UV Market Blogs

Tuesday, December 12, 2006

Up 10%, DG in one month

Up 10%, DG in one month

Taking a look back just about a month ago I had an article about the US minimum wage and its effect on the discount outlets which cater to lower income America.  In that article I discussed Dollar General and its chart at the time which was ready for a lift.

After just about 30 days in the trade, it rose to close at $15.32 on Friday for a gain of 10.13% since recommendation of purchase.  The stock came through the 200 day moving average which was crucial for future gains, possibly to $20 per share.  It topped out at a share price of $16.97 before what is known as traders remorse (the movement of a stock going through a key line, then falling back to the line) where it fell back to the 200 day moving average.

If at any time the stock moves below the 200 day moving average, I would recommend a sell.  The stock will return to the 100 day moving average before settling in that area.  If you are active in the trade I would recommend setting your stop loss just $.10-.20 below the current 200 day moving average.  This allows for margin of error but protects from large movements between the two key moving averages.

Mortgage delinquencies, the threat is on.

Mortgage delinquencies, the threat is on.

Investing in 2005-spring 2006 was defined by the real estate market.  Middle class America was suddenly worth tens of thousands more in the course of a year and some entrepreneurial spirits raked in hundreds of thousands flipping low priced homes.

An article was released today by the AP saying that delinquencies and late payments are on the rise, primarily by lower income households and families.  I have several reasons for this:

A:  During the real estate boom throughout the last year and a half, home prices, specifically in the lowest priced homes went up higher when compared to wages.  Middle and upper class Americans were the people who were most invested in real estate during the last boom.  These investors purchased homes for lower class and lower middle class citizens to lease or possible purchase from the investors after renovation.  In some cities, entire neighborhoods of low income areas were purchased to be renovated and then resold to potential inhabitants for $20-30,000 more than originally paid for the home plus the new additions.

B: Home prices in the lower income areas addressed above rose, by percentage, higher than the high income suburbs which experienced the same boom in prices.  Homes in $70,000 neighborhoods saw rises of 200-300 percent due to renovations.  When an entire neighborhood is flipped, the houses are of better quality and gain as a whole.  No one will want to buy a $200k home in a neighborhood of $50k homes but they will have no problem buying a $200k home in a neighborhood of other $200k homes.

C: Lower income families missed out on the housing boom and are forced to pay more money to the people who are renting their homes to them, or to the banks who hold the mortgage on the property.  Middle class and higher profited the most from the latest real estate boom, as with any boom.  Those who have the money to invest will always fare best in a market, you cant win without investing. 

This marks the end of the real estate days at least for another decade.  When you have people missing payments, real estate prices as a whole are too high for the current wages.  We’ve lived in a society where you buy now and pay later but there is a crucial point where people are maxed out and are unable to make good on the things or money that was borrowed.

What good is a market when no one can afford to front the money?  This is what I think real estate has lead to.  We’ve got another good 10-15 years before we see another real estate boom, things like this are 10-20 year occurrences.

Wednesday, December 06, 2006

Options for shorting

Options for shorting

Shorting stocks usually requires credit, high account balances and lots of protection for the broker.  Shorting stocks involves the borrowing of shares in order to buy more to cover the amount you borrowed at a later time.

Its like borrowing a car, selling it for $1000 then one year later buying a car just like the one you borrowed for $800.  Giving the car up, you profit the $200.  Sell now, buy later at a lower price.

Shorting stocks, especially those with absolutely horrid earnings can be extremely profitable.  However due to the inability for many small time investors to sell short due to account restrictions in place by the brokers, the gains are missed by the small investors.  There is a very easy way to bypass the restrictions on selling short.  The easiest is just to buy put options.  These are already leveraged because each option is equal to a share of stock but costs much less.

One could buy a lot, 100, of put options sometimes for the same price of one share of stock.  Options that seem out of range sell sometimes for as low as $5 a lot.  These usually move in amounts of 5 cents per movement so it would be an instant double if the price gets even remotely close to the strike price.

If you haven’t, you should really check out OptionsXpress or go to your current broker to find the rates for trading options.  The commissions for options are generally higher by a few dollars but the amount of stock you control is usually higher as well.  Profits by percentage are much greater on a lot of options than on a share of stock. 

You don’t have to own stock to profit from it.  As covered previously, options are basically buying up the offer to buy stock.  Weird thought in our minds to be borrowing something without paying interest.  Technically you do pay something to get a return, the price paid for the option goes straight to the lender as a fee for “borrowing” the stock.

Believe it or not, options can be used to short too.  Put options are the market gods’ gift to the small investor.  Options allow you to short shares for much cheaper while applying the other capital to other trades.  Rather than control 100 shares short of one company, I could place orders on 10 different companies with the same amount of money.

I can diversify a portfolio more heavily with $100 in options than $500 of that same money in stocks. Options are a great way to make investments you normally wouldn’t have been able to do. 

Tuesday, December 05, 2006

Timeframes

Timeframes

Today I was reminded of a very important part of trading through trading of my own.  There is more than just one timeframe.  Just because your trade is based what you see on a daily chart doesn’t mean that you should ignore the 3 hour chart just because “it doesn’t apply.”

I based this EURCAD (Euro to the Canadian Dollar) trade on mostly the 3 hour chart.  I sold the euro based on the RSI combined with the moving averages, however this is not important.  The important thing is that a moving average on the 15 minute chart and the 1 hour chart eventually affected my trade, resulting in an early close until the pair convinced me again that I had made a good trade.

I am, professionally at least, a trader.  Its just what I do, hopefully many of you are also doing well with your trading.  You will find soon that in trading, you never have good hours.  This is another lesson for another day but simply, I did not wake up and feel remotely conscious enough to even touch my computer yet alone my forex accounts.

When I logged in I found my pair to be roughly 55 pips in profit, turning a 3-4% return on my total portfolio.  I began to scan the charts to see where I should exit, if needed, and to see if there was any upcoming turbulence in sight.  Sure enough, problem!

There is a nasty moving average sitting below the pair on a 1 hour chart.  It is a 50 hour simple moving average floating just below the current price.  These key, and round, numbered moving averages usually mean extreme support.  This is not a good thing when you have bet the pair will drop.  Going up is the last thing you want.

I immediately close out and lock in my 55 pips profit which I was happy with.  I’ve told myself that I will re-enter this trade when it falls through this crucial support.  The pair also encountered resistance from the 15 minute chart and a 200 period simple moving average.  The longer the timeframe, the stronger the line is usually.

Here are some screen shots from the troubling averages:

Below is the one hour chart.  You can see a strong support moving average, not a good thing in my case.  Ignore the first blue triangle indicating a buy, I was merely testing the interest on the pair.

The 15 minute chart isn’t much better.  The 200 period moving average on the 15 minute chart is giving crazy support.  Again, ignore the first blue triangle indicating a buy, I was merely testing the interest on the pair.

Metal is in

It wasn’t until yesterday that I realized the insane gains that have been made in the metals industry and our dependence on the metals in everyday life.  I’ve been scoping some sources for further information about the materials, what they’re used in, what caused the recent rise in prices among other things.

I found this to be extremely interesting way to hold the USD with little risk.

The US nickel is comprised of 3.75 grams of copper and 1.25 grams of nickel.  This coin is worth 5 cents in everyday purchases, but on the spot market, your nickels are worth 6.6 cents!  What a great way to make 34% in just seconds.  Convert all of your money to nickels, melt them down, then sell the metals to companies who produce things like copper wiring, or refrigerators which use a lot of the metal!

Unfortunately the cost of another substance needed in this equation has gone up quite a bit.  Natural gas, needed to heat the nickel and copper to melting points, is also at all time highs.  I’m certain you’ve noticed the prices in your heating bills or even in gasoline at the pumps.  Gas prices are high, no one is questioning that.

This is a year for metals, and it seems as though this will be the decade for metals.  I’ve found that the supply of metals across the board is down.  Copper for example is only stored at a quantity equal to a three days production.  If 10% of production is lost due to re-evaluation of the shaft or other problems that restrict processing of the metal, it would take only a month for the world to be demanding more copper than can be produced. In comparison oil has a daily surplus equal to a much higher percentage than copper and it has also ran just as high as copper.  All of the high priced metals are in extreme demand and reports have indicated that they will be that way for years to come. 

Monday, December 04, 2006

Bread Butter and dividends

Stock returns aren’t so great, but the dividends are

Let’s get this straight.  The stocks known for their best overall performance did not become the most rewarding stocks because of the amount the stock price rose.  Usually the increase in share price is only half of the whole equation.

The most important part to a long term investment is its DIVIDEND.  A dividend is an amount paid to shareholders as their share in the company.  Dividends are sent out by how many shares you own, if you own 100 shares of a company that pays a $.25 annual dividend you will receive $25 each year just for holding the stock.  This is your share of the money the company made over the year prior.

Corporations are not required to pay a dividend and many take this option.  High R&D spending companies will opt in favor of cutting dividends or paying no dividend at all in order to boost their product line.  Technology companies are a perfect example of a stock category that pays little to investors for holding their shares.  In the technology sector, products are only hot for a few years if even a few months so the tech companies must constantly push out the best product possible.  Google is a perfect example of a company that does not pay a dividend.  The earnings are simply invested within Google to produce shareholder value rather than deliver payments to investors for possible investment into other companies or sectors.

Dividends are usually between 1-10% of the stock price paid back to investors each year.  The board of directors of each corporation will set the frequency and amount of each dividend but usually the dividends are paid quarterly to investors.  There are other dividends called special dividends.  These special dividends are simply payment from the corporation that was not expected.  When a corporation sells a large part of its business or pockets a one time profit, the money is usually dispersed to the shareholders as a special dividend.  Obviously the money can be kept by the corporation but is most likely dispersed to shareholders, or is used for the corporation to buy itself back, or to pay down debt.

Paying down debt is another reason some corporations would choose not to pay a dividend.  Debt reduction will aid returns to shareholders in the future so it may be seen as a priority to the corporation to get the debt reduced or eliminated.  Interest charges are always a big expense to most modern blue chip companies.  While no corporation can avoid debt entirely, actions can be taken to reduce the debt at hand and lower interest charges.  Later this will bring more shareholder equity.

Dividend stocks have become far more interesting since the US laws recently changed the taxed amount on dividend payments.  All dividends are taxed at a 15% rate regardless if the payment is one dollar or one million dollars.  Lowered dividend taxes are a big reason the markets have been flourishing as of late.  Stocks are more lucrative because the checks are not eaten up by taxes.  A 15% tax is much lower than the income tax of most people in the United States.  Low taxes mean more interest and more money into the markets and later brings financial gain to all who are invested.  As we know, in order for the markets to gain ground, the amount of money invested must rise an equal amount.  This has encouraged investors to take positions in high yield companies to boost their portfolio.

Dividends are what have made Phillip Morris, now Altria, the best performing stock ever in the US markets.  Reinvesting dividends are the best way to make a huge gain in your portfolio.  Often, dividends are dismissed as tiny checks that make no real difference to a portfolio.  However these payments can take the return of your portfolio up one or two percent each year.  While this may only be seen as a percentage point or two, the effect this leaves on your portfolio with compounding can be enormous.

Below are fadskjfdskafjs stocks to consider investing:
Southern Copper PCU 10.2% dividend yield
This stock is the best bet in my own opinion.  The company has copper mines in both Peru and Mexico.  Southern Copper is one of the largest producers of copper which is up over 400% in just one year.  Copper is an extremely versatile metal and is slowly becoming a rare commodity on the markets.  Copper is used in thousands of high demand products, especially in the technology business.  Copper is so valuable that thefts of wiring and even air conditioners have occurred simply because both contain a high amount of copper that can be sold to scrap metal yards and copper refiners.  The numbers speak for themselves.  Currently the international inventory for copper is just three days worth of production and finding a replacement for the metal will not be easy nor immediate.  Much like oil, a problem in the supply of copper could send copper prices through the roof, which is already five times higher than last year.  Simply, copper is in high demand with low supply and this company has everything going for it.  A 10% dividend yield sweetens an already awesome investment.  One downside for this investment may be the future growth for Southern Copper exists only in the rising copper prices.  But as the markets have shown, copper prices are highly volatile and will stay at high prices.  I don’t think we will see a slowdown in copper because of sheer supply and demand.  Copper will forever be in demand and the supply won’t be getting any bigger any time soon.

Ship Finance International SFL 9% dividend yield
This company has a very interesting business model.  It buys oil tankers then sells long term leases on the tankers.  But the company takes precautions and never has un-leased inventory.  Ship Finance International does not buy a tanker until it has a leased signed in hand for 8 to 12 years.  The company also receives 20% of the profits from the tanker over its $28,000 daily rate.  The company is protected from falling shipping prices because the leases are signed for 8 years at a time.  While the company is protected from harm, it can still reap the rewards when the tankers earn more than the daily rate.  Analysts have concluded that investors are not particularly interested in the stock because fears of falling shipping rates.  This is no matter to SFI as the company has already locked in its profits for years to come.  SFI pays a 9% dividend yield as of its latest share price.  This yield alone will double your money every 8 years even if the stock gains no ground.

Washington Mutual WM 4.8% dividend yield
There isn’t much to say about a company like this.  Washington Mutual is older than dirt and just another financially sound bank.  Everything is right about this stock, the only problem stems from news of a slowing real estate sector.  Washington Mutual has been unable to break into the upper 40s.  The only problem I see is purely technical.  Earnings have yet to cease and the company has great balance sheets.  The 4.8% is a modest dividend yield for such a high class stock.  4.8% is icing on the cake, this stock would be a buy even with no dividend.

Regal Entertainment Group RGC 5.8% dividend yield
The Wal-Mart of theaters.  Regal operates 6400 screens in the United States.  The company was created when two other theaters were merged together after emerging from bankruptcy.  Regal leads the way with innovation, handing out pagers to keep unruly audience members from ruining the shows.  Regal Entertainment Group works hard to keep patrons coming back.  Reward yourself with a 5.8% yield on top of an already stable company!

Friday, December 01, 2006

Kerkorian Gives Up

Kerkorian Gives Up

This is honestly the headline of the century for GM. Game over.

Kirk Kerkorian is a billionaire who resides in the United States.  He is president of his own holding company called Tracinda which purchases companies on his behalf.  Kerkorian was very important to the development of early Vegas and has a nickname to suit: the father of the mega resort.

As of 2006, it is estimated that Kerkorian is worth $9 billion in stock and cash due to his amazing investment history.  He has built several hotels and resorts in Las Vegas, and also made heavy investments in the MGM entertainment company and recently GM.

Quite simply, American automaking is on its way out because of stubborn unions and even more stubborn CEOs.  Workers are demanding too much money from unprofitable companies and the consumer is unwilling to buy a more expensive product.

Asia is leading the way with automobiles because of cheap labor, quality products and inexpensive overall product.  Asian cars are much cheaper than US cars on the lots.

The only chance GM had was in a man named Kirk.  He was the owner of 9.9% of the company up until just a few days ago when he sold out to further his stake in MGM.  Now we find today that he has sold virtually everything he owns in GM.

Having an investor like Kirk Kerkorian often instills a sense of confidence in the company.  If one of the worlds richest investors likes a stock then its sure to be good right?  Apparently not.  Kerkorian didn’t become one of the richest men due to bad investments, it stemmed from his ability to create value and insane returns on his investments.  Just last year I believe Kerkorian purchased more stock at the same price he received for the remaining of his shares today.

Kerkorian is more than just billions of dollars.  He is an investing king.  Like university and the name of the professors, Kerkorian defined General Motors as a sound company.  In order to escape this debt hole that exists now I truly believed GM would have to take on further debt to spark interest in the new products GM had on display. 

The trouble is that GM has horrible cars to offer.  Their new lines will not hit the market for another few years and the current cars are out of style mom-mobiles that have a gallons per mile figure rather than a miles per gallon quantity.  The cars are much more profitable to produce but the demand for such cars is dwindling due to high gas prices.

GM has nothing on which to lean, not a break in sight, and I believe fundamentally this stock is headed to sheer worthlessness.  I would strongly consider purchasing two year duration put options against the GM company.  Without Kerkorian, GM looks even less attractive as a sound investment. 

Look at the bright side, GM only lost $3 billion dollars in 9 months.  Put options for Jan 08 are $3.10 for a strike price of $25 per share.  This means the market has already priced GM at $22 per share in Jan08 which is just a year away.  Sell sell sell my friends, join the bandwagon because this strikes the beginning of a definite end of GM.

Wednesday, November 29, 2006

Bernake stays strong on interest rates

Bernake stays strong on interest rates

Bernake spoke today that interest rates will not be lowered from the current point.  In my opinion this is overall bad news for the markets.  The time period after a plateau of interest rates is usually a poor time for the markets. 

We lie now in a period of stable interest rates in an attempt to keep inflation low.  As we know, low rates boost financial markets and high rates slow them down.

I believe there will be no future hike in interest rates for at least a year.  If your portfolio relies heavily on US money markets or other income producing investments I would start to invest as much cash as I could.

Tomorrow I will write about some high yielding stocks but that is tomorrow.  For now we need to focus on the future of US interest rates.  Below are my predictions:

1st Quarter, interest rates will stay the same.  However starting in the beginning of the second quarter, the US FED will start to consider lowering rates to preserve market gains.  I think the overall US market will be healthy from a strong 4Q but the numbers for 1Q will be unimpressive.

2nd Quarter, traditionally this is when oil prices move higher and cause an unhealthy strain on the markets.  Energy prices generally do not peak until July but the wake is felt even in the early second quarter.  The FED will be forced to lower rates to boost an otherwise falling market.

3rd Quarter, this is usually a slow time for the US Markets.  I believe the FED will hold interest rates for the 3rd quarter as the housing market cools down for winter.  Traditionally, the back to school and winter months are poor real estate times.  Spring is always the big boost to the real estate markets. 

4th Quarter, this is usually the time for huge sales numbers.  This is the biggest time for retailers and manufacturers of goods.  Its hard to predict what the FED will do in this time period without actual hard numbers. 

The long and the short of the article is this, if you are relying on a fixed income investment I would recommend that you place investments now.  Interest rates are as high as they will be all year, regardless of what was announced by the FED.  Get in now or be stuck with 3%.

Tuesday, November 28, 2006

Bad day at the boards

Bad day at the boards

Today was just a bad day all around with all major indices erasing part of their latest gains.  The DJIA dropped 1.29 percent while the S&P500 and NASDAQ lost 1.36 and 2.21 respectively.

These losses aren’t very crucial to the markets because it follows weeks of strong rallying in the markets.  Historically, the fourth quarter is when the markets do best because of strong economic numbers coming from increased holiday spending.  This is the time of the year where most retailers begin to make a profit, companies like Toys R Us and KB toys especially.

Black Friday, the day after Thanksgiving in the US is the largest day of the year for retailers.  I myself participated in the madness resulting from some of the largest sale prices each year.

It is no wonder retailers put up such extreme sales numbers when stores have lines forming at 4am to enter the store at 5am.  The holiday rush is absolutely incredible.

Numbers from retailers have so far been less than awesome.  I would not buy any retailing stocks just for a temporary boost from the upcoming holiday season.  Holiday sales do have high impact on sales numbers but generally cause little rise in the stock of retailing companies.  Poor sales numbers however, will lead to decreased stock prices.  If retailers don’t make estimates, I would reason that their share prices will suffer, probably in the 10-15% range.

In the markets it is expected that you make numbers and there are consequences if they aren’t met but little compensation when paralleled.

Tuesday, November 21, 2006

Risk allowances

Risk, while unwanted, is the reason why your portfolio has the ability to grow in value.  The amount you earn on your investment is correlated to the amount of risk you are willing to take.

CDs and money market accounts are considered to be zero risk because they are insured by the FDIC in the US.  Investments into hedge funds are usually higher risk because the capital is invested into various stocks and ETFs that are not guaranteed by any governing body.

You should never be willing to lose more than 2% of your account balance on any one transaction.  This is a simple rule that the new investor and the hedge fund manager alike should follow.

To make money, you need to first figure your win to loss ratio.  The number is not very important.  Unlike competitive sports, you can still be a winner if your win to loss ratio is 1 win to every 99 losses.  Your win loss ratio won’t decide whether or not your portfolio makes it to a bowl game.

After you have found your win loss ratio you need to find the appropriate stop loss and take profit to set on each trade.  Assuming your win loss ratio is 50:50, you should set your take profit slightly higher than your stop loss.  This means that you should set your stop loss to an 8% loss on the trade but your take profit at 10%.  After 100 trades you will have made 10% on 50 trades and lost 8% on the other 50 trades.  While you were not perfect, you will have made money.

Some investors make money with ratios as low as 1:20.  Investors who invest in the most speculative of investments are usually willing to lose 20 times for just one win.  The one win will have been a huge gain; enough to cover the previous losses and then some.

A trader who only wins 1% of trades can beat a trader with 99% accuracy simply because of the amount of assumed risk and the amount gambled on each trade. 

Don’t be upset if you can only win a few trades out of every 10.  This is perfectly fine, all you need to do is adjust your stop loss and take profit levels so that you can profit from a losing record.  The key is to cut your losses and let the winners run, but since we aren’t psychics this turns into a wild guess.

Study your recent trend history and develop a strategy for making the most out of your trades.  Average your take profit to find what will work best for your strategy and make your stop loss conform to your win loss percentage.

Anyone can win 1% of trades but it takes an informed investor to turn that 1% into profits.

No brokers

No brokers

The markets are cut throat.  What may seem like a helping hand can also be a one way ticket to a non-existent portfolio.  I have very little experience with stockbrokers and that is just enough for me.

As a stockbroker, your job description is literally “pawn off the stocks the firm wants to dump.” First and foremost the stockbroker is employed by the brokerage firm and will seek to protect the interests of his or her employer rather than that of the everyday investor with holdings at the branch.  The job of a stockbroker is to sell what the brokerage house wants to sell rather than the best investment for the client.

Stockbrokers might as well be used car salesmen.  Look at it this way, if there are shares that you can purchase, there are other people who no longer wish to be involved in the business.  A sale happens because one party, for one reason or another, is no longer interested in possessing a product and another individual desires the product.

Stockbrokers are necessary for the majority of investors to place trades on the market.  Unless you are the owner of a seat on the exchange, you will need to use a stockbroker to buy or sell a security.  Some funds are only available through the use of a stockbroker (who receives a commission on the sale).  The job of a stockbroker, essentially the middleman, will always exist because most people do not have direct access to the markets. 

Technology is slowly taking over the investing scene.  Through various online brokerage firms, and investor can place trades for just a few dollars up to ten thousand shares.  These low fees make it available for an investor with any size portfolio to make an investment.  Stockbrokers need not be an individual to be considered a stockbroker.  Etrade and Charles Schwab are both considered stockbrokers however they are corporations rather than individuals who partake in the business of brokering stocks.

It may be necessary for you to call in your trades to your broker.  While it is necessary for you to use the broker to invest, you do not have to heed every investment decision he makes for you.  The casual investor will usually accept the word of a broker to be accurate and in the best interest of himself.  The brokers do have extensive knowledge of the markets, right?

WRONG!  To obtain a license to become a stockbroker you need to know the laws.  Especially in the United States, the examination for a license requires that stockbrokers know all the ins and outs of laws reguarding the financial markets but do not test for financial literacy.  To be quite frank, a broker does not need to know anything about how to pick good investments.

I don’t know about you, but I sure do no want my investment dollars in the hands of someone who has not yet proven to be profitable in the markets.  This is why for the casual investor I would choose mutual funds for investments.

The managers of hedge funds and mutual funds are paid by incentive.  A manager who outperforms will make more money than a manager who loses.  There is a reason for a manager to perform well as it will help him personally.

A stockbroker is paid by the amount of stock he or she is able to solicit to his or her clients.  The fees are usually flat fees but can also be a percentage of the overall investment.  If the trading house needs to sell unwanted shares of a company, the firm can offer extra payments to brokers who move the stock.

In simple terms:
Brokers make money by selling securities to investors
Managers make money by returning the best possible returns to the investors.

Don’t listen to your broker and make your own analysis of every investment before you decide to invest.  Read the fine print and do not take your broker’s word as perfection.  You will save lots of money and probably learn a thing or two along the way.

Trade like a rock

Trade like a rock

The dictionary defines rocks as: “mineral matter of variable composition, consolidated or unconsolidated, assembled in masses or considerable quantities in nature, as by the action of heat or water.” But in this case I mean it to be a boring hunk of stone that neither thinks nor feels pain or emotion.

Becoming a professional investor, or at least a serious investor, requires an emotional disconnect between both your money and your status.  When involved in such a volatile market you should not have any emotional attachment to an investment.

You should not invest in any company simply because you work for it.  This is one of the biggest downfalls in the portfolios of many investors.  Your future is in jeopardy when you work for a company and also have investments in the company.  If the company goes under, you lose both your job and your investment.

When I trade short term and often high risk timeframes I like to set my trades and forget them.  I always make sure to set my stop loss and take profit then leave from my trades.  If a trader sits and watches his trades move up and down each point or pip at a time, they will be more likely to lose.

Emotions run thick in trading.  Unfortunately, whether we are willing to admit it, we are tied to our money.  Money has become a necessary evil in life.  To earn in investing, one must first people able to accept a certain level of risk in order to succeed.  Each time I make a trade, it literally marks whether or not I will be eating that week.  Every gamble is an important part of my livelihood.

When we bring ourselves to worry about what may happen if the money is lost we start to assume unnecessary amounts of care.  When I first started trading I had a habit that left me in the red, and only until I started to leave my trades alone did I recover.  I would watch my charts as my positions gained and lost through normal daily trading.  A small swing would send my heart pounding.

Many times I found myself closing out of trades because I was so emotionally stirred.  I would sell way before my stop losses were reached and sometimes take profits of just a few dollars. 

I later learned that in order to be successful I was going to have to care less about my trades.  To participate in the markets I had already assumed risk with my capital and it was time to convert that risk to profit.

I don’t know when it happened or why but I started to set and forget.  Set and forget became my new slogan.  I would set my trades in the morning (before I left to go to high school) and come home to see my profit or loss.  Often my positions were still open when I got home and I had to immediately leave my trading platform or I would be too overbearing on my account.

The key is to not micro manage your money.  It is one thing to be a thorough investor, but you should not be sitting over your investments with a magnifying glass.  Your portfolio is like an ant farm.  Keep feeding it periodically and let it mature on its own.  I could never disagree that watching your portfolio rise from pennies to thousands to your retirement is a delight, but we must make certain to know that watching can also be self destructive.

Trade like a rock.

Sunday, November 19, 2006

The price to earnings ratio

The price to earnings ratio

This is the most widely used ratio in finance not only because of its simplicity but because the figure can usually siphon the good from the bad.  Take for instance Google, it sells for a Price to Earnings (or PE) of 63 while its rival Yahoo trades at just a 34 PE.  Which is better?

PE ratios are simply price divided by the amount each share earns per year.  A PE ratio of 20 simply means that the stock is worth twenty times what it is expected to earn each year.  A company with a market cap of $100M and a price to earnings ratio of 20 earns $5M a year.  Make sense?

Price to earnings is used all the time in real estate investing, or by entrepreneurs when they buy small businesses.  Price to earnings is simply a return on investment calculation.  You’ve probably used a price to earnings ratio when deciding on a new car.

Price to earnings ratios aren’t always accurate however.  Some investors are willing to pay 65 times what a company is set to make because the company may have extreme growth rates.  Google is a company which trades at high PEs but it offsets the high price by setting high growth rates.

Technology companies are usually those with the highest PE ratios while established companies like banks and companies with large market caps have low PEs.  Citigroup, one of the largest banks in the world by assets, trades at a PE of 10.  Obviously the larger companies usually have slower growth rates because they are already well established.

To balance the differences in earnings ratios, investors use a formula called Price to Earnings to Growth.  Known as the PEG it is the price of each share, divided by each shares earnings, divided by the growth rate in percent.  A corporation valued at $50 per share with a $5 earnings per share and a growth rate of 20% will have a PEG of one-half or 0.5.

Like price to earnings, the best PEG would be as close to 0 as possible.  Investors generally consider 1 to be a good PEG number and worth an investment.  Three to five would be a very high PEG and the stock would be a sell in the eye of an investor.

Both the PE and PEG are examples of fundamental analysis in today’s market.  While the markets base worthiness on what someone is willing to pay, the PE and PEG seek value.  A Corporation that makes $200M a year will not sell for $100M.  This is just not something that the financial markets of today would allow.  There will always be a certain range for investors to take.  A PEG of 10 would not be a favorable investment for any one who is looking to invest for the long haul. 

Value works.  When you can buy what, in your opinion, should be a $10 stock for $5 you have created wealth.  The PEG is a great outline to find true investments worth taking.  Calculations like the PE and PEG help value investors such as Warren Buffett, the second richest man in the world, find companies that are worth an investment.

Experiment and identify companies with low and high PE ratios.  You will find that PE ratios vary by sector but most stocks will fit in a very tight range for PEG figures. Yahoo finance provides both the PE and PEG already calculated for each stock on the exchange.

Friday, November 17, 2006

Oil prices

Oil prices

Look I’m liberal, but I know better than to blame Bush for high oil prices.  Enough with the politics.

The general public is largely unaware of how financial markets work.  Everyday I hear the same bickering of politicians being responsible for the high prices of oil and along with oil, gasoline.

Most people seem to have failed their high school economics classes.  Supply and demand are the key to any market or economy.  In a free market, price is dictated by both supply and demand.  Supply is set forth by the oil companies and demand is generated from the consumers at the gas pumps and in the comfort of their heated homes.

The only way for oil prices to move is by increased or decreased supply or demand.  OPEC could come out today and slash production by one half and send the market into a tizzy.  Oil prices would hit all time highs, probably more than twice what the prices are now.  Oil is a leveraged product, we as the consumer will continue to buy it until we can no longer make reason to do so.  Even if we have to cut into our own profit margins we will make it work.

We’re dependant on oil and the oil companies are dependant on us.  The consumers ultimately drive the price of oil because without demand, oil would be worthless.

Don’t pass the blame for oil prices, especially when we hit lows like we have today.  Your politicians can’t do anything to affect oil because in the end, the hundreds of free markets around the globe set the price of your crude.  Oil is cheap right now, take advantage and buy a position to make some money as a hedge against future prices.

I am 10000% certain oil will not settle at $56 per barrel.  When next summer rolls around I think we will again see the $75 barrels we saw this summer.  Lookout, don’t be surprised when this natural phenomenon occurs yet again!

The art of the pump and dump

The art of the pump and dump

We all get these most annoying emails, faxes even snail mails.  They speak of great wealth, the next Microsoft and a company that is about to make more in a day than any other has made in a year.

The letters go on to say a target for the stock, which is usually several times the current value of the shares.  Usually these stocks are penny stocks with a value of less than one dollar but they can be high priced per share too.

The target stock is usually an unsuspecting, sometimes bankrupt company.  The stock has a low daily volume and little interest from current investors.  The company might as well exist in a ghost town in your favorite scary movie.  No one could tell a difference because the stock is sometimes all that’s left after a crazy CEO decides to rob the company for all it’s worth.  This is especially true in the case of pink sheets, worthless shells of companies that will never come back from the dead.  You never know, you might be buying parts of Enron when you buy that $.00003 a share stock.

The person behind the operation has been in careful planning for a time period of up to a few months.  The operator of the scheme has to be careful to take a position in the company without drawing attention to himself or others operating the ring.  Submitting a bid order for too much stock could cause the markets to attempt to correct the difference and send the price of the stock upward.  This is not what the operator wants to do, the best thing that could possibly happen would be for the price to fall as the operator buys in. 

Because the majority of these companies share for share are worthless, the operator often has to buy tens of thousands of shares to make it worthwhile.  Some brokers limit their orders to 10000 shares then $.01 a share after that.  This makes it difficult for the operator to buy extremely low priced shares.  To make it worth the while, most shares involved in these operations sell for $.10 or higher.  The brokers commission gets out of hand on any company with a share price lower than ten cents.

Another point, the only people who always gain from the markets are the brokers.  They provide the exchanges for a small fee that offers them zero risk.  The money that flows through the markets isn’t new wealth, its just money being sent between different people.  The brokers are the only ones who win in this negative odds game of trading stocks.

Now the promotion starts.  The operator has to bring in a large amount of purchasers in order to drive the price as high as he can.  As we know already, increased demand will lead to the ultimate rise of the share price.  The operator will usually buy bulk lists of fax, email, mailing addresses in order to get the message out.

For just a few minutes of his time, the operator can send a message to millions of email accounts.  Even if the message is read and followed by 1 out of every 1000 people the return rate will be great for the operator.  The unsuspecting investors rush in to buy into what seems like the opportunity of a lifetime.  The operator usually has an extremely well crafted sales letter to pitch the investment to the ordinary person looking to strike it rich.

It is human nature to be lured by fast wealth.  The letters promise near instant returns in the hundreds of percentage points. 

The investors start buying into the security and push the price up.  With each new investor, the operator of the pump and dump slyly sells his shares.  The operator generally sells as the stock is rising and is entirely out of the stock before the price crashes.  When pump and dumps occur they usually cause the value of a stock to go straight up then right back down in a shape that looks like and upside down ice cream cone.

The operator sells his shares to all the new investors who think they just got involved in the ride of a lifetime.  The operator can slip away with thousands, maybe millions of unearned dollars.  The new investors realize soon that they are in the possession of tons of worthless stock. 

This scheme is run all the time, around the clock and leads to the loss of several billion dollars a year by defenseless investors.  The issue sparks from the ease of running such a scheme and the availability of people who are willing to invest before researching.  During the tech bubble a teenager manipulated this same scheme to defraud investors out of nearly one million dollars.

Do not invest in any of the stocks mentioned in mailers.  These stocks are usually junk companies that no longer exist.  The operator is merely pumping to make a quick buck.