Gaming Wall Street’s Public Relations Charade

Every three months investors get a chance to game Wall Street’s great public relations charade. CEOs solemnly declare their recent quarterly profits. They then explain what went right (and to a lesser degree what went wrong) to those listening in on the conference call.  

But what appears to be the objective disclosure of a company’s recent performance is anything but. They’re carefully orchestrated PR sessions. They remind me of the public appearances of politicians running for office in campaigns elaborately planned by highly paid people.

And the financial media industry which is bought and paid for by Wall Street sends their 25-year old kids down there to lap it up.

Every once in a great while an analyst questions the logic imperiously imparted by the CEO. For example, one such analyst, Meredith Whitney, questioned the health of banks a couple of years ago when everybody else considered toxic assets a minor irritant.

But for every Ms. Whitney there are 500 analysts who drink the Kool-Aid.

As an investor, if you know how this game works you can make a lot of money. IDE’s Ted Peroulakis has been observing these public relations charades for over a decade. He knows how the game is played. And he knows how to work it to his advantage.

When Bad Performances Are Good Enough

Ted does most of the hard work well before these public relations charade take place. Ted explained to me just how he does it...

“If you follow a company closely, you can see how they are spinning their performances...and if analysts are falling for it. Recently I’ve seen many instances of analysts making big downward adjustments in response to pessimistic statements by companies. For every 20 companies this happens to, I pick one or two to make a play on.”  

Recently Ted noticed that analysts were paying too much attention to JP Morgan Chase’s weak loan portfolio and not enough attention to its profit-making trading activities. Ted correctly predicted that the bank would beat expectations. And they did so easily when they reported last week. Ted’s recommended call option on a financial ETF gave his Options Power Trader readers a 100% gain.

Ted did the same thing with Freeport McMoRan, the huge copper and gold mining company. He noticed the company had made big cuts. At the same time it was complaining about rising mining costs. While analysts focused on rising operational costs, Ted focused on rising commodity prices. Convinced that Freeport would easily exceed expectations, he suggested a call option and nailed it. Last week the option gave his readers another 100% profit.

Another company, Research in Motion, also convinced analysts that it wasn’t doing so well. Ted saw another opportunity to make his readers a quick profit. He suggested a call option. The results? A 152% gain for his readers.

If you’re interested in Ted’s Options Power Trader service, click here.

Are You Avoiding Your Portfolio?

I’m amazed at how many of my friends insist on ignoring their portfolio. These are smart and successful people who usually like to tackle issues head-on. But when it comes to investing, they morph into wishy-washy bystanders. What’s going on?

I can think of three reasons why people ignore their investments and I’ve seen all three in play during the past year...

1. The stock market is climbing ferociously and your portfolio is making great gains.

2. The stock market is sinking along with your portfolio. It’s too ugly to contemplate, much less do something about it.

3. The market goes up some days and goes down others. You’re confused and unsure what to do.  And there’s no consensus in the mainstream financial media what is going on. Without a clear direction you do nothing.

The Invention of the So-Called Self-Adjusting Portfolio

It’s never good to ignore your portfolio. Your oven may be self-cleaning. Your computer may automatically clear your hard drive of stray viruses. But your investments require your attention...always. There are no exceptions to this rule, not even for target-allocation funds.

What are target-allocation funds? If you believe Wall Street brokerages, they self-adjust to your changing toleration for risk. These funds take into account your age and assume that the older you are, the less risk you want. So as you grow older, the funds automatically increase your bond investments and decrease your stock investments.

That’s fine as far as it goes, but it leaves out a lot. They don’t take into account whether the stock market is rising or falling. They don’t take into account whether the interest from bonds will cover the rate of inflation. And these funds had a horrible 2008. They offered little in the way of protection.

Target-allocation funds are no substitute for staying on top of your portfolio, whatever the markets are doing...

This Market Is Full of Hot Air

Even if the market is rising (like it has been), you need to watch for these three things:

1. Valuation. If stocks are getting pricy at the same time as revenues are falling or stagnant, a correction may be at hand. Companies are right now valued as if this were the third year of the recovery, not the third month (if that).

2. Sentiment. What are investors thinking? When everybody is excited about the market, that usually means the market is running out of buyers to push up stock prices. We’re not quite there but we’re getting close.

3. Strength of the economy. The market has bought into the phony recovery we’re having. I can’t remind you enough times that what we have isn’t a recovery. The economy has stabilized at a very low level of performance. The market can’t keep going in one direction and the economy in the other indefinitely.

Taking Stock of the Globe

So what can you do when things get ugly here? You know we're in a global economy. You can always escape Dodge by looking overseas. It’s time your portfolio reflected the real world, especially when you have so much to gain by doing so.

The average American investor has just 6% of his portfolio outside the good ole USA. It should be at least double that.  Here are five reasons to diversify outside the U.S.:

• Many non-US markets offer faster rates of economic growth than the U.S.

• Many of the world's leading companies are domiciled outside U.S.

• The US stock market is not among the 10 best performing equity markets this year

• From 1970 to present the U.S. market never ranked as the top performing developed market for any one year

• 71% of world GDP is generated outside the United States

The easiest way to invest globally is through ETFs (Exchange-Traded Funds). You can pick countries, regions, or global sectors like healthcare, industrials and energy. Andrew Gordon’s most recent pick in his ETF service covers a corner of the global energy market that is preparing for a very long climb. If you want more information on Andy’s service, click here.

Invest Safely,

Bob Irish
Investment Director
Investor's Daily Edge

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