The day has finally come. The site has been in the works for what seems like forever, and with the help of a fellow blogger, today marks the first day of existence. A big thanks and recognition goes out to PostmanR over at wearethepostmen.com, he was the driving force behind putting this together and also created the awesome header you see at the top of this lovely page. The Postmen is a great read for sporting news, and of course Youtube videos. They are a few tube connections away, so check it out.

So what is this blog going to be about? Not sure about that really. I am a student studying Accounting and Finance at the wonderful Kelley School of Business, here at Indiana University. I am interested in much of the equities markets, and imagine I will write about some of my observations about what is going on in the general markets. My knowledge is a little above the average joe, so if you see anything where you think I may be off my rocker, please write a comment. I would love to turn this blog into something more of a discussion board where fellow beginners and intermediates can come together and enhance one another’s understandings of what’s going on out there.

So, pop the cork on the bottle of bubbly, bring the anchors on deck, wearethebusinessmen.com has set sail!

Today, Apple released its wildly anticipated first quarter earnings, raking in a paltry $1 Billion (insert Dr. Evil line here). Now, one would expect after beating Street estimates and pulling in $1.14 a share compared to 65 cents a share in the last year’s period, to see some pricing upswing. Not so fast my friend. Apple (AAPL) shares fell $2.15 to close at $94.95.

So what’s the deal? Jon Fortt at The Utility Belt offers what I think are some great explanations and dead on analysis here. He looks at the dropping (but still increasing) sales of iPods as a precursor to trouble on the horizon. I tend to agree with him. Being on a college campus, I feel like we are pretty in tune with what Apple has going on. I can’t walk around campus without seeing at least 90% of my peers sporting their ear buds. But once you have an ipod - what’s next? Surely not buying your music!!

I still don’t see Mac laptops everywhere like I do Dell. The iPhone is cool, but unproven, and switching wireless carriers may become a big pain in the rear for most would-be buyers. So as the life-cycle of the iPod approaches maturation, it will be interesting to see where the growth will come from. And lest we forget about that pesky little stock options scandal!

Anyhow, in the interest of full-disclosure (because I heard that’s what people do on business blogs), I hold no positions, long, short, whatever you want in Apple.

I have heard the cries of my many select readers about the lack of posts I have created. I have had trouble coming up with original ideas for the blog thus far, and hate to just regurgitate stories that others have posted. So tonight, I offer you an introduction to an investment tool which is becoming extremely popular - the ETF, or Exchange-traded fund.

Let me start by saying that after you digest this post, there are two complimentary resources you should check out. In no particular order, Yahoo! provides a great ETF education center here and Investopedia provides its usual superb coverage here.

The ETF can be compared to a mutual fund, and often times more specifically an index fund. However for comparison purposes, ETFs seem to be more of a kid brother to the index fund, only the kid brother who is more intelligent and athletic. Let me explain. The benefits of an index fund are that it successfully tracks the holdings and returns of an index such as the S&P 500 with lower costs than actually going out and buying each of the 500 (get it?) companies’ shares that make up the S&P. The S&P 500 index funds have consistently outperformed many of the mutual funds who seek to beat its returns.

However, owning an index fund doesn’t allow the investor many of the flexibilities that owning a stock does: that of shorting, going long, and selling intraday. If I want to buy an index fund, I will do so at the price listed at the end of the day, paying the same price as another person, even if I submit my order in the morning and he or she in the afternoon. An ETF mimics the index fund in the sense that it seeks to hold a proportionate basket of stocks listed on the S&P 500. Here is the kicker: owning an ETF allows the investor to do all of the things listed above, and do so throughout the day, not just at the close of the markets. The ETFs price also rises and falls throughout the day, and I may pay more or less in the morning as someone who buys at a later time during the day.

Investopedia provides a great way to translate this: say we collaborate in the morning and believe the S&P is due for a big run-up today. We go out and buy an ETF that attempts to replicate the performance of the S&P 500 say, SPY. Throughout the day the S&P index rises, and so too does the price of our ETF. Having enjoyed the spoils of our correct guess analysis, we sell the ETF at the end of the day (with 2 commission charges of course) and take our gains to the local bars and squander it. Kidding of course, but you see how it works. An index fund does not allow the investor these intra-day trading capabilities.

There are numerous other benefits to ETFs including lower expense ratios and tax benefits, but I don’t want to overwhelm the class with this lesson. One thing to know is the ETF market is getting bigger by the day, both in terms of money invested in them, and the number of offerings. According to Morgan Stanley’s Great ETF Book, as of the publication date of November 14, 2006, ETFs saw an increase of 34% of money invested, rising to $409 billion. The number of listings in the US in 2006 has increased by 135, to a total of 354. Both of these numbers are increasing on a weekly basis. These tools cover anything you could ever want to invest in and provide a great, somewhat cheaper way of diversifying and finding some great returns.

In my next post I will highlight a few ETFs which I have been watching and discuss some of the implications of their holdings. Until then, check out what the pros have to say about them at the sites listed above.

In the spirit of competition, it has come to my attention that some
would like to participate in a fantasy equity trading game. While I have received my fair share of ridicule for starting this (thanks a lot, roomies), I will not be deterred by the jeers of some. So for those of you who would like to be involved, send the site an email. The game will be run through Investopedia. It will start on Monday, February 5th, and last through the end of the college school year (May 4th). Each player will be given $100,000 fake money to invest as they see fit, and we will determine a winner by overall return. I plan on doing interviews with some of the players, and talk about the strategy they used for their investments. It will be interesting to see what some of my college peers like to look at for their investments. For many, it will be their first time investing (fake money or not), so I will enjoy hearing about their reactions to what worked and what didn’t.

Also, I have contacted a fellow blogger and college student, Yaser Anwar, from Investment Ideas by Yaser Anwar, to serve as our “pro” for the contest. He has an impressive list of experiences and his blog is really a top-notch read. I suggest to my readers to check out his blog, as it is a prime example of one of our peers who knows what is going on. Yaser has agreed to offer some tips as we go along (time providing), and I would look forward to interviewing him after everything is said and done to get his outlook on what our generation has to look forward to in our investing horizon.

I think it is extremely important for people my age to start thinking about investing whatever money they can. As our nation continues to see declining saving rates, a growing trade deficit, etc, etc, it is so easy to get sucked into thinking that saving is not important. Our government has set a terrible example for our nation of spenders/consumers, and it should be no surprise our citizens are some of the worst in the world at saving their money. I hope that this Investopedia game will encourage readers to think about investing and the really great things it can do for you so long as you start early, and stick with it.

While we are at it, now would be a good time to recommend Robert T. Kiyosaki’s book Rich Dad, Poor Dad. This book was suggested to me by a fraternity brother (yes, men in fraternities read books) of mine and it really made me think about the things money can do for you, when invested in the proper vehicles for an extended period of time. While Kiyosaki is a big proponent of real estate for a variety of reasons (deferral of tax on gains for one), the main thing to take away from this book is that many people have the wrong idea about money. This book is one of the best I have read in terms of a plain-speak book about how to start thinking about person wealth. Get on it today if you haven’t already read it.

In the meantime, I will be preparing for Sunday’s game and readying to crush the competition come Monday’s kick-off for our stock game. I have sent invites to readers who I thought might be interested, again, please let me know if you were left off that list. Enjoy the weekend!

Alright, let’s all take a deep breath first after reading that headline. I couldn’t think of a better way to get all of that in there. Perhaps PostmanR/E can help me out on that one.

Just to remind everyone that fantasy equity game has begun (with me in last place - 2 day return of -3%), and only three people have decided to add stocks to their portfolios. I am sure they are just waiting on those limit orders which they put in first thing Monday morning!

Let me explain the title of my post. It seems to me that people my age know a lot more about how good a stock could be without knowing it. What caught my attention is this article, from Investopedia. It talks about the woes that Gap, Inc (GPS) has seen in recent times, and how it has faced tough competition from the likes of Abercrombie and Fitch (yes, our beloved “moose” is a publicly traded company! ticker: ANF, totally awesome!). This is what my headline was trying to get at. While you and I may not be thinking about these kind of things and applying them to our investing, we would all agree: Most teens today wouldn’t be caught dead without a moose on their chest and some “destroyed” A&F jeans. This has been a trend for awhile now, even since I was in high school (Class ‘03, thank you very much). We all knew none of us were shopping at the Gap, except for those sweet pique polos which were required by Jesus and the Parochial school board.

So let’s say back in high school, we were smart enough to notice this and applied it to our investing strategy. A&F was dominating the retail market, and we knew what our peers wanted and what they we wearing. Check out the 5-year chart on Abercrombie & Fitch stock:

Yea. The moose is doing some serious work out there in the markets. Look back at 2003 when we all would have agreed about its market dominance, even as teens just trying to find our next date for the Homecoming dance. Could have picked up a share of their stock for half the price of some of their sweetest jeans.

Just to drive home my point, here is the same 5 year chart for Gap, Inc (GPS):

Now I hope the title of my post makes a little more sense. For many investment gurus, one of their top rules is to only invest in things you know about. As fickle as it may sound, at the age I am now, Abercrombie & Fitch is a company I know about. Just because I couldn’t tell you their net income from last year, or how much their P/E ratio is doesn’t mean I couldn’t tell you that when it comes to teens and their clothes, A&F has no peer. Don’t get me wrong - there is a place for financial statement analysis and many other research techniques. However, applying our daily life to investing is a great starting point for most people, and something many think nothing about.

The author holds no positions in either of the two stocks mentioned in this article, though he wishes he would have bought more A&F stock instead of those stupid “muscle” t-shirts back in high school. Darn.

On Wall-Street there is a famous saying that goes “the only free lunch is
diversification”. However, I was tipped off to another Wall Street “free lunch” a couple of weeks ago with this offer:

College students, listen up! RealMoney is offering you something special… a free subscription through May 31, 2007. The only requirement: You must have an email address that ends in .edu. Email collegetour@thestreet.com to accept my personal invitation to come read my blog every day, plus all the other writers on that great site. Pass it on!

So for those Jim Cramer fans out there, you can gain free access to thestreet.com and RealMoney (both Cramer websites) provided you have the necessary student credentials. Both of these sites are filled with Cramer’s blogs and musings, with a lot of other good articles and information. I emailed the above address a few weeks back and received a reply with a link for a free membership in only a couple of days. The membership is valued at $230 for a year, so this is a good opportunity if you qualify. The only downside is you get about 6 emails from the website with links to new articles, such as a before-the-bell, after-the-bell, etc. I think there may be a way to limit these when you sign up, but overall they aren’t too big of a nuisance.

My apologies to the loyal readers out there for the lack of posting lately. If only it were as easy as throwing a YouTube clip up and calling it a day (cough, PostmanE, cough). But there are many issues to address for this month’s day’s installment here at Businessmen, so let’s move on.

First, I got an email from a reader this week with a tip for a story. I would like to let the readers know that if they ever feel the urge to head out and do some research and write a story, I will more than happily post it with the credit given where it is due (unless the article is really good, at which point I will throw my name at the bottom and have you “silenced”). I think that would be a neat addition to the site, so consider this your invitation to fire away at the keyboard.

I will be posting some content later tonight, so be on the lookout for that. If you haven’t bought stocks in our Fantasy Equity Challenge yet - well, for one you are beating me - but you really should put that money into the market.

I came across this article the other day on
Yahoo! Finance which I thought would be a great
item to share with the readers. It gives a very appropriate starter portfolio for the beginner investor. I know many of you will be graduating in a few short months (only cool people stay for 5 years), and hopefully you will store some of those hard-earned dollars in investments. The proposed portfolio has exposure to the US market, an international dimension, and then has the rest in Bond Index Fund for more consistent returns (4-5%). The three funds listed are Vanguard funds, which is usually regarded as the “cheapest” of the mutual fund providers in terms of expense and load fees (most mentioned are actually no-load).

The Yahoo! article links to this piece from Market Watch which has a summary of some “lazy” portfolios out there for the investor who doesn’t have the time to be poring over data and commentary on a daily basis. Basically, park your money in these portfolios and let it sit - how hard is that? And the icing on the cake? Most of these portfolios are actually beating the S&P benchmark over the past few years.

Common in the portfolios is basically this: cheap index funds tied to US market returns, cheap index funds tied to international markets (some have Europe, Pacific, and a few Emerging markets), and then lastly, each portfolio has some type of fixed income exposure in terms of bonds, treasuries, and inflation protected securities (more on these at a later date).

The bottom line? The Market Watch article states that 80-85% of actively managed portfolios under-perform the S&P Index on a yearly basis. One reason I wanted to get as many people as possible participating in the Investopedia equity game is to show how hard is it to beat the market. We could argue all day about efficient, semi-efficient, or any other type of market philosophy you believe in. However, it is tough to argue against the great gift many of us have in time. Put your money in a portfolio with the exposures listed above, and based on history, you will be more than happy with your end result.

The Yahoo! article wraps up with a great few paragraphs I hope everyone reads. The following is a snippet:

“Think you’ll never have a million dollars? It’s easier to obtain than you might think — if you’re young and patient. Thanks to the power of compounding, a 25-year-old needs to invest only $1,720 a year to reach seven figures by age 65. That assumes an 11% average annual return,” and that’s not even a fully funded IRA.

His next big point is the key: “For investors who start young, most of that $1 million is interest [and reinvested dividends]. By age 65, the 25-year-old has invested only $68,800 — less than 10% of the ending balance.” Please get it! That’s the amazing magic of compounding: You’ll retire a millionaire by investing a mere $68,800 total over the years, the other $931,200 “grows” magically over time, thanks to compounding.

What are you waiting for?

Welcome to the site’s first ever Company Analysis entry, featuring Deere & Company. In these entries, I will try to give readers a very broad view of a company in terms of fundamentals, talk about how it is faring and viewed in the market today, and then attempt to look toward the future. First a few forewarnings: This will be a rough first attempt. I will try to explain as much as possible in the following, but for reasons of length and reader attention span, this will be extremely condensed.

If you have been following the markets lately, there is a chance you have heard Deere’s (DE) name mentioned many times. Today on CNBC’s After the Bell they were featured in a piece and Jim Cramer has written about them on his sites and talked about them on Mad Money quite a bit recently. So why Deere, why now? A few reasons for that, but first have a look at a chart of Deere’s stock price over the last year:

The stock was up another 2.6 points today to an adjusted close of $115.95, and since 22 Feb, 2006, the stock is up 49.83% ($77.39).

Let’s take a look at some of Deere’s fundamentals. Last Wednesday, they released first quarter earnings for FY07 (Deere’s FYE is 31 Oct). First Quarter Earnings Per Share checked in at $1.04, soundly beating analyst estimates which were around .80 cents a share. There’s a quick ticket for a stock price bounce. In that release, they also raised net income guidance for the year $75 million to $1.4 billion. A big surprise was that Agricultural equipment net sales rose 10%. The first quarter for Deere is usually met with negative operating cash flow due to low volumes (who buys a tractor in the middle of a cold, Midwestern winter?). Such was the case this year, but only to the tune of -$660M, versus last year’s 1Q amount of -$821M.

Deere’s Chairman and CEO, Robert W. Lane has preached “lean inventories” since he took the helm at Deere in 2000. A man of his word, inventories declined 9% year-over-year, while sales grew 3.4%. This is the fifth straight quarter Deere has shown sales growth with inventory decline (Smith Barney Research). A quick note on this: “lean inventories” are important for a cyclical stock/industry such as Deere (& Ag) because when the going gets bad, it hits hard. Having a bunch of tractors, combines, dump trucks, etc, on the inventory lots is not a good thing and makes the “trough” we see in cyclical companies that much deeper. During the conference call, it was noted that production schedules are down for the year 9-10%. In a cyclical company such as Deere, EPS is highly correlated with the economic growth, thus the nature of cyclicals.

So the numbers are good, outlook is good, but what am I forgetting? Ethanol and corn of course! With the increased emphasis on alternative energy, most notably ethanol, the price of corn has shot through the roof. Back in January 2006, Corn Futures were being settled for a little over $2. In February of this year, the price had jumped to a little over $4. A huge move for corn growers and Deere. The prices of soybeans and wheat has risen as well. All good news for farmers and their suppliers.

An interesting note and something to watch about Deere is their net cash situation. At the end of Q1 07, Deere had $181M of net cash. Growth initiatives such as dividend increases and share buybacks have all been implemented. During the conference call, this issue was brought up. Deere representatives responded by referencing the two above moves, as well as their acquisition of Roberts Irrigation. Over the last weekend, Deere used some of that excess cash to buy Lesco, a turf-care products provider. This excess cash was also probably what prompted a very interesting private equity play in December.

So the stock is at all-time highs right now, insiders are cashing out some nice options, and overall the picture looks very good. For now, it just seems to be a guessing game of how high the stock can climb. Recently, institutional investors have been pushing the stock price up with some buying action. Jim Cramer believes $130 to be the ceiling (he also referred to Deere today as a “dot-com stock with a real company behind it”), but many others have the stock pegged in the $100-$115 range. I performed my own discounted cash-flow analysis for Deere in December ‘06 and came out with a valuation of about $98. If you would like to see that paper and the accompanying material, I would be more than happy to send along what would be a wonderful way to spend an hour or two - digesting some hardcore Corporate Finance.

If you made it this far, congratulations - I hope you enjoyed the first company analysis. Next will be an analysis of the exchange stocks such as NYSE, CME, and ICE, but hopefully there will be a good interview accompanying those. More on this later. For now, post any comments or thoughts you had on the first series of these, and your outlook.

Full Disclosure: I do not own any real stock of DE, however, they are my one bright spot in the fantasy equity game. I had a great summer internship with Deere in 2006 and have a family member employed by the company.

Ouch.  That seemed to be a popular word yesterday
after the close of of the Dow down 416 points.
As sick as it may sound, I kind of enjoyed the day.  There was a ton of excitement, moans, groans, and even booing as they sounded the closing bell (something I was wondering about all day).  So I enjoyed the day?  Yes.  As a person with an investment horizon that spans out about 40 years, I was OK with what happened.  I used yesterday as a day to learn.  When I woke up in the morning and saw the market down 100 points a short time into the trading day, I immediately got out a notebook and began taking notes.  I am going to summarize my notes in a subsequent entry.  Throughout the day I took notes on what people were saying, whether it be the talking heads on CNBC, Fund Managers, Jim Cramer, you name it.  I took detailed notes on some of the marco-and micro economic factors that were present.  I also took notes on things such as Greenspan saying there was a chance for recession.  I tried to detail as much as I could about the day that was.

So we all got creamed yesterday.  In the long run, you are going to have days like this, and it is something we as investors need to learn to stomach and learn from.  I hope you learned something from yesterday, I know I did.  More to come on this later, but for now, I will leave any of you to comment with your thoughts.

I am so sure that this site, combined with our
Investopedia equity game has pushed readers over
the edge to finally invest in the real markets. So in order to help you do so, today I will outline Jim Cramer’s 5 rules for doing your own homework on the stocks he talks about during his show. Cramer mandates that his viewers do homework before buying on his recommendations. These come from his book Mad Money: Watch TV, Get Rich, which came out back in December 2006.

Step 1: Find out how the company makes its money.

Sub-questions that follow are how the company made its money last year, how it made money last quarter, and whether these are high or low quality earnings.

Step 2: What Sector does the company belong to and how has that sector performed?

Sub-questions include the specific sector, its performance over the last three, six, and twelve months, and what forces tend to move stock in this sector.

Step 3: How has the stock performed?

Sub-questions include the stock’s performance in the last year, six months, three months, month, and week.

Step 4: What do the comparisons tell you?

Sub-questions include whether the companies faces any threatening competition, the P/E of the stock, the average P/E of its competitors, the PEG ratio, the average PEG of its competitors, and how much cheaper or expensive the stock is compared to its peers (based on multiples).

Step 4 and Step 5 are significantly more analysis based, which may require some knowledge of the terms listed above and below. Hopefully the example provided in a later post will help with accurately comparing these numbers.

Step 5: Can the stock survive its balance sheet?

Sub-questions here include how much debt the companies has, how much debt it has due this year, how much free cash flow(FCF) the company had last year, how much FCF it should have this year according to analysts, will the company generate enough free cash flow to pay its debts this year (also known as positive working capital), can it pay it debts next year (interest coverage ratio), and finally will the company have to sell assets to pay its debt in the near future (Acid-Test Ratio).

On Step 5, I have a few different looks than Cramer offers in his book. However, I will compare and contrast his directions to that of my own when I do the company analysis.

I want to leave the company we do our homework on up to the readers, so feel free to fire away in the comment section about the company you would like to see analyzed. Doing an analysis like the one done earlier on Deere is fairly easy. Cramer’s homework takes a lot more time and a great deal more number crunching from financial statements. I will pick whichever company gets the most votes (if there is one) and if one doesn’t stand out, will just select one that I think might interest our crowd of loyal followers. Understanding of the linked terms above will be crucial for comprehension of tomorrow’s post, as I will probably not link all the terms used for the analysis. Also, some may have different views about which ratio or comp works best to evaluate the questions, and I encourage you to comment if that is the case. No feelings will be hurt. Suggestions, please.

So we have returned from Spring Break (better known in Bloomington as SB2K7 - so hot!) with tans, peeling skin, some wild stories, and our desire to attend class and study completely gone. First thing to address is a happy one year anniversary to PostmanE & PostmanR over at wearethepostmen.com. It seems like just yesterday I was over in foggy London reading their first blog and wondering what the heck they were getting into. However, since then I have obviously caught the bug as well, due in large part to their funny and enjoyable site. They were recently signed on to cover MLB baseball at AOL sports blog, The Fanhouse, and have their individual pages here (PostmanE) and here (PostmanR). Congrats!

As for this site, on Wednesday night I hope to do the Dell analysis, as proposed by our loyal reader Cork. In the meantime, go heavy on the aloe and sober up.

Sorry for those still waiting on Dell. I am a bit bogged down with a couple of exams this week and also ran into some trouble formatting excel tables into the blog. I am working on it though, so it should be soon enough.

I saw on CNBC’s Closing Bell today this story where some disgruntled investors are suing brokerages who underwrote IPO’s back in the technology bubble era. The investors allege that brokerages colluded with one another to rig the price of the after market rather than supporting it. For those of you looking to get some background on an IPO, head over to Investopedia and read up.

Here is a brief excerpt from the MarketWatch article:

At issue is whether tie-in agreements - deals between investment banks and securities firms that require the purchase of additional securities in aftermarket trading of new stock offerings - amount to antitrust violations that can support a private antitrust lawsuit. The investors who brought the lawsuit allege such agreements created stacks of stock purchases that artificially drove up the price and margin on hot new stocks. The firms say their conduct was legal under the securities laws.

I personally don’t see this case going much farther for a variety of reasons. The first being a government power struggle which would surely ensue. By that, I mean that the SEC normally regulates this type of activity, however, there is antitrust element and Justice Department oversight at work as well. All a big mess there.

On top of all that, it is tremendously unclear in my opinion that the brokerages committed any foul. It is accepted practice in the IPO industry that the underwriting firm retains an option to offer more shares than originally agreed upon with the firm (known as a “Greenshoe option“). In the Greenshoe option the underwriters can sell 115% of the firm’s original share offer. This provides price support for the newly issued shares and also covers some of the underwriters’ risk. The underwriter typically has 30 days to exercise this option.

If the shares increase, the underwriter uses the Greenshoe option to cover its short position. If the stock falls, it covers the overallotment option by purchasing shares in the open market.

In today’s preceding, Justice David Souter asked “what is the particular difference between supporting the price and rigging the after-market”? In order to determine this, I believe the following must be reviewed (from The Journal of Finance, June 2000, Ellis, Michaely, and O’Hara):

“It is the underwriter’s larger responsibility to support the price of the issue. Price support refers to stabilizing bids, trades, and penalty bids made by the underwriter to influence the price by slowing price declines (Regulation M SEC release #34). Although there is no legal restriction about the price level at which stabilizing trades can be made, stabilizing bids can be made only at or below the offering price. Stabilization is intended to be temporary in nature…”

However, in the MarketWatch article it is stated that underwriters and brokers colluded so that in order to receive preference in the initial offering, a broker agreed to buy a certain amount of shares in the aftermarket. I was unable to find any SEC regulations on this particular practice, but there could be trouble if the brokers were supporting through buying rather than the underwriters.

If this case were to successfully be prosecuted against the brokerages it would be a huge hit to our capital markets in terms of new offerings. There is already enough heat about Sarbanes-Oxley and its destruction of the small-cap IPO. A loss for the brokers here would damage IPO markets even further. It will be interesting to see how the collusion argument plays out, but I believe the question of rigging and supporting should be a victory for the brokers.

A week of finance awaits here at Indiana University. On Wednesday, I will be a member of the studio audience while Jim Cramer tapes an episode of Mad Money here in Bloomington as part of his Back to School Tour. A blog will surely follow about that, though maybe not until later. Also, on Thursday and Friday, I will be taking part in the Training the Street Workshop so I will be sure to share some of the knowledge sure to be garnered in that affair. After that on Friday, I will make the trip home and look forward to seeing some of the commentators over Easter break to swap stories. I just received the excel files for Dell, so I will begin cracking away on that.

I apologize for another Jim Cramer post, but this was too good to pass up in a few ways. The first being that securities law is an interest of mine, and the second being our friend Jim Cramer could be in some hot water (if only to sit down with him during his visit and have a chat).

Henry Blodget, a writer over at Slate.com has had a bit of a feud going with Mr. Cramer for sometime now. Before it was a little more wishy-washy and nothing concrete, basically Mr. Blodget telling us never to listen to Cramer about stock. Now it looks like regulators could have a legitimate beef with Cramer for market manipulation back in his hedge fund days.

In an interview through Cramer’s site (watch it here), thestreet.com from December, Mr. Cramer details some of the investing tactics that are used (and should be used if you want to “be in the game” according to Cramer) by Hedge Funds in order to gain some shady profits in a down year. Cramer sites the tactic called “fomenting” (illegal according to the SEC, which is described as the following in this article from The New York Times:

“Here’s how fomenting works, according to Mr. Cramer: Say a hedge fund manager is holding a short position — a bet that a stock will decline — in Research in Motion, which has just announced blockbuster quarterly earnings results. An enterprising fund manager might call several brokerage houses and either feed them bad information or order a slew of short sales. Then he or she could call up a “bozo reporter” with a fake news tip about Resarch in Motion rival Palm.”

For those of you interested in the gritty details about torpedoing a stock, here is Mr. Blodget’s documentation of Cramer’s quotes with some of his explanation included in brackets:

“A lot of times when I was short at my hedge fund—meaning I needed [the market to go] down—I would create a level of activity before [the market opened] that could drive the [pre-market] futures [down]. … Similarly, if I were long, and I wanted to make things a little bit rosy, I would go in and [buy] a bunch of stocks and make sure that they were higher.”

“What I used to do … if I wanted [a stock] to go higher, I would take and bid, take and bid, take and bid [repeatedly buy stock and then make an offer for more], and if I wanted it to go lower, I’d hit and offer, hit and offer, hit and offer [repeatedly sell stock and then put more up for sale]. And I could get a stock like Research in Motion—that might cost me $15 to $20 million to knock RIM down—but it would be fabulous, because it would beleaguer all the moron longs [investors betting the stock would go up] who are also keying on Research in Motion.”

For a little more explanation about the Bids and the Offers Mr. Cramer is referring to, you can inform yourself here. Mr. Blodget furthers his article with the following quotes from Cramer, which are incredibly revealing:

“The great thing about the market is it has nothing to do with the actual stocks. Now, maybe two weeks from now, the buyers will come to their senses and realize that everything that they heard was a lie, but then again, Fannie Mae lied about their earnings for $6 billion, so there’s just fiction and fiction and fiction.”

“I think it’s important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push [the stock] down, then leak it to the press, and then get it on CNBC—that’s also very important. And then you have a kind of a vicious cycle down. It’s a pretty good game.”

Rich. Very rich. Now, lets move over to a great legal analysis which I found over at STOCKGATE TODAY (via investigatethesec.com), which is “an online newspaper reporting the issues of Securities Fraud”. From March 2, David Patch offers the following analysis, which I find pertinent to the above quotes:

“According to Cramer he would go in and blast a stock [torpedo] to drive the stock price down. I guess that begs the question, when is aggressive trading no longer trading but manipulation? Blasting a stock down hoping to force others to panic and do the same seems to encroach on bear raid manipulation. In fact, lets read the laws straight out of the SEC handbook.

Rule 10b-5 of the Exchange Act of 1934 states that it is unlawful “to effect, alone or with one or more other persons, a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.”

If a torpedo was intent on driving out the “weak kneed investors” hasn’t Mr. Cramer just admitted to fraud by my interpretation of this law as it had the intent of inducing fear into others and forcing them to sell? I think that would be for regulators to sort out but certainly you readers are welcome to formulate your own opinions.“

In response to Mr. Patch’s question at the end, I would certainly think there are going to be some forthcoming investigations. This is has to be very tough for Cramer, he frequently opines on his show about sticking up for the little investors, and how we need him to help us against the big guys. It certainly sounds like that is the case, but how nice that he admitted to using these tactics in his hedge fund hey-day. It will be interesting to watch how this story unfolds, as of right now, no comment from anyone at CNBC, but Cramer has posted his own retort on The Street. I would definitely look for this to get bigger in the coming days, as once it crosses WATBM.com (our new acronym for the site), you know the story is legitimate.

As a brief aside, this story conjures up memories of Jonathan Lebed’s case, where a teenager used AOL message boards to prop up small and micro-cap stocks based on false information (referred to as a “pump and dump” scheme). He was able to make something like $800,000 in a year, but had to pay $285,000 of that back in a settlement where he admitted no wrong-doing. Quite a time for a fifteen year-old. A few similarities in the two cases, but interesting to note that Cramer had quite a response to Lebed’s market manipulation in this article from 2001.

I’ll be keeping an eye on this in the upcoming days and will update accordingly.

(Note: the picture included is by no means intended to label this as a fraud, just a themed picture meant to insinuate “investigation of potential wrong-doing”.)

Tags: Hedge Funds, Jim Cramer, Securities Law

As mentioned before, tomorrow Mad Money with Jim Cramer will be filmed here at IU. Today, Cramer had a book signing where he chatted up the crowd. He seemed to be genuinely enjoying himself amongst the students, lots of booyah’s, and the like. Pictured below is Cramer at the book signing, and a WATB exclusive look at what the set will be like for Mad Money tomorrow. For the record, he signed my book “Paul, Thanks for having me! Booyah!”

They have actually lowered the jumbotron in Assembly Hall to make up the back of the set. The total layout was surprisingly large. They are allowing about 800 people in from what has been reported, which will fill up the south stands of The Hall. I will be there early to secure a spot and will blog afterwards about my experience. Should be a good one, especially with the guest appearance of Mark Cuban which I learned about today. Here’s hoping Mr. Cuban graces us with his presence at the bars again!

Everyone’s favorite TV personality, Jim Cramer, was at
University of Indiana University last Wednesday to film
Mad Money as part of his Back to School Tour on CNBC. I’ll start with a chronological synopsis of the day and then add some commentary.

The admission line started forming about 11AM to get into the taping and the doors opened around 2PM. The set up was really impressive on the floor of Assembly Hall, with the set facing the south bleachers of the stands which were completely full. We were first introduced to some of the behind the scenes people at Mad Money, then Cramer came out to a rousing ovation. From what I have read, there were about 2,000 people at the taping, which is quite a bit more than have been at any other school.
At 3, we were treated to a tremendous performance from the comedian who Mad Money brings along to the Campus tours. His name was Kevin, and I am still trying to figure out what his last name was. A real journalist may have been taking notes such as these. He had some great Bush jokes and also some tremendous lines just bantering with people in the crowd. All those in my crowd were incredibly pleased with his performance, and we vowed to attend one of his real shows in New York. Could only imagine what kind of crude jokes that would produce.

At shortly after 4, Cramer came back on to begin filming the actual show. It seemed to me like the computer set up, and more specifically the internet, at his “desk” was not working, as people were constantly behind it trying to fix it and Cramer hardly stood behind it at all during his taping. This is speculation, but based on some merit.

Cramer’s first segment was with none other than Mark Cuban, who came out and immediately drilled a 15-foot jumper on an assist from Cramer. The crowd was rocking after that. Cuban was asked about the Cubs (basically saying they aren’t for sale and when they are, someone can come talk to him - great response), and also what young investors our age should do with their money. Cuban’s response was classic, and definitely caught Cramer off guard a bit when he said students shouldn’t invest in stocks, rather, “sweat equity” - or investing in yourself. Only Cuban would illicit such a honest, right on retort. Cuban took the pressure off students, telling us that now is the time to experiment and try new things, and not to worry about finding your career right away.

After Cuban’s segment we heard about Cummins (CMI), with the host demanding to film part of the segment sitting on an old engine which was found at a random Bloomington, IN parts store.

The show continued with a lightning round, 3 stocks from the
Investment Club here at IU, then Cramer and Cuban taking
questions from the crowd. Taping wrapped up around 6:15PM.

Overall, the atmosphere was exciting. Being there for 4 hours+, the crowd stayed surprisingly enthusiastic and Cramer seemed to be enjoying himself for most of the time. Following are some observations:

• All those in my group agreed that his show has to be very difficult to tape 5 days a week. Before taping, Cramer seemed very stressed about the quality of the show, and went back to work on writing the prior hour to taping.
• Cramer was incredibly pleased about the way the Cuban segment went. He was literally talking about it for the rest of the taping, commenting on how Cuban “came to play” and it was way better than any segment he had taped with a CEO. He mentioned that Cuban is a natural in front of the camera (agreed) and that most CEO’s just clam up once the camera comes on.
• In between segments, Cramer talked with the crowd throughout. It was like a constantly running lightning round as people would just throw out stocks and Cramer would interrupt whatever he was doing and give a brief analysis. One that I remember in particular was Cramer’s take on Halliburton (HAL), which he says has been unjustly run through the mud by political forces. He commented on them in comparison with another competitor who disguises themselves as a French company which he said was garbage. Unfortunately, I don’t remember who the other company was, so if anyone remembers or knows who this might be, feel free to inform me.
• On Wednesday, an IU student recommended Spartan Motors (SPAR) as a buy to Cramer based on its military contract for vehicles which are protected from IEDs in Iraq, its production of fire trucks, and the retiring baby boomer’s will who buy Spartan’s RVs. At the time, Cramer seemed to not know much about the stock, but on his show Thursday, he agreed with the student and recommended it. The stock has had quite a run, but it still looks interesting based on the fundamentals.
• Cramer talked for awhile about the “shticks” he uses to keep viewers interested and how he knows it takes away substance from his show. I think this is a key point that a lot of people miss. I know how many detractors there are out there about Cramer and his show, but they miss the point in my opinion. Look, he understands that he doesn’t get every stock right, nor does he claim too. I think Cramer would be better served admitting that he won’t necessarily make you “mad money” nor can you really “watch TV and get rich”. However, for me and many others, Cramer has gotten us interested in investing, made us more aware of how the market works, and tuned me in to thinking about investing at an early age which will serve myself and others well in the future.

It is time to get people off of his back and take the show for what it is: a vehicle for getting people thinking about investing when they normally wouldn’t, and making people aware that making your money work for you in the markets is preferable to working for your money throughout life.

(Picture from Aaron Bernstein at the Indianapolis Star)

I thought some readers may enjoy a look at some of the
finance websites that I frequent. I know the blog roll
could be used for that, but I think a little blurb about what is on each site might help. Please take a look at the sites below, they are often full of much better information than you will get here! But seriously, these sites are valuable to visit on a daily basis, and provide some great insight into all things “market”. Hopefully you find something to add to your own bookmarks.

1. Bloomberg: Sometimes a more accurate site than Yahoo! Finance, but I like the charts at Yahoo quite a bit more. The news on Bloomberg is much more comprehensive as well.
2. Damodaran Online: Dr. Damodaran has an incredible website here with loads of spreadsheet models for any type of valuation you could think of, as well as some great research papers on pertinent topics in finance today. This is a must for any student studying finance right now - his models alone will save a ton of time on projects and the like. He also has notes on classes he teaches, speeches given, and other presentation material. Become friends with Damodaran, friends.
3. Big Charts: For the technical traders out there, this site is my preference over stockcharts.com.
4. St. Louis Fed: The Federal Reserve Bank of St. Louis has a great site here for any government data related questions you may have. Check out their Working Papers section for any research needs you may have. The Research Section has any US Fed report you could ever want and provides some great charts as well.
5. SEC Law: If you enjoyed any of the previous securities law posts, this is a great site to check out. Not updated everyday, but the content is challenging and interesting when articles are posted.
6. Spreadsheet Models: Some overlap with Damodaran’s website, but other useful spreadsheet models can be found here as well. Also a good library of papers can be found within this site here.
7. HedgeFolios: Very in-depth market analysis, frequent updates. A good one all-around.
8. Slate: Slate’s content is a little more relaxed and not so technical, but still interesting to read at the same time. An interest in finance, or business for that matter, is by no means required to enjoy some of the content at their Business & Tech section.

For more, just link to any of the blog rolls that these sites contain. This list gives you an idea about some of the great content that is out there on the web, by no means it is comprehensive. If any of the readers have other suggestions, please feel free to add them in the comments section.

As our loyal friend Tsunami indicated in his
comment,the Dow has indeed eclipsed the
13,000 point benchmark. However, this is by no means an indication that the US economy is stable, or in the “Goldilocks” phase. Q1 GDP growth came in at a paltry 1.3% compared with estimates which were around 1.8%. In the the previous quarter, GDP was 2.5%. The Fed’s Beige Book, a summary of economic data from its 12 regional banks, came out on Wednesday showing that housing continued to be a drag - most banks reported declines in residential real-estate and homebuilding. From various reports, the Fed faces uncertainty about inflation which will play a big factor into whether we see a rate cut, hike, or nothing at all. Many bulls such as Jim Cramer are holding steady that the fed will cut rates this year.

Based on this economic data - it seems the market move was a surprise. However, a significant amount of companies came out with better than expected earnings over the past week. These better than expected earnings and the strength of the market can be reflected in four themes as I see it (2 of these taken from our friend Bob Pisani, a favorite of WATBM.com):

• Buybacks & Buyouts: Companies are using their excess cash to buy back stock. Simple supply and demand tells us when there are less shares available to buy, price will rise. Also, as robust activity in Private Equity and M&A continues, even more shares are coming off the market through these deals. Buybacks are also influenced by companies seeking to beat street estimates for EPS numbers. Easy to understand: EPS calculated as earnings over shares outstanding, the less shares available, the higher EPS sees to be. CNBC reported, from S&P research, that retired shares are on track to reach a 42-year record. An estimated $640 billion from private equity and $400 billion from buybacks will serve as an estimated $1 trillion devoted to taking shares off the market in 2007.

• Beat the Street: A big week for earnings last week, as many Dow and S&P 500 components beat estimates which were seemingly conservative market-wide. According to Bloomberg, of the 313 S&P 500 companies which reported Q1 earnings, 213 or 68%, beat analyst estimates for the quarter. The winners from the Dow 30 were Boeing (BA) ($1.13 vs estimates of $1.02) and 3M (MMM) ($1.28 vs estimate of $1.12). Other notable earnings surprises were: Apple ($.87 vs $.64), Amazon ($.26 to $.15), Whirlpool ($1.55 to $1.12), and Texas Instruments ($.35 to $.31).

• Earnings from ROW: ROW, as taken from Jim Cramer, means Rest of the World. Companies are relying on international sales to boost earnings, not domestic revenues. This is another important point when considering the market’s upward move. It is not the US Consumer who is driving these earnings surprises. For example, 3M’s profit gained 52% with help from an increase in revenues from China and India. Boeing’s gain resulted from orders with Azerbaijan (might want to follow the link there…Azerbaijan?) Airlines and Singapore Aircraft Leasing Enterprise. Apple’s (AAPL) ipod shipments grew fastest in international markets. As predicted by Cramer during his visit to Indiana University, Cummins (CMI) knocked one out of the park in its earnings release. Shares were up 30% total last week and 17% on Friday after they reported $1.42 EPS, destroying estimates at $.86 a share. Sales were down in most segments for North America. Continuing on our theme, this was well-outpaced by growth in areas such as Europe, India, and the Middle East.

Overall, an interesting week for US companies and the markets overall. It will be interesting to see how this slowdown in US GDP plays out. If the Fed cuts rates, it will spur further growth and upside in the market, and could help domestic markets recover. Some bears believe that the fed will raise rates to curb inflationary pressures driven by increases in pricing on energy, which seem to be a primary concern for Fed Chairman Bernanke.

The lessons learned this week: international presence is mandatory in today’s environment, especially with US growth lacking - those who fail at generating revenues abroad will be left in the dust. Second, corporations (with help from private equity and M&A) are doing their part to beat estimates and increase prices by buying back stock at historic rates - increasing EPS and driving demand for liquidity.

Congratulations to “ctwagner” for winning the
inaugural WATB.com Portfolio Challenge. CT,
as he shall be referred to from hereon, won
with a total portfolio return of 15.20%, finishing with an equity value of $115,198 from his original $100,000 investment.

In our time window (2/2/07 - 5/4/07) the S&P returned 3.95% and the Dow returned 4.8%. CT’s impressive return of 15% smashes both of these benchmarks. For the record, “eabrenna” was the only other player to beat both of these indices.

CT actively managed his portfolio through February and the first week of March, then only made one trade through the rest of the competition, which was a pre-selected sell stop order.

CT’s Winners:

• McDermott International (MDR): A heavy construction firm, but very diversified, CT bought in February for $51.05 and saw the price skyrocket to near $70 by the end of competition. On 1 Mar, the company released Q4 results showing net income quadrupled from prior year Q4. An impressive pick indeed, and a company not many of us know about I imagine.
• Chipotle (CMG): Just at a glance, I think Chipotle was the most traded stock in the game throughout portfolios. This stock didn’t disappoint for anyone, most of us, including CT buying at around $60, and watching it rise to $81.75 by the end of competition.

I hope everyone enjoyed the competition. The Chipotle example is exactly what I wrote about earlier with Abercrombie and Fitch. It is important for us as young investors to trade on what we know. What do we know about Chipotle? That us and our friends consume their burritos in mass quantities (sometimes even 3 at a time, right E?). Thanks again to everyone that participated and we will fire it up again next school year.