To OTC Journal Members:
 

Traders Stay Away- This is not Your Kind of Market

Those words were taken from a book I am currently reading. This classic tome is highly recommended by notables like Marty Zweig, Kenneth Fisher, and Worth Magazine. 

Reminiscences of a Stock Operator was first published in 1923, and takes place around the turn of century. I have read about 25% of the book, and I feel as if I am reading about today's market. The book recounts the experiences of Larry Livingston, a professional trader from the age of 16 who made and lost millions in the stock market. I recommend it highly. It's a fascinating book. Akin to baseball at the turn of the century, the technology, the playing fields, and amount of money have changed, but the fundamentals for success remain the same.

It seems Livingston made and lost millions as a speculator in the markets until he finally figured out the true secret of accumulating wealth. He made $300,000 shorting rail road stocks after the San Francisco earthquake, but gave it all back betting against the ensuing economic recovery after the disaster (sound familiar?). $300,000 in 1901 probably equates to something like $30 million in today's dollars.

After years of making and losing millions, Livingston finally determined he made the most money by sitting through tough markets and allowing your holdings to mature.

We are in a unique market environment right now. 1900 is acting like a magnet for the NASDAQ. We can't make any progress in either direction, and volume is extremely light.

If you want the negatives, just read the newspaper. Skyrocketing oil prices, increasing interest rates, and horrors associated with the war in Iraq and the Israeli/Palestinian conflict dominate the headlines. 

On the plus side, many of the companies I speak with on a daily basis are delivering very exciting corporate developments. I have been involved in the microcap world for nearly 17 years, and I have never had so many small companies anticipating such dramatic growth rates.

Of the seven companies on the "current profiles" list for the OTC Journal, all could grow substantially this year, at least five will have double digit growth rates, and two or three could deliver 300% to 400% growth.

The market was red hot from March of 2003 to January of 2004. Against that thinking, all the major equity indexes are down for the year. No sectors have been exempt from the sell off. 

If you believe as I do that this is a correction in an ongoing bull market, you should be accumulating your favorite stocks on dips. It is an excellent market environment to wait for pullbacks. American Water Star delivered that kind of opportunity this past week.

However, if you believe March of 2003 to January of 2004 was a correction in an ongoing Bear Market, you should sell all your stocks and keep your cash on the sidelines. 

In either case, avoid the temptation to "overtrade" with your money. Stocks are not breaking out or breaking down. Trading for a quick profit in this market environment is futile. You will simply churn up your own capital for little or no gains. 

There were plenty of trading opportunities last year, and I believe we will have plenty of breakouts when this correction is over. In the interim, hold your positions and accumulate more on dips. The only stocks I have sold in the last two months were in companies who's corporate results were unacceptable. Price was not a factor in my decision. Aside from that, I have paid little attention to the level stocks are trading or to my brokerage statements. I believe the good growth companies will trade up when market conditions improve. I don't know exactly when that will be, but I will be ready when some of these stocks are more fully valued. On Monday, look for an edition covering corporate results from the March quarter for several of the companies I follow.

In the interim, I am planning to visit several of the companies I cover in order to get a first hand look at operations. I was at American Water Star Thursday, and couldn't be more excited about the future of the company. During the first week of June, I will be visiting NeWave, NetWork Installation, and Family Room. I visited with VirTra Systems in April, and expect great things out of them.

If these companies grow and prosper you will eventually make money in the stocks. While we're slugging through this tough and indecisive market, don't churn your own account. Accumulate dips and have faith. American Water Star is a great example. They just delivered 73 truckloads of their exciting new beverage to Wal-Mart Superstores. Free demos start on Monday. Early reports say the product is already selling well. So far, they are only in 1400 stores. If the beverage sells well, they will likely be in all the Wal-Marts and the Sam's Club, which could easily equate to $100 million in annual sales. I've tried their beverage and love it. Why would anyone sell the stock at this point? 

Here's a press release from one of the aforementioned companies that should deliver double digit growth and turn profitable:
 

Family Room Entertainment (OTC BB: FMLY) Expects to be Cash Flow Positive Next Fiscal Year

Fiscal 2005 begins July 1st for Family Room, and the company was out today predicting it would turn cash flow positive from operations for the first time in its history.

Family Room is clearly in the throes of a major paradigm shift. The level of projects they are producing in 2004 far outstrip anything they have done to date. Early this year they produced Justin Timberlake's first movie, and his name is sure to bring a big demographic to the film's audience. Two Oscar winners: Kevin Spacey and Morgan Freeman costar in the film.

As disclosed in today's press release, Family Room will produce four more major films throughout the remainder of 2004. They are doing two more Steven Seagal movies, 88 minutes starring Al Pacino, and collecting an outstanding cash fee from the remake of the AmityVille Horror.

The Pacino movie represents a major breakthrough for Family Room. Until now, the company has collected its producer fees during the making of its films, and some minimal residuals. 

For the first time in Family Room's history, they will receive of percentage of box office receipts on 88 minutes once the film exceeds certain thresholds. They have never received this kind of back end revenue on any past productions. This is a major breakthrough for the company, and is symptomatic of a growing reputation for getting the films financed and produced.

In light of this new calendar of business, the management of Family Room is formally projecting the company will turn cash flow positive from operations in fiscal 2005. The funds will flow from producer fees only- there is no expectation of back end royalties in their forecast. The company will probably take all the right downs possible in the March and June quarters to set the stage for profits.

Potential windfalls from this year's productions will come in 2005 from the box office. That's what makes the company a great speculation. There are about 60 million shares issued and outstanding, meaning the market is only placing a $6 million value on the company. A mere $1 million windfall would equate to $.16 per share in earnings, more than price the stock is now trading at. They expect to be profitable in fiscal 2005. 

I don't know what the catalyst will be, but sooner or later................ Accumulate.

Here is the complete text of the press release:
 

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