Limit Order Pain

By on September 27, 2006

Originally published in October 1998:

INDEXES ON 9/30/98

DJIA 7,842.62

S&P 500 1,017.01

NASDAQ 1,693.84

Editorial

We may have seen the worst of the mini-bear, but then again, maybe we haven’t. Chairman Greenspan dropped the Fed Funds rate a miserly 1/4 percent. This does not bode well for the market. The Fed is being overly cautious and if they don’t accommodate further, stocks will get hurt. However, long term interest rates remain near 5%, so the market appears fairly priced at the 8,000 level. The one wild card is the global economic contraction that appears to be gaining momentum on the downside. However, the worldwide deflationary cycle will probably not get out of hand and turn into a severe recession because the primary engine of demand, the US, is in a demographic sweet spot right now. There is an incredible desire for goods and services by the baby boomers. Because this very large and influential group will be more selective in their spending, not all industries will experience large increases in demand. This extraordinary cycle should last for another 8 to 10 years, driving stocks in favorable groups upwards. There will definitely be setbacks, like we’ve recently experienced, along the way. However, there are no guarantees that the DJIA won’t fall below 7,400 in the near-term, especially if the government and banks are forced to bail out more hedge funds that made large, leveraged, ill-timed bets. I’ll admit my crystal ball is more fogged now than it has been in a long time, but the chances of a fall below 7,400 appears to be less than 25%, by my guesstimation. If the Dow does fall below 7,400, panic could set in and stocks could crash to the low 6,000s due to a spate of margin calls and tax loss selling. The Gillettes and Cokes of the world, so dependent on global sales, continue to undergo an orderly reduction in valuation; bringing the prices of their stocks back into equilibrium with their reduced growth prospects. I might consider purchasing G and KO if I get another buy signal and their PEs have dropped to the mid-20’s.

Limit Order Pain

The Tactical Timing System issued a buy signal on September 21. Unfortunately, I decided to place a limit order on the purchase of Monaco Coach (NASDAQ: MCCO; 25 1/4), since its so thinly traded. As luck would have it, I missed buying it by 5/16 of a point and it proceeded to rise more than 8 points, or 40%, in the 5 days after the signal. On September 25, I tried to buy Travelers (NYSE: TRV; 37 1/2), but was unable to. The aggressive account was in the process of being transferred to Datek Online, which offers significantly lower rates than my old discount broker. I will purchase TRV as soon as the transfer process is complete.

The Worldwide Domino Effect

Some have asked the question, “how will the Asian crisis effect US companies?” Lower sales to Asian countries is having and will continue to have a very detrimental effect on sales growth for many companies. It has caused actual sales declines for some companies….and even a small decline in sales can injure profits to a high degree. For example, consider a company with $1 billion in sales…lets say the cost of those sales is $900 million, which leaves $100 million in profit. Now, say 10% of their sales, or $100 million, were made to Asia and Asian sales have dropped by half to $50 million. The company now has $950 million in total sales. The companies cost of sales is going to go down somewhat, but not as much as the drop in sales because many of the costs are fixed and it takes longer to adjust costs (laying off employees, etc.) to match the drop in revenue. Management might be able to drop costs by $25 million to $875 million. The companies profits are now going to be $950 mil. (revenues) – $875 mil. (costs) = $75 million. This translates to a 25% drop in profits from just a decrease of 5% in sales. This has happened to many companies who do business in Asia (along with their suppliers), and it is going to continue for the next several quarters. The effect on the stock market is obvious. The danger is that shareholders could reign in their spending, which in turn effects other companies sales, creating a detrimental domino effect. We have seen this to some degree with the damage done to the Russian and Latin American economies and equities. At some point this process ends, but the hard part is determining when.

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You may soon have a new way to trade stocks. Bloomberg online covers the emergence of a new type of stock exchange at http://www.bloomberg.com/mag/vp_9810_online.html

Portfolio Updates

Observations on the stocks held in the portfolios can be found at http://members.aol.com/stocksystm/holdings.htm

Portfolio Activity

The Tactical Timing System issued a buy signal prior to the markets opening on 9/21/98. To comply with the system, the following positions were purchased (each have approximately a 5% weighting after purchase).

Aggressive Portfolio:

Monaco Coach (NASDAQ: MCCO), placed a limit order at 19, order did not go through (low for day was 19 5/16)

Intel (NASDAQ: INTC; 81 1/4)

Danka Business Systems (NASDAQ: DANKY; 6 5/8)

Conservative Portfolio:

Disney (NYSE: DIS; 25)

Circus Circus (NYSE: CIR; 9 7/8)

Brunswick Corporation (NYSE: BC; 12 5/8)

Target Allocations

Aggressive portfolio: 105% equities, -5% cash.

Conservative portfolio: 85% equities, 15% cash.

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