UV Market Blogs

Thursday, November 16, 2006

Don’t play games

Don’t play games

Microsoft, Nintendo and Sony will all release a crucial gaming system in 2006.  Microsoft has its xbox 360, Nintendo is attempting something new with the Wii and Sony will release the Playstation 3.

I know for a fact that both the xbox 360 and the playstation 3 will be selling for less than the cost to Microsoft and Sony to produce the consoles.  Some investors expect record sales to push up the stocks of these companies.  Both Sony and Microsoft are gambling that the amount of games sold after the consoles are released will account for enough to cover the loss each company is taking to sell the consoles.

I believe the Wii will be the overall best performer because it is also the cheapest at a price of $299.  Pricing will always play the most important piece in a decision because money is what limits us from getting whatever we want.  The Playstation 3 should run a close second, although the highest in price, because it has a built in Blu-Ray disc player.  Blu-Ray is a new high definition format of today’s DVDs.  I expect many consumers to purchase a Playstation 3 because it allows them to get a cheaper Blu-Ray player than normally.  Even though some people will only buy it for the Blu-Ray player, many more will decide to pass out even more money for the games to the console.

The gaming industry is high risk due to children driving the market.  For the most part, video games cater to people under the age of 18 who for all intents and purposes usually do not have incomes outside the home.  Parents are often the ultimate decision maker on their children’s purchases.  We all know how trendy things such as gaming can be.  Sega, a former console maker, created a revolution with its game system Genesis but failed miserably in the years to follow.

I do not under and circumstances, recommend investing in a gaming company.  The volatility involved is just too high to be considered investment grade in my opinion.

Google fears copyright infringement

Google fears copyright infringement

Google bought YouTube just a few weeks ago but is already starting to feel the heat from Youtube’s content.  The site, youtube.com, offers free video hosting to uploaders and the ability to view all the videos uploaded to viewers.  The videos are added entirely by other people, not YouTube itself.

This practice has led to the problems Google is facing today.  YouTube offers many TV shows, movies, and other revenue generating content for free.  When Google considered buying the video site, it knew that because of its large value, it may be target of many copyrighting lawsuits.

Google has withheld $200 Million from the purchase price in order to cover possible copyright charges from content producers.  Youtube was largely free of lawsuits because the company was a startup with very little cash.  Google is sitting on billions in cash and the entire company is worth over $100 Billion.  This opens the door for content producers to sue for large sums.

This new release makes Yahoo seem like that much better of an investment.  Yahoo is offering everything that Google is minus the high price to earnings ratio.  Sorry folks, but the Google bubble is long over.  The growth rates which made Google such a high flyer are entirely unsustainable and will lead to the eventual collapse of the Google share price.  If Google takes a tumble it will decrease the ability to purchase small companies which offer extreme growth rates.

Google does not have the capacity to continue these rates of growth without buying risky ventures like YouTube.  When Google bought Youtube it was without income, even losing money on large bandwith expenses.  Yahoo is the internet stock of choice for me, especially after Google bought this crazy lawsuit bait of a website.

Saturday, November 11, 2006

Minimum Wage hike- Effects on lower income population

Minimum Wage hike- Effects on lower income population

After the recent elections and a shift of power from right to the left, a new bill is set to be created to hike the federal minimum wage from $5.15 to $7.25 per hour.

I think this is something awesome for the American economy.  This will also help companies like Wal-Mart, even though they are ridiculed for their payroll practices.

Most minimum wage workers are high school kids.  Very few people over the age of 18 work for minimum wage simply because they have experience in whatever field they are currently employed.  Refer back to your teenage days, we weren’t very savvy savers.  Every dollar that enters the hands of a teenager will eventually be spent again and reentered back into the economy. 

Many people think this will hurt companies like Wal-Mart because of how many people employed at these discount businesses currently earn minimum wage.

I think this minimum wage hike will help discounters like Dollar General, Wal-Mart even Kmart.  The clientele at the above operations consists of lower income America.  With a 41% pay raise almost overnight, the shoppers who frequent the stores will have much more money to spend on goods.

While I am in favor of no set minimum wage, because I believe it restricts a free market economy, I do have no doubts this will spur much more activity in the economy.  Political and economic theory will show that prices should be set by supply and demand and be allowed to float freely; wages are no exception to this rule.

A 40% increase does seem a bit sharp however.

I do not think that the minimum wage will be increased by $2.10.  I think this is just a number set to look better by comparison.  If the bill is shot down, democrats can try again with JUST a $1.50 raise.  $1.50 is a huge increase but compared to $2.10 it doesn’t seem nearly as high.

Deep discounters will see the biggest gains from this.  I would not recommend buying Wal-Mart on news like this because of the current market cap of the company.  Dollar General would make a perfect investment for this kind of news release because of a market capitalization of only $4.3 billion.  There is plenty of room for growth in the value of Dollar General as a whole.  I think the increase in minimum wage will come to be entirely positive for Dollar General.

Dollar General Chart:
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Dollar General is also an outstanding technical play.  I was lucky to enter the stock at $12.50 a share and have been holding since.  DG is teetering on the most crucial support line to its share price. 

I think DG is a great long term play because of its steady growth, small market cap and an awesome looking chart.  I did not include the moving averages in the chart but DG has made it through both the 50 and 100 day simple moving average.  I expect that it will make a move for the 200 day moving average sitting at $15 a share.  The prospect of a high flyer will depend on its performance against the 200 day MA. 

If it gets through, DG could make another run for $20.  If it doesn’t make it, the price will retreat back to the ancient trend line and prepare for another upward move.  To be quite honest, I don’t think that trend line will be broken for years to come.

Friday, November 10, 2006

What commission does to your investment capital

What commission does to your investment capital

(Because stocks do not have a universal set of commission costs per trade, I will be using the Foreign exchange markets to get the point across.  It doesn’t matter what you are trading, fees exist in all markets!)

I frequent several online forums, a few for trading and economics, a couple politics discussions but in the trading forums I see so many posts of people who are ready to leave the markets because of failure.

Investors have been sucked into the forex markets through only greed.  Most new investors go right to trading after only reading a short ebook on the subject.  To make matters worse, it is estimated that only 10% make money in the forex markets, the other 90% lose some and quite a few of that 90% lose it all!

Forex is advertised as a market without fees for trading.  This is of course untrue as no broker stays in businesses without charging money to trade.  Forex commissions are quite different however, they are automatically priced into the price of the currency pair you are buying or selling.  Forex works with things called pips, or the smallest unit in a price.  In stocks this would be like the penny or cent. 

Most brokers charge anywhere from 2-5 pips for buying and selling pairs.  This works out to $20-$50 per lot of 100,000 units of currency.  The spread is kept by the trading firms to ensure they can make money as the middle man.

Back to the main topic:

Most new traders seem to quit so soon because of lackluster performance.  In 95% of these threads there is a reoccurring trend.  Most new investors trade very short term charts!

The years 1999 and 2000 changed investing forever.  The technical age was booming and everyone was interested in “day trading.” Every magazine depicted day trading as an elite activity.  People were making millions a year just by buying large quantities of an equity and selling just after a few minutes to hours for very small gains on each individual share.  Volume was the key to success with day trading, buying 10000 shares of Microsoft meant that an investor could make $5000 just with a .50 rise in the share price.

Now I go forward to today and every new person to the forex markets loses it all in just a few weeks.  I have a reason for this:

When you buy a pair on the foreign exchange markets, you pay a little bit extra due to the spread.  Everyone knows this, and if you didn’t, reread the top of this post

When trading in short time periods, you are usually looking only for very small gains on the equity you have purchased.  Through volume you plan to make a killing on your overall investment. 

If I am a day trader looking to make 10 pips on an investment, I have to make 13 pips to reach that goal.  Buying in costs me 3 pips as it is, so the price must rise 13 pips in order for me to make 10 pips.  I’ve started off the investment at a loss.

This means that my commission accounts for 23% of the gain of the currency pair.

Forex is, I believe a positive odds gain because of the amount of money that is spent to keep currencies between certain price points.  Governments and banks are willing to lose billions to keep their currency prices where they need to be to promote economic growth.  This is another story for another day. 

What we need to know is that markets are basically 50/50 investments.  There is a 50% chance the pair will drop and an equal chance it will rise at any one time.  The universe just works like this.

Now lets apply what we know to our profit taking:

Let’s now assume I am a swing trader so I’m looking for roughly 50 pips from each trade.  Each trade costs me 3 pips just like last time.

My pair must rise in value 53 pips to reach my profit point.  This time, because of my increased timeframe, the spread only accounts for 5.6% of the gain.

This time commission accounts for 5.6% of the currency pair gain!

The informed investor has plenty of ammunition behind him or her to overcome a 5.6% deficit.  Through utilizing charts and analysis the average investor can find a plan to win more trades than just 55%. 

I am certainly not much more than a part time investor.  Granted I do trade for a living, I am not an investing god.  I can consistently win about 95% of my trades but I do not take many trades.

The moral to this story is to be patient.  One great trade is always better than three mediocre trades.  Figure out how much commissions are affecting your bottom line and work to increase your profit to commission ratio. 

Thursday, November 09, 2006

Ethanol

Ethanol

Democrats took over both Senate and House of Representatives in the states and I think alternative fuels will be a big thing for the democratic agenda.  Republicans have supported big lobbying firms for the last decade and now with new leadership, I think the house will pass bills allowing for increased tax cuts for alternative fuel usage.

It will cost roughly $1 to produce ethanol fuel from corn.  A bushel can be converted into three gallons of ethanol ready to be put into your car for driving.  When corn is purchased, it isn’t bought from some big time food company.  The source is the American Farmer. 

Farmers earn relatively low wages from actual farming land.  Most farmers make money through increasing prices in raw land.  A farmer who finds a highway moving through his crops will be sitting on millions of dollars in land because of the new traffic.  The distribution of wealth through the consumer to the farmer will go mostly to the farmer.  Small time farmers are having hard times selling their excess crop and government subsidies can only offer so much.  If ethanol became a serious fuel source in America I think overall the economic situation would be much better.

Ethanol is only 80% as efficient as gasoline.  Gasoline has more energy content gallon for gallon, but essentially you will be paying $1.25 for something that is as useful as $3 of gasoline.  Sounds like a good deal to me! 

Ethanol is also negative carbon emissions.  While driving, burning off the ethanol fuel is actually helping the environment.  The crops that are grown to produce ethanol help sequester carbon into the ground.  While gasoline creates many deadly gasses when burned, ethanol is actually helping!  It’s hard to believe but it’s true.

Cars that can run on ethanol are produced in Brazil by American auto companies so doing the same in the US shouldn’t be an issue.  I would look to invest in the first company to announce a car that can run on ethanol.  The company that offers an inside look into their new models first would get their name out before another other company attempts to take market share. 

Years will pass before we see these new “flex” fuel cars on America’s road but be on the lookout for any company investing R&D money into alternative energy cars.  They will be the best performers for the money.

Wednesday, November 08, 2006

Microsoft and Linux? Weird!

Microsoft and Linux? Weird!

I think this $240Million dollar agreement between Microsoft and Linux is one of the most interesting deals this year.  Nothing tops this one.

Linux has long been the getaway from Microsoft’s capitalistic crusades.  The majority of Linux users have issues with Microsoft’s business practices rather than its software.

Linux is an open source operating system which is used by just a small percentage of the population, mostly hardcore techies.  Linux is also used on hundreds of thousands, probably closer to millions of servers, worldwide.  It is the operating system of choice for businesses and other establishments which desire the fastest and most efficient operating system for their hardware.

As we all know, Microsoft and Google have been involved in an extreme turf war.  Google has owned the internet ad industry outright and Microsoft has owned the software arena since the beginning.  Both companies are attempting to partner with any company possible in order to create something new and valuable for investors.

Google has been working alongside mozilla to promote the firefox browser.  Due to firefox being a faster and more secure browser and internet explorer (Microsoft product) getting worsening press coverage, many people have moved to firefox as their browser.  The new internet explorer contains features that firefox users have been enjoying for years.  Tabbed browsing is the biggest feature that IE lacked for the longest of time.  Tabbed browsing makes it possible for firefox users (and now IE users) to browse multiple web pages with just one open browser window.  This limits cluttering your screen with multiple browsers and helps surf more efficiently through web pages.  Tabbed browsing allows the user to read one page while another loads.  I used tabbed browsing all the time, it allows me to get much more work done!

Google has had all their, what I call “Nifty,” software released as freeware.  I think it is mostly done as a marketing proposition for Google.  Each user of gmail, Google earth, or desktop Google will be more likely to use Google as a search engine because of their extensive exposure to the Google name.

Most of the files that Google releases really aren’t absolutely necessary programs.  Google Earth is honestly one of the most worthless software programs I have on my computer.  Sure, it makes for hours of fun looking at all the things most people will never see in their lifetime, but for practical purposes it really doesn’t serve a use.

Many people, especially bloggers, have speculated that Google would release its own operating system and even a super cheap computer meant to take on Microsoft.  Obviously this new operating system would need a base for comparison or even an existing operating system to be used as a frame for the new operating system.  Linux would have been the perfect operating system for this role.  It is light, open source, and could be modified to put any Google software under the sun on it.

The main reason I think Microsoft chose Linux as a target was to invade Google’s “turf.” Many people, including myself, wanted to see Google turn Linux into its own operating system.  A Google operating system would mean a free operating system, compatible with any computer that could be put into mainstream computers practically overnight.

Google has plenty of bandwith in which to distribute copies of Linux fully loaded with its own programs and resources.

The makers of Linux are set to make a killing with the new partnership.  The company now has $240 million in order to promote its own business ventures and software.  The small company has the prospect of joining companies like Microsoft in the closed source software market.  In reality, Microsoft could be funding a company that eventually takes on Microsoft.  The two are in relations now, but when 2012 rolls around and the agreement expires, I think Linux will emerge as its own software company.

This new agreement with Microsoft works awesomely for Linux.  Just from the press alone, Linux is set up to receive many more inquiries for its fledging operating system.  Since the announcement I don’t think a day has gone by that I haven’t heard about the agreement.  Press is always good for Linux, which has gained is popularity mostly from those who left Microsoft products in order for more stable operating systems such as Linux.

I wonder if we are getting to the point where we have to pay for Linux.  Linux has long been the open source operating system of choice, however at any time Linux could close up shop as a free software and become pay per license.  Or even ad-based! 

Linux offers an awesome operating system for companies which I’m sure would pay for the right to use its software.  The home user is starting to become more acquainted with open source software and Linux could become a household name in the open source industry.

If Linux did become software that was pay per license, how much would we, as the users, pay?  Microsoft XP currently sells for a whopping $200, why wouldn’t users be willing to pay $50 for a copy of Linux, which is faster and less computer demanding.  Plus all of the applications that are available for XP are starting to make their way to linux operating systems.

The agreement between the two may spark some trouble with Apple sales.  Microsoft can now offer the best of both worlds, a free open source operating system, and a full blown XP and Vista with every bit of software needed.  While I do thinks this is a play against Google, Apple Computer will have to respond.

So what happens to the Old Linux users?
Linux used to be the refuge from Microsoft and its business practices.  The super nerdy or “technically inclined” usually have at least one computer running Linux in order to run all of the high tech, hacker type programs.

I think Linux may lose some of their high tech following because of their partnership with Microsoft.  But also I think it is safe to assume that they will pick up many more typical computer users who aren’t exactly computer inclined but have large pocketbooks.

Financially, this $240 million dollar deal was an absolute drop in the bucket for the coffers of Microsoft.  Microsoft is the most valuable public company so $240M to defend its domain would be a wise investment.

Don’t expect shares of Microsoft to drop because of this $240M expense.  Its really not much at all to Microsoft. 

For the investor:
I do not recommend buying shares of Microsoft simply because of its value.  Microsoft is worth too much money to grow at rates that are higher than the overall markets.  It takes several billion dollars in market cap to move Microsoft just a few percentage points.  This kind of drain means that Microsoft will never been a very volatile stock and for the long term investor, it probably wont return near as much as the overall markets.

Saturday, November 04, 2006

Leveraging commodities with stocks

Leveraging commodities with stocks

Commodities are best defined as “An article of trade or commerce, especially an agricultural or mining product that can be processed and resold.” In this case I mean gold, silver, corn, beef, whatever is traded on US commodity markets.

The problem with commodities is that they are not traded as freely as stocks are and because of high minimums they are traded mostly by institutional investors and other professional investors.  Commodity futures are often traded in 100,000 bushel lots, so for corn, this would require more than $200,000.  Commodities are less leveraged than the foreign exchange markets and opening a futures account usually requires huge minimums so I will show you a way to profit on the rise and fall of commodity prices.

Commodity prices are set on markets all around the world, but the biggest market is the Chicago Board of Trade Futures market.  Futures work by agreeing to purchase a commodity for a certain price on a certain date.  When buying futures, an investor believes that the value of the commodity will be higher when you take delivery, allowing the investor to make an instant profit on the investment.

Gold and Silver futures make up most of the activity on the futures boards.  Banks and governments alike turn to gold and silver bullion in order to protect their assets.

Since futures accounts require high minimum investments and also include numerous fees, trading certain stocks will allow an investor to invest in commodities by proxy without opening new brokerage accounts.

The best way to make a leveraged investment on gold is to buy stock in a company that is currently out of commission due to low gold prices.  There are many gold mining companies where it costs them $500 an ounce to mine and haven’t been able to until recently after gold prices surged.

A gold company that operates at a cost of $300 an ounce will not go up as high when gold prices go up as a company that operates at a $500 cost.  A $20 rise in gold will mean a much higher operating margin for the company that operates closest to current price in gold.  If gold is $550 an ounce and a company operates at $500 per ounce then a $20 rise in gold would mean that profits rise 40% for the company. 

News is a big player in commodities because of the supply and demand variables.  Stocks usually have no real demand and a steady supply.  Commodities are always in demand because they are used up and supply depends on how much is produced.  There is never a set supply for ANY commodity.  Bad weather could mean that corn yields are down 10%.

Sticker shock and stock splits

Sticker shock and stock splits

Sticker shock is an amazing phenomenon that continues to baffle me.  Why people are willing to pay $.99 for 6 eggs but not $1.29 for 12 makes me wonder about modern society.

A more likely example:
The increase in gas prices has left people “in a tizzy.” An increase of five cents a gallon will send people into chaos while when their cell phone bills go over $50 the same people don’t seem to have a care in the world.

A recent prize drawing for $100 at a certain local bank generated no interest.  Its $100, you’re in a bank where you probably have several times more stored away.  I mean, its just $100 right?

A very similar, just as advertised give-a-way is announced where winners will receive a $100 gas card.  Whoa, $100 in GAS?  That’s awesome, in the US that is about 40 gallons.  Everyone and their brother’s dog is there to sign up for the chance to win $100 (in free gas.)

Another thing, the American Express gift cards that can be spent ANYWHERE where American Express is taken, which for the most part, is everywhere.  Believe it or not, currency can be spent anywhere within the country or continent (euro) it is representing.  An American Express card is seen as such a great alternative to giving cash, even though in reality it is the same thing.

The gas card was effectively worth less than the $100 cash because cash has the potential to be spent on other necessities.  Gas can only be used by a small range of things.  But since the price of gas is relatively high, the gas card looked better than cash even though cash has more utility.

What does this have to do with the markets?

Stock splits happen all the time.  Usually stock splits are meant to increase the amount of shares and proportionately revalue the price of each share.  Reverse splits also occur which do the exact opposite, lower the amount of shares and raise the price.

Stock splits allow investors the chance to get involved in a company with less money than usually required.  (Most brokerages will not allow you to buy portions of shares, although some discount online brokers offer this service).

A stock priced at $100 is pretty expensive relative to the price of other stocks in the US.  If the stock was split 4 for 1, the stock price would drop to $25 per share and everyone would own four times as many shares.  Basically, nothing happens, you still have the same amount of money.

After stock splits however, investors tend to look at the stock more.  For one reason or another it seems as though after every stock split the stock rises several percentage points.  Stock splits seem to renew interest in the shares and send prices soaring.

Reverse splits do the exact opposite.  Usually reverse splits only occur because the company has to keep a minimum share price in order to stay on a certain exchange.  Many stocks on the AMEX stock exchange have to do this because the AMEX requires that stocks have a value of $1 per share.  If any less than $1 the company can be booted off the exchange.

After a reverse split goes through, the price of the new shares always drops.  Just like a normal split, the stock price is affected by renewed interest/disinterest in the stock.

Pricing has a huge effect on the overall markets.  Watch what happens after your favorite stock splits.  I would bet that in the few weeks following the split the stock will have risen a considerable amount, usually a few percentage points.

Thursday, November 02, 2006

Max your employers retirement “donations”

Max your employers retirement “donations”

Most businesses have some sort of retirement plan in place for their employees, usually 401ks.  The average 401k plan offers a 50% match on 6% of your income.  Some offer more and some offer less.

I encourage everyone to invest the most they need to get the full benefit from their employer.  Maxing out a 401k with the specifications above will be essentially and instant 3% pay raise.  I do not recommend putting more than the amount needed to reap full benefit in your 401k.  I do think you should invest the money but rather put it in an IRA account.

401ks often contain a poor selection of funds and the investment opportunities are certainly limited by law.  A self directed IRA can be invested in virtually anything under the sun from houses and real estate to artwork.  While adding anything over the benefit into your 401k is a sound investment you get far more opportunities by putting that money in your IRA.

Everyone should have an IRA, whether 1 or 100, you need to have a retirement account.  IRAs help shield your returns from taxes to keep your money growing.  You can open an IRA at every financial planning or brokerage company.

Some establishments charge high fees for maintaining your accounts.  Shop around and bargin for the best price possible.  Some trading firms will hold your account for free with a little haggling if you have a sizeable portfolio or they believe you will use their investments in your IRA.

The key is this: your employer is handing out free money for your retirement.  All you have to do to claim it is invest like you normally would into the 401k plan offered at work.  The second you invest into your 401k you get an instant 50% added to it. 

You’ve already made money with your first deposit.  Managing your 401k usually takes little work.  Just select the type of mutual funds you would like to invest into.  Companies will automatically take your 401k investments out of your salary and into your account.  You probably won’t even miss the money, but after a few years of growth you’ll be sure you invested.

Predict future gas price movements

Predict future gas price movements

I thought I’d write a new article about how to predict the price you will be paying at the pump in your area.

The best way to find these numbers is to talk to someone who owns a gas station, I know a few people in the oil business so just asking them was the easiest and most accurate way for the me to do it. 

Depending on the state taxes which can be found here: http://indianagasprices.com/tax_info.aspx and the amount your gas station operator wishes to make will influence the price you pay at the pump.

Wholesale gas prices can be obtained at Bloomberg.com.  Finding the gas prices within the next few days is rather easy.  Take the current price at the pump, subtract state taxes and you are left with the profit margin.  Add the profit margin and the state taxes together to get the amount you should add to the wholesale price to find future movements.

Here in the great state of Indiana, $.55 is added to every gallon as tax/operator profits.  By checking Bloomberg.com I can accurately predict the prices of gas within the next couple days.

Warning people of the possible hikes or drops in prices will lead to quite a following.  It’s a good networking idea to tell anyone who drives if prices will be dropping soon.  I’ve gained quite a following from people who are interested in where gas prices were going, if only they knew it was that easy.  

Predicting gas prices can be both fun and rewarding when you are correct.  If you like to cut costs, start by using the calculations above to decide when you should fill up your tank.  $2 here and there makes a big difference in your retirement portfolio.  These savings mean big money over the long run

Carry trades

Carry trades

The foreign exchange market, or forex, is the largest market in the world with $1.9 TRILLION trading hands daily.  It is by far the largest global market.

The forex market allows for serious leverage on trades, as high as 400:1.  This means to acquire the rights to $100,000 I need to only put up $250.  The inter banks will loan me the other 99.75% I need to make the trade.

When you buy and sell positions on the market, you are borrowing money from a bank in one currency and depositing in another bank with a different currency.  When I buy euros with USD I am literally moving my US dollars from a US bank into a European bank with Euro based accounts.

Of course, when money is borrowed you have to pay interest, right?  When you make a trade on leverage the money is borrowed from one bank with interest and invested in a bank that pays dividends.  CHA CHING!

Currently I can borrow money from a Japanese inter bank for investing on the forex markets for just a .37% interest rate.  Depositing this borrowed money into a US inter bank will give me 4.455% interest a year in profit after the Japanese rate is deducted.

4.455% per year is practically nothing, I could keep my money domestically in an online bank and achieve that ROI.  This is where the power of leverage comes into play.  If I am borrowing at 50:1 leverage my ROI instantly shoots to 222% per year! Compounded daily rather than just annually it comes out to 921% per year! 

Why this works:

Japan is having a hard time to even get borrowers for their finance industry.  In order for the economy to keep moving, money has to be out working to generate revenue.

At one point, one could borrow from Japanese inter banks for zero interest because of how slow the Japanese economy was progressing.  US banks are offering high rate of returns because of the quick growth in the US economy.  Rates are artificially kept high to stunt inflation concerns. 

I would never recommend taking a position solely for the interest payments.  These investments return so much because the amount of risk is practically astronomical.  Trading at 50:1 leverage is something that should never be attempted without sufficient account balances.  If a trader is fully leveraged he or she can lose all of their money on just a 2% loss.

The opposite is also true.  If the currency pair were to progress 2% in your favor, at 50:1 leverage you would have doubled your money!  These high rates of return are not sustainable, you should not at any time attempt to do this kind of trading.

The risk in these investments is high.  Because of the leverage in this scenario is as high as 50:1, a 2% drop in your currency investment will lead to a 100% loss on your account.  These swings are extremely common as a currency can gain or lose 2% over the course of a week and 10%+ over a month timeframe.

Investments like this are not recommended, they are just used for illustration of investment theory and the possibilities in the forex markets.  Do not attempt 50:1 leveraged trades without a sufficient amount in your account to counterbalance heavy margin trading.  While there is no risk of losing more than you have invested, you can lose everything in just a few ticks.

When trading forex it is recommended that you trade no more than 2-3% of your balance at any one time and plan on being able to lose 1-2% on each trade.  Slow and steady wins the race, just ask the world’s richest investor, Warren Buffett.

Wednesday, November 01, 2006

Self fulfilled prophecy

This is one of the most highly debated topics in the finance industry, it involves not just stocks but any commodity where the price can be accurately charted with sufficient volume.  Buying and holding a well positioned stock with good earnings growth should obviously lead to higher valuations for the stock years down the road; that is of course all things being equal and stocks selling for a general price/earnings range.  If there was a specific P/E value that all stocks should sell for then this would make technical analysis essentially worthless and make investing with just the fundamentals the new “trend.”

Many people, it seems to be mostly the older investors, hate technical analysis.  Technical analysis to an old value investor is like voodoo to a priest.  Many people believe that indicators such as trend lines, relative strength indexes or moving averages only work because EVERYONE uses them.  Now this could be the case, if everyone used the same indicators the market would move in very choppy patterns between two values.  Up and down like a graph of your heart beat.  I am a strong believer that technical studies have more going for them than that they just work because so many people use them.

Technical studies chart how the price moves rather than what news or fundamental piece of information makes an investor buy or sell a security, equity, commodity, or even things on ebay. (Ebay is great!)

I believe technical studies accurately determine where prices will be going.  Watching technicals should be a very important part of your investment research.  I will talk about the easiest but often most important technical study, the trend line. 

Below is a chart of Google Inc:

There are many key trend lines in this chart but the two most crucial are the two red lines.  These lines draw a nearly perfect tunnel which Google has followed since its IPO.  The stock did break through to the upside, but this can never been seen as a bad thing regarding its strength.  That just shows how powerful the buying was behind the stock.

The bottom red line has yet to be beaten by the price.  It has been tested three times but it has never given to the downward force.  (Downward force, sounds like something out of Star Wars)

The top line has been destroyed on four occasions, but is showing its strength in the recent peak.  This line is weaker, but this is not a problem.  It just demonstrates how much stronger Google is to the upside rather than in the selling.  Google can crush the upward trend but doesn’t buckle when testing new lows.

Trend lines can be used horizontally too.  Important, round numbers such as 500 or 525 tend to show the most support or resistance because that is the location where most people place their stop or limit orders.  This was discussed in a previous blog post about why we tend to like these numbers more, its titled “Dow 12000, but what do these numbers mean.”

Trend lines best display the slope of the advancement or decline in a security.  The older the trend line, the stronger it is. Usually when trend lines have never been broken they are stronger to future attempts to cross the line.  Trend lines that have been compromised usually do make good market indicators but show a weak support or resistance rather than a much stronger, unbroken line.

While it is true that stocks can be manipulated by such self fulfilling prophecies, simple technicals like trend lines are not fueled by the masses who use them.  Trend lines are in the simplest form a line at which an investor expects a security to advance or decline.  Technicals are neither witchcraft nor the end all solution to investing. 

Look to start drawing trend lines in your stock charts to help give you an idea of where a stock will be headed.  The returns of your portfolio will increase substantially by utilizing trend lines to their full advantage.  To get ahead of the game you must do something that most people do not; using trend lines is a perfect way to obtain the advantage.

Monday, October 30, 2006

Stock Options

Stock options have been all over the news because of fraud by executives via stock options.

Stock options all you to own the option or choice to buy stock at a set price later on in time.  It’s like putting 5% down on a home so that you have the right to buy it a year later.  If you don’t buy it a year later, you’ve lost the amount you spent.  But if the value of the home goes up 8% then you can exercise the option, buy the home, and sell for a 60% profit on your investment.

Options give you extreme leverage on your money.  When you buy options, you are buying them from someone who has written calls on their stock.  These are sold in 100 share lots.  The seller has chosen to sell the options for their set price and allow the buyer to purchase at that price.

Here’s an example.

I own 100 shares of Wal-Mart and I think the price of Wal-Mart stock will not move up or it might even lose value.  I think that the value per share will be absolutely stagnant until January 2007 when 4Q numbers come out.  In order to make some money with my shares, since I don’t think they will gain value, I write what are called covered calls.

Wal-Mart costs $50 a share.  I’ll sell the option to buy my stock at $52.50 anytime before the third week in January for just $.39 a share.  Since I have 100 shares, I can make $39 even if my investment goes no where.

For an investment of $39, the buyer essentially controls my shares until January.  I cannot sell my shares because I have an open option on them.  If Wal-Mart goes up to $55 per share then the buyer can buy my shares from me for $50 because he bought the options, this results in a net gain of $461 on my 100 shares. 

I gain $39 from the sale of the options no matter what, but I missed out on the $5 gain on each share.  If Wal-Mart stock stays at $50 then the purchaser of my options won’t exercise his option.  He can buy the same stock on the open market for $50 a share so why pay $52.50 from me?  Even though Wal-mart neither went up or down in value, I pocketed $39 from my shares of stock.  Pretty cool huh!

Selling covered calls on your shares always gives you an instant reward of the cost of the option.  However, if the price of the stock goes up, you could lose out on potential gains.

It’s another gamble in the world of investing.  I would recommend selling covered calls to earn additional returns on your stock if you don’t think that the shares will be going up in value any time soon.  The opposite can be done if you are currently short on a stock, you can sell shorts if you don’t think the price will drop.

Tomorrow I will highlight how executives have been cheating investors through stock options and how you can get the most from your options.

Shopping for rates

Shopping for the best interest rates is the best thing you can do for your personal savings.  Look at it this way, if banks are going to give you money AND keep it safe, why not look for the best interest rates you can find?

Storing your savings in your bed at home gives you 0% yield and is not protected against theft.  Currently GrandYieldDirect.com has the best rates online for savings.  They will pay 5.25% a year on balances as low as $1.  This is the best option for people with smaller savings accounts, and I think you should try to keep a small savings account so you can have more money working at higher interest rates.

Banks are paying you for nothing, you have to keep your money somewhere.  I’d suggest spending some time at BankRate.com to find the best interest rates.  Look out though, some banks try to stiff you with high withdraw fees or many restrictions on how you can withdraw.

Saturday, October 28, 2006

China and its currency

This “problem” (I use quotes because its only a problem for the US, and quite a gain for china) seems to have been put on a backburner.

China has kept its currency, the Renminbi or also known as the yuan pegged to the US dollar.  This means that the currency rises and falls in value with the US dollar.

Because the currency is kept undervalued with the dollar, China has become the manufacturing outsourcing capital of the world.  China is now one of the fastest growing nations, soon I think it will take status as a superpower.  Its economy is growing at extreme rates and the money just keeps flowing into China.  Usually when an economy is doing so well the currency will gain value, but since it is pegged to the USD without a free float it will stay undervalued.

Why the US is up in arms:

-A cheap currency in China means that jobs will be outsourced to China.
-The trade deficit with China will always be huge for the US because the currency is so cheap.

Good for China:
-Steady flow of money into the countries economy because it will always be cheaper than producing in the US/
-Since it is pegged to the dollar, the Chinese don’t ever have to worry about becoming more expensive than domestic manufacturing because the currency is pegged.

China has moved forward and began to peg the yuan to a “basket” of currencies, although that basket is widely unknown.

I think when China is ready to take on its status as a worldwide super power it will unpeg its currency.  I believe that the yuan would gain incredible amount of value just in the first month of trading.  There is so much potential in China but it is being restricted because of the currency peg.