Woodcreek's annual update...

After a year of investing, I've learned a lot. I've made some good trades, some bad trades, but most importantly I've made some money!

I finished the year up 55% after fees! I was able to turn roughly $2,350 into nearly $4,100! If fees weren't included, that gain would have been over 83%. Lesson learned there, trade larger dollar amounts rather than making a number of smaller trades.

I've made the shift from trading good stocks and balance sheets like Buffet, to trading on hunches, to trading on indicators like MACD. I've had success with each of these styles, as will as some misses with each. I've also found a couple stocks that I've had success trading and plan to keep doing so. So far, I'm liking trading Dow and Skyworks, but I keep an eye on lots of other stocks like Kroger, GE, Citigroup, MGM, Ford and Manitowoc to name a few.

Here's to many more years of successful trading to come!

The auto bailout

ESPN's Tuesday Morning Quarterback Gregg Easterbrook has some great discussions on the economy and bailouts spliced into his football column. My favorite part is at the end of the column regarding the government's negotiations with the auto companies.

Based on how poorly Washington has negotiated with General Motors and Chrysler, here's what it might sound like if Nancy Pelosi was buying a car:

DEALER: Yes sirree, I can let you have this cherry-red baby for $19,999.99! Plus undercoating and dealer prep.

PELOSI: I'll pay $50,000.

DEALER: For a limited time only, I can throw in remote-controlled eight-way power cupholders, for another $999.99.

PELOSI: I'll buy them at $75,000.

DEALER: Do you want the extended warranty?

PELOSI: No. But I'll pay another $25,000 for it.

DEALER: Aren't you worried something will go wrong?

PELOSI: If it does, I'll just send the bill to the taxpayer.

DEALER: So you are willing to pay $150,000 for a $20,000 car? I'll have to go ask my manager! (Disappears into back, pretends to talk to manager, returns.) Lady, you drive a hard bargain. He says that for $31 billion, we will give you absolutely nothing at all.

PELOSI: Sold.

Its funny and cynical and probably close to the truth. Earlier in his column, Gregg mentions it would have been better for the government to buy cars from GM and Chrysler, rather than just give them the money outright. Besides helping Detroit immensely, this is the kind of out of the box thinking that we desperately need.

How does this relate to investing? Well, over the past month, we've been looking at auto companies and their suppliers as potential short term investments; buy them low, hope for good news to drive stock up temporarily, and then sell. Obviously risky, but potentially very profitable. However I can't really see any of these stocks rising in a manner worth the risk, unless the bailout (or any major event) truly does something to improve the long-term fundamentals of the company. I could be wrong, but right now I will be looking elsewhere for short-term profits.

More shenanigans from credit card companies

I mentioned back in February that Experian was dropping access to your true FICO score. Liz Pulliam Weston has a great article on some of the deceptive practices of credit card issuers and why we should demand to have free access to our FICO credit scores, the scores used by most lenders and the ones that have the greatest affect on a person's ability to get a loan. I highly urge you to visit the links on the second page and send a message to your congressperson.

Why is fair credit practices vital for an end to this recession? We all know by now that the lack of credit flowing through the country is a huge problem. However these deceptive practices by credit card companies are hampering people from spending when the country needs it most. For example, a small business owner might not have needed to use credit a few years ago, but does during this recession to purchase new inventory. He has keep his balance low, paid on time, and used his credit responsibly. However, the credit card company sees him as an infrequent user of credit, reduces his credit limits (or closes the account altogether), and now the business owner can't make the purchases he desperately needs to get him through the recession. This is happening all over the country, and until we put a stop to this, the recovery will take longer than it needs to.

Don't try to figure this market out...

Watching and participating in the market over the last few weeks, one thing has become exceptionally clear; there is no clarity.

I've pulled three straight great trades (Lear +52.3%, Citigroup +57.25% and Bank of America +15.83%), I'm up roughly 13.5% on all buy & sell trades since I started trading in December, and my holdings of GE and Manitowoc Co. have been moving around their break even points, yet I still don't feel too confident in the market, nor do I have any real gameplan moving forward.

The best thing I've found to do so far is to follow the old adage "buy on the rumor, sell on the news". This has worked especially well on companies the government is subsidizing through loans and bailout, but you need to be careful because things can turn on a dime. A perfect example of this just happened with Bank of America. As I outlined in posts to the topic "Paul Woodcreek's Personal Portfolio" (http://11bagger.blogspot.com/2009/01/paul-woodcreeks-personal-portfolio.html), I chose to buy BAC because the government wasn't going to let it fail, the CEO hinted at big profits, and the price was low. I bought at $7.6482/share on 4/3 and rode it up to $11.58/share on 4/14. This is where things stood six days before they were to announce earnings. If nothing else, I figured it would slowly climb upwards until earnings were released... I was wrong. As of Friday (the last trading day before earnings were released), the stock saw a high of $11.23/share. I decided to hold through the weekend in hopes BAC would beat the estimates of $0.04/share. When I saw the earnings come in at $0.44/share, roughly 9x expectations, I figured this stock would skyrocket. Looking at pre-market numbers today, the stock was down about 8% and was at a point that my $1 trailing stop would have sold me out of the stock on open had I not changed it. So, I figured I'd widen my margin to $1.50 and see what the day held for me. BAC dropped like a rock... my trailing stop sold me out before 10:30AM!

When the dust settled, I still netted 15.83%, but I also left about $2.50/share of profits uncollected (DOH!). BAC ended up closing the day at $8.02/share, down 24.34%. This on a day where they blew away earnings estimates. I don't understand it, but I'm happy to take my profits and move on. I'd urge all of you to do the same... when profits are there to be taken, don't get greedy, just take them. This market is irrational and dangerous, even if you're right on top of things and try to use common sense.

Mark-to-Market accounting, bank stocks and you...

Here are a few links that explain mark-to-market accounting and what it could mean for investors...

http://www.newsweek.com/id/192562

http://www.bloomberg.com/apps/news?pid=20601039&sid=ajc25z7IOrTk&refer=home

http://online.wsj.com/article/SB123880085634588515.html

http://uk.reuters.com/article/bankingfinancial-SP/idUKBNG40992520090403


So, what does all this mean? Well, to most people, not much. However, if you're savvy and can keep a portion of your portfolio liquid and an eye on these stocks, you could potentially make some money with these changes. Most traders probably aren't that plugged in, so my plan is to continue to trade bank stocks under the assumptions that they are so beaten down there's a ton of upside potential, there's very little downside since the government has shown they aren't going to let the big banks fail, and since the banks hold all the money that drives our economy, they have to improve before the rest of the market does.

So when is the time to get in, and where do you place your bet? My plan is to play a mix of banks I'm expecting to turn a profit and those who may be returning TARP funds to the government. As you may have seen in the blog post on my personal portfolio, I've already been in and out of Citigroup (NYSE: C) in a small, but highly profitable trade, and now I'm into Bank of America (NYSE: BAC). If BAC can show a profit when they announce their Q1 results on April 2oth look for this one to skyrocket. Their CEO, Ken Lewis, said a month or more ago he was expecting a profit and the stock promptly took off.

http://www.usatoday.com/money/industries/banking/2009-03-12-bank-of-america_N.htm

What I'm looking for from BAC is a quick jump in price, then I'll set my following stop and see what happens. If it quickly spikes, then retreats a bit and the stock sells, I'm happy with the profit and will move on. If it goes on a long term climb, all the better. Either way, I'm looking to turn a profit then move on to something else. The nice thing about BAC is they'll be announcing their earnings a couple days later than JP Morgan (4/16) and Citigroup (4/17), so if things turn south in those announcements, there's still time to bail. Wells Fargo announces earnings on 4/22, so if you wanted to trade without any insulation, you may want to play Citigroup then Wells Fargo due to the spread between announcements being greater than three trading days.

Japanese companies with a durable competitive advantage

Warren Buffett emphasizes buying companies with a durable competitive advantage, while Peter Lynch talks about finding companies that aren't well known but are run well, and poised for growth. I am currently in Japan visiting my brother and I wanted to mention a few companies that I see fit those molds. I haven't had time to look up stock information, or see if they are publicly traded companies, but maybe there are a few gems in here.

First up are beverage companies in the Coca-Cola realm. In Japan, there are two main beverage companies, Asahi and Suntory, that have a monopoly on the beverage industry, be it soft drinks, beer, or fruit juice. Japan is litered with vending machines, and you are guaranteed to see a Suntory or Asahi product on every street, usually for 20-30 yen ($.20-$.30) more than you can buy them in a regular store.

Second are the convenience stores, in the vain of 7/11, which they actually have in Japan. The two other main stores are FamilyMart and AmPm. Most of these stores are open 24 hours and you can't go a few blocks without seeing one. There have always been people in these stores, regardless of the time I have entered one.

Finally, there is the grocery chain Daiei, similar to a Meijer or Kroger (for you Michiganders) or a smaller Wal-Mart that has a full grocery section. This seems to be the best place to do all in one shopping, although I have heard there are a few Costco stores in Japan, for those bulk shopping trips.

I don't know if anyone of these companies have stock that can be purchased, but for those looking at companies within Asia, those are a good place to start.

Japan to lead at G20?

Here's one for all you readers kicking it in Japan:

Prime Minister Taro Aso of Japan contends that Japan is ready to take the lead at the G20 summit.

"industrial output was down 9.4 per cent month-on-month and data on Tuesday showed the most rapid worsening of job availability since 1974 – Mr Aso’s message is clear: Japan remains a force in the world"

In my opinion, Mr. Aso has no choice but to take this tactic to G20. Due to Japan's size and technology heavy economy, they rely very heavily on exports. Japan's economic problems will likely be among the last of the economic superpower's to clear up due to this reliance on other economies improving first. As other countries race their currency to the bottom, Japan's exports get even less attractive.

Whether or not Mr. Aso really believes that his country is in a position to lead the world's economic policy doesn't matter--for Japan's sake he hopes they listen because Japan needs the rest of the world's co-operation.

Oh, and he has an election coming up in November.

Personal Finance: More on Life Insurance

There are a few remaining questions I wanted to answer with regards to life insurance. I don't want to get into the whole term versus cash value life insurance debate at this time (I'll save that for next week). There are situations where cash value insurance can be useful, but typically you are better off with term insurance.

How do I purchase life insurance?
You can purchase coverage over the internet or through a life insurance agent. Insweb is one site that I have heard of, but there are many different providers out there. It is extremely important to select a company that will pay your claims. I would go with a company that has been around for some time (20 years or more) and is rated A (preferably better) by the rating agencies. Unlike much of the debt that was rated shadily by the agencies that has caused our current fiscal crisis, the ratings agencies actually do a pretty good job with life insurance companies because these type of companies have been around forever and are easy to understand.

How do life insurance agents get paid?
Agents work on a commission that is dependent upon the annual premium you pay for the policy. Most of your first year premium is actually going directly as compensation. For instance, if you buy a 20 year term policy for $1000 annually, the agent will get somewhere between 50%-90% of that premium as a first year commission. If you keep the policy in force for more than 1 year, the agent will usually get trailing commission of around 5%-20%. The actual percentage is going to depend upon the pay structure of the company the agent is working for.

Additionally, compensation for cash value life insurance is typically higher than term insurance. For example, for a $1000 annual premium policy, an agent may be paid $700 for a term policy and $800 for a cash value policy. This is not always the case, but it is typically what I have seen.

I will get more into the differences between cash value and term insurance in my next personal finance post. If you would like any particular questions answered as well, I will try to cover them in that post.

Personal Finance: How much life insurance do you need?

I hope to use Thursday's posts to talk about personal finance issues. Up first is the misunderstood world of life insurance. I'm assuming you already know that most people need it. I can attest personally to its importance as my dad died when I was in college, and if not for life insurance, I never would have finished college, and my mom, brother and myself would have struggled financially for sometime afterward.

Who needs life insurance?
Anyone who would inconvenience a loved one financially if they die. If you own a home, have kids, are married, or have a lot of non-student load debt, you probably need life insurance. Students and other young people don't necessarily need it, but if they can afford it, it is a good way to guarentee coverage against some future uninsurability.

How much coverage should you have?
A good rule of thumb is 7-10 your annual income, but much there are several calulators that will better estimate what you need (here and here). At a minimum, I would recommend enough to cover burial expenses, and 2-3 years of income replacement for your family. Ideally though, you want to pay all debts and provide several years of income replacement, possibly even funding retirement for your spouse, or paying for college for your kids. I am single without kids and I have enough coverage to pay off my house, pay off my debt, and give both my mom and my brother a nice inheritance should I die. Of course, how much coverage you get will be based upon how much you can afford to spend and your ability to qualify for coverage.

What type of coverage should I get?
In general, term insurance will be the most affordable for the majority of people, but there are some instances where permanent insurance is useful.

I will explain more about the types of coverage and how you go about purchasing it, in the next post on the subject.

What are your thoughts on life insurance? Post your comments below.

Club Update 3/10

Since the last club update, most of us have experienced some significant financial changes. In light of this we have decided to suspend contributions to the club for the next four months while things sort themselves out.

This doesn't mean we'll be abandoning the blog--to the contrary we'll be trying to keep up daily posting and making it as worthwhile and interesting as ever. We'd really appreciate any comment you guys could leave, telling us what you like or don't like about the posts so we can tailor some of the content to what you're interested in!

Choosing to invoke hardship was something the club didn't take lightly, but thankfully the entire club agreed on the procedure. Also helping out was the fact that we spelled out hardship conditions and voting procedures in the General Partnership--just another example of how a well written GP can cover your club in a sticky situation.

Right now we're taking away the possibility of further capital investment, but we hope to use it as an opportunity to continue to work on bylaws, the blog, and further educate ourselves so that when we are ready, we can pull the trigger on the next big purchase.

Add to that a bit of good news, as GE went up 1.46 today, and we're feeling that we're on solid ground.