Wall Street Mind Games

8/3/2019 Wall Street Mind Games

1/9

Wall Sr Mid Gams

Part I:How Te Pr ring Cn

Help You PickWinning Socks

ContentS:

Pr nd rising Sock PicesSying in he Know

Te Pess releseQuoien

Te Pr ring

the price o a share ostock goes up or downdepending on a number o

actors, which can sometimesbe derived rom a combina-tion o technical and unda-mental analysis. However, asany investor knows, ormulasdont always work the way theyshould. I they did, somebodywould have long since devel-oped the perect computerprogram that would perorman analysis and determinewhether or not the price wouldgo up, and by how much. Wecould then use said program toget rich very quickly. Unortu-nately, no such program exists,and in the world o stocks, as inall things, there are no guaran-tees. A stock with strong un-damentals may remain stag-nant. A protable companys

stock may dip when every typeo analysis says it should rise.An unprotable company onthe brink o disaster may evenexperience at least a temporaryspike in stock price.

thats because there is aworld beyond both tech-nical and undamental analysisthat must be accounted or:

Wall Street Mind Games.

In the rst part o this se-ries, well discuss the publicrelations unction. Briey put,public relations is a businessprocess that keeps the com-panys name in the public, bydoing things like issuing pressreleases, encouraging members

o the press to mention the companyor its products in newsworthy articlesand participating in community events

Companies sometimes spend hundredso thousands, or even millions o dol-lars a year on this unction. Why? Be-cause it has inherent value ar beyondthe sales/advertising process. In theconsumer community, successul publicrelations will cause buyers to rememberyour companys name when theyre at thestore getting ready to make a purchase. Inthe investor community, successul pub-lic relations will cause investors to con-sider investing in your company ahead othat o your competitor, sometimes eveni your competitors company has betterundamentals.

Heres an example: Suppose you area tech company. A common ployyour PR agency would use is somethingcalled a contributed article. Tis is anarticle that would be ghost-written by a

proessional writer and oered to a trademagazine or publication. Because youwant it to be newsworthy, it is not writ-ten in the orm o an advertisement; inact, it may not even mention your com-pany or products directly at all. Ratherit describes some related technologicaaspect o your product line, and whyit is superior or innovative. Te articleshould stand on its own, apart rom yourcompany, as worthwhile and inorma-

tive reading material. It does, howeverbear the byline o your top executive(even though it was actually written bya PR writer). Tis project may cost sev-eral thousands o dollars, and it doesnteven mention your product. Why do it?Its simple: Because it bears the byline oyour top executive, it positions that ex-ecutive, and your company, as the leadingexpert in the industry.

by ManyBackus

August 2007 www.FirstHourTrading.com
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2/9

Wall Sr Mid Gams Part I:How The PR Rating Can Help You Pick Winning Stocks

by Many Backus

Heres where public relations be-

comes part o the psychologyo trading. A good trader, when do-ing due diligence, will look beyond thenumbers and determine whether ornot the company has a strong manage-ment team. Seeing that the top execu-tive has published a technical article in

a leading trade magazine, the investor

will be more inclined to believe thatmanagement is strong, and make theinvestment. Current stockholders willtake notice o the article and buy moreshares. Te price will go up when thearticle is published, even i all otherundamental indicators remain the

same. Tis is why, when researching

a stock or potential investment, oneshould take notice o whether or notthe ofcers have been published, andhow oten. Whether the ofcer, or aghost-writing PR agent actually writesthe article is irrelevant.

the price o a share o stockgoes up and down several timesthroughout the trading day. In reality,a company whose stock goes rom $10a share to $10.25 a share between 10a.m. and 11 a.m. didnt increase in real,bottom-line value during that hour.In all likelihood, nothing signicanthappened in that hour, no new clientscame on board, and revenue didnt in-crease beyond what would normallybe expected or that short period.Te only reason that it increased by aquarter during that 60 minute intervalis because a relatively large number oinvestors decided that it would be agood idea to buy some o it. As such,part o investing goes beyond lookingat whether the company itsel is mak-

ing any money, or is likely to do so inthe oreseeable uture. It also involvessecond-guessing what everybody elsein the investor community thinks.

Public relations is a unction o in-uencing what people think, anda company that is active and skilled inpublic relations will be able to inu-ence the investing community in a pos-itive way, so that more people buy thestock and the price goes up, or at leastdoesnt go down when it would oth-erwise. O course, a company doesntengage in public relations or the solepurpose o manipulating stock price.Nonetheless, stock prices do rise andall as a by-product o public relations,whether it was intended or not.

I you were able to know ahead otime what all the other investorswould do, then you would make a loto money indeed. Investors, especiallythose who engage in day trading orswing trading, are always looking orinsight into a stocks short-term utureperormance. Studying the requencyo public relations events such as pressreleases, published articles, and thelike will provide traders with that in-sight.

Pr nd rising Sock Pices

Sying in he Know

In some cases, you may be able tonotice a more or less bell-shapedcurve in stock price that responds topositive press. Tat positive press mayconsist o a good press release, a glow-

ing media report about a new product,or a positive mention in a stock mar-ket newsletter. In general, the stockprices response to public relations istemporary but cumulative. It will rise

initially, perhaps beyond a sustainablelevel, then drop back down to its pre-vious level, or i youre lucky, a little bithigher.



3/9

by Many Backus

Over time, positive PR will be one

contributing actor to a long-term upward trend. Long-term, goodPR will be the sustaining actor inkeeping share price levels where theyshould be. Tink o it as supports on abridge. Well-designed supports keeps

the bridge rom collapsing, even when

there are too many cars on it. Well-de-signed PR keeps the companys shareprice rom collapsing, even when out-side events would otherwise causethat drop.

I youre a swing trader, you want to

look out or those PR-related belcurves, and get in on the beginningo them, and sell when it reaches thetop.

Heres how you do that.

You will probably already be lookingat charts or each stock in your port-olio on an ongoing basis. Youll prob-ably also have a stock ticker programgoing on your PC screen. But beyondstudying the charts to nd your bestentry and exit points, you should also

be subscribing to news eeds that sendyou headlines, preerably in real timethroughout the day, relating to eachcompany in your portolio or watchlist. Besides a news eed, you can alsokeep up on press releases by subscrib-ing to a daily eed rom PRNewswire.In addition to your other research,read the news and press releases, take

notice o when they were issued, andbe prepared to act.

regular appearance o positive pressreleases does a lot o things or thecompany. Besides getting the companysname in the eyes o the buying public, italso gets the companys name in the eyeso the investing public.

again realizing that there are no ab-solute perect ormulas, do take alook at the requency and quality o pressreleases that a company issues when con-sidering buying or looking or an opti-mal entry point. Along with inormationyou glean rom your study o the chartsand the companys undamentals, use thepress release concept as a guideline. I orexample, the stock price is holding steady,the company has a good stream o sales

and has a worthwhile product, immedi-ately ater the issuance o a relevant pressrelease announcing a major new clientwould be an ideal time to consider buy-ing in.

again, this has more to do with thepsychology o trading than the un-damentals o trading. Within a day or so,

that press release will have been picked upby some news outlets and market letters,and people may be talking about it in thestock chat rooms. Youll see commentslike, Did you hear, company X signed ona new million dollar client. Investors willstart buying. I the release contained ex-ceptionally good news, analysts may eventake notice and raise their rating.

Te Pess relese Quoien

All other things be-ing equal, a companythat issues regularpress releases willhave better stockperormance thanone that does not.Every time the com-

pany has a majorcustomer win, en-ters into an industrypartnership, wins anaward, or releases anew product, thereshould be a press re-lease.




4/9

by Many Backus

Within one to two days, youll see the bell curve

beginning to orm as the news spreads and mo-mentum builds. But since you saw the press release with-in hours o its issuance, and you bought the stock imme-diately, youre in the best position. Ten your researchinto the technicals and undamentals will come in handywhen you derive your exit point and determine how highthat bell curve will rise beore it goes back down.

ater youve done your technical analysis, undamen-tal analysis, and any other analysis you choose to do,determine the companys PR rating. Heres how to do this:Check the ten points below. Each one that you can checko as afrmative is one point. I the stock gets eight toten points, they have a high PR rating. Between ve andseven points earn it a passing PR rating, while below ve

merits a ail. A stock with a ail PR rating is probablynot a good bet, even with positive technical and undamental indicators. A stock with a passing rating is worthy oconsideration, given other good technical and undamentaindicators; while a stock with a high PR rating should beconsidered at least as a swing trade possibility, even i otherlong-term indicators are not positive.

Te Pr ring

Check the companys press re-leases. Tey should be issuing atleast one release a month, preerablymore.

Within the context o thosepress releases, does the companymake announcements o major newcustomer wins or partnerships?

In addition to press releases,does the company have a press kitavailable to members o the press

that includes collateral such as casestudies, white papers, and productoverviews?

Check the companys web siteto see i there is a publications sec-tion, and determine whether anyo the top executives or technologists have published articles undertheir byline. Do a web search on thenames o the ofcers to try to turn

up any other articles in print.Does the company have a pro-

essional PR rm on retainer? I so,they get one point.

Press mentions. Te companyor its PR rm should be workingwith industry journalists to incor-porate quotes rom executives, andmentions o the company and itsproducts in newsworthy articles.

Community involvement. One

point i the company is involved incommunity organizations unrelatedto its industry, such as youth groupsor charitable programs.

Does PR sta have a hand ingenerating the 10-Q and 10-K?Tese are much more than just gov-ernment orms the SEC makes youle. Beyond the numbers, these doc-uments should include detailed

inormation about the periodswins and uture potential wins. Itheres a good narrative included,add a point.

rade and industry associa-tions. Is the company a member oany trade associations, standardsbodies, or industry groups?

A proessional web site. Eveni the company makes somethingthe public doesnt readily use, such

as a behind-the-scenes technol-ogy, they should still have a high-prole web site that does a goodjob explaining what they do.


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5/9


6/9

by Many Backus

Non-GaaP Mind Gmes

have more common sense paid less at-

tention to the expectations, and said,Oh, this company had 23 cents EPSthis quarter, thats pretty good, andtheyre doing good research as well,this companys going places.

In short, the earnings expectationsare nothing more than a Wall Street

mind game. But those who recognize

it or what it is, and recognize howthe earnings expectations manipulatesshare price, and can look beyond thoseexpectations and see a companys trueworth, will prot to a greater extent.Knowing that the share price will droptemporarily and go back up gives a sav-vy investor two ways to prot.

Looking beyond the bottomline o the quarterly results,and understanding the psy-chology o how the market,analysts and investors willreact to those numbers, iscritical to trading success.

When the quarterly results are in, a lot o compa-nies will play the non-GAAP game. Tis adds inor subtracts out certain GAAP numbers and plays a gameo what-i. And while this is, to an extent, another mindgame, it can be a very useul one. Some analysts tend to dis-count the what-i game, and this is another reason why wenever listen to analysts. In act, most Wall Street analysts

have an abysmal track record, and do very little except wearexpensive suits, try to sound important, and make a lot omoney or them-selves.

Heres how itworks: ABCSemiconductors,in their 10-Q andin their quarterlyanalyst conerence,

rst issues the by-the-book GAAPnumbers, as they

are required to do by the SEC. But then, the CFO comeson the line and says, Tis quarter we had an unusual one-time R&D expense o $1 million dollars, and i we take thisout o the picture, our EPS would have come in at $0.26instead o $0.23, which means we would have exceeded ex-pectations by a penny. Tis is valuable inormation, and avery valid calculation that should not be discounted. How-

ever, when a company is engaging in what-i, do keep inmind what specic line items they are playing with. A one-time R&D expense is probably a good thing. A one-timelegal expense o ten million dollars to keep the CEO outo prison probably does not bode well or the companysuture success.

When a company alls short o guidance but still isprotable, thats what Wall Street calls mixed re-sults. And it causes the analysts a lot o undue anxietyMixed results however, can be an opportunity i you un-derstand what caused them.

Te anlys Confeence

Wall Sr Mid Gams Part II:Quarterly releases and analyst conferences: What they really mean

Most corporations, when they release theirquarterly results, also hold a quarterlyanalyst conerence. Te analysts typically get tohear rst what the actual numbers are, and thena press release is issued immediately ater so therest o the world gets clued in. Tis analyst con-erence is one o the most important events othe quarter, oten setting the stage or the comingthree months. Tis is where the analysts get theirinormation they need to make their own

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7/9

by ManyBackus

However, dont be put o by theterm analyst conerence. Hereshow they work. ypically, they are tele-phone conerence calls. Analysts rommajor brokerage rms are invited toparticipate, and typically the compa-nys ofcers will be present on the call.A sae haven statement will be read,the CFO will read a prepared state-

ment about the results, and the CEOwill make more general commentsabout operations. I there are anywhat-is to be discussed, they will bebrought up at that point. Future earn-ings guidance will also be given. Tenthere is a question-and-answer periodwhere analysts grill the ofcers aboutspecic line items, operations, andother details.

t

ypically, ordinary stockholders(as well as any reporters on the

line) arent invited to ask questions,but some companies do make the con-erence available via webcast or any-one who wants to listen in. ranscriptsare also usually available within a ewhours o the call. Tere are third partycompanies who transcribe all o thesecalls and make transcripts availablethrough a subscription-based web site.I you are a serious investor, it may be

worth your dollar to subscribe to oneo these services.

the analyst conerence is usuallythe very rst public (or semi-public, as the case may be) release oinormation, although many investorsneglect to recognize its importance.Te conerence typically comes beorethe press release, and beore the 10-Q.

And since in the world o Wall Streettiming is everything, this analyst con-

erence is oten what triggers breaks inshare price trends. o be sure, any in-vestor should review the press releasesand should use the 10-Qs as resourcesor research, but to neglect the analystconerence is to miss an opportunity.

We mentioned above the theanalysts set the stage or theshare price by having theirnger on the trigger dur-ing the conerence. Its pos-sible, because o RegulationFD, or ordinary investors tohave this same advantage.


recommendations. We have actually

listened to analyst conerences andwatched a stock ticker at the same time,and saw share price literally change inront o our eyes in response to whatwas being said on the conerence. Makeno mistake: the analysts that are in on

this conerence have their nger on

the trigger. Te minute they hear badnews they will be the rst ones to sell;and at the same time, i the companymakes a bold new product announce-ment, they will be the rst to buy.

a Hisoy Of Te anlys Confeence

aew years back, some legislatorswere justiably concerned thatanalyst conerences were giving ana-lysts an unair advantage, in that theinormation they received gave them

special privileges in terms o accessto inormation. Specically, the datathey were receiving during the callswere said to be better and more timelythan the inormation provided to the

general public. Te SEC accuratelydecreed that there were two classes oinvestors; those who had greater ac-cess and were more in the know, andthe rest o us. Te system was that



8/9

by ManyBackus


this system, although the SEChas since made regulations tosoten it (Regulation FD), still existsto a degree. But ortunately or us,the Internet has leveled the playingeld, at least to a degree, by making iteasy or ordinary olks to listen in onthese calls. Te role o the analyst asintermediary between company andstockholder has become obsolete. Teanalyst conerence is still the rst place

inormation is released, but since theSECs new rules were issued in theyear 2000, its possible or ordinary in-vestors to get a peek too. Te analystsare still usually the only ones who getto ask questions, and in all airness, itwould probably be impractical to openup the oor to all comers, but theresno longer any reason to sit around andwait or the analysts to tell us what todo.

But despite Regulation FD, a sur-prising number o investors knownothing about it, dont realize the val-ue o this conerence, and dont realizethat its available. And the inormationdisclosed in the analyst conerenceeven though it is more public than be-ore, still unctions as though it weremore proprietary, simply because mostpeople dont take advantage o it.

Mking tnscions aound Te anlys

Confeence

there are, without a doubt, oppor-

tunities to buy and sell every dayo the year, and a good trader shouldbe able to take prot any day. But thepositioning o the analyst conerencepresents a great opportunity to takeprot by being at the leading edge oinormation.

More oten than not, share prices

will go up or down immedi-ately ater an analyst conerence, andin greater proportion than they wouldgo up or down otherwise.

analysts were provided with the best and most timely

orward-looking inormation, and the analysts thenpositioned themselves as intermediaries who inter-preted that inormation and gave it to the investorcommunity second-hand.

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9/9

Abou the Auhor

Perus great civilizations and asci-nating history has long intriguedvisitors the world over, who come tosee such wonders as the lost city oMachu Picchu, and the ancient Incacapital o Cuzco. But while visitors are

pondering the glory o the magnicentPeruvian Andes, those who are in theknow realize that Lima, Peru is astbecoming an international economicorce to be reckoned with--and thecity is also home to one o the mostdynamic and knowledgeable stocktraders in present days.

D

espite the act that he is hala world away, Manuel Backus

knows more about Wall Street thanmany analysts who actually workthere. At age 24, Manuel has alreadygained worldwide notoriety and theattention o Wall Street.

at a very early age, he became as-

cinated with the game o chess,quickly becoming a competitive player,oten playing (and winning) againstchess masters with many more yearso experience than he. Even as a youngchild, while others were out playing,Manuel would be either seeking outchess games with the citys elite, orquietly pondering new game strate-gies. He received rigorous trainingrom Grand Masters, and many ex-

pected him to go on the proessionalcircuit. But while he was enjoyingthe glories and accolades o being ayoung chess prodigy, something elsecaught his eye--the stock market. Heused his analytical capabilities gainedrom chess playing to devise unusualbut highly successul tactics or stockmarket investing. In his early teenageyears, when he wasnt playing chess, hestarted studying the stock market and

running his own model portolio, andlater started investing real money inan online account. Soon, he switchedrom chess competitions to stock pick-ing competitions.

Some call him the untutored prod-igy o stock investing, althoughthe moniker doesnt do him justice. Itstrue, Manuel does not work in a WallStreet brokerage house. He is not aninvestment advisor, and he is not astock broker. And he has no plans tobecome one. Tats because his phi-losophy o business is undamentallydierent rom that o the investmentadvisor and stock broker. An advisoror brokers primary goal is rst, to earncommissions, and second, to not rock

the boat. Tey make a lot o money

or themselves, but they dont do a lottowards helping their clients build reawealth.

Manuel is well-schooled as welas sel-taught. Although todayhe is well amiliar with the traditionalschool o stock market investing, hehas eschewed many o the conserva-tive and methodical approaches oWall Street. Ater careul study andpractice in the marketplace, he quicklycame to the realization that traditional investing approaches make analystsand brokers very wealthy indeed, butdont do much or investors.

He has been trading stocks sincehe was a teenager, and startedoering his own Model Portolioby the time he was 20. Using seven

high-caliber technical indicators andtwo proprietary indicators o his owndesign, he created the Killer 9 trad-ing ormula to nd stocks with thehighest potential or prots or day-traders and swing traders. oday, hisPortolioCrater system--a tradingsystem unlike any other--delivers un-heard-o returns, ar beyond thoserealized by the trading proessionalso Wall Street. Manuels nancial wiz-

ardry has already made himsel andmany others very wealthy. Already atthe young age o 24, he has amassedenough wealth to retire comortably--although he has no plans to do soWall Street is watching, and the worldis expecting great things rom this -nancial genius.

August 2007 www.FirstHourTrading.cm
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Wall Street Mind Games