December 04, 2007

This Was Funny At the Time

REMEMBER THIS COMMERCIAL? Heh. I loved this when it came out. The kicker, of course, is the possibility E*Trade Financial Corp. may go the same way as, and the sock puppet. Heh. It's the Blade Runner curse for the 21st century!

Anyway, much to my annoyance, I am now losing money on ETFC, which is now down to $3.91 per share. What's that? OK, so I'm only losing $20. No, not $20,000 -- $20. I told you I didn't invest much in the stupid thing, and I wasn't kidding. I mean, I'm not that crazy. But I digress.

Over the past couple of days, ETFC has had its ass kicked because yet another idiot analyst downgraded it -- this time because of the Citadel deal. The analyst set a target price of $2 and said the company wouldn't make any money in 2008.

How do I know the analyst is an idiot? Because I own the stock. Duh. If he upgraded it, he'd be a genius.

In all seriousness, though, this is what happens when you buy an extremely volatile stock in an extremely volatile market and approximately 90 percent of the volume involves day traders, hedge funds and other speculators trying to squeeze out pennies on their trades. I have no doubt the analyst is an extremely smart and reasonable person, and it's entirely possible his report will prove correct, just like it's entirely possible that Citigroup analyst's report -- which started this whole rigamarole -- will prove correct. However, I am guessing that Mr Ken Griffin, Citadel's chief, is smarter than the analysts.

After all, if Mr Griffin's investment goes south, Citadel is out upwards of $2 billion, because the fund's $1.75 billion loan will go bye-bye and its $400m in E*Trade stock will be worth less than a roll of toilet paper. (Those certificates aren't Charmin soft). As a result, I figure Mr Griffin is not going to let E*Trade collapse. I also figure he just plans to wait until the market turns eventually, and then cackle maniacally as he reaps in untold profits as a result of the deal. In the meantime, he can do fun things like castigate E*Trade's management at company board meetings.

As a result, I figure I can keep my E*Trade stock for a while, because I bought it at an near-low (even if it is now lower) and it will hopefully rebound sometime in the near future. Like next Tuesday. But even if it takes until 2010 or 2011, that's not really a concern for me, because I'm looking at a pretty nifty risk-reward equation. If it bombs, I'm out a few hundred bucks. If it scores, I could theoretically do pretty well. Now comes the waiting game. Winning it will require a bit of intestinal fortitude.

OBLIGATORY DISCLAIMER: The beta on ETFC is 3.16. You'd have to be downright certifiable to think this would be a safe, prudent and reasonable investment. As such, it would make sense to buy an industrial-sized bottle of Pepto-Bismol if you were actually crazy enough to buy into it. Speaking of Pepto-Bismol, look at PG -- it's near a 52-week-high! I wonder if there's any connection. Nah.

Posted by Benjamin Kepple at December 4, 2007 11:54 PM | TrackBack

According to an old saying, successful individuals trade to trade well, not to make money. Seems to me you had ample opportunity to sell high and turn this into a tidy and profitable venture. I'd also wager that technical analysis predicted this ebb in stock price.

Posted by: arasfa at December 5, 2007 11:12 AM

Arasfa --

I *absolutely* had ample opportunity to sell high and turn this into a nicely profitable venture, as you said. After all, ETFC recently hit a high of $6 and I could have sold then and made about a 43 pc profit.

But that's not why I bought it. I bought it at ~$4.21 because at the time I figured the stock was at least somewhat undervalued and it seemed like a chance to get on the bottom floor for a long-term play. Now, going in, I knew I had a chance of catching a falling knife and so far, at any rate, this is what has happened. But I figured the long-term opportunities outweighed the short-term risks associated with the volatility. We'll see if I am right in six months or a year or two years. I could well be wrong.

I had talked about this in earlier posts on ETFC and so my expressed annoyance about losing money was not a deep-seated annoyance, but rather a kind of "ah, crap" annoyance. After all, the stock is extremely volatile and heavily traded and so I am well expecting the possibility of a loss -- minor or significant. But I am also hoping for a nice kill -- eventually -- as well. We'll see if that will be my downfall on this one.

As for technical indicators, I am not a market timer. This is not to say that I don't think market timing can work, it's just that I'm not a quant and don't want to spend what little free time I have poring over data and searching out cup-and-handle patterns. My personal investing approach is more human-oriented, and in this case my idea was to take advantage of what seems like a classic case of market inefficiency (as seen in the rise from $3.50 to $6 over the past few weeks). It may be that I missed the boat in not selling at that recent peak, and if there is any blame for that it is all mine. But at this point, my tiny speculative effort is still rooted in the hope for a nice long-term gain (i.e. at least a two-bagger).

But we'll see. In the meantime I am somewhat enjoying watching how this thing swings around like a roller-coaster.

Posted by: Benjamin Kepple at December 5, 2007 06:48 PM
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