Wall Street Mind Games

Part I:
How Te Pr rating Can
Help You Pick
Winning Stocks
ContentS:
Pr and rising Stock Prices
Staying in the Know
Te Press release
Quotient
Te Pr rating

t
he price of a share of
stock goes up or down
depending on a number of
factors, which can sometimes
be derived from a combina-
tion of technical and funda-
mental analysis. However, as
any investor knows, formulas
dont always work the way they
should. If they did, somebody
would have long since devel-
oped the perfect computer
program that would perform
an analysis and determine
whether or not the price would
go up, and by how much. We
could then use said program to
get rich very quickly. Unfortu-
nately, no such program exists,
and in the world of stocks, as in
all things, there are no guaran-
tees. A stock with strong fun-
damentals may remain stag-
nant. A proftable companys
stock may dip when every type
of analysis says it should rise.
An unproftable company on
the brink of disaster may even
experience at least a temporary
spike in stock price.
t
hats because there is a
world beyond both tech-
nical and fundamental analysis
that must be accounted for:
Wall Street Mind Games.
I
n the frst part of this se-
ries, well discuss the public
relations function. Briefy put,
public relations is a business
process that keeps the com-
panys name in the public, by
doing things like issuing press
releases, encouraging members
of the press to mention the company
or its products in newsworthy articles,
and participating in community events.
Companies sometimes spend hundreds
of thousands, or even millions of dol-
lars a year on this function. Why? Be-
cause it has inherent value far beyond
the sales/advertising process. In the
consumer community, successful public
relations will cause buyers to remember
your companys name when theyre at the
store getting ready to make a purchase. In
the investor community, successful pub-
lic relations will cause investors to con-
sider investing in your company ahead of
that of your competitor, sometimes even
if your competitors company has better
fundamentals.
H
eres an example: Suppose you are
a tech company. A common ploy
your PR agency would use is something
called a contributed article. Tis is an
article that would be ghost-written by a
professional writer and ofered to a trade
magazine for publication. Because you
want it to be newsworthy, it is not writ-
ten in the form of an advertisement; in
fact, it may not even mention your com-
pany or products directly at all. Rather,
it describes some related technological
aspect of your product line, and why
it is superior or innovative. Te article
should stand on its own, apart from your
company, as worthwhile and informa-
tive reading material. It does, however,
bear the byline of your top executive
(even though it was actually written by
a PR writer). Tis project may cost sev-
eral thousands of dollars, and it doesnt
even mention your product. Why do it?
Its simple: Because it bears the byline of
your top executive, it positions that ex-
ecutive, and your company, as the leading
expert in the industry.
1
by Manny Backus
August 2007 www.FirstHourTrading.com
Wall Street Mind Games Part I:
How The PR Rating Can Help You Pick Winning Stocks
2
by Manny Backus
H
eres where public relations be-
comes part of the psychology
of trading. A good trader, when do-
ing due diligence, will look beyond the
numbers and determine whether or
not 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 that
management is strong, and make the
investment. Current stockholders will
take notice of the article and buy more
shares. Te price will go up when the
article is published, even if all other
fundamental indicators remain the
same. Tis is why, when researching
a stock for potential investment, one
should take notice of whether or not
the ofcers have been published, and
how often. Whether the ofcer, or a
ghost-writing PR agent actually writes
the article is irrelevant.
t
he price of a share of stock
goes up and down several times
throughout the trading day. In reality,
a company whose stock goes from $10
a share to $10.25 a share between 10
a.m. and 11 a.m. didnt increase in real,
bottom-line value during that hour.
In all likelihood, nothing signifcant
happened in that hour, no new clients
came on board, and revenue didnt in-
crease beyond what would normally
be expected for that short period.
Te only reason that it increased by a
quarter during that 60 minute interval
is because a relatively large number of
investors decided that it would be a
good idea to buy some of it. As such,
part of investing goes beyond looking
at whether the company itself is mak-
ing any money, or is likely to do so in
the foreseeable future. It also involves
second-guessing what everybody else
in the investor community thinks.
P
ublic relations is a function of in-
fuencing what people think, and
a company that is active and skilled in
public relations will be able to infu-
ence the investing community in a pos-
itive way, so that more people buy the
stock and the price goes up, or at least
doesnt go down when it would oth-
erwise. Of course, a company doesnt
engage in public relations for the sole
purpose of manipulating stock price.
Nonetheless, stock prices do rise and
fall as a by-product of public relations,
whether it was intended or not.
I
f you were able to know ahead of
time what all the other investors
would do, then you would make a lot
of money indeed. Investors, especially
those who engage in day trading or
swing trading, are always looking for
insight into a stocks short-term future
performance. Studying the frequency
of public relations events such as press
releases, published articles, and the
like will provide traders with that in-
sight.
Pr and rising Stock Prices
Staying in the Know
I
n some cases, you may be able to
notice a more or less bell-shaped
curve in stock price that responds to
positive press. Tat positive press may
consist of 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 stock
prices response to public relations is
temporary but cumulative. It will rise
initially, perhaps beyond a sustainable
level, then drop back down to its pre-
vious level, or if youre lucky, a little bit
higher.
August 2007 www.FirstHourTrading.com
3
by Manny Backus
O
ver time, positive PR will be one
contributing factor to a long-
term upward trend. Long-term, good
PR will be the sustaining factor in
keeping share price levels where they
should be. Tink of it as supports on a
bridge. Well-designed supports keeps
the bridge from collapsing, even when
there are too many cars on it. Well-de-
signed PR keeps the companys share
price from collapsing, even when out-
side events would otherwise cause
that drop.
I
f youre a swing trader, you want to
look out for those PR-related bell
curves, and get in on the beginning
of them, and sell when it reaches the
top.
Heres how you do that.
You will probably already be looking
at charts for each stock in your port-
folio on an ongoing basis. Youll prob-
ably also have a stock ticker program
going on your PC screen. But beyond
studying the charts to fnd your best
entry and exit points, you should also
be subscribing to news feeds that send
you headlines, preferably in real time
throughout the day, relating to each
company in your portfolio or watch
list. Besides a news feed, you can also
keep up on press releases by subscrib-
ing to a daily feed from PRNewswire.
In addition to your other research,
read the news and press releases, take
notice of when they were issued, and
be prepared to act.
r
egular appearance of positive press
releases does a lot of things for the
company. Besides getting the companys
name in the eyes of the buying public, it
also gets the companys name in the eyes
of the investing public.
a
gain realizing that there are no ab-
solute perfect formulas, do take a
look at the frequency and quality of press
releases that a company issues when con-
sidering buying or looking for an opti-
mal entry point. Along with information
you glean from your study of the charts
and the companys fundamentals, use the
press release concept as a guideline. If for
example, the stock price is holding steady,
the company has a good stream of sales
and has a worthwhile product, immedi-
ately after the issuance of a relevant press
release announcing a major new client
would be an ideal time to consider buy-
ing in.
a
gain, this has more to do with the
psychology of trading than the fun-
damentals of trading. Within a day or so,
that press release will have been picked up
by some news outlets and market letters,
and people may be talking about it in the
stock chat rooms. Youll see comments
like, Did you hear, company X signed on
a new million dollar client. Investors will
start buying. If the release contained ex-
ceptionally good news, analysts may even
take notice and raise their rating.
Te Press release Quotient
All other things be-
ing equal, a company
that issues regular
press releases will
have better stock
performance than
one that does not.
Every time the com-
pany has a major
customer win, en-
ters into an industry
partnership, wins an
award, or releases a
new product, there
should be a press re-
lease.
Wall Street Mind Games Part I:
How The PR Rating Can Help You Pick Winning Stocks
August 2007 www.FirstHourTrading.com
4
by Manny Backus
W
ithin one to two days, youll see the bell curve
beginning to form as the news spreads and mo-
mentum builds. But since you saw the press release with-
in hours of its issuance, and you bought the stock imme-
diately, youre in the best position. Ten your research
into the technicals and fundamentals will come in handy
when you derive your exit point and determine how high
that bell curve will rise before it goes back down.
a
fter youve done your technical analysis, fundamen-
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 check
of as afrmative is one point. If the stock gets eight to
ten points, they have a high PR rating. Between fve and
seven points earn it a passing PR rating, while below fve
merits a fail. A stock with a fail PR rating is probably
not a good bet, even with positive technical and fundamen-
tal indicators. A stock with a passing rating is worthy of
consideration, given other good technical and fundamental
indicators; while a stock with a high PR rating should be
considered at least as a swing trade possibility, even if other
long-term indicators are not positive.
Te Pr rating
Check the companys press re-
leases. Tey should be issuing at
least one release a month, preferably
more.
Within the context of those
press releases, does the company
make announcements of major new
customer wins or partnerships?
In addition to press releases,
does the company have a press kit
available to members of the press
that includes collateral such as case
studies, white papers, and product
overviews?
Check the companys web site
to see if there is a publications sec-
tion, and determine whether any
of the top executives or technolo
gists have published articles under
their byline. Do a web search on the
names of the ofcers to try to turn
O
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up any other articles in print.
Does the company have a pro-
fessional PR frm on retainer? If so,
they get one point.
Press mentions. Te company
or its PR frm should be working
with industry journalists to incor-
porate quotes from executives, and
mentions of the company and its
products in newsworthy articles.
Community involvement. One
point if the company is involved in
community organizations unrelated
to its industry, such as youth groups
or charitable programs.
Does PR staf have a hand in
generating the 10-Q and 10-K?
Tese are much more than just gov-
ernment forms the SEC makes you
fle. Beyond the numbers, these doc-
uments should include detailed
O
O
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O
information about the periods
wins and future potential wins. If
theres a good narrative included,
add a point.
Trade and industry associa-
tions. Is the company a member of
any trade associations, standards
bodies, or industry groups?
A professional web site. Even
if the company makes something
the public doesnt readily use, such
as a behind-the-scenes technol-
ogy, they should still have a high-
profle web site that does a good
job explaining what they do.
O
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Wall Street Mind Games Part I:
How The PR Rating Can Help You Pick Winning Stocks
August 2007 www.FirstHourTrading.com
Wall Street Mind Games
Part II:
Quarterly
releases and analyst
conferences: What they
really mean
ContentS:
Non-GaaP Mind Games
Te analyst Conference
a History Of Te analyst
Conference
Making transactions
around Te analyst
Conference

have been consistently proftable every

quarter for the past fve years. One quar-
ter, they issue earnings guidance that
says next quarters EPS will come in at
$0.25. However, their scientists have
come up with some new technology that
will make them a lot of money down the
road, and the company decides to fund
some additional research. Te quarter-
end comes, they are still proftable and
doing well, but EPS was $0.23, two cents
below expectations. When the market
opens, their stock drops from $20 to
$19. Analysts from major brokerage
frms change their rating of the company
to perform from outperform. Does the
company deserve all this? Absolutely
not. A forward-thinking investor will see
the R&D being done and recognize the
company as a strong player, and instead
of passing it by or short-selling it, will
buy up as much as he can for a long-term
hold. An even more strategic investor
would make two transactions. First, the
investor would recognize that the nature
of the market would drive the price down
in the short-term, and would short-sell
early in the day for a quick proft; but the
investor would also recognize the long-
term potential and would recognize the
drop in price as a buying opportunity--
and would buy additional shares in an-
ticipation of a strong rebound within a
few weeks or months.
W
hat just happened? A good com-
pany was artifcially made to
look like it was not as good as it really is,
primarily because of the markets inces-
sant need for predictions. But what else
happened? Some investors saw the im-
mediate results and said, oh, this compa-
ny came in two cents under expectations,
and share price is dropping, this compa-
nys in trouble. But other investors who
5
by Manny Backus
a
t one time, publicly-held
corporations had a long-
term focus. Teir strategies
revolved around achieving
long-term, long-lasting suc-
cess, even if it meant forsaking
short-term profts. Giving up
a little bit in the present, for
the sake of longer-term, steady
gains, is perfectly logical. Its a
good strategy, and its still used
by a lot of private companies.
It makes sense for a company
to think not just about their
next move, or their next quar-
ter; but to think about the next
dozen moves and the next doz-
en quarters.
B
ut unhappily, such is not
the case. Te analyst and
investor community, invest-
ment bankers, and the market
itself, puts a lot of pressure on
companies to frst predict what
their results will be for the up-
coming quarter, and then to
either meet or exceed that pre-
diction. And then the analysts
themselves issue predictions
of their own, which puts ad-
ditional pressure on companies
to perform as expected, even if
it is to the detriment of their
long-term goals.
t
hese predictions, and the
pressure to make them
come true, can have a detri-
mental efect on a companys
long-term operation, as well
as a detrimental efect on the
stock price. For example, lets
take a theoretical company:
ABC Semiconductors. Tey
August 2007 www.FirstHourTrading.com
6
by Manny Backus
Non-GaaP Mind Games
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have more common sense paid less at-
tention to the expectations, and said,
Oh, this company had 23 cents EPS
this quarter, thats pretty good, and
theyre doing good research as well,
this companys going places.
I
n short, the earnings expectations
are nothing more than a Wall Street
mind game. But those who recognize
it for what it is, and recognize how
the earnings expectations manipulates
share price, and can look beyond those
expectations and see a companys true
worth, will proft to a greater extent.
Knowing that the share price will drop
temporarily and go back up gives a sav-
vy investor two ways to proft.
Looking beyond the bottom
line of the quarterly results,
and understanding the psy-
chology of how the market,
analysts and investors will
react to those numbers, is
critical to trading success.
W
hen the quarterly results are in, a lot of compa-
nies will play the non-GAAP game. Tis adds in
or subtracts out certain GAAP numbers and plays a game
of what-if. And while this is, to an extent, another mind
game, it can be a very useful one. Some analysts tend to dis-
count the what-if game, and this is another reason why we
never listen to analysts. In fact, most Wall Street analysts
have an abysmal track record, and do very little except wear
expensive suits, try to sound important, and make a lot of
money for them-
selves.
H
eres how it
works: ABC
Semiconductors,
in their 10-Q and
in their quarterly
analyst conference,
frst issues the by-
the-book GAAP
numbers, as they
are required to do by the SEC. But then, the CFO comes
on the line and says, Tis quarter we had an unusual one-
time R&D expense of $1 million dollars, and if we take this
out of the picture, our EPS would have come in at $0.26
instead of $0.23, which means we would have exceeded ex-
pectations by a penny. Tis is valuable information, and a
very valid calculation that should not be discounted. How-
ever, when a company is engaging in what-if, do keep in
mind what specifc line items they are playing with. A one-
time R&D expense is probably a good thing. A one-time
legal expense of ten million dollars to keep the CEO out
of prison probably does not bode well for the companys
future success.
W
hen a company falls short of guidance but still is
proftable, thats what Wall Street calls mixed re-
sults. And it causes the analysts a lot of undue anxiety.
Mixed results however, can be an opportunity if you un-
derstand what caused them.
Te analyst Conference
Wall Street Mind Games Part II:
Quarterly releases and analyst conferences: What they really mean
M
ost corporations, when they release their
quarterly results, also hold a quarterly
analyst conference. Te analysts typically get to
hear frst what the actual numbers are, and then
a press release is issued immediately after so the
rest of the world gets clued in. Tis analyst con-
ference is one of the most important events of
the quarter, often setting the stage for the coming
three months. Tis is where the analysts get their
information they need to make their own
August 2007 www.Fi rst HourTradi ng.com
7

by Manny Backus
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H
owever, dont be put of by the
term analyst conference. Heres
how they work. Typically, they are tele-
phone conference calls. Analysts from
major brokerage frms are invited to
participate, and typically the compa-
nys ofcers will be present on the call.
A safe haven statement will be read,
the CFO will read a prepared state-
ment about the results, and the CEO
will make more general comments
about operations. If there are any
what-ifs to be discussed, they will be
brought up at that point. Future earn-
ings guidance will also be given. Ten
there is a question-and-answer period
where analysts grill the ofcers about
specifc line items, operations, and
other 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-
ference available via webcast for any-
one who wants to listen in. Transcripts
are also usually available within a few
hours of the call. Tere are third party
companies who transcribe all of these
calls and make transcripts available
through a subscription-based web site.
If you are a serious investor, it may be
worth your dollar to subscribe to one
of these services.
t
he analyst conference is usually
the very frst public (or semi-
public, as the case may be) release of
information, although many investors
neglect to recognize its importance.
Te conference typically comes before
the press release, and before the 10-Q.
And since in the world of Wall Street,
timing is everything, this analyst con-
ference is often what triggers breaks in
share price trends. To be sure, any in-
vestor should review the press releases
and should use the 10-Qs as resources
for research, but to neglect the analyst
conference is to miss an opportunity.
We mentioned above the the
analysts set the stage for the
share price by having their
fnger on the trigger dur-
ing the conference. Its pos-
sible, because of Regulation
FD, for ordinary investors to
have this same advantage.
Wall Street Mind Games Part II:
Quarterly releases and analyst conferences: What they really mean
recommendations. We have actually
listened to analyst conferences and
watched a stock ticker at the same time,
and saw share price literally change in
front of our eyes in response to what
was being said on the conference. Make
no mistake: the analysts that are in on
this conference have their fnger on
the trigger. Te minute they hear bad
news they will be the frst ones to sell;
and at the same time, if the company
makes a bold new product announce-
ment, they will be the frst to buy.
a History Of Te analyst Conference
a
few years back, some legislators
were justifably concerned that
analyst conferences were giving ana-
lysts an unfair advantage, in that the
information they received gave them
special privileges in terms of access
to information. Specifcally, the data
they were receiving during the calls
were said to be better and more timely
than the information provided to the
general public. Te SEC accurately
decreed that there were two classes of
investors; those who had greater ac-
cess and were more in the know, and
the rest of us. Te system was that
August 2007 www.Fi rst HourTradi ng.com
8
by Manny Backus
Wall Street Mind Games Part II:
Quarterly releases and analyst conferences: What they really mean
t
his system, although the SEC
has since made regulations to
soften it (Regulation FD), still exists
to a degree. But fortunately for us,
the Internet has leveled the playing
feld, at least to a degree, by making it
easy for ordinary folks to listen in on
these calls. Te role of the analyst as
intermediary between company and
stockholder has become obsolete. Te
analyst conference is still the frst place
information is released, but since the
SECs new rules were issued in the
year 2000, its possible for ordinary in-
vestors to get a peek too. Te analysts
are still usually the only ones who get
to ask questions, and in all fairness, it
would probably be impractical to open
up the foor to all comers, but theres
no longer any reason to sit around and
wait for the analysts to tell us what to
do.
B
ut despite Regulation FD, a sur-
prising number of investors know
nothing about it, dont realize the val-
ue of this conference, and dont realize
that its available. And the information
disclosed in the analyst conference,
even though it is more public than be-
fore, still functions as though it were
more proprietary, simply because most
people dont take advantage of it.
Making transactions around Te analyst
Conference
t
here are, without a doubt, oppor-
tunities to buy and sell every day
of the year, and a good trader should
be able to take proft any day. But the
positioning of the analyst conference
presents a great opportunity to take
proft by being at the leading edge of
information.
M
ore often than not, share prices
will go up or down immedi-
ately after an analyst conference, and
in greater proportion than they would
go up or down otherwise.
analysts were provided with the best and most timely
forward-looking information, and the analysts then
positioned themselves as intermediaries who inter-
preted that information and gave it to the investor
community second-hand.
August 2007 www.Fi rst HourTradi ng.com
About the Author
9
P
erus great civilizations and fasci-
nating history has long intrigued
visitors the world over, who come to
see such wonders as the lost city of
Machu Picchu, and the ancient Inca
capital of Cuzco. But while visitors are
pondering the glory of the magnifcent
Peruvian Andes, those who are in the
know realize that Lima, Peru is fast
becoming an international economic
force to be reckoned with--and the
city is also home to one of the most
dynamic and knowledgeable stock
traders in present days.
D
espite the fact that he is half
a world away, Manuel Backus
knows more about Wall Street than
many analysts who actually work
there. At age 24, Manuel has already
gained worldwide notoriety and the
attention of Wall Street.
a
t a very early age, he became fas-
cinated with the game of chess,
quickly becoming a competitive player,
often playing (and winning) against
chess masters with many more years
of experience than he. Even as a young
child, while others were out playing,
Manuel would be either seeking out
chess games with the citys elite, or
quietly pondering new game strate-
gies. He received rigorous training
from Grand Masters, and many ex-
pected him to go on the professional
circuit. But while he was enjoying
the glories and accolades of being a
young chess prodigy, something else
caught his eye--the stock market. He
used his analytical capabilities gained
from chess playing to devise unusual
but highly successful tactics for stock
market investing. In his early teenage
years, when he wasnt playing chess, he
started studying the stock market and
running his own model portfolio, and
later started investing real money in
an online account. Soon, he switched
from chess competitions to stock pick-
ing competitions.
S
ome call him the untutored prod-
igy of stock investing, although
the moniker doesnt do him justice. Its
true, Manuel does not work in a Wall
Street brokerage house. He is not an
investment advisor, and he is not a
stock broker. And he has no plans to
become one. Tats because his phi-
losophy of business is fundamentally
diferent from that of the investment
advisor and stock broker. An advisor
or brokers primary goal is frst, to earn
commissions, and second, to not rock
the boat. Tey make a lot of money
for themselves, but they dont do a lot
towards helping their clients build real
wealth.
M
anuel is well-schooled as well
as self-taught. Although today
he is well familiar with the traditional
school of stock market investing, he
has eschewed many of the conserva-
tive and methodical approaches of
Wall Street. After careful study and
practice in the marketplace, he quickly
came to the realization that tradition-
al investing approaches make analysts
and brokers very wealthy indeed, but
dont do much for investors.
H
e has been trading stocks since
he was a teenager, and started
ofering his own Model Portfolio
by the time he was 20. Using seven
high-caliber technical indicators and
two proprietary indicators of his own
design, he created the Killer 9 trad-
ing formula to fnd stocks with the
highest potential for profts for day-
traders and swing traders. Today, his
PortfolioCrafter system--a trading
system unlike any other--delivers un-
heard-of returns, far beyond those
realized by the trading professionals
of Wall Street. Manuels fnancial wiz-
ardry has already made himself and
many others very wealthy. Already at
the young age of 24, he has amassed
enough wealth to retire comfortably-
-although he has no plans to do so.
Wall Street is watching, and the world
is expecting great things from this f-
nancial genius.
August 2007 www.Fi rst HourTradi ng.com