"Brokers" Snared

By on May 21, 2006

Originally published on:

January 12, 1997

The market’s intra-day volatility is really picking up. This has been a sign of a top in the past, but I don’t think that will be case this time. Every time the market drops, waves of buying pour in carrying the market ever higher. This kind of action can continue for quite some time. However, I believe a correction will begin in the next few weeks dropping the Dow to between 6,000 and 6,300. Doesn’t that sound odd….a drop to the low 6,000 range. That shows just how far we’ve come in a couple of short years.

One big question mark I see on the horizon, as stated in the past, is the prospect for higher oil prices. If oil rises to over $30 a barrel, the market could swoon by 10 to 15 percent. Many lower income consumers are tapped out and financing their lifestyle on credit cards. If prices at the pump rise by 20 to 30 cents a gallon this will be too much for many of them to bear. As a result, the personal bankruptcy rate could soar towards 2 million per year.

“Brokers” Snared

In the past week, 50 stockbrokers were charged with having paid impostors to take the series 7 licensing exam in their places. This may be the tip of the iceberg regarding this type of fraud. Among the reasons given for falsely gaining the “stockbroker” credential was the market was so strong that the prospective brokers didn’t want to miss out on the good times. Of course, to achieve “success” these con-men needed a license. With their fraudulently obtained credentials they could get a job with any number of brokerage firms and gain the confidence of prospective customers. The bogus brokers could then set up customer accounts, persuade the unknowing to trade, or get authorization to “churn” the accounts.

A good stock market strategy does not have you jumping in and out of stocks from day to day or even week to week. Unfortunately, most brokerages never advocate holding stocks over a long period of time since they are focused on generating commissions, which in essence is a conflict of interest. Excessive trading will, in most accounts, only create wealth for the brokers while sapping the principal of the customer’s account. My advice is to avoid full service stockbrokers, who are generally not far removed from used car salesmen.

A little perspective…..

The first organized stock market in America was formed back in 1792. The slowest day of trading on the NYSE occurred back in 1830. The number of shares traded was 31. There apparently wasn’t a problem with phony brokers back then.

Portfolio Updates

Utah Medical (UM) management recently announced a glum forecast for near term earnings and sales. Management did predict that full year earnings for 1997 would exceed those recorded in 1996. The stock promptly plunged 20% on the news, but made up about half that loss in the next couple of trading sessions.

Mylan Labs (MYL) received FDA approval to manufacture and market Ketoprofen capsules, a generic version of a drug used for rheumatoid arthritis and osteoarthritis. MYL has been a strong performer over the past month.

Kushner-Locke (KLOC) disclosed sales and earnings for the fourth quarter and full fiscal year. Sales were massively higher than the previous year ($80 million vs. $20 million), but KLOC was only able to eke out earnings of 2 cents per share. I have visited the America On Line company message boards and the people posting messages are generally very unhappy with KLOC management salaries and future prospects. Purchasing stock in this company has been a very humbling experience.

Recommended Allocations

The aggressive portfolio consists of 90% equities and 10% cash. The recommended allocation for conservative portfolios is 70% equities, 30% cash.

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