Thursday, August 16, 2007


I am not a great fan of technical trading but I do watch technical indicators to help with my long term perspective. By the same token, traditional fundamental analysis can also be very misleading. The best buys I have ever made were based on a good top down view of the world. Most of the best buys were washed out stocks where the conventional wisdom saw no hope of recovery. The stocks typically were not attractive from a technical or fundamental perspective. The P/E ratio on a washed out stock is often infinite. A good example, of course, CAL which traded at $4 a few years ago and which had no earnings or net assets. Still, technical indicators have a place in ones investment tool bag.

Jamie Baker upgraded CAL to his market focus list today. He has posted a 12 month price target of $37. He gives fundamental reasons why CAL should do well as a company but he also mentioned the old down 30 in 31 airline rule. This rule has worked for airlines because they are cyclical momentum plays. The rule says that if an airline drops 30% within 31 days, it will rally strongly over the next 6 months.

The rule sounds like an old wives tale, but it has worked rather well. I'll always remember the time a smart investor friend told my poker buddies that US Airways was a goner. He and I had a heated argument and I invested all I had available at $6 as soon as the stock started moving up. Many years later the company did file bankruptcy but the stock was trading at $4 when my friend and I argued and the stock zoomed to $65 per share over the next few years. Folks, if you ride one stock hard on margin over such a move you will make a fortune.

CAL has moved from $4 to $54 and back down to $26 in five years. The second leg of the move is ready to roar. No one can say that the carry trade unwinding is over. Liquidity problems are still all around. The bottoming process may take a while longer. However, there is a real probability that the world economy will slow enough to take the pressure off oil prices. Should CAL save 10 cents per gallon, without reducing revenues, it will make almost $2 extra per share. WOW! What if it were to save 50 cents per gallon?

The top down view is that the world has never seen such strong demand for international air travel. As far as the eye can see, the growth in China, India, et. al. will increase demand for travel. Check the web and you will find an article about how China has decided to limit the number of new airline start ups. Under new code sharing agreements and new ticketing agreements, it becomes more and more important for airlines to have partnership deals. The little guys are going to get squeezed by the majors.