UV Market Blogs

Friday, October 27, 2006

Large Cap, Small Cap, Pink Sheet, Blue Chip

You’ve heard them all there are tons of names for stocks but I’m going to go over the following terms and tell you what they mean.

Blue chip
Large Cap
Mid Cap
Small Cap
Penny Stock
Pink Sheets and Over the Counter

Blue Chips:
Blue Chip stocks are the biggest companies on the markets.  Wal-Mart, Exxon and Microsoft would be perfect examples for blue chip stocks.  They are the tried and tested stocks on the market with market capitalizations of billions.  Blue Chip stocks are usually the leader of the field.  Intel would be a Blue Chip in the processor industry as Microsoft is in the software scene.  These stocks often create an average return on your investment.  They make good long term investments for anyone who doesn’t like a lot of risk.  Lets be real, how possible is it that Wal-Mart will disappear in the next ten years?  Highly unlikely.  The DJIA, Dow Jones Industrial Average, is comprised of the best 30 Blue Chip stocks on the market.  $1 invested in the Dow in 1980 would bring back $13 today, Blue chips will always be great investments.

Large Cap
Large Cap stocks are those that have a large market capitalization but aren’t as big or great as blue chips.  Large cap simply means that their market value is very high.  Google is a good example of a large cap stock with a $147,000,000,000 ($147 Billion) dollar market capitalization or worth.  Large caps require a large amount of money flowing into the stock to push it upward.  If Google were to go up just 1%, $1.47 billion dollars would have to flow into the stock.  High numbers like this mean that movements in the stock’s price should be steady and flowing, not choppy and volatile.  Large caps will return better over the long run than blue chips because of smaller market values than the blue chip stocks.

Mid Caps
Mid Cap stocks are smaller than large caps and usually worth $1 billion to $5 billion in market capitalization.  These stocks, because of their relatively small market cap compared to large caps, move much greater over time because it only takes a few billion in added worth to double the price of the stock.  All of the large cap stocks were once mid caps, even Wal-Mart was once worth just $1 billion.  (Now its worth $215 Billion) Mid caps have been consistent in the gains over time.  Mid cap funds have proven to beat large caps by a few percentage points each year.  While this might not seem like a lot, after compounding it could mean the difference between a $1M portfolio and a $2M portfolio.  That definitely makes a dent in any retirement plans.

Small Cap
Small Caps are even smaller than Mid Caps, usually worth less than $1 billion.  (Take in mind all these depend on the investor, people who are used to investing in blue chips might think of a small cap of being worth $50 billion or less!) These stocks over the long term have produced better gains than mid caps and large caps however year to year they are much more volatile.  Risk is always paid off with a better reward and that certainly is true with small cap stocks.  Generally small caps aren’t household names like large caps and are usually confined to one region.  This gives them much more room for expansion and higher growth rates.  Its always easier to double the worth of a small corporation than a big corporation because a small corp needs less money and has more markets untouched than a large corporation.  Small caps have been great money earners and over history have done better than mid and large caps.  Don’t be fooled though, when the market moves downward, small caps often lose the most percentage-wise.

Penny Stocks
Penny stocks include any stock worth less than a dollar a share but as a dollar has slowly lost its value, we’ve come to accept any stock with a value of less than $5 a share as a penny stock.  Penny stocks are usually old high flyers who were worth $10s of dollars per share but have fallen, but this is not always the case.  As with anything, there are always those diamonds in the rough that can make you a fortune.  For the everyday investor I would not recommend penny stocks because of the volatility and most are just corporations waiting to go bankrupt.

Pink sheets
Pink sheets are the low of the low.  The lowest you can get.  These are basically bankrupted corporations that still exist on a cheap exchange called the pink sheets or bulletin boards.  These companies may or may not still be in existence and many are used to commit fraud.  I do not recommend pink sheets to anyone, even market experts.  There is no rhyme or reason to pink sheets or why you should be involved with them.  Stay away from these stocks, there is a reason why they aren’t on the real exchanges.

There you have it, all the definitions of stock terms.  I will try to keep this list updated as much as possible, if you have a term that applies to the value or position of a stock then leave a comment and I will add it to the list.

Remember, stick with no less than small caps if you aren’t a full time investor with a lot of capital or it may come back to bite you. 

Thursday, October 26, 2006

Fed keeps rates

Fed keeps rates at 5.25%

As expected the Fed kept rates at 5.25%.  This should mean that the markets will advance at the same rate at which they have, which recently, is only a good thing!

Look for good market returns through the New Year, this 4Q should be a good one!

Wednesday, October 25, 2006

Hedge Funds

Hedge Funds are the typical mutual fund on ecstasy.  These funds were high flyers especially in the tech boom when they were able to get in and out of all the tech titans before the big crash in 2001 but investors are still expecting a lot from their hedge fund investments.

A new poll by Morningstar Inc. says that 65% of financial advisors who where polled about hedge funds said they expect double digital gains each year.  It also states 67% of the respondents claim more than 10% of their clients invest in alternative investments; hedge funds.

Hedge funds have a different set of rules and regulations that allow them to trade more often.  This usually leads to higher fees to the investor because of such rapid exits.

We’ve come to expect so much from investments like hedge funds because of their lucrative past.  But now the market is becoming saturated and the funds have TOO MUCH in capital to keep up the gains.  About 9000 hedge funds invest a total of $1.3 TRILLION dollars, that’s twice as much as in 2001! 

If you’re in it for the long haul stick with traditional investments.  Mutual funds are just as good as hedge funds without the risk and lower fees. 

Fed to decide on rates tomorrow

The Federal Reserve can, in one decision, decide the fate of the US Economy for an entire month.  Each month the Fed comes together to discuss the prime rate, or the interest rate charged to banks for wholesales loans.

Lowering rates means that businesses can borrow more for less and expand and break-neck paces but also creates high inflation.  High rates cause the market to slow down, businesses stop borrowing as much to keep interest expenses down.

No decision has a greater effect on the economy and the financial markets as the rate decision.  When rates are high, it brings in money from all around the world to our interbanks where other countries can earn on our high yields.  But domestically high rates are known killers to the markets.

Under Greenspan, the Fed was often criticized for lowering rates too low and causing inflation then bringing the prime rate too high and causing an economic fall out.

Last year the Fed seemed rather concerned about sky high housing prices in California.  Raising interest rates curbed people from moving every six months and making hundreds of thousands of dollars from the leverage obtained from low interest rates.  People could borrow for 4-5% and make 30-40% on the total price of the home.  Often, homes would go from $500k to $1M in less than a year and pocket the home owner $500,000 minus interest of roughly $50K.

Investing with borrowed money in real estate gives extreme rates of return.  Most lenders require only 5% down payment if they even require one at all.  An investor could take control of a $1M home for $50k and in one year sell the home for $1.2M, a gain of $150k and a percentage gain of 200%!

These market conditions cannot be sustained forever, if they did, bread would cost $10 a loaf and milk $30 a gallon.  This creates an economic divide.  The poor work for low wages while the rich investor can double his money every year.  We’ve seen in the past that this is never a good thing for a nation.  (French revolution)

The Fed plays a very important role in the economy that is often overlooked.  The interest rates bring new investments from overseas into the markets and help inflate returns domestic investors can earn. 

The Fed is even more important internationally than in the US Equity markets.  The forex market is a $1.9 Trillion a day market.  All of the largest banks participate on the foreign exchange.  To keep it simple, the foreign exchange markets are the backbone of the global economy. 

Start watching the Fed reports and the rate meetings.  There is a lot to be learned about how the Fed dictates the prime rate and what effect is has on not only our investments but investments around the world.  Look at all the previous stock market crashes, especially 1987 and see what the Fed had to do with it.  Prime rates affect more than just how much your house or car cost you each month as they can effect your retirement seemingly overnight. 

I think rates will stay the same at this next meeting.  The market is moving at a good pace and it’s too early to try to stop it.  If the Dow starts to approach 12500 I think we will start to see some pressure to raise rates.

Struggling US Automakers

Ford and GM just cant keep up with the foreign automakers.  Japanese manufacturers such as Toyota or Honda can produce cars faster and cheaper than here in the US, and consumers just keep buying up these foreign brands.

Ford posted a $5.8 billion quarterly loss on Monday.  QUARTERLY!  Ford is in deep trouble.  At this time, Ford has a market cap of $15B but at this rate that may start dwindling away as the assets do.

Henry Ford who is credited for his revolution with the assembly line in the production of early cars is being beaten by foreign makers who can produce cars faster, cheaper, and just as durable as American models.

Ford started producing higher profit margin SUVs and trucks rather than the family sedan.  This, in my opinion, will lead to a further loss as gas prices move upward.  SUVs are falling out of favor for middle class families.  The SUV was the car of choice for “soccer moms” in the late 90s/early 2000s but when gas is so expensive they just aren’t economical.

Honda and Toyota have it right, each producing their award winning compacts such as the Honda Civic and the Toyota Camry.  These cars are known both for their durability and affordability to middle class America.  Both are friendly on gas too, and the civics can be purchased as hybrids.

The only way Ford can regain the automotive market in the US is if E85 ethanol is introduced.  Ford and GM, both struggling US automakers, make flex fuel cars (cars that can run on both gas or E85 at the owners choosing).  These cars are very popular in Brazil where a large percentage of the population has these cars.

The cars allow you to use regular gas or E85.  In some situations gas will be cheaper than E85 so the driver can fill up with gas and run it just like any other car.  When ethanol is cheaper, it can be filled up on ethanol and driven the same way.  Flex fuel allows the consumer to decide what’s best and at what times.

Hopefully the US can realize its foreign oil dependency and start to make E85 the new standard.  This would be a fresh breath of air for any US automaker and the consumer tired of paying $3 for a gallon of gasoline.  Until this happens though, I would refrain from investing in the US automotive market.  The major players are slowly losing everything and all new pipeline cars aren’t expected to hit the markets for another few years.

Monday, October 23, 2006

One market, Two types of traders

There is just one market, the global financial markets but there are two very different types of traders.  The difference is as clear as night and day, conservatives and liberals, black and white, you get the point.  They share one goal, to strike it rich in the financial markets, but utilize two very different strategies to get there.

The first is a fundamental investor.  Defined by taking a more age old approach to investing and looking at the core of businesses (leadership, finances, profit margins) to select better built businesses for, usually, long term gains. 

A fundamentalist is more interested in who leads the company than who is doing all the buying and selling of the stock.  News and analyst studies are very important to the fundamental trader.  And fundamentals make sense, a profitable company should go up in value, right? 

Not entirely right, but right in theory.  See, with stocks, the value of the company could go to $.01 for the entire corporation if there are no buyers and thousands of sellers.  As I explained before, the profitability of a company has nothing to do with the way the stock moves.  OBVIOUSLY, when a company does well more people will want to invest.  But from a standpoint of how the markets work, it really doesn’t work this way.

Don’t get me wrong.  Warren Buffett, the second richest man in the world has made a living out of buying undervalued and profitable companies and making a fortune, $40+ Billion to be exact. 

Most investors are fundamental investors, I would guess at least 80% to be so.  Most people with retirement or long term portfolios tend to be fundamentalists because in the long term a corporation will probably gain value if it is fundamentally a good investment.  Wal-Mart is probably a fundamentally sound investment, it has consistent growth and is the largest in its field.  Wal-Mart is highly unlikely to go down the tubes any time soon so it should hold its value, making it a good fundamental play.

On the same token however, we have the technical investors.  Known for sitting in front of 10 computer monitors and watching a wide array of charts, graphs and confusing calculations, technical investors are usually professional investors more interested in short term trades.

Technical investors are more interested to see who is buying and selling and at what price.  If I know that many people are buying ZZZ Corp at $5 a share I could get in at $5.10 and ride the stock up to say $6 where I know there are a lot of people selling.

Technical thinking is studying how the markets move prices of an equity rather than earnings.  In my previous article about the Dow reaching 12000 I used more of a technical approach to looking at the DJIA. 

Technicals are best when used in short time periods where the market dictates more than long term growth and earnings ratios.  Technicals do work over long time periods but not with the same returns or efficiencies as short term.  Taking 3-4 short trades a week will yield many hundreds of percent better than 3-4 trades a year over the long term.  This is always to be expected because you can capture the best short time period for return rather than waiting five years to see a similar return.

When fundamentals and technicals work:

Fundamentals
Fundamentals are usually best on an equity that can be depleted or is tied to something greater like the economy of a nation.  Corn is one of the commodities which fundamental trading would work best.  Corn is eaten by people and animals so the market depends on the consumers rather than when people are buying and selling.

A stock is never consumed, it is always available to be bought and sold and always in a specific quantity.  Corn supplies, for example, vary from year to year with the weather and whether it is a popular crop with farmers.  When supplies drop, a fundamental, corn prices are going to go up.  This is simple supply and demand

Fundamentals work best with a product that is consumed and its supply is constantly changing. 

Technicals
Technicals work best with fixed supply commodities such as stocks.  Technical traders watch the levels at which buying and selling occur most and try to enter the markets at these specific values.  Technical investors usually aren’t concerned near as much with the financial stability of the company as they are with how lucrative the stock looks to other investors.

There are two very distinct types of investors but both have proven to be profitable.  Decide what kind of investor you want to be and stick to it.  Specialize in investing and your profits will explode!

Saturday, October 21, 2006

The oil situation

The oil situation

OPEC agreed on Friday to cut production of oil by 1.2M barrels per day.  That’s 200,000 or 20% more than expected in cuts.  The original cut was expected to be just 1M barrels.  Some OPEC leaders went as far to say that another 500,000 barrels of oil will be taken off the daily production when OPEC meets again in December.

Recently oil has taken a considerable tumble from the sky high $75 a barrel to just $57.  OPEC has decided to cut back on production in order to push oil back to the previous highs.

Oil is a tricky subject:

Everyday, 82M barrels of oil are produced and sold on the worlds exchanges.  Of the 82M barrels in production, 80M are used immediately to supply the world’s ever increasing thirst for oil.  The remaining 2-3M barrels are usually heavy Saudi crudes which cannot be easily converted into usable energy forms such as gasoline.  This crude usually comes from very sandy ground which is essentially tar.

In simple terms, all the oil that is produced is used up almost immediately.  There is really no room for comfort when it comes to oil.  OPECs 1.2M bpd cut could send oil prices up more than the oil actually represents of daily production.  Assuming that 82M barrels are produced daily, a 1.2M bpd cut would drop the production of oil 1.25%.  However prices would most likely rise 4-5% or even more.  Because oil demand is so tight, the gains and losses are heavily leveraged.

Even when oil is $75-80 a barrel the demand for crude stays the same.  Oil and energy are so much a part of our daily lives that we have come to the point of paying whatever we can in order to get it.  When gasoline was $3.50 in my town, I saw no more bikes on the road or less cars on the street, I did however, hear more complaining and threats of going on a “gas strike.” The fact is that oil is worth more than $75 a barrel.  It has been previously said that a barrel of oil is worth 10,000 man hours of labor, which in the US would cost $51500 even at minimum wage.

I can’t perceive a lesser demand until oil tops $100 maybe even $125 per barrel.  We are so energy dependant that money becomes no object when we talk about gasoline and our oversized cars.  The only solution to lessening prices is to lessen demand.

Google Vs Yahoo

This could be one of the biggest rivalries in the internet content arena.  Yahoo, which has existed years longer than Google and with its own portal filled with news, finance, and games, verses the newly founded Google with an array of disorganized subprojects varying from online video to satellite images of the Earth’s surface.

So who has the upper hand?  Google has a growth rate in the double digits but Yahoo is more like the blue chip stock with steady growth and consistent earnings.

My take on the two:

Google derives 99% of its income from its adwords infrastructure.  This system is basically an advertising agency which charges e-businesses to advertise on sites which display the adwords for a partial take of the revenue.  Without adwords, Google would not exist today.  It would be entirely broke.

Enter Yahoo.  Its a tech titan, its been through the ups and downs of the tech bubble and is trading at just 27 times earnings (Google trades at 67 times earnings).  Yahoo keeps revenue flowing through a variety of online services from news, email, games, groups and many more things including its pay per inclusion directory. 

Yahoo recently created an exact clone of Google’s adwords program, named Yahoo Publisher Network or YPN. This gives Yahoo a clear advantage over Google in the third party advertising arena for many reasons.

Yahoo has become a very profitable company WITHOUT their publisher network.  Only until recently was this program created so it hasn’t added anything to its bottom line.  Google makes 99% of their income from adwords, and Yahoo makes virtually nothing.

What does this mean?
Yahoo can essentially pass all of the money advertisers pay to the sites publishing the ads.  This does no harm to Yahoo’s bottom line because it’s survived without the program for years.  If Yahoo does this it will cause many webmasters from Google to Yahoo to serve ads.  Because Google is so dependant on their adwords program, Yahoo could put Google on its knees in a flash.

Google probably only serves about 15% of its daily ads from the search engine itself.  If YPN is able to offer higher rates to publishers, it could take away 85% of Google’s earnings overnight. 

Yahoo has the advertising networking done already.  Yahoo serves millions of ad impressions throughout its content pages in the portal.  These positive advertiser relations should only help YPN get off the ground and gain ad dollars.  When the advertisers start moving to YPN, so should the publishers.

I think Yahoo is the better long term play in this scenario.  In my opinion, Google is still a few years behind on Yahoo in building up a solid network in which they can display their ads.  Google has made several off the wall marketing decisions in the last year that have really sent investors for a spin.  It bought all rights to myspace ads for a year, they just bought YouTube for $1.65B, and now own a considerable percentage of the dieing AOL.

While I think both stocks are overpriced I think you should buy Yahoo shares if you want to have exposure to the internet.

Thursday, October 19, 2006

Dow Stretches for 12000 but what do these numbers mean?

Dow stretches for 12000 but what do these numbers mean?

The Dow Jones Industrial Average or DJIA for the duration of this article is the oldest index for the New York Stock exchange (also NYSE for the duration of this article.) The DJIA is comprised of 30 stocks (see below for list of stocks) which are some of the most known stocks in the world.

The DJIA also crossed a very important number, 12000, this week.  It was the first time it has closed above the figure.  But what do these numbers really mean?  12000 is just as important as 12980.93 right?  WRONG!

Let’s put this in perspective.  You and I both like to keep things simple.  When we sell things at a garage sale or anything where calculations will be taken without sales tax or even without calculators we like to keep the numbers well rounded.  I won’t be selling my grandma’s plates for $.99 or $1.01 each, I’ll probably round it to $1 to keep my work of adding and making change simple.  Traders think in the same fashion as well.  We like to make it simple and well rounded, while some more than others, we can all agree that using even numbers makes our life easier. 

So what does this have to do with trading?  I’ll explain.  Stocks move because one person or many people have entered higher or lower asking prices than the current price and another person accepted it.  If AB Company is $5 a share and I ask $5.50 for my shares and another person accepts, the new price is $5.50 per share.  Prices aren’t dictated by how much a company makes or how well its new product is doing.  A company is worth only what someone is willing to pay for it, or at least a share of it.

When I want to sell or buy a stock I usually don’t enter an order at $25.95 unless that too is a very important level.  I’ll probably just enter it as $26 even.  This is what people have done with the DJIA.  Those who were holding the DJIA futures probably had sell orders in set to sell when the DJIA reached 12000.  In order for the Dow to move above 12000 it was going to have to take a lot of pushing from people who had sell orders at or around 12000.  When a stock, index, or equity moves through an important level such as 12000 it takes out a lot of downward positions.  Those who had sell orders at 12000 were bought out by the buying strength and can no longer insert new sell positions at 12000.

Just a few days ago the DJIA moved above 12000 but was shot back down into the 11000s.  This is due to the amount of sells set at 12000.  The movement through 12000 the first time severely weakened the line at 12000 and made it even easier to break through this time.  This is known as traders remorse, when a stock moves above a level only to be corrected then goes back to that very level.

Now that the DJIA is above 12000 it should be harder for it to fall below it again simply because traders have probably issued buy orders at 12000.  But if it does fall through it will make a sharp move down because there are probably sell orders placed below 12000.

Companies in DJIA.
3M Company (MMM) Alcoa Inc. (AA)
Altria Group, Inc. (MO) American Express Co. (AXP)
American Int’l. Group (AIG) AT&T Inc (T)
Boeing Co. (BA) Caterpillar, Inc. (CAT)
Citigroup Inc. (C) Coca-Cola Co. (KO)
DuPont (DD) Exxon Mobil Corp. (XOM)
General Electric Co. (GE) General Motors (GM)
Hewlett-Packard Co. (HPQ) Home Depot, Inc. (HD)
Honeywell Int’l. Inc. (HON) Intel Corp. (INTC)
International Bus. Mach. (IBM) J.P. Morgan Chase & Co. (JPM) Johnson & Johnson (JNJ) McDonalds Corp. (MCD)
Merck & Co. Inc. (MRK) Microsoft Corp. (MSFT)
Pfizer Inc. (PFE) Procter & Gamble Co. (PG)
United Technologies Corp. (UTX) Verizon Communications Inc. (VZ)
Wal-Mart Stores, Inc. (WMT) Walt Disney Co. (DIS)

Wednesday, October 18, 2006

Why investing is the best job

Why investing is the best job

Being a professional investor is the best job one could have.  Unlike most jobs, investing requires absolutely no physical labor.  All the money to be made from investing is cashing in on your skill at trading the markets.  Knowledge is everything in this game, it doesn’t matter if you’re 6 or 60, in the best shape of your life or have a disability, investing knows no boundaries.  Every trade could potentially put you into retirement.  Get excited about investing, it’s the only way to make a great life for yourself and for the generations following you.

When you apply for a normal job you are paid an hourly rate.  This puts a damper on the possible earnings of this new job.  There are only a limited hours that you can work daily and an amount which your employer is willing to pay for hours worked.  Usually you can be replaced at any time by another employee.  When you work for yourself, you can never be replaced and the amount of money you make will never be limited.

After becoming an investor you are no longer limited to any amount of money.  You have to potential to own the world’s most profitable corporations in just a few years.  This isn’t a get rich scheme, its been proven that those who get involved in the financial markets are usually the super rich.  On average the markets have continually paid more than your bank account and better than inflation.  In the long term I can think of no better place to keep your wealth. 

Investing takes as much time as you are willing to dedicate.  An investor can stay up to date and find trading opportunities worth pursuing in just 2-3 hours per week.  Obviously the more time you spend the better the chance of finding investments but this is all up to you on the amount of time you wish to dedicate.

The economics of the workplace are not in your favor.  Start dedicating more to your investments and stop making someone else rich!  Make investing a part time job, each hour you spend looking at your portfolio will bring greater rewards.  In the coming weeks I will go through some methods for finding winning stocks.  Some require no time at all and some require complete dedication.  I look forward to keeping this blog filled with information to help you succeed.