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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: RGinPG who wrote (10639)	2/5/1998 3:06:00 AM
From: Chuzzlewit	Read Replies (3) \| Respond to of 95453

Ron, you are partially correct -- expectations of future earnings are what drives stocks up, which is why this sector is so sensitive to the possibility of war in the Gulf. Ultimately, the sector is driven by the supply and demand for rigs, not the price of a barrel of oil, although that will indirectly affect the demand for rigs. None of this is predicted or predictable by TA. The TA I was looking at was published a couple of weeks ago, and I'm sorry, but I don't recall the authors. But there is ZERO evidence that TA works, and significant statistical evidence indicating that it is totally pointless. All of the "evidence" for TA is anecdotal and simply does not stand up to close scrutiny. ARIMA modeling of time series indicates no price memory, which of course is implicit in TA. Just consider this: statistically valid trends can be drawn if you specify the starting and ending points, but no future statistical inferences are mathematically possible, so it is impossible to generate a standard error for the prediction, but that is exactly what a Bollinger band is supposed to be! The same is true of MACD. These are surrogates for the first and second order derivatives of the underlying function and are used to detect inflection points in the curve, but since the function is mathematically undefinable none of this makes any sense. Now, about your point in making money. I invested in VRC back in April at $11.25 (split adjusted). I invested in ESV in May at $23 (split adjusted). I recently bought GLM at $23 1/2. I have not sold any shares of these stocks since buying. My holding period for VRC has been about 10 months yielding an annualized rate of return of (23/11.25)^(12/10)-1 or 136%. My holding period for ESV is about 9 months, so the annualized rate of return is (30/23)^(12/9)-1 or 42.5%. Now for the real kicker: by trading you must immediately give up a portion of your profits to the government, and you must pay capital gains taxes at a higher rate. Suppose I were to have an investment that appreciated at 30% per annum for 20 years, at which time I sold and paid my capital gains taxes of 18% on the profit. Now, annualizing that profit would yield 28.72%. Now, suppose you were to adopt a trading strategy. You would be paying taxes at the rate of 28% per annum in the year the capital gain was realized. Therefore, in order for you to realize a gain equal to the buy and hold gain of 28.72%, you would need to have a pre-tax gain of .2872/(1-T)-1 where T is the short-term tax rate (assumed to be 28%), so the pre-tax rate needs to be 39.9%. In other words, you need to out-perform the buy and hold strategy by 9.9% per annum just to be at the same place (I've neglected transaction fees from this analysis). One of the reasons for the big difference in returns (30% vs. almost 40%) is that since taxes aren't due until the position is liquidated, effectively the government is extending you a non-recourse, zero interest loan. To demonstrate just how powerful this effect is, assume that the short-term and long-term tax rates are identical at 18%. I've shown above that a 30% per annum investment will have an effective rate of 28.72% (after taxes), but if taxes were to be paid annually, the after-tax rate would fall to 24.6%! Well, enough for now (I'm getting typist's cramps) Regards, Paul