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Author: Mike Celeste Editor: Tony Ponzo January Circulation: 13763

Stat Sheet Week Ending January 28th 2006

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+245.0+2.3%+189.0+1.8%
S&P+23.0+1.8%+36.0+2.9%
NAS+56.0+2.5%+99.0+4.5%
Splitmaster Strategies
Basic...............+4.7%
Big Dipper..............+10.7%
Option Calls..............+74.0%
Option Puts..............+81.0%

Highlight of this past week
EME CALL nicely rising and PUT falling despite market maker problems.

In this Issue---Testimonial---
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"Thanks for the email. Being concerned about your client's opinions will insure your success. I didn't get filled today but I really didn't worry about it. I've talked to Del at AOS in the past and understand that he has some discretion in his orders but has my best interest in mind. This is not an exact science. If it were, we could all do it without you. I'm just looking at making money overall on a consistent basis, which I believe you have provided. Keep up the good work and continue to improve. I appreciate the auto trading. Overall, good job and continue to communicate.

Best regards,
Gale

SplitMaster Basic System---
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The last 2 splitters in this system closed out, and as expected, both were good winners. Our month ended with a gain of 4.72%, or annualized at 79%. It doesn't seem like much when you say 4-5%, but when you look at how that turns out for a year, it is pretty darn good, we think. Of course, we don't know how the full year will end, but we'll be satisfied if we can average this 4% - 5% for every month, or that 79% annual return. We say satisfied, but not enough to sit on our laurels, believe me. We are always looking to improve--but--not to the point where we take unnecessary risks. As one of our long term team members said just this week, "Don't mess with a good thing".

Big Dipper System---
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PTC was our play that closed out this month, and it was a great way to start the year. It ended with a gain of 10.69%. Our greatest problem in this system is getting more new plays without risking the downside too much. The splitters just haven't been falling enough to make the target buy price, and we have cut the drop level. We will continue to work on this aspect, but don't want to get new plays just for the sake of having new plays. There has to be logic and historical pricing to back them up.

Options---
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EME continues to be on our "news" page. Our team members know that we had a problem with the market maker on the CALL option. There is only one exchange that carries EME and there is only a one-person market maker. He did not open the option pricing when the stock opened up 35 cents, but waited until the stock went up a $1 and then raised the CALL price an equal $1. That's not the worst of it.

There were only a few trades at that price, and he raised it even more, and has made the spread on the stock ridiculous--about 1.50 difference between bid and ask--sometimes even more. The PUT was wacky, too. The stock opened and never went lower, but the PUT went up in price (that was good for some of the team that write PUTS). It made no sense at all. Now---get this--the next day, our young mentored team member remained patient and persistent. The first CALL price purchased on our regular buy date was at 5.00 and went up from there. The stock opened at 77.00 that day. The next day, the low of the stock was 78.15, a full 1.15 higher. Our team member had left his limit order in at 5.00----and he got it. This market maker is making no sense at all---and now this market maker has taken almost all the time value out of the CALL, on the bid side--with 3 weeks of trading left in the option. Fortunately, the stock has moved up nicely, so he has had to move the bid price up, also. We're very happy for you team members that were able to get in on this one. (I missed it, myself). I called the CBOE and the Pacific Exchange, where the option is traded and read the riot act to them--pointing out that it wasn't personal, as they didn't let me talk directly to the market maker--but I insisted my "message" be delivered to him.

S+P 500 Options---
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After last Friday's debacle in the market, we were pleased by the action this week. The SP plays have returned to their expected direction and are showing profits, based on the last sales of the PUTS, near the end of the market day on Friday. Also, there has been quite a bit of question about the margin required for this play, if you are approved. It remains a 100% winner since we have had it as a system, but we never say that there won't be a loss. The margin requirement is a lot higher on PUTS written against the S&P 500 Index than it is on stocks. Each broker sets their own margin terms, but we know that there has been incorrectly high margin totals given out. We say that you should ask for the most experienced margin person at the brokerage house. We learned that because we were given the wrong information, too. This system requires that you be approved by the broker in order to trade naked PUTS--and with good reason. So, make sure you understand everything, and know that there are different margin rules at each broker.

The Quest---
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While I sit and lick my wounds, I am excited about the coming week, as it looks like there could be several plays for me to pick from. Reminder--This is not a system, but just something I am working with--and cherry-picking--which is a definite no-no. I just want to see if I can work this investment up with the goals set, even tho I don't follow exactly to the rules. I fully believe that with more self-discipline I will realize that just playing the system is the best way--and getting some of every one--from at least one system picked from the SplitMaster list.

Chart Indicator---
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The Indicator is back over to the Positive side, after flirting below it for a couple of days, based on last Friday's severe drop. The CI actually never did get confirmed to be Negative (it requires several days to confirm), even tho individual days were under the line. To us, after we held our breath over last weekend and tried not to think about the market, the most important factor was that the market held all this week, and showed more strength again over the last 4 days of the week. Monday was stable and then we took off---and we are grateful.

Stock Split Comments---
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As we have mentioned before, we were expecting the number of split announcements to rise, and this week, it definitely happened. While not all of the announcements came from companies that met our criteria, enough did, and we will be seeing them come as buys in Feb. and following months. The state of the economy is such that we feel that enough companies are doing well, and that feeling is what we think pushes the new split announcements to be issued. One mention, tho, of a bad memory revisited. Those explosive days of the tech bubble and the stocks involved came to mind as a couple of split announcements were released. EXP announced a 3-1 split and the stock was up over 33 points the next day--and went up 9 more the next day, before settling back a little, but still up over 33 points from the closing price--before the announcement. The stock opened at 150 (first opportunity to buy it) and is now 163 as I write this, after being up over 172. We never have predicted stock splits, as we have plenty of work to do maintaining our system of keeping track only of stocks that have already announced a split. We will leave that niche to someone else--and good luck to them. We will stick to what we know best.

Pattern Play System---
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There are four new plays scheduled this coming week, with possibly more. Two will be option or stock plays and two will only be stock plays as the time premium on the options are way to high. We have a long list of stocks to analyze over the weekend (you mean some people work only 5 days a week?) and there are some definite potentials. Again, tho, we remind everyone that this system is new in our groupings of systems. It is not a split based system, either, but a number of them have gone thru our split system. We do not have the long historical studies available to us on this, nor do we want them. Currently we are analyzing from the year 2001 to current, figuring that the investor's psychology has changed quite a bit from the heady days of the tech bubble. We are looking for stocks that have a solid history of this time, for a certain period of time where they have gone up every year at the same time. We do have data on stocks that decline at certain times of the year, but we don't have the time right now to analyze those---and we like to think positive. Also, re data--we are always updating our split data to see if investor's moods have changed--and they do change--so that we can make adjustments to our split systems. As explained above, the Big Dipper is the system that requires the closest monitoring.

Tip of the Week---
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Our long term faithful team member, Leece, took the time to send me a book and I'd like to share my feelings about it. The name of the book is "How Investors Can Make Money Using Mass Psychology" and was written by James Dines (of the famous Dines Newsletter, etc.). in 1996. Leece says it was a life changing experience for her. While I am in the early section of the book, I can see many points that Mr. Dines makes that agree wholeheartedly with my own opinions. You might want to take a trip to your library and check it out. It has good thoughts for all areas of your life, not just investing, too. Thanks, Leece, and my partners will get to read it, too--we all like to share.

The Economy---
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There continued to be mixed news on the economic front, but overall I think it has remained on the positive side. I am going to repeat something once again--you can always find something in the news to make you fearful about investing at that particular time---the key word is "always". Iran has again re-entered the picture, and their was worry expressed about them cutting off oil supplies--well, what do you think that country lives on? It's oil income--do they cut off their major income to spite us? It reminds me of the fear about foreign countries selling all the US bonds they own, and creating chaos. Look, they have been saying this for decades and it hasn't happened yet. The interest rates they can obtain in other countries is less than what they can get with us, and with security. Also, they know that the US buys the greatest percent of foreign made goods, and that is also good for their countries. We have to use logic when hearing fearful things. The book mentioned, "Mass Psychology", covers this by pointing out the herd mentality. Some at the front of the herd go in one direction, so all the rest of the herd does, too. They figure it is best to follow the others in the herd. No, it isn't always best to follow the herd. One of the theories used to make money in the market is called the Contrarian Theory--which simply means that when a large majority of investors feel something is going to happen, you go the other way. OK, so can fear be overcome in another way? We think so---the history of stock splits have shown a winning system for 31 straight years now---and that certainly covers a lot of crisis times around the world. Think about it--31 straight year of gains (and it is probably longer, but we don't have the date prior to that), thru thick and thin. Why do you think that is? What is the possible logic behind it? Yes, and I keep repeating this one, too---we think it is because companies that split their stocks are doing well at that particular time. We have pointed out that during all bad times, it is good for someone else. Hurricane Katrina was a terrible tragedy, no question about it (and don't even bring up my old bugaboo about how insurance companies always, ALWAYS, drag their feet on paying out ) and the human suffering is immeasurable. However, a number of sectors of the economy benefited--naming just a few--heavy equipment companies, mobile home companies, construction, etc. Did you see, for example, the report that CAT came out with this week? Outstanding, and the stock reacted accordingly. And the list goes on. So bad times are always good times for some sectors.

Just a few notes about other things. If you notice the stock market and how it reacts to earnings, you will often see good news reported on earnings, but the stock takes a dive because there is worry about the next quarter. You know, what have you done for me lately?

That happens every earning reporting period. Apple is a good example. Their 3rd quarter was great, but there were worries and fears about the 4th quarter and how many ipod users could there be left that didn't already have one, etc., etc. OK, the stock was hit in October, but recovered to make new highs. Now, the 4th quarter results are in, and it was another terrific quarter--but fears have arisen about the 1st quarter. The stock has dropped from its high. Is it going to recover and make new highs? I'll tell you that I'm betting on Apple.

In the real estate area, I am amused by the media's reporting of the state of their economy. While the stock market puts a lot of worry into the coming quarter, the opposite seems true in real estate. Today's headlines state that 2005 was a record year for housing--new homes and resales. Later, down in the story, you will see that prices in hot areas have come down for the 3rd straight month--housing starts have dropped dramatically, inventory is high, and length of time to sell is getting longer. To me, there is reason to worry about the upcoming months in this area, but the reports seem to want to dwell on a 'soft landing' where prices don't drop, they just level off. I have never seen that happen in real estate where I've lived, and I've been around for quite a while. Let's see who's right about this--keep tuned.

My other favorite economic area is gasoline. We saw another 10 cent rise this week (and I haven't been out today to see if it's even more), while at the same time, the weekly report on inventory and demand for gasoline showed that inventory went up and demand went down. The energy companies are reporting record profits this quarter and some have even hired PR firms to try to explain why their profits aren't as obscene as it appears. Energy stocks have been good, and the only way I know is to join them when we can't beat them. I think profits will continue at a high level as long as oil prices remain above $50/barrel, and their really isn't any good reason oil should be this hi--but it is.

Today's Thought---
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With the Academy Award nominations coming up, we look to Bob Hope's comments--on never winning an Oscar. "Welcome to the Academy Awards or, as it's called at my home, 'Passover'.".............We can smile again----------

Mike

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