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The BMW Method
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By captainccs
November 23, 2007

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I usually don't pay too much attention to the market as a whole preferring to zero in on specific stocks but now the market is giving off so many signals that it is worth listening. Here is what I believe:

Prices (inflation/deflation) are a consequence of the money supply, high liquidity increases prices while low liquidity lowers them and this is as true of stocks as it is with any commodity. There is no such thing as intrinsic value, only exchange value and if there is a shortage of dollars then prices must drop to move the merchandise, including stocks.

And here is what I see:

We have come to the end of a highly liquid market. During the past four to five years bullishness created liquidity and this liquidity, in turn, raised prices which, in turn, reaffirmed bullishness. Then, at midnight, the coach reverted to a pumpkin. People realized that the credit market rise was unsustainable and by cutting back, reduced liquidity. Now we go into a downward spiral until people realize that, once again, they are overdoing it. Although lack of liquidity affects most if not all stocks, the emphasis is on financial stocks specially those that had close contacts with home building, mortgage lending and securitizing. Many of them are already broke and it is likely that some more will follow. On the other hand, there are some that are too big to fail or otherwise have the special protection of the political system such as Fannie Mae and Freddy Mac.

How this applies to the BMW Method:

The BMW Method, like most investment strategies, relies on the usual. Strange as it may seem, low CAGR is a usual event for all companies and the BMWM uses this information to buy stocks at an advantageous time. But if currently liquidity is not at normal levels then prices in general should be more depressed than usual. If this is, indeed, the case, then any stock that is at low CAGR by our long term charts is more than likely not at low CAGR in the current circumstances, it has room to drop some more. This is very true of financial stocks, somewhat less of building related stock and less so of the rest of the universe of stocks.

Conclusion:

1.- I just don't see a need to rush to buy any financial stocks just now
2.- We probably can cherry pick non-building, non-financial stocks that have been hammered by a nervous market (I bought HANS a few days ago)
3.- If you do decide to buy, one way to protect yourself from further drops is to sell expensive covered calls. On HANS I found a call that was selling for 22% of the price of the stock, in effect I took an additional 22% discount on HANS on top of the 24% one day drop. The covered call will limit your upside should the stock be called but you will still be making market beating results. In the case of HANS, I would be making 30% in 8 months (CAGR 58%)! In the case of BWLD, the stock dropped far enough that I was able to buy back the calls at half price. Should BWLD fly again (hahaha) I can sell more expensive calls against it at a later date. But in any case, I'm buying below market prices.

This is the time to invest like a good hunter: stalk you pray patiently and pounce when the time is ripe but not sooner. Isn't that what an IcyWolf would do?

Denny Schlesinger