UV Market Blogs

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.

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%.