Glossary

Cramer
On Wall Street Mayhem when we use the term “Cramer” we are referring to Jim Cramer the host of CNBC’s Mad Money show. Usually our discussion of Cramer will be related to his comments and stock picks on the Mad Money show.

Cramerized
The term “Cramerized” is used on Wall Street Mayhem referring to the effect that Jim Cramer’s statements on Mad Money have on a particular stock. When a stock is profiled on Mad Money it typically trades significantly higher for the next 1-3 trading days. At Wall Street Mayhem we often look for short selling opportunities when a stock has moved based on Cramer’s comments when there has been no fundamental change in the business prospects for the underlying company.

Event Trade
The term “event trade” is used on Wall Street Mayhem referring to a stock trade entered in anticipation of an upcoming event that is expected to move the underlying security. Event trades are made in anticipation of both positive and negative upcoming events.

Exchange Traded Fund or ETF
Exchange Traded Funds (ETFs) are similar to stocks because they can be bought and sold on a stock exchange anytime during the trading day. ETFs are similar to mutual funds because they allow investors to buy an entire basket of stocks or other investments through a single purchase. ETFs often track the performance of a specific index. Common ETFs include: QQQQ which tracks the performance of the Nasdaq 100, SPY which tracks the performance of the S&P 500, and DIA which tracks the performance of the Dow Jones Industrial average.

ETFs often have lower total expense ratios than mutual funds. Therefore, Wall Street Mayhem advises that for similar investment products, investors should usually buy an ETF instead of a mutual fund. For example, an investor should buy SPY which has a total expense ratio of .10 instead of buying the Dreyfus S&P 500 Index mutual fund (PEOPX) which as a total expense ratio of .50. Both SPY and PEOPX track the S&P 500 so the only difference in total investment return should be the total expense ratio. If an investor charts the performance of an ETF and a mutual fund the difference in total expense ratio will typically not be shown. However, for a long term investment, the difference in the total expense ratio can make a large difference in the total return of the investment.

Float
A company’s float is the total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares. A small float can make a security move dramatically in a short period of time.

Fundamentals or Fundamental Analysis
Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a particular stock. Fundamental analysts study everything from the overall economy and industry conditions, to the specific financial condition and management of the underlying company.

At Wall Street Mayhem we rely heavily on financial statements to form the basis of our fundamental analysis (see quantitative analysis). For our long term investment picks we typically try to find companies that have steady increases in revenues, profits, and dividends.

Long or Long Position
The term “long” or “long position” is used on Wall Street Mayhem to refer to the ownership of a security.

When Wall Street Mayhem enters a “long position” in a security we are expecting the price per share to increase.

Market Capitalization or Market Cap
A company’s market capitalization is the total dollar value of all outstanding shares calculated by multiplying the number of shares outstanding by the current price per share. This term is often referred to as market cap.

Play
The term play is used on Wall Street Mayhem to refer to a stock trade based on an underlying theory or event. For example, we will often refer to the trades we enter based on the Inside Wall Street column from Business Week as a “Business Week play”.

Price to Earnings Ratio or P/E
The price to earnings ratio (P/E) is a ratio of a company’s current share price compared to its per share earnings. The P/E is calculated by dividing the current share price by the earnings per share (EPS). If a company does not have any earnings then the company does not have a P/E.

Unlike the price per share, P/E ratios are useful when comparing the relative valuation of two different stocks. Although P/E comparisons are most useful when comparing two different companies in the same industry, P/E ratios can be used to compare any two companies that both have positive earnings.

A forward P/E refers to the P/E a company will have for the next year based on analyst estimates of profits. When calculating a forward P/E the current share price is divided by the projected earnings per share.

The P/E ratio is sometimes referred to as the “multiple” because the P/E ratio is an indication of how much investors are willing to pay for each $1 of earnings.

Private Placement
When a company sells stock to a private group of investors outside of the publicly traded stock market, the transaction is called a private placement. Large banks, mutual funds, hedge funds, insurance companies, and pension funds are usually the investors involved in private placements.

Shares Outstanding
The total number of shares held by investors including restricted shares owned by company insiders. The number of shares outstanding is reported on a company’s balance sheet and it is used to calculate market capitalization and earnings per share.

Share Price
The price an investor pays for a single share of the underlying security is the share price. The share price cannot be used as a measure of valuation for the underlying company because the number of shares outstanding varies for each publicly traded company.

Shelf Registration
A shelf registration is a registration of a new issue of stock which is prepared in advance. A shelf registration details the time frame and total numbers of shares that can be issued. After a company has completed a shelf registration, the company can sell the new stock when market conditions are favorable. When a publicly traded company has issued a shelf registration, investors should be cautious because often the company will complete the sale of the new stock to institutional investors below the current market price. This is especially true for companies that are not profitable and are using the funds to finance current business activities.

Companies with active shelf registrations that have difficulties raising capital through traditional financing are often highlighted as short sell opportunities at Wall Street Mayhem.

Short or Short Sell
In finance, short selling or “shorting” is a way to profit from the decline in price of a security, such as stock or a bond. Most investors “go long” on an investment, hoping that price will rise. To profit from the stock price going down, a short seller can borrow a security and sell it, expecting that it will decrease in value so that they can buy it back at a lower price and keep the difference. For example, assume that shares in XYZ Company currently sell for $10 per share. A short seller would borrow 100 shares of XYZ Company, and then immediately sell those shares for a total of $1000. If the price of XYZ shares later falls to $8 per share, the short seller would then buy 100 shares back for $800, return the shares to their original owner, and make a $200 profit. This practice has the potential for an unlimited loss, for example, if the shares of XYZ that one borrowed and sold in fact went up to $25, the short seller would have to buy back all the shares at $2500, losing $1500.

When Wall Street Mayhem enters a “short position” on a security we are expecting the price per share to decline.

Short Interest
The total number of shares of a security that have been sold short by investors and securities firms. Short interest is often represented as a percentage of the float.

Short Squeeze
A short squeeze is a situation in which a lack of supply and an excess demand for a traded stock forces the price upward. Short squeezes can result in a rapid increase in share price for the underlying security. Short squeezes are more common when the underlying security has a high percentage of the float sold short. Sometimes during a short squeeze the price of the underlying security will be much higher than the true demand for ownership of the security.

Technical Analysis
At Wall Street Mayhem we believe the term “technical analysis” is a misnomer. Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts to identify patterns that can suggest future activity.

Wall Street Mayhem believes that the term “technical analysis” is a misnomer because individual securities do not necessarily follow past trends. The term “technical” analysis implies a scientific basis to the research when in reality technical analysis is often misleading and not based on any technical knowledge.

New business developments and breaking news have a much larger effect on the share price of an individual security than do the previous trends of said security. However, technical analysis is followed by many investors and analysts. Therefore, sometimes technical analysis results in a self fulfilling prophecy and the underlying security can move based on technical indicators.

Technical analysis appears to do a much better job of forecasting when applied to the market indices. Therefore, Wall Street Mayhem will occasionally make trade recommendations based on technical indicators of the Nasdaq, NYSE, or the S&P 500, but we will never enter a trade based the technical indicators of an individual security.