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Mix-Ansicht- ENRON and the battle for investment survival - leibovitz, 10.12.2001, 13:33
- balance sheets across the economy are very high risk - leibovitz, 10.12.2001, 13:55
ENRON and the battle for investment survival
ENRON AND THE BATTLE FOR INVESTMENT SURVIVAL
One of the main reasons we rely on technical analysis (following the trend) is our philosophy, which states that the key to winning the"battle for investment survival" is to miss the big disasters. Enron is a case in point. Last year we liked it and its excellent upside momentum and relative strength put it on our key Focus List as a buy on April 14, 2000! It stayed on our preferred list of recommended stocks almost five months until it came off on September 8, 2000. During that period of time Enron shot ahead a strong 20.7% while the S&P 500 rose 10.2%. Stocks come on and off our Focus List based upon two criteria - the stock must be relatively strong (40%) and so must the group (60%) it is in, and if the technical readings on either the stock or the group fall, we get out. Then the next clear-cut message from Enron came when the stock was showing relative weakness and so was the group. Thus, Enron got on the NDR Avoid List on October 12, 2000 at $35.81. Since then Enron is down -99.3% and the S&P is actually up 4.4%. This shows good evidence of momentum catching the major moves and the ability to cut the losses short.
But there are other lessons in regard to Enron and the battle for investment survival, because Enron was a huge user of debt, derivatives, as well as"creative financial accounting" - three things we have constantly warned about in recent years. Earnings from many companies are badly polluted, and balance sheets across the economy are very high risk. Note private domestic non-financial debt on chart E0503 below. There could easily be more Enron-type situations out there.
I also asked Lance Stonecypher if he could tell me some other examples of avoiding disaster with our Focus Ranks and he said that in the cases of Polaroid, Bethlehem Steel and Swiss Air among many others, that our Focus Ranks, in each case, like Enron, were very low (negative momentum) prior to the really disastrous drops.
Another example -- Our NDR Technology Sector exposure on the NDR Focus List reached a peak of 85.3% at the end of November 1999. Prices then rose another 39.2% until March 10, 2000, while our exposure fell. By April 18, 2000 Tech sector prices had fallen 22.2% and the Focus List exposure had plummeted to 3.9%. That of course, was just the tip of the iceberg as from April 18,
2000 to September 21, 2001, the Tech sector lost another 79.8%. Our trend-sensitive momentum based ranking system, however, allowed us to be underweighted for much of that period, avoiding a real disaster.
One final point - a lot of people like to think and talk about some growth stocks as if they are"momentum" stocks and they mean that in a very negative way as if there is something derogatory about the concept. We see all stocks, growth or value, as either positive, negative, or neutral momentum stocks. We like them as long as upside momentum is positive and we see them as"negative
momentum" stocks when they lose relative strength. We don't like to hold negative momentum stocks because almost all the big disasters come from that group. Go with Mo -- it avoids disasters and helps pick winners. --Ned www.ndr.com
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