WALL STREET…DEFLATING LIKE A MARGINAL SOUFFLE…
(from its over-hyped prices beyond any true value of real earnings)

For the past four years Wall Street has been on a party binge. Now it’s deflating like a marginal soufflé from its over-hyped prices beyond any true value of real earnings.

As a result we’re now seeing investors stampeding like a herd of panic-stricken cattle desperately seeking an exit from this market’s extreme roller-coaster up and down volatility by as much as a thousand points in a day. That’s enough to give anyone financial motion sickness, and we suspect that a lot of those so-called – One Percenters – may not be part of that demographic for much longer because of that.

Of course there are a number of factors operating on Wall Street these days which didn’t exist back in the day when watching the Dow race upwards towards a high of 600 had investors drooling to plunge into the market like so many ravening winter-starved wolves. Today, however, with the way everything is so interconnected and “globalized”…if someone in China sneezes…a lot of folks in New York…catch cold…and the recent Chinese “sneeze” of devaluing their currency, combined with the general slow-down of their economic machinery (even possibly on the verge of outright recession), has made a lot of folks in New York, and elsewhere, catch…cold.

Such volatile conditions like this makes us recall how a canny Hungarian refugee (an engineer) named Nicholas Darvas figured out how to game them, going from near zero to several millions in something less than eighteen months. While he did that in an up market, he replicated his methodology in the down market that followed…raking in several million more solid gains from that episode. He achieved all of that because his engineering background led him to realize that all stocks in the market were like up and down… escalators…with most never really in synch, with each one moving independently either up or down depending on whatever pressures there were, or lacking, to cause those up and down moves. The trick was to know when it was the right time to jump on one moving upwards, and, when it was the right time to jump off of it when it started to go back down again.

He wrote a book about it later on. Unlike most such publications which are usually great on concepts but woefully short on specific how-to details, he clearly laid out his method, giving precise, step by step, instructions on how to do what he had done. It’s probably no longer in print, but in these volatile times, if you can find it…it is well worth the effort.

We ourselves had an interesting experience back in the far time of the go-go 60s on how pursuing “real value” rather than “price” earned us a tidy profit. A late former partner of ours, a true financial genius, was always preaching about researching any stock’s “book value” before investing in it. By that he meant what was its net asset value after all accounts and debts had been paid off. What was left, divided by the number of shares outstanding, was its true or “real value”.

It so happened that Rolls-Royce, at that time the bluest of blue chips, because it had mismanaged its expansion and involvement into aero-space and military aviation production (away from its core high end automotive business), was forced to go into bankruptcy. Our partner seized the occasion to quickly compute what its residual “book value” would be after the liquidation process had been completed, and estimated that there would be a pay out of close to $3.00/share. He estimated the process would take about 2 ½ to 3 years. By this time its stock had dropped to something less than .60 cents/share, and was about to be suspended from trading. Fortunately we were able to squeeze under that wire, buying up almost 15,000 shares at .58 cents/share. Two days later trading was suspended.

As he had calculated it took some 30 months before the liquidation process was done, and the bankruptcy Administrator announced that the payout would be $2.86/share. Those of us who had participated in this “investing” venture each ended up with slightly less than $5,000. Not a bad return from an initial investment of less than $600/@.

The moral of this is that there’s much to be said for…bottom feeding… when things seem to be going south; but, the thing to remember is that whatever the stock market is doing does not necessarily reflect what’s actually happening with the economy. At most it’s simply a symptomatic reflection of its anemic condition of that moment. Nothing more.

CENTURION