero and we lose all our money as shareholders
Best Case Scenario: The already ousted CEO and CFO take the fall for the company’s misgivings. The financials are restated and it turns it was nowhere near as bad as everyone thought…earnings aren’t affected very much, and an analyst at Piper Jaffray gets excited and upgrades the stock….causing all the high paid lemmings at the other Investment Banks and Institutions to follow suit and the stock goes back to $50 dollars in a matter of a few months.

Most likely scenario: The worst part is over. They got the fall guys out of there already. Diamonds board pledges that their reputation is paramount to their success. The financials are restated and it’s bad but the company will survive and over the next few quarters things start to improve once this is behind them, and once bitten Wall Streeters learn to trust the good folks at Diamond again. They even start to play golf with the new CEO and CFO. People around the world continue to eat Pringles, Chips, and nuts of all varieties. They go about their lives completely oblivious to Diamond Foods former financial problems.
From the money in RISKY BUSINESS portfolio I am betting that the third scenario will play out. I won’t buy right at the open tomorrow. I will wait to see if the stock goes anymore before I purchase, but if it stays under $24 I am pulling the trigger tomorrow morning. I have the advantage of not having to report a profit to my shareholders next quarter, so if it takes a little longer for the company to recover so be it. That just means I won’t have to pay the short term capital gains rate. I am long DMND