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Blue Collar Mission Statement

1- Become CEO of your own money

2- Become financially independent

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Never before have the convictions of the Blue Collar philosophy become more meaningful as they have this past week with the arrest of Bernie Madoff for what may become the biggest fraud in the history of Wall Street. Madoff, now being called “the Thief of Wall Street”, engineered a $50 billion ponzi scheme that has had a rivetting impact on families and charities from Palm Beach Florida to Europe and beyond. How could this have happened, how could it have been avoided, and what are the lessons learned?

Background:

Madoff was a self-made man. His roots began on Long Island, NY as a life guard and sprinkler system installer before entering the world of finance. His reputation grew as a competent, ethical, and philanthropic pillar of the Wall Street community. He was named Chairman of the Nasdaq as his reputation reached impeccable heights. Everyone trusted Bernie. His firm, Bernard L. Madoff Investments Securities LLC (“BMIS”) ,consisted of two main branches:

1- The broker-dealer section which traded stocks for their own accounts. This part of the business has not been implicated in any wrong-doing.

2- The money management section where he oversaw tens of billions of dollars of client assets and where he ran his ponzi scheme.

What is a Ponzi Scheme?:

Named after Charles Ponzi wherein money is taken from new investors to pay off longer term investors. Charles did his scam by touting a postage stamp that could be used anywhere in the world. He guaranteed investors to return double their money in 90 days. As new money poured in, the former group of investors were paid off and the scam snowballed. In much the same way, Madoff claimed consistent returns of 12% annually in any and all market conditions. He paid off investors with the tremendous flow of new money coming into his firm. This worked great for many years until the market hit its current downturn and people started pulling out of the market and no new money flowed in. The gig was up!

How did he claim to accomplish these returns?

He used what is called a split strike conversion strategy which is a fancy term for an option collar: He buys a stock from the S&P 100 (like Coke or AT&T), then sells a call option and buys a put option on that stock. This is vaguely similiar to what we do except he also buys a put (like getting insurance but lowering potential profit). This strategy works in an uptrending market but old Bernie claimed success in all market conditions. His trading was non-transparent and never checked by the regulators because everybody trusted Madoff.

Warning Signs and Regulators:

In 1999, Frank Casey, Fortune USA President, along with his fund managers ran a “dummy portfolio” using the split strike conversion strategy. He came to the conclusion that the claimed results were fraudulent and reported this to the SEC in 2000, 2002, 2005, and April of 2008! He backed these allegations with the fact that the volume of options traded could NOT possibly support the claims Madoff made of buying and selling options on tens of billions of dollars of S&P 100 stock. He also complained about the lack of transparency in Madoff’s portfolio. One of Casey’s associates wrote to the SEC: “The SEC should burn in hell for allowing this to blossom from a $10 billion ponzi scheme in 1999 to $50 billion one today”.

The SEC missed many red flags. First of all, Madoff had an impeccable reputation. Many former SEC officers become part of Wall Street. Arthur Levit, former SEC Chairman even asked Madoff to help develop policy for the SEC! How could anyone doubt this man? Furthermore, SEC resources are limited and cases need to be prioritized. They tend to focus on high risk investments like derrivative trading, not the more conservative system of Madoff (or so it seemed).

Christopher Cox (this man is toast!), the current SEC Chairman admits shock over the lack of follow-up with regards to the allegations made from 1999 to the present.

Who got hurt?:

This is the really sad part. So many hard working people trusted their life savings to this monster/sociopath. Members of the rich and famous set like Steven Spielberg, Frank Lautenberg, Mort Zuckerman, and many of their charities all got hooked in. In addition, many pension funds gave a bulk of their cash for Madoff to invest for them. Outside the USA, institutions such as the Royal bank of Scotland and the Korea Life Insurance Company were also severely impacted. First we learned that we could not trust AIG, then Lehman, now this. Who can we trust? How do our global financial partners feel about regulation in this country?

Many people have been effected and may not know it yet. Those who invested in Fund of Funds may have had money held by Madoff. These funds use as an investment strategy investing in other funds rather than investing directly themselves. Many of these Fund of Funds gave a bulk of their money to Madoff and their investors will feel the loss as well.

Lessons learned:

Everyone who knows Bernie Madoff is shocked. Wall Street, the SEC, stockbrokers, friends, relatives, you name it. Where does that leave us, the average Blue Collar Investor? How can we figure out who to trust if all these people can’t? We can’t either!

How can this happen?

This is probably a whole article unto itself. Suffice it to say that it probably is some combination of lack of education (I know nothing about the stock market), laziness (I just can’t take the time), and greed (It doesn’t sound reasonable but I’m in!). Most of all it takes a brilliant mind tarnished with sociopathic tendancies. Look at all the good people this man hurt.

The Blue Collar Philosophy:

By becoming CEO of your own money we would never entrust all our money to one person. We don’t care about reputation only what makes common sense. Even if we did give some of our hard-earned money to Madoff for his crime spree, it would have been a small portion because diversification is so important in our investment portfolio. We would never, ever give all our money to one guy! I believe in diversifying asset classes, stocks, and cash. If you get hurt in one area the others can pick you up. I’m all for mastering a particular strategy, after all that’s what I do when I sell covered call options. My son, Craig, gave me a great analogy in this regard: He calls it “learning the move”. When he was in high school, Sega Genesis was in vogue. He played an ice-hockey nintendo game where you would take the puck in on the backhand and then as you approached the goalie, switch to the forehand and you could score on anybody. He learned the move and was successful most of the time. Our move is selling covered calls or whatever move you choose. It is much more prudent to learn the move than to fall victim to the Bernie Madoffs of the world.

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Jim Cramer Makes Us Some Blue Collar Money; Vol. IX by Tony Covino

“Let’s Make Some Bread”

Hello all Blue Collar Investors!

On December 11^th Jim Cramer had the CEO of Panera Bread (PNRA), Ronald Shaich, on his show. He told Cramer that despite a tough 2008, Panera Bread is up 34 %. Comp sales have been in positive territory for the first three quarters and said this quarter will be the same. Earnings are expected to jump between 46 % and 54 %. “We’re not walking away from that guidance”, Shaich said.

Panera’s also sitting on $31 million in cash and should generate $ 70 million in free cash flow next year. That’s a great cushion to get through this recession, but Shaich is focused on growth. “A recession is probably the greatest opportunity you can have”, the CEO said, “to build a company and to build a fortune.” This sounds to me like this CEO has tremendous faith in his company!

Let’s run this company through our Blue Collar fundamental checks:

• Overall : A
• Technical: B+
• Fundamental: A –
• Attractiveness: A+
• Group Technical: C
• Overall rank: # 1 out of 63 stocks
• Earnings report due on  2/10/09(not confirmed)

Now let’s look at the chart:

PNRA Chart 12-19-08

The 20d EMA is just above the 100d in an uptrend rebound

• The OHLC bars are trending above the 20d EMA
• The MACD is above its trigger line and both are above the zero line
• The MACD Histogram is above the zero line (above trigger)
• STO is at 80 and slightly below its trigger line
• Heavy volume around December 3^rd pushed the stock price up

If we were to sell an option in a normal market we could sell the Jan $55 call @ $3.20 for a 1-month 5.9% return OR  (more conservatively) sell the Jan. $50 call @ $6.30 for a 3.3% 1-month return with a phenominal 8.5% downside protection!

In closing:

Panera Bread is seeing a benefit of lower commodity prices both for itself and its customers. The company’s food costs are down and that will increase company margins. We have lower gas prices and that means customers are more willing to spend a night out with that extra money in their pockets. Cramer calls Panera Bread, “a winning stock with winning management and that’s exactly what you are looking for in this difficult environment.”

Thanks and I hope to hear from you all,

Tony C.

——————————————————————————————————————Last Weeks Economic News:

On Tuesday, the Federal Reserve Board announced that it would lower the federal funds target rate from 1% to a range of 0% to 0.25%. It also indicated its willingness to purchase mortage-backed and Treasury securities. This sparked a market rally on tuesday wherein the S&P 500 rose 5.1%.

Other news wasn’t as positive. The Consumer Price Index (CPI) had its largest monthly drop ever, indicative of the depth of the recession we are experiencing. Steep declines in housing starts and industrial production also added to the negativity. For the week, the S&P 500 rose 0.9% for a year-to-date return of -38.15%.

I really hate ending my articles on bleak economic news sooooooo…..the Yankee signed Sabathia and Burnett so their pitching staff is looking really strong for 2009!

Use the “comments” link from this article to add your opinions and suggestions.

Best wishes,

Alan (alan@thebluecollarinvestor.com)

]]> http://www.thebluecollarinvestor.com/blog/%e2%80%a2the-bernie-madoff-ponzi-scheme-a-validation-of-our-blue-collar-philosophy-plus-tony-c-checks-in-on-cramer/feed/ 5 http://www.thebluecollarinvestor.com/blog/call-to-the-sec-wake-up-and-reinstate-the-uptick-rule-now/ http://www.thebluecollarinvestor.com/blog/call-to-the-sec-wake-up-and-reinstate-the-uptick-rule-now/#comments Sun, 14 Dec 2008 16:51:34 +0000 admin http://www.thebluecollarinvestor.com/blog/?p=509 Did you ever sit down, scratch your head and say to yourself, “I just don’t get this?” Maybe your best friend is dating a loser; or your favorite pro football team recently hired a clueless coach; or perhaps your college professor just finished puffing through a full pack of cigarettes while giving a 1-hour pathology lecture. Well, I’m scratching my head right now and asking: “why hasn’t the SEC reinstated the Uptick Rule?” I first addressed this issue back in September:

http://www.thebluecollarinvestor.com/blog/jim-cramer-makes-us-some-blue-collar-money-vol-6-plus-keep-an-eye-on-stock-splits-by-tony-covino-and-alan-ellman/

For those Blue Collar Investors not familiar with this rule let me first start with a few definitions:

1- Uptick Rule: An SEC rule that requires every short sale transaction to be entered at a higher price than the price of the previous trade. It prevents short sellers from enhancing the downward momentum of an asset which is already declining in price. This rule does not apply to such ETFs as the Qs which ARE allowed to be shorted on a downtick because they are highly liquid, have plenty of buyers, and will rarely be driven to unjusifiable low levels.

2- Short Selling: The selling of a security that the seller does not own, but rather borrows. The assumption is that the price will go down so it can be bought back and replaced at a lower price thereby generating a profit on the price decline. If we sell short 100 shares of stock XYZ @ $10 per share, $1000 is generated  into our account. If the stock price decreases to $8 per share, we buy it back @$800 to replace the borrowed shares thereby earning a $200 profit. This tactic is often used in Hedge Funds. Please note that short selling isn’t all bad. It provides a check against unrealistic price exuberance and provides natural buyers on the downside. But without the uptick rule, unsavory professionals can use it to hurt average investors like us.

3- Bear Raids: The illegal manipulation of attempting to push the price of an equity lower by taking large short positions and spreading negative rumors about that company.

History:

The original Uptick Rule (SEC rule 10-a-1) was implemented by Joseph P. Kennedy, Sr., the first SEC commissioner in 1938. This helped create the needed market stabilization to offset the volatility and risk that resulted from the Great Depression. This rule remained in place until July, 2007. With this rule now eliminated, we have seen bear raids which have driven down share prices dramatically without warning, hurting us financially and causing the loss of market confidence among Blue Collar Investors. This rule needs to be brought back NOW. The SEC MUST limit the manipulative ability of these professional traders and thereby profiting from these downdrafts at our expense.

So why, you ask, was this rule repealed in the first place. Well, the SEC did a study. Sounds dangerous already! It was conducted from 2005 through part of 2007 when market volatility was low and price appreciation was the norm. The SEC felt that the markets could take care of themselves without the oversight of this rule. How wrong they were. I just don’t get it….why don’t they reverse that decision? These guys did wake up briefly in the fall when they implemented temporary short stock borrowing restrictions and also instituted a ban on the short selling of financial stocks. But then they went back into hibernation. Will somebody please wake these guys up!

Calls for reinstatement; I’m not the only one:

1- Muriel Siebert, former state banking superintedent of NY: “The SEC took away the short-sale rule and when the markets were falling, institutional investors just pounded stocks because they didn’t need an uptick.”

2- Jim Cramer (you know who he is!), who said the SEC needs to start enforcing the laws again, regulate the markets, stop bear raids on stocks, get rid of the ultra leveraged ETFs and bring back the uptick rule.

3- Wachtell, Lipton, Rosen & Katz, an advisor on mergers and acquisitions, said short-selling was at record levels and asked the SEC to reinstate the uptick rule…there is no tomorrow.

4- Also calling for reinstatement are (from Congress) Gary Ackerman, Carolyn Maloney, and Mike Capuano, along with Senator John McCain who said that the SEC has allowed short-selling to turn our markets into a casino.

5- The New York Stock Exchange: In an October, 2008 survey, 85% of the members of the NYSE supported reinstatement of the uptick rule.

Conclusion:

The current SEC Chairman, Chris Cox has got to go. Blue Collar Investors work so hard for our money; we need a voice at the SEC that will allow us to invest with confidence and on a fair playing field.  If President Obama puts the right person in charge, a major step will taken to restore market sanity and cash into our 401Ks. Until that happens, I am sitting down, scratching my head, and uttering the words, “I just don’t get this!”

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SPECIAL THANKS

To Dave Lindahl, nationally known real estate expert and millionaire investor, for taking the time to review my book, Cashing in on Covered Calls. Here is a link to that review:

http://www.thebluecollarinvestor.com/aboutus.shtml

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Last weeks Economic News:

The Producer Price Index (PPI)  fell 2.2% in November mainly due to declining oil prices. With food and energy factored out, monthly inflation was mearly + .1%.  Retail sales were down for the 5th consecutive month led by the automotive sector. However, with auto and gas factored out, “core” sales were up .3%, after 3 straight down months. The global economic slowdown manifest itself in declining exports and imports. For the week, the S&P 500 was UP .4% for a year-to-date return of -39.1%.

Market Tone:

Today we’ll examine the S&P 500 which is showing some positive signs with the MACD and Stochastics, but still a downtrending moving average; and the investment/brokerage/financial sector which is starting to show some signs of life. We need a lot more confirmation than this but a few green lights are more than welcome. The charts:

S&P 500 12-12-08

Investment/Financial/Broker 12-12-08

This year is almost over; we’re looking forward to a (much more) profitable 2009. We can’t change the past or feel responsible for aberations such as we have experienced this year. Learning from the past is important; dwelling on the past is an exercise in futility.

My best to all,

Alan (alan@thebluecollarinvestor.com)

Alan’s last article stressed the importance of ascertaining where the “Big Boys” were headed with their investment dollars. I also did some digging and found a gem, with the help of J. Cramer,  that goes along with what Alan wrote about in his last article.

Let’s run it through our Blue Collar System:

Overall A+

Technical A-

Fundamental B+

Attractive A-

Group Technical A-

Scouter rating of 7

EPS on 10/23/08 not confirmed

Industry is Medical/Dental

Now let us look at the chart:

MHS from StockCharts.com 9-16-08

-The EMA is just breaking through a trading range.

-The MACD is just breaking positive above the zero line and the MACD  is above its trigger signal.

-The histogram is above the zero line (MACD minus trigger).

-The slow STO is breaking upwards above 80, and above its trigger.

-Heavy volume gave a boost up the hill around the second week of September (Hedge funds)?

-Looking good

 
Let’s make some Blue Collar money:

If we buy MHS at $49.52 (at the time of this writing) and sell the Oct.50 call we can get a 3.7%, 5-week return . In essence, this is an A-T-M Strike. Although there are some exceptions, it usually doesn’t  pay to sell I-T-M or O-T-M strikes in a situation like this for conservatively priced equities.

Cramer quote:

“Medco is one of the great recession stocks” He is bullish on this stock. I discovered thisstock gem while watching the ‘Lightning Round” where I usually have a pen handy because of Cramer’s fast pace during this segment. In addition, this has been a “Cramer favorite” for some time.
Thanks for your time, I hope to hear from you all and tell me what you think.

Tony

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Keep an Eye on Stock Splits:
Another way to locate potential equities for your watch list is to be alert for the announcement of stock splits. Oftentimes,  Board of Directors will decide to increase the number of outstanding shares via a split. Common splits include 2-for1, 3-for-1, and 3-for-2. Since market capitalization (# shares x price) must remain the same before and after the split, the price per share is decreased. This lowering of the equity cost allows average Blue Collar Investors the opportunity to buy more shares. We must also make sure that the split announcement was truly based on an appreciating equity with sound financial and technical indicators.
I noticed today that BKE announced a 3-for2 split (effective Oct. 30, 2008) and a .05 cent increase in its quarterly dividend. I checked our system criteria and was quite impressed.

See what you think.

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At the time of this writing, BKE can be purchased for $58.78 per share.

 I-T-M Strike (Oct. 55):

- Sell (1) BKE-JK @ $5

- ROO is (5 – 3.78) or 122/5500 = 2.2% for 5 weeks or 22% annualized

- Downside Protection is (378/5878) = 6.4%

 O-T-M Strike (Oct. 60):

- Sell (1) BKE-JL @ $2.10

- ROO is (210/5878) = 3.6% for 5 weeks or 36% annualized.

- Upside Potential is (222/5878) = 3.8%

Here’s the chart for you to analyze: 

BKE from StockCharts.com 9-16-08

If the fundamentals, technicals, and calculations meet with your approval, it may earn a spot on your watchlist. 

Hedge Funds: Follow-up Information

As an addendum to my last article  the deleterious effect of some hedge funds on our economy in general and the stock market in particular, new information is beginning to surface.

The Wall Street Journal reported today that the SEC will begin enforcing a rule that requires short-sellers to actually verify access(to borrow) to shares they sell short. This will dramatically slow down the process of share depreciation due to short selling.

Next on the agenda should be re-instatement of the “uptick rule” which allows traders to short a stock ONLY on an uptick (price increase). Cramer has been screaming about the repeal of this rule the last few months and I am hoping the SEC listens and responds.

Finally, I would not be surprised if the SEC took more dramatic steps to control the glut of short-selling and start instituting NEW rules and regulations. It’s a shame that it takes an historic collapse of the financial and housing communities for our “protective” agencies to take appropriate actions. I’ll keep an eye out for this and report to you if now information comes out.

Thanks to Tony for his Cramer article and to all of my readers for your tremendous support,

Alan