Friday, November 14, 2008

How Much Further Can They Fall ?

I came across this article recently which documents how the locusts have descending upon Washington for a piece of the bailout pie. This is a great employment program, as it should really address the unemployment issue going forward. Create a bailout, then employ the unemployed to fight over it. So many bright minds in Washington I cannot count that high.

I have received quite a few email inquiries on various topics but a recent one I feel compelled to address publicly. The one in particular from reader R.W. (thanks for the note), asked the following...

With so many large cap well known, household names plummeting and now trading in the teens or single digits, how much further can they fall, I mean zero isn't that far away?

This is a wonderful question to which I would only ask that we look back to the tech bubble for some answers. Back in the tech mania, stocks were running 30 and 40 pts per week doubling and tripling in the span of a quarter. So what did the management do, they satisfied the market and started splitting their stocks, twice the shares at the half the price.

Remember all the splits Nortel (among others) did on the way up? Well, back in December of 2006 Nortel, after falling from a high of $86 and resting at about $2, executed a reverse 10 for 1 split. This means that if you had owned say 1000 shares of NT at $40 you would now have 100 shares at a cost base of $400. I would counsel that you NOT look at a chart of Nortel since this reverse split as it has had no effect as the stock now resides at $0.56. Yes you read that correctly, 56 cents.

I fully expect Nortel to come back once again to do another extremely ineffective reverse split most probably in the order of a 1 for 25 or 1 for 50.

This all leads me back to the original question. I fully expect companies like Motorola, GE, Citicorp, among many others to start the process known as the reverse split. This will make it palatable once someone breaks the ice. I expect GE to reach it's target about $8. At that time GE may make the move to reverse split say 1 for 5 which would get a stock of GE's stature back to a level they deem more appropriate.

My thoughts on stock splits, regular or reverse are just like ordering pizza. You can order a large pizza and see it come in say 8 slices. Now you can slice in into 16 slices but the question is do you have any more pizza? Of course you don't. Can you believe people bought tech stocks ahead of splits thinking it was bullish? Self fulfilling prophecy into one day it simply wasn't anymore.

As for the generalization that a stock can only fall so far. Many thought GM and Ford (Kirk Kerkorian) a bargain in the high single digits. GM resides around $3 and Ford about $2. These are drops of 60 and 70% on stocks that used to be $50/share. Something to consider when someone tells you a stock is looking really cheap based on how far it has fallen from it's highs. It would be wise to remember the sage advice from the greatest trader ever, Jesse Livermore who often remarked that a fool measures his bargains by how many points off the top it has sold. Wise counsel indeed.

Good speculating to you all and never forget that "an investor is a speculator who made a mistake and will not admit it".


Open Positions:
Short 1 unit Apple ticker AAPL @ $110.90 stop @ $100.53
Short 1 unit Salesforce.com ticker CRM @ $56.05 stop @ $32.56

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