UV Market Blogs

Thursday, February 01, 2007

Mutual Funds extended

Mutual Funds extended

Mutual funds try to maintain a broad range of investments, bonds, stocks, other funds even a small percentage of cash.  This keeps your investment as safe as possible while maximizing the amount the investment can gain.  These mixes also help fish in uneducated investors to the mutual funds.  It is taught that investors should mix their portfolios by subtracking their age from 100 and investing the answer in stocks, the age quantity should be invested in bonds.

Mutual funds now have some of the lowest cash holdings ever.  This means two things.  We’re the most invested we’ve ever been in the markets, stocks or bonds.  Money must stay in the markets to keep them rising or to maintain the price.

This is a good thing for the markets.  We need this.  But the bad thing is that the amount invested in stocks and bonds can only go down at this point. 

One of the reasons we see such extreme losses when they do happen is because as mutual funds put more in cash and money markets, stocks fall.  As stocks fall, people withdraw their money.

This defensive strategy is what is most damaging to the markets.  Pulling out as prices drop is not only a dumb long term move but a move that can cause a total topple.  AKA 1929.  Long term money is made by investing when prices are at there lowest.  As mentioned earlier, investing a set percentage weekly regardless of price is the best way to get in at all prices of the market and maximize the compounding potential.  Investing weekly rather than annually will bump your returns hundreds of percentage points over the course of your life and or your retirement. 

Right now mutual funds are fully extended into the market.  Buying into a fund now will yield the highest stock and bond mix.  In a few months it wouldn’t surprise me to see that funds pull back to 5-6% in cash as interest rates settle.

I’m really sorry for the whole doomsday scenarios I’ve been posting lately, but the next two topics promise to be an upper. 

Wednesday, January 24, 2007

Trade of a decade

Trade of a decade

I trade the shorter term charts most often but I try to investigate the longer term charts often.  This way I can track long term, wealth building investments, rather than just the typical dollar here dollar there to just make the monthly payments.  Long term pip movements can earn an investor 10000% easily with moderate compounding.

This is the beauty of forex investing, the leverage and its application to long term investing.  Leverage can be further leveraged with the use of stops.  I can assign more money to my investment if I reduce my stop loss.  This leads to greater return over the long term investment period but also this increases risk, not so much though, as the stop loss is further limiting.

Applying stop losses early allows to use your leverage as much as possible.  With a tight stop, it wouldn’t be detrimental if I used 100:1 leverage.  Even at leverage that high I can be set so I won’t lose more than a few percentage points.  This does mean, though, that the price must move almost immediately in my direction.

The trade I am talking about here is on the GBP/USD chart.  As we know, trends that develop on longer term charts tend to last longer and are stronger.  The durability of a trendline is much like that of a name of a company.  The longer its in business, the more trusted it becomes.

Not only have these trends existed for such long periods of time, the trends are developing on a chart with monthly bars.  This means the trend is most reliable.  It truly is a full-fledged TREND if it exists on timeframes spanning YEARS!  Trends are simply patterns that develop, but trends aren’t really trends if they only exist on the tick charts.  Those trends are so small and miniscule the spread would eat up all of the potential profit.

I present to you this beautiful chart of the GBPUSD since it first started trading in one month bars.

First and foremost there is some horizontal resistance.  Horizontal lines are extremely important because they are often points that are RARELY penetrated by price.  Horizontal lines are often marked at the top of movements when a price hits that infamous no mans land.  Horizontal lines in forex are usually backed by huge financial establishments, governments, or banks.  This is another point to hit on!

Forex is not like anything you’ve ever experienced in stock markets.  The prices of currencies have effects beyond national borders and affect whole economies, unlike stock prices which generally only affect a few investors rather than populations of people in capitalistic countries.

Banks, Governments, even investment firms all take part to make sure that there is a global balance in the foreign exchange markets.  See, if GBPUSD were to go to $3 overnight, things would be awfully bad in the United States.  Our currency would have, in effect, lost 50% of its value against the British pound.  Instantly goods from Great Britain would cost 50% more because of this unfavorable rate.  Anything that the United States had once imported from its former ruler probably would have ceased the second that trade happened.

The United States as a consumer would have to buy from a country which has more favorable prices and better exchange rates.  It is worth it to government and big banks to make sure that the balances are in place so that this doesn’t happen, so that one country isn’t put into financial peril.

One way to make sure that a currency does not get out of hand is to raise or lower interest rates.  When interest rates are lowered, this is thinking internationally of course, the prospect of investing in that nation is lower.  Who wants a lower interest rate?  In forex, the people who feed on the interest alone might start borrowing from that country (selling its currency) to invest it in a country with a higher rate (buy that currency).

Its called hedging and people do it all the time.  Up until recently Japan had a 0% interest rate.  I could borrow on the exchanges and it would cost me nothing!  Why?  Well first of all the Japanese are notorious for their saving, the average Japanese family saves 18% of its take home income while the average American saves a NEGATIVE 2.2%.  Yay debt!  Also, the Japanese banks need their money out working in the economy rather than just sitting around collecting dust.

The Japanese wanted their money to be invested overseas and bring money BACK INTO Japan, boosting the snail paced economy. 

What I wanted you to understand here is that the foreign exchanged markets aren’t nearly as local as we would expect.  The price of your hamburger depends on the exchange rates at various points in time.

Next focal point of this chart would be the magical RSI divergence that I love so much.  The RSI tells us the strength in the pair is dying while the chart itself is disagreeing.  This disagreement shows a “divergence” in the strength and the price, meaning the price will fall rapidly to make good with the RSI.

When strength falls, so does the ability for a security to gain value. When it gains value and loses strength this doubly means its lost ability to further gain value.  At this point we can only wait until one of three things happen:

1 The security goes in favor of the RSI as expected. 
2 The security goes against the RSI
3 The security forms another step in an RSI divergence and goes back to the beginning of following either the first possibility or the second.

I think this will be one amazing trade.  I’m willing to ride this particular trade for at least a year, and in that time I believe the pair could go as low as $1.83-85 per Pound.  That’s about 1000-1300 pips.  Enough for a gain of 5-650% on just a one time investment.  I’m shooting for a bit more risk here.  I was lucky and invested at the top and so far my first position is up 230 pips already.  Every 100 pips I will be furthering my investment a whopping 33%.  So for each 50% gain, I’m reinvesting 33%. 

I’ve got 3 positions, one up 230, one up 130 and one up just 30 pips.  In this short time my total return is 94.3% ROI on my entire investment with this specific investment plan.  Unfortunately these positions pay a negative interest rate, which accounts for some change, maybe a couple dollars, each day.  The key is that I expect to earn at least 500% with this trade so negative interest will not hurt my portfolio on the least bit.

Remember that although I’m up considerably so far, it would be ridiculous to think that these gains cannot be erased.  I’m perfectly expecting to see my positions move closer to the red because the pair moved so violently lower.  This is one of the few investments in which I would recommend taking investment even as the pair goes against you.  The more it loses, the more chances I have to invest and slowly raise my average investment price higher.

I would call for this pair to make its way back down to 1.41 but we have to remember that these charts do have some extreme impact on world economies.  A fall to 1.83 is neither going to hurt or help the economies of the US and GBP like a fall to 1.41 would.

The US just doesn’t have the credientals to warrant an exchange rate of 1.41:1 on the GBP.  If this were a trend happening in say nature, I would be all for fallowing it down to 1.41 at an extreme profit, enough to probably put everyday people like you and I on the short list of billionaires.  Being in a group of just 400 people would be pretty cool huh?

Thursday, January 18, 2007

Want to retire in 2025? 2050? No problem.

Want to retire in 2025? 2050? No problem.

2007 rolls around and investing is all about convenience.  Never mind how much your funds are earning or who is managing your investments, convenience is the best return on investment!

New funds allow for any investor to simply set and forget their investment targets.  Want to retire in 2045, there’s a fund for that!  2030?  Yeah we have that too.  And better yet we do all the balancing and even invest in other mutual funds for you!  Great huh?  Not exactly.

I’ll get to the goodies but first a short story.

I hadn’t any experience with these funds nor did I know that these funds existed until my sister, 25 and largely ignorant of finances, asked me to evaluate the plans that her new employer had to offer as a 401k benefit.

Let me tell you, the list was extremely exhausting!  In her packet of probably what I would figure to be about 200 pages of 99% rubbish “we have to say this or you can sue us garbage.” The remaining two pages were compromised of a list of 9 funds.  A choice of year 2010-2050 retirement investment mutual funds.

I consider my sister to be on par with most people out there who know nothing about retirement other than that the key to success is to save.  Luckily enough though, my sister proved to be a rather open-eared client with some idea of a budget.  (At least she was without a column for big screen plasma TVs on her budget.) She knew that someday she wanted to wakeup at 10am everyday, bum around, do the crossword puzzles in her local paper then hit the mall for 98509480953 laps around the mall with the rest of the 60somethings who probably didn’t invest in the mutual funds she was offered.  They were straight up worthless!

So anyway, I tool back through the two pages that actually have some worth to them and attempt to make something out of the nothing the particular company has provided.  (I won’t mention the mutual fund company because after some research, all timed investments happened to be less than great.

The list had various investments all with a timeframe.  Basically, pick a timeframe you want to retire and it will happen.  At least, that’s what is seemed like to my sister before I reminded her that if it was possible that she could retire in 2010, no one would be working.  The pages seemed like the ultimate guide to retirement to anyone with minimal finance experience.

Picking a date for her retirement was easy.  It wasn’t important that she retire anytime soon, she had just gotten out of medical school, and she could afford the risk of the longer timeframe accounts.  2050, the last choice on the menu, was my pick.  It had the least amount of cash and moneymarket and the highest ratio of stocks to bonds.
This particular company must have only found it important to list the pie charts of stocks, bonds and cash holdings of each mutual fund offered.  Honestly, if you make your decisions on this small amount of information you deserve to lose your money.  Investing doesn’t work like this.

To her it seemed that if she picked the 2010 mutual fund it would mean that she would be able to retire sooner.  I can see how this would be the case for most people.  2010 is closest and should yield the highest returns to get me to retirement, right?  Nope.

Most professional money managers will tell you that the amount of risk you should take when you near retirement should be as low as possible but take higher risks when you’re younger because losses can always be corrected when you have that much time to ride out a possible storm.

The 2010 fund was probably 25% stocks and 75% bonds.  Probably with an ROI of 6-7% a year but that wouldn’t be good enough for someone who is just beginning to save for retirement.

After some bickering, we settled on a retirement fund for her, dedicated the most she could of her income to the 401k to receive the benefit of the employer.  And the remainder of the 10% of each check she dedicates to retirement to go to her IRA, where she can actually pick some decent funds.

Why are time based mutual funds so bad?

They charge extremely high funds for things that you should, as a future retiree, be doing.  These particular funds that were offered charged high fees but were essentially funds of funds.  Basically the manager of the funds in which my sister could invest took all of the money invested and divided it up into other mutual funds, then charged another fee on top of the other mutual fund fees for his or her “work.” If you ever plan to kick it back in retirement and just doze off those post-lunch afternoons, you’re going to have to do some research in your investments. 

Another reason I would never recommend these funds is because they will soon be too saturated to provide decent returns.  I can easily foresee every employer in the nation sacking their 401k choices for these new “convenience investments.” Some of the investment dollars are pawned off to other mutual funds but some are invested within the original time based fund into stocks.  Fidelity is running into issues with some of their super money-heavy funds.  Because so much money is invested into Fidelity’s mutual funds, they no longer have the liquidity or the ability to enter and exit trades without pushing the markets.

When funds top billions of dollars their buying and selling patterns can put a huge strain on the market as a whole.  The US equities market is not nearly as big as we tend to think and can be easily influenced by billons of dollars, as we would expect.

Once more, the amount these funds charge to manage your money will add up to THOUSSANDS over time.  They charge 1-2% per year, Vanguard funds charge less than .5% per year.  The difference, over time and compounding, works out to possibly hundreds of thousands in your portfolio.  If it is worth it to you to just invest in whatever they give you, no work on your part but you miss out on thousands of dollars, go ahead.  The smart investor, and the one who will never run out of retirement dollars will invest in other funds as an individual.

I would take the time and invest “by hand.” If your employer offers mutual funds like these and only like these you should speak to your higher-ups about a change in plans.  Until then, sock away as much as your employer would match but put your other money in better quality funds!  You’ll save yourself thousands in fees in the long run and choose where YOU want your money, not where someone else thinks you should put your money.

Basically, if you get an employer match, max out what you can.  If not, don’t invest in these funds, they just aren’t worth it.

Dow SELL SELL SELL?

Dow SELL SELL SELL?

New year is long gone and the buying that pushes the market upwards has left with it.  Most people who sold positions to take the tax break have all ready done so and if necessary or desired, they’ve probably taken stake yet again.

On the last trading day of 2006, 4.8 billion shares traded hands.  The US Tax system allows investors to sell out of a losing trade and use it as a loss against earnings in the markets.  This is one way that investors can avoid, at least in the US, paying 15% on their gains by taking losses early.  If you have a significant amount of losses in one year it is worth it to sell out and re-buy.  It wouldn’t be worth it on a sum less than a thousand dollars or so because of commissions plus the time involved.  Nope, no way, not worth saving $100 to uncle sam if you have to spend $50 to do it and put in a few hours of tax prep.

The January effect is, well, over.  Celebrations are done, its time to put up the champagne and go on with 2007 like it is any ordinary year.  Let’s dissect a chart of the Dow for the last two years.  (This does include 2007, it’s 2 years as in 730 days, not two full years.)

First thing that I think when I see this chart was that 2006 was definitely a good year for the markets.  Although we’re still lagging the triple digit gains in Asia but hey who’s counting, a year like this hasn’t come in far too long.

As we know though is that after the party comes the crash.  I don’t mean crash as in an absolute fallout but I think we should expect to see at least SOME correction in the markets.  500 points or so?
When looking at the chart a clear trend can also be found.  It’s obvious that 2006 was a smooth and steady rise to the top, some ups and downs were in the mix but overall it was a consistent and measurable pace.

As with all good trends, these trends for the most part show some age and with age comes credibility.  The majority of key trendlines are currently above the price of the Dow, showing a strong resistance against any future rises.  Good news for the dow though that the lines are moving upward, not downward so even if the price starts to fall in the trend, its price overall could be rising.  Falling to the bottom of the channel three months from now would mean that the price of the Dow actually went up.

This isn’t a call to move your money out of the markets, but if you plan to move money into an index fund based on the Dow 30 I would suggest waiting for the price to drop a little bit.  Wake up!  We’re coming off record highs, and it shouldn’t be expected that the index continues to post these new highs.

If you’re already invested, GREAT, stay in the market.  Its not worth it to exit then get back in.  If you’re feeling like risking some money though for a decent prospect at a gain, I would suggest buying some futures!

In the game of roulette I would suggest to you never play a color because the opposite has come up 20 times in a row.  If black comes up 50 times in a row, the chance that it will be black next time is still 50/50 (minus the 0s mind you).  Roulette wheels have no memory or pattern, but as technical analysts would tell you, humans do!

I’ll elaborate on this idea fully tomorrow but basically investors will notice when highs are made and establish that this is probably the highest the index will go.  Then a sell off occurs and the index drops from its high. 

When I hear “new high” I also think “new top” and I guarantee I’m not the only investor that makes this connection, whether consciously or not.  People who believe strongly in the use of trend lines will be more likely to sell out at a top because a price is reaching unrecorded territory.

History tells the future but without historical data it is impossible to chart the future.  I would hold off on buying the Dow and just sit back and watch how it tops.  Its going to top soon.  The formation of the top will tell us a lot about its prospects for again flying high to new highs.

Wednesday, January 10, 2007

Time to buy oil

Time to buy oil

Today brought an 18 month low on the price of oil, now at $55 per barrel.  As of right now we have just about 6 full months until summer comes, along with peak driving season and increased automobile sales.

The time is now folks, at $55 per barrel buying oil is virtually risk free.  Summer brings the hurricanes and other weather woes that put the economy, through the price of oil, on its knees.  To be quite frank, oil will not ever again fall through $50 per barrel, it just won’t happen.

Today’s selloff of oil by institutions means nothing because as soon as this oil hits the market, it is used up.  The only hurt to the price of oil is slight and temporary and can be corrected by unions such as OPEC.

OPEC can and will keep oil above $50 per barrel.  Its been both proven in theory and in reality when in 2006 oil peaked at $70 per barrel that consumers would pay whatever it takes for the gooey black stuff.

Friday, January 05, 2007

2006 biggest acquisition year

2006 biggest acquisition year

This year marked the biggest year in history for mergers and acquisitions, striking out the previous record of the year 2000 by double digit percentage differences.

2006 was also the largest buyout year by private equity firms, meaning essentially hedge funds for the super rich.

This marks many questions for me as an investor:

Does this mean that we’re doomed for a crash in 2007 like 2001?
Has the upper class become too upper class?
Could we be headed for another 2001?

In 2000 we saw one of the largest bubbles of all time.  IPOs and tech stocks and no caps to the amount they were worth, it was simply a buying spree all the way to the top.  It became a time where people would sell as stocks fell and buy as they rose.  Traditionally the opposite was most profitable but we were literally thrown in an upside down marketplace.

In 2000, anything with a price to earnings ratio of less than 100 was a perfect “buying opportunity.” HUGE growth was passed off for higher ratios than the market had ever seen.  It was chaos, and we were coming to the worst…

During our time in the 2000 stock market rise I remember watching Bloomberg as analysts pumped each upcoming IPO as the next Microsoft.  It could have been a corporation owned by the Amish but that didn’t matter, it was the next big tech stock of the 21st century! 

What I am trying to show is the amount of education in the markets.  No one really knew what they were buying, tickers hardly tell the name of a company, and why know?  Time is money!  Research takes time, and we’ve got to invest now or we will miss on the next big one!

I’m afraid we’re entering a similar stage with what could possibly become a similar outcome.  Investors still do not do enough homework before investing.  We still have the same schemes same shady brokers (stockbrokers) and the same people on TV touting the next big one.

Lack of education will lead to the most money lost the fastest.  There is no way to protect your money if you do not make your own decisions.  During the 2000 stock market bubble this became a common theme as brokers jobs were made easier because they could sell anything to anyone.  (Did I mention brokers aren’t good?)

Private equity is just that, equity in the hands of private investors.  Not institutions or banks or the trading houses.  Private equity is like what is sitting in our etrade accounts but the difference is, the private equity you hear about so much on TV isn’t our petty five, six or even seven figure balances.

Private equity forms partnerships like the famous Blackstone.  When multimillionaires and billionaires come together to form a fund or partnership their equity amounts to enough to buy up many of the highest valued corporations on the exchanges.  These private equity firms buy up the company entirely and take it private.  No more do these corporations exist on the exchanges, all of the stock is owned solely by the partnership.  Earnings from the company can be divvied up however the group would like to.

Many times these firms are set up in places like the Brittish Virgin Isles.  Places like these offer extreme tax shelters to any entity setting up shop.  For the Virgin Isles, little filing is needed to start a corporation and virtually zero accounting need to be done in order to stay within compliance.  As long as the corporation makes the yearly dues, the company also incurs no tax.  A flat fee of less than $3000 per year is paid in order to retain financial dealings within the island.

In this way, the rich are able to remain rich by paying virtually zero in taxes on the amount of money they make from the investments of the partnership.  Because these corporations are real corporations, they have all the freedoms you would normally expect.  Holding property and investments is not an issue, they can even buy your home for you! 

Through a variety of tactics like these the super rich are becoming super super rich.  2005-2006 were years that definitely most benefited the top few percent of the payscale rather than the bottom.

2005 was the beginning of the real estate boom that pushed any home into a multimillion dollar home.  Those who do not own their own home, usually the lower class, missed out on such huge gains, further lagging society.

History would show that such a large dividing line between the rich and the poor is extremely unhealthy for any economy and society.  The French Revolution being one of the best examples of such an extreme.  But this is the forthcoming of the American society, as wealth floats to the top unproportionally than from the bottom it will create such a division that we have a social tragedy.

In a capitalistic society it is impossible to limit this natural phenomenon.  Those who are wealthy have a head start on those who aren’t.  And as we’ve seen from private equity, they also have the power to motivate business.

But is the wealth of the upper class damaging to the markets?
Not really.  Wealthy investors must keep their money in the market because where else will it be kept?  The money has to stay invested to keep its worth because we sure aren’t experiencing deflation.

The wealth of the rich can only become detrimental if we experience a mass exodus of the markets.  As we know, rapid release of money from the markets causes extreme losses, especially when you have billions of dollars moving out from just a few stocks.

Another 2001 is very likely, but it wouldn’t be due to a fallout of the markets, rather a failure of the US Government and at the individual level.

The US economy is stuck on debt, in no other way is the US growing its GDP.  The current savings rate for US civilians is a negative 2.2%.  That 2.2% is PURE debt.

The pump and dump

The pump and dump

When I mentioned pump and dumps earlier, I didn’t have such a prime example as I do now.

At the time of the first writing I was without any recent mailings of a scheme known as the “pump and dump” where speculators pump the worthiness of undervalued stocks and hope that the sheep follow to boost the price into the stratosphere.

Unfortunately most new and inexperienced investors are intimidated by the amount of knowledge or general know how that is required to do well in the stock market.  The stock market can be a dangerous and unforgiving place and the small investor can be sucked in to thinking that anyone else’s opinion is worth much more than their own opinions.

The stock was GDKI.pk and it was mass-mailed to my email address over the weekend of December 25.  The US markets were closed on the day of December 25 but were to go back into trading the next day, a Tuesday.

Below is a chart of the stock over the days involved:

The first red marks the point where the email was sent.  The stock was trading for about 9-9.5 cents per share before the email was even published and sent.  The operator of the scheme probably placed his entries during the week before the pump and dump was to happen.  That is most likely the reason for the small increase in price and volume during the earlier week.

The blue is most like the time at which the operator of this scheme sold the majority of the stock.  Usually the operator of the pump and dump scheme holds the most shares because he or she can easily sell the shares to those buying into the scheme. 

I marked the orange square as most likely being the top to this scheme.  I cant see the stock moving any higher than it is now, the operator has sold out and there is no one left to promote the stock.  As we know, in order for a stock to gain in value it must receive new investment capital from previous investors or from new investors.  After such a great gain the new investors will be slower to place money into the equity fearing a total loss.

Interesting enough, I believe the operator of this pump and dump, at least this time as he or she hasn’t in the past, knew someone involved in the company.  The operator either came in contact with an official or sent out a press release with on his own accord to bolster the stock price.  Press releases can be sent from variety of online companies.  For less than one hundred dollars it is possible to get your news release on the top of the news pages for the specific stock and I think this is what the operator did.

The release was hardly newsworthy, probably just some junk thrown together to keep investor interest and confidence high enough to suggest more investment dollars would be a smart move.  These press releases can be sent by any one, your six year old could compile a story and send it out via one of the thousands of press release websites on the internet and for $30 get it on yahoo news.

After seeing the chart, you might get the feeling that it would be profitable to follow these schemes.  And it might be.  But investing is more than just making money, its about making money and keeping your morals intact.  By participating in a pump and dump scheme you are taking place in an illegal activity, and benefiting only the brokers and the operators.  You’re encouraging spam and the playing upon less informed investors.

Question?
When you first started investing would you like it if someone preyed on your investment dollars?

No!  When you first start is when money means the most to you.  Do not fall to the bottoms that these operators have fallen.  Feeding on the lack of experience of others is not how you want to make your money.

Follow the trusted path, take investment in stocks that you think will perform well, not those that you know will lead to a loss of many people at your gain.  The stock market already lacks forgiveness, do not make it any worse!

Monday, December 25, 2006

Hong Kong?

Hong Kong?

Hong Kong moved ahead of the US in IPOs this year but still second to London as the most popular country for IPOs.

IPOs are Initial Public Offerings in a stock that is set to trade freely on the boards.  Formerly institution or privately owned, these companies sell themselves to raise capital to continue or grow their business.  Almost any large company you can name today is traded on the exchanges and at one time went through the IPO process.

IPOs are known for making Americans rich during the tech boom at the turn of the millennium.  Tech stocks would IPO and gain several hundred percent in one day.  These stocks were all thought to be “the next Microsoft” and investors bought based on possibility rather than probability.  The vast majority of these offerings had balance sheets in the red and lackluster growth but to investors on the boards they were played as lottery tickets.  One win could cover the loss on hundreds of other investments.

IPOs were the goldmine for investors with access to online brokerages, which were just becoming hot on the scene.  Investors could now buy and sell within the same day, even the same hour with low commission costs.  IPOs were set to flourish not only because of the capital available for investment but also the newfound ease of investing online.

Due to strict laws and regulations in the United States; Hong Kong is quickly becoming a place to escape the harsh governments and regulatory organizations such as the SEC.  Hong Kong has enough legalities in place to prevent fraud but not enough to where it puts a strain on legit businesses.  In the US, new accounting laws stemming from frauds such as Enron threaten even the most honest of companies.  Compliance to these laws demands more personnel and more money spent.

This is just another prime example of globalization today.  New banking techniques and advanced computers allow for capital to be moved around the world in just seconds.  I can now invest in a company in Hong Kong just as easily as I could in the states or possibly even easier because of looser laws.  Hong Kong has it right, favor the corporations and the investors will follow.  The new markets in Hong Kong will soon become a factor in the global economy.

Thursday, December 21, 2006

The January Effect

The January Effect

As 2006 comes to a close with the Dow Jones Industrials pulling a late rally and a 16% gain for the year, mostly achieved in the 4th quarter.  There are two issues at hand here.

#1 Profits from this last quarter will not be sustained:
Recent reactions from the fed regarding interest rates were all but positive.  After the last two meetings, a sell off resulted after the news was published.  Rates as posted previously, will be a huge factor in the performance of the overall market in the first quarter 2007.

I have numerous trend lines which I have been marking on the charts for the last year or so.  All of them seem to hold up nicely and, on average, the price of the index in question is right in the middle of the lines.  I believe them to be reasonably accurate and one of the lines is about 9 months old, quality there.

The gains were graduated and moderate.  The chart made strong wave patterns suggesting a real trend rather than dumb luck.  The strength of the channel was tested on a few occasions, but it has held up for the last 5-6 months.

The Dow chart is beginning to encounter some resistance in the form of both record highs and the relative strength index, or RSI.  Investors are always weary to send an index or a security to a new high because it is untouched territory.  The history defines the future for most technical traders so no data is available for companies or indices which top old records and rewrite the books.

The relative strength index shows the “energy” of the stock.  The RSI is anything but relative as the stock is compared to itself.  Investors use the RSI by selling at 70 on the indicator and buying at 30.  The indicator is also used as an oscillator with divergence.  Divergence shows that the value is strengthening or weakening while the “energy” of the stock is doing the opposite.

Monday, December 18, 2006

Hedge Funds

Hedge Funds

After the last article about the importance of gains and losses and proportions to the rest of investors, I thought an article discussing hedge funds would be fitting.  By definition from InvestorWords.com “A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).”

Hedge funds are basically mutual funds on ecstasy.  Everything in a hedge fund is quick and perhaps, depending on your perspective, shadier.  As stated above, hedge funds can utilize various investment vehicles that are not open to ordinary funds.  Mutual funds are held to stronger laws and more scrutiny from government agencies such as the SEC than hedge funds. 

Hedge funds also have the ability to sell short.  In falling markets, mutual funds have to work to just protect capital rather than grow it.  Hedge funds have the options to enter short positions meaning hedge funds have the capability to gain in markets that are detrimental to mutual fund portfolios. 
Granted, in a falling market not every company loses value, but the census is an overall loss.  Hedge funds offer more investment opportunities and a higher chance of return in the best and the worst of markets.

Hedge funds often employ strategies that work for short term, greater risk gains.  While mututal funds may hold a stock for years at a time, hedge funds can enter in and out of trades whenever desired.  The buying and selling of mutual funds must be reported and carries much more red tape.  A hedge fund has the liquidity and ability to buy in the morning and sell at close after just a day of trading.

I would argue that the reason for such trendy and choppy markets is due to such hedge funds.  Hedge fund managers are usually younger than traditional and older mutual fund managers.  Technical analysis is applied more with younger investors than the older because it is a new science.  The ways of mutual fund managers will not be changed but I believe that hedge fund managers are more willing to change their investing ways. 

Hedge funds help keep the markets in control.  They act as strong support and resistance controls to keep the markets in an identifiable range. Hedge funds keep the market in line for the retail investors.  Mutual funds do not have the same impact on the markets like hedge funds.  They are severely limited by government laws and regulations.  Because of the impeding laws, mutual funds often opt to hold investments through long periods of time. 

Beating not meeting the market

Beating not meeting the market

To advance in society an individual must beat out the other members of society and move faster.  If inflation is 2% per year and I’ve my money earning just 1.5% per year I am falling behind.  Inflation will eventually eat up the majority of my capital, leaving me with essentially nothing.

The mindset is, any gain is gain enough.  But this is untrue.  Investors have no worries when the market excels at 15% but their portfolios earn just five percent.  But when you inverse this, the overall market loses 10% but the portfolio of the investor above loses just 5%, the investor goes insane.  How could he or she lose so much money?

In reality the investor who loses less than most people fares better than the investor who earns less than everyone else.  The investor who lost less has essentially earned because everyone else lost more money.

Be a frugal investor and know that beating the market is more important than the overall percentage gains or losses.  Without the rich, you’ve no poor and if everyone is equal, everyone is poor.

While beating the market with positive gains year to year is a surefire way to a great retirement and financial wellbeing, the returns arent the most important parts.

Do not complain when your investment manager loses 3% but the average was a 20% loss but you should complain when your returns account for just 10% when the average earns 30%.

A quieted gasoline market

Ahh $2 a gallon sure does look nice to US consumers and lowered prices go over just the same in the international markets.  But now is the time we need to start investing for the summer.

The last person never makes money, ever.  In order to succeed in the financial markets, an investor needs to be the first in an investment and also the first one out.  Returns to the first investors come from the later investors who drive up the price of the investment vehicle from increased volume and higher bid prices.

Gasoline prices made a modest gain in the retail market in the last week.  Wholesale prices are looking about the same for the last few months.  Its time to start looking toward summer.  Wholesale gas prices will not fall below $1.50 before summer, when the driving season starts and more gas is needed. 

Take your stakes now or miss out on a great opportunity.  There is no reason for gasoline to fall below $1.50 for the duration of our existence on the planet.  No new refineries will hit the lines until it is too late and oil is being drained faster than it can be produced.

Enter your trades before January 1.  For some, this may provide some tax breaks as well.  Positions have only one way to go, and that is up. 

Thursday, December 14, 2006

Want to get into banking?

Want to get into banking?

We’ve all, at one time, as investors, been perplexed by the inner workings of the bank down the corner.  How to perfectly judge risk and reward ratios and the basics of buying and selling loan assets.  Even on the corners as we see Payday loan companies we see establishments that make 30-40% a year on high risk loans.  If only we could tap these fountains of wealth, we could micro-loan anywhere from $1 to $25000 and get paid a high interest rate for our assumption of risk.

Payday loan companies offer ridiculously high interest rates to those who simply cant afford them.  These companies thrive on the idea that the borrowers take out a loan against their future paychecks, then the payday office receives the paycheck as payment.  That is, of course, after high interest rates and other fees are tacked on the price.  These companies have to cover high default rates, but are rewarded when a client pays off the loan at a rate higher than the default.  These businesses can legally charge hundreds of percent in interest each year and still operate legally in the United States.  I’m sure we would all like to earn 30% on our money, even in a forex account I only earn 5.25% per year, 30% would be awesome.

Now there is a way to do it.  Much like eBay revolutionized online auctions and selling useless crap, Prosper is hoping to privatize the lending industry.  Prosper.com offers high returns for ordinary people like you and me who want to finance loans for people who would otherwise not receive them due to poor credit or high debt to earnings ratios.  At Prosper, you can take any loan you would like to, and earn some hefty returns on your money.

Think of it this way.  Bob, your co-worker has $10,000 of credit card debt which charges him 20% in interest each year.  Lets say you decide that to make some money, and help out your poor friend Bob, you pay off his credit cards and he will pay you 15% a year in the form of a monthly payment.  You’re getting 3 times the best bank rates in the country and helping someone out.  You will also receive monthly checks, producing cash flow which can be reinvested in other loans or some more traditional investments.

Prosper.com allows anyone to invest in the lives of others.  The borrowers post their ads like you would see on eBay, complete with profile of how much the borrower earns along with an expense schedule.  The wanna be borrowers basically have one page to spill their guts, whatever story they happen to have for money trouble.  About 50% of the stories posted seem to be involving credit cards or other high interest loan schemes such as the payday loans I discussed earlier.

Lenders can choose how much they would like to loan to each borrower, a minimum of $50 is imposed by Prosper.  The lenders bid by interest rate, the lowest interest rates will always win.  Some lenders offer $500-1,000 to the borrower and some are consistent $50 loaners.  Prosper allows investors to spread risk amongst however many loans the site has to offer and the lenders have to lend.  Someone with $10k could loan all of it to one person, or make 200 separate $50 loans.

Prosper shows all the information necessary about an individual.  Their earnings to debt ratio, credit rating, and a suggested interest rate provided by the person seeking capital.  The borrower can offer additional information which can only assist him or her in their search for money.  The site has a groups section, basically when someone joins a group, the group offers its name basically as a consignor.  The group incurs no monetary loss if a member fails to make a payment or makes one late, but members of the group are expected to be responsible and possible lenders can check on the stats of a group to see its history on payments.  The group gains by collectively getting lower interest rates if all the members are responsible members of Prosper.

Prosper recognizes the risk of members skimping on payments because this really isn’t a true financial institution.  However, Prosper reports all payments to the three major credit bureaus in order to keep its borrowers in line and as an insensitive to pay on time.

How it works exactly:

1 The borrower posts an ad, basically an option in order to get the cheapest interest rate possible.  They have to sell themselves, listing all of their credentials and information.  Borrowers are allowed to ask from $1,000 to $25000 for whatever reason.

2 Lenders offer their best interest rates and the amount of money they are willing to lend to the person seeking capital.  They must conform to the interest rates set by the borrowers.  If the borrower sets the rates too low, the borrowers will not take the loan because of the amount of risk involved.  The minimum lenders are able to lend is $50 with a maximum of $25,000, the max people are allowed to borrow on the site.

3 Borrowers accept the bids and receive a bank transfer from Prosper in the amount that was accepted.  Each month, the amount of the loan payment is debited from the borrower and divided amongst the investors by the amount each investor loaned.  If a borrower is late on a payment, Prosper acts also as a collection agency, working to collect the money on the investors behalf.  If the borrower ceases to make payments, it is reported to the big three credit agencies.

Lenders can make some serious returns on their money on prosper.  I have seen high risk loans go for as high as 29% while low risk loans to AA+ credit members go for 7-8%.  The low risk loans on Prosper offer 40-60% higher returns than that of your low risk money market accounts so for the low risk investing I would say it is worth it.

Prosper sends you monthly checks for the interest you collect on your loans.  This allows for heavy compounding because each investment carries a minimum of just $50.  With just a few thousand invested, you would be able to make new investments each month for greater monthly income.  Check it out, its worth a shot.  Help others and yourself from this high-yield, low and high risk, investment vehicle.  http://www.prosper.com

Tuesday, December 12, 2006

HP says its looking for higher revenue

HP says its looking for higher revenue

Hewlett-Packard Co suggests that 2008 revenue will top $100 Billion dollars.  These estimates come after the company has cut 15,000 jobs and struggles with a low profit margin in the computer building and printing and imaging sectors.

The short term outlook is bleak for HP, I believe.  The technicals scream sell with RSI divergence on this recent peak.  I’m glad to see this article hit the news boards as I probably would not have stumbled upon this chart.  $40 is a tough area for the stock to pass and there is a trendline moving just above the stock, which also sits currently at $40 per share.

I would suggest a quick sell short of this stock.  Its probably good for $3 or 7.5% to a return to the 100 day moving average.  Regardless of improving fundamentals, this stock is ready for a correction.

Fed is still inflation wary

Fed is still inflation wary

The Fed again chose to keep interest rates at the same rate of 5.25% on fears of high inflation and the costs associated.  Investors weren’t thrilled with the news and sent the Dow Jones down 10 points. 

The federal reserve is at a crucial point that can make or break the markets.  We’re teetering at a top and the only thing keeping the markets up is increased amounts in the stock market.  If the fed keeps rates the same next month, I think we will see lessened activity in the markets and the dow will lose a few hundred points. 

Low interest rates allow institutions and the public alike to borrow money for investment and to expand business at lower costs.  High rates cause the economy to slow because less money is borrowed at higher rates.  Higher interest rates take more out of circulation.  I think the fed will lower rates either .1 or .25% next meeting in order to keep the market at its current highs.  Failure to do so will cause a 2-3% drop in the overall markets.