The Great Dance Continues
Research for Online Investors

by John Dalt

11/03/09

One of the great things about writing the MarketToday newsletter is the ability to view the market as an observer.  To spend the day reading other’s views and watching the ‘great dance’ that occurs every day between buyers and sellers.

On certain days, the screen is all green as it seems every stock is headed higher, it always reminds me of the saying, “A rising tide lifts all boats.”  Other days, the screen is all red, as sellers try to dump every stock they own, reminding me of the classic video with comedians John Fortune and John Bird explaining the “Subprime Banking Mess.”

The line that always makes me smile is, “Market participants don’t know whether to buy on the rumor and sell on the news, do the opposite, do both, or do neither depending on which way the wind is blowing.”

Since the market hit lows last March, almost all stocks have recovered from their 52-week lows.  The interesting thing to watch is the days where the screen is not “all green” or “all red”.  The stocks that are green or red reflect investor’s interest in risk.  When investors are scared, they sell off riskier assets and rush to the good ‘ol blue chips.  When investors feel confident, they scoop up the risky companies and let the blue chips languish.  Many companies who rightfully are classified as ‘blue chips’ have not recovered to their 52-week highs, but are quietly building their business and expanding their dominance.

Our long-term portfolio subscribers have been picking up some great ‘blue chip’ companies at attractive prices in the last year.  It is always exciting to find a ‘high flyer’, a stock that returns double or triple in a year or two, and we have a few.  They can reward you, but they can fall like a three-year old out of bed.

When you troll the back alleys looking for the ‘story stock’ that promises fantastic returns you accept the risk that some of these bets won’t end well. I have heard, but cannot attribute a statistic that causes great concern, over half of all public companies will go broke. I am very cautious buying ‘story stocks.”  You should be too.  One of the secrets to increasing wealth is to not lose money.  High flyers may be fun but the party can turn into a nightmare when they fall like autumn leaves.  Stay with the best, you will sleep better and your portfolio will grow.

Berkshire Hathaway (BRK) announced this morning the agreement to purchase Burlington Northern Santa Fe (BNI) for $100 per share in cash and stock.  The deal values the company at $44 billion, BRK’s largest acquisition ever.  The deal includes assuming $10 billion in debt carried by BNI.  Buffet reportedly made one offer, because that was all he could afford.  BNI has been valued at $79 to $95 by analysts; the enterprise value of the stock (according to the company) was $103.16

By noon, three law firms had released contact information for shareholders to participate in a possible class action suit.  The law firms are “investigating possible breaches of fiduciary duty by the Board of Directors of Burlington Northern Santa Fe.  The company may not have adequately shopped itself around before entering in this transaction.  Berkshire may be underpaying for Burlington, thus unlawfully harming Burlington shareholders.”

Word of the day sent in by subscriber A.A.
Barratry—The practice of stirring up of groundless lawsuits.

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The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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