Wednesday, November 28, 2007

Having a Second Job without Working

What would you say if you were able to make a few extra bucks two or three times a week on top of your regular job without working?

If you're like me, you'd probably ask where you can sign up!

Well, with the recent major swings in the market I think it would be possible to accomplish such a feat fairly easily by taking short-term positions (ie. daily, overnight) on stocks that are experiencing a fair amount of volatility lately.

Now, I'm not talking about investing in a highly speculative stock that will cause you to lose sleep over or an illiquid, cow-pasture stock that you'll have to convince your neighbour is the next big diamond mine just so you can sell your stake... I'm talking more about the big boys. You know the ones: The guys on the main index with all those shares freely flowing from one hand to the next with recognizable names that just happen to be the ones you wouldn't mind owning for the long-term in the event things don't go quite according to plan.

Surely, you would have to take commissions into consideration with such a strategy but wouldn't it be nice to make an extra 100 bucks a day or so by just buying and selling a blue-chip stock within a few hours or days?

And oh yeah, don't forget that capital gains are taxed at only half the rate of your regular job's income.

Just something to keep in mind while you keep your treasure chest on the sidelines during these volatile days on the market...

Sunday, November 25, 2007

How the Market Really Works

Since it's Grey Cup Sunday, here's a funny skit that provides an explanation of the ingenuity of the financial markets at work...

Too bad it's true!

Tuesday, November 20, 2007

How Call Options Work

If you've ever been curious as to what the heck "Options Trading" is all about, Preet from WhereDoesAllMyMoneyGo has written an excellent three-part series on the subject at Million Dollar Journey:

How Call Options Work I - The Basics

How Call Options Work II - Examples

How Call Options Work III - Call Option Writing

Sunday, November 18, 2007

Highest Cash Levels in Years

After updating my spreadsheets this weekend, I can safely say that I haven't had such a small percentage of funds held in stocks in years.  My portfolio is currently approximately 87% cash. Looking at the charts of stocks on my watchlist, I can't say that I see anything very intriguing to invest in so I'm either going to have to wait from the sidelines or expand my horizons.  I've missed out on the big bounce from the August lows but at this point in time, I see a lot of stocks as being 'tired' and ready to rollover.  That being said, we're well into the month of November, which anectodally is the start of the run-up to the RRSP-buying season. Time will tell what happens. 

Saturday, November 17, 2007

McInerney's Assessment

It's always interesting to read up on new ways to assess companies based on their fundamentals. Brian Milner's article, "RIM: out of the stall zone?", discusses Francis McInerney's methodology.
What follows is an excerpt from the article:

Mr. McInerney has developed an innovative means of assessing which companies are likely to exceed even the wildest expectations of the market while others are destined to bitterly disappoint and still others are at risk of squandering huge leads over rivals.

Dedicated followers of his analysis would have jumped on the Apple bandwagon long before it got overcrowded, embraced Google, Comcast and Intel, been wary of Nokia and Microsoft and steered well clear of the likes of Viacom, News Corp., Alcatel-Lucent, Ericsson and the auto makers. They also would have understood why retail giant Wal-Mart continues to brush aside all challengers and why Dell is no longer able to do the same.

But the Canadian expatriate had never subjected RIM to his rigorous formula, an oversight he vowed to correct at the behest of The Globe and Mail.

What he discovered was less than flattering, although by no means a disaster in the making.

RIM started the current fiscal year with a lousy grade of C- from Mr. McInerney, managing director of New York-based North River Ventures. But it has since improved markedly.

“It had a high velocity of capital – operating earnings as a percentage of enterprise value [equity plus long-term debt] – but a mediocre velocity of cash.”

The latter describes how fast a company can turn sales into cash, which is a simple way of assessing how efficient it is at managing its working capital. Those that excel at it get better information at a faster rate from their customers, can afford to take more risks and are more likely to sustain profits.

To measure cash velocity, Mr. McInerney's equation takes days of sales in receivables, adds them to days of inventory and subtracts accounts payable turnover.

Of course, there is more to it than that. After determining how effective a company is in managing cash, capital and the flow of information, he applies an algorithm to come up with grades from A to F, although he doesn't bother with an E.

“After you hit D, there's just no point,” he laughed.

In RIM, Mr. McInerney discovered a relatively slow organization with a strong rate of return.

Michael Dell used to describe such companies as pools of cash waiting for smarter competitors to come along and siphon off their profits.

RIM had a profile similar to Nokia's, which has made them both vulnerable to such predation, Mr. McInerney said. “Companies like this are in my risk zone.”

But in the first six months, RIM slashed inventory days to 21 from 33 and receivables to 57 days from 69. Payable turnover was down to 25 days, indicating that RIM has tightened its supply chain and cleaned up its operations. Its grade is now a more respectable B.

“During the first half, management appeared to have realized how vulnerable it was and seemed to get religion,” Mr. McInerney opined. “If it can get to an A- by the end of the fiscal year, this will indicate a major turnaround. The stock will be a keeper.”

The top-rated companies have closer to 10 days worth of inventory and no more than a month of receivables. Dell, for example, had about five days worth of inventory at its zenith, and its direct-sales business model enabled it to collect from customers before paying suppliers.

The next quarter will tell the tale for RIM, Mr. McInerney said, warning that the company is now in what he calls the stall zone. Why? Because it's much easier to slide backward at this level than it is to improve the fundamentals.

How well you manage the demands of the future depends on the number of cash wait states in your business. McInerney has developed proprietary wait state metrics to gauge your management's ability to navigate the future. You can calculate your company's Management Grade by entering your numbers at their web site.

If his North River Management Grading System throws you an A, you have one of the best performing companies in your sector. If you come up with a C, or worse, you have deep structural problems that you must address immediately. You don't want to tell shareholders after their earnings have evaporated that you got North River's Management Grade F, for free, and did nothing about it!

Monday, November 12, 2007

IBM Takes Over Cognos

Cognos has long since been considered a takeover candidate in the highly-consolidatory business intelligence software industry and it finally happened today as IBM announced its intentions to purchase the company in an all-cash deal.

FP Trading Desk notes that Cognos showed deviant trading behaviour in days ahead of IBM takeover:

Cognos shows deviant trading behaviour in days ahead of IBM takeover

Ottawa-based software maker Cognos Inc. (CSN/TSX, COGN/NASD) said on Monday it agreed to be purchased by IBM (IBM/NYSE) in an all-cash deal of US$58 per share. But in the two days before the US$5-billion deal was announced, Cognos shares rose 9.5%. The stock closed at $45.69 in Toronto trading Wednesday, before rising to end the week at $50.02.

Measuredmarkets' analysis shows deviant behaviour trading in Cognos shares on Nov. 8 and 9, despite any major news from the company. However, it has long been considered a takeover candidate.

Measuredmarkets Inc.'s Early Warning Service alerts investors to when a stock’s trading pattern changes significantly from its normal behaviour. The trading analysis covers nine time periods, examining closing price, total volume and the number of individual trades. It surveys the NYSE, NASDAQ (National Market), AMEX and TSX, and is available at

Saturday, November 3, 2007

Upcoming TSX Index Rebalancing

I have always wondered what kind of performance boost a stock gets when it's added to an index. One would think there would be extra demand for such a stock and hence a higher share price but from what I recall from casual observation, this is not always the case. So as a bit of an experiment, let's make a note of the likely candidates and revisit these stocks at year's end to see how they performed.

On November 2nd, The National Post's FP Trading Desk noted that:

Ahead of the December 2007 rebalancing of the S&P /TSX composite index – due to be announced by Dec. 14 and to take effect after markets close a week later – CIBC World Markets analyst Yin Luo is making his predictions as to what some of the changes may be.
QLT Inc., Angiotech Pharmaceuticals Inc., Cyries Energy Inc. and Ballard Power Systems Inc. are the four members of the benchmark index consider likely to be removed, based on data as of Oct. 30.
Meanwhile, nine companies meet the criteria for addition, Mr. Luo said in a research note. These include Allen-Vanguard Corp., Canadian Hydro Developers Inc., Canaccord Capital Inc., Mega UraniumLtd., Gold Eagle Mines Ltd., Gateway Casinos Income Fund, Timminco Ltd., Absolute Software Corp, and Sandvine Corp. European Goldfields Ltd. is also on his watch list for potential candidates for addition.


As an avid investor, you've probably wondered how well you can predict the future performance of a stock. Perhaps, you've heard a thing or two about technical analysis but believe it's fruitless or you think you're a TA-expert, but don't feel comfortable placing your own money on the line.

Well, now there is a great time-lapse stock trading game called Chartgame where you can test your stock prediction strategies.

When playing Chartgame, the web site will present you with a random historical stock chart of an actual large cap (S&P 500) security, without telling you which company and time period the chart represents.

You are then given the opportunity to reveal the stock chart one day at a time, selecting to "buy" or "sell" the stock at various times. After a maximum of one year is played for the security, the actual name of the company, and what time period the graph was for is revealed, and you move on to another stock chart for an unknown company and time period.

You are rated on how much gains you made over how many days invested. The computer compares you to a strategy of "buy and hold" on the stocks played. Your goal is to beat that.

This a great game to sharpen your trading skills with actual historical stock charts. It is straight-forward as it simply provides you with the stock chart, daily stats, and associated volume so you don't have to be an expert in moving averages, bollinger bands, etc. to play the game. This may be a bit too simplistic for TA-experts but for the average-Joe investor like me who likes using simple technical analysis techniques to help predict future stock performance, Chartgame is an excellent way to improve your skills.

If you have time this weekend to test your skills (and/or luck) in the market, I recommend you give Chartgame a try.