BubbleBustInvesting.com

An Alternative For Measuring Market's Negative Sentiment

2011-09-09T07:33:00.001-07:00

With the real possibility of the U.S. (and the world economy) leaping into recession before year end - perhaps triggered by the collapse of the Euro currency and the European Union - investors are jittery and three bellwether indicators attest of this nervousness:

VIX: a measure of volatility for the S&P 500 Index (SPY) traded above 30 since the beginning of August. Yesterday it closed at 33.38.
iShares Barclays 20+ Year Treasury Bond ETF (TLT): Yield on long-dated Treasuries are at record lows, with TLT making a new high for the year at $114.93.
SPDR Gold Trust ETF (GLD): Gold still trades near record high levels around $1,800, even though the metal corrected sharply adter the Swiss Franc lost its safe haven status after the SNB pegged its currency to the Euro.

Here we propose a different measure of market's negative sentiment by comparing the value of deep out-of-the-money and at-the-money put options on the S&P 500 Index that expire in 43 days, on October 22, 2011. What we find is downright scary!

Read the full article here.

Google's Zagat Acquisition Means Trouble For Open Table

2011-09-08T13:37:00.000-07:00

After being criticized for its big move to buy Motorola Mobility (MMI) last month, Google (GOOG) is now cheered by a smaller, yet important acquisition of restaurant review firm Zagat.

When seen together with the company’s partnership with local search networks Local.Com (LOCM), this move helps Google expand its presence in another content area that can be monetized in a number of different ways, including offerings to local restaurants. This means that Google is going head to head against highflier Open Table (OPEN). What does it mean for investors?

While this development is expected to have a small impact on Google’s stock (up less than half percent), it already has big impact on Open Table’s stock—near 10 percent down after the announcement.

Read the full article here.

Why Precious Metals And U.S. Treasuries Aren't Good Bets Against The Current Uncertainty

2011-09-07T10:37:00.001-07:00

With the world economy heading for a double-dip recession and sovereign debt concerns growing, small and large investors are rushing to buy three assets that are considered a safe bet against uncertainty: gold, silver, and treasury bonds. This has sent iShares Silver Trust (SLV), SPDR Gold Shares (GLD), and iShares Barclays 20+ Year Treasury bond fund (TLT) soaring, while SPDR S&P 500 (SPY) has been heading in the other direction. But are these investments the right bets against the current uncertainty?

Read the full article here.

Trading Strategies for a Turbulent September

2011-09-05T14:09:00.000-07:00

The beginning of the month is usually positive for stocks, as pension and other automatic savings plans pour into the market. However, that wasn’t the case for September, as Friday’s employment report makes very likely that the U.S. economy-- and perhaps the world economy -- is heading for a double-dip recession.

Last time the U.S. experienced a double-dip recession was back in 1981-82, and it was ugly both for Wall Street and Main Street. Unfortunately, this time around things may be worse for the U.S. as economic policy, especially monetary policy, is maxed-out. For instance, in 1982 short-term interest rates were around 16 percent, while this time around they are near zero. This means the economy cannot count on lower rates to recover, as was the case in 1983-84.

Read the full article here.

Netflix's Other Problem: Competition From Amazon, Blockbuster, Coinstar, And Wal-Mart

2011-09-05T14:07:00.000-07:00

Following the news that Starz Entertainment (LSTZA) won’t renew its content contract with Netflix (NFLX), the company’s stock took a big hit on Friday trade. Losing close to 10 percent of its value by early afternoon trade—and near 30 percent from all time high. What is next for the stock?

Read the full article here.

Avoid the Fallen Dot.com Angels

2011-09-05T14:06:00.000-07:00

Remember the high-tech bubble of the late 1990s, when dot.com and networking company stocks rose by leaps and bounds, sometimes doubling and tripling in a single trading-day?

With the bubble busting in the early 2000, these days are gone. Some of these companies went bankrupt, while others stay very close to earth like fallen angels. Recently, however, a number of these companies have been rising in price, as they reported better than expected results. Cisco Systems (CSCO), Ciena Corp. (CIEN), JDS Uniphase (JDSU), Alcatel-Lucent (ALU) and Ariba Inc. (ARBA), for instance, they all reported better than expected results, and their stocks have been edging higher.

Read the full article here.

2 Option-Based Strategies to Overcome High Volatility

2011-09-05T14:03:00.000-07:00

Two related and unresolved economic issues are weighing heavily on the market since the beginning of August, creating lots of uncertainty for investors:

Will the U.S. (and the world economy) go into recession before year end?
Is the Euro doomed to fail?

Some have called the bottom at 1100 on the S&P 500 Index following the August 9th selling climax. Unfortunately, the answers to the above questions will only be known in hindsight, 6 months or a year from now. In our opinion, investors should remain defensive with a focus on capital preservation.

Three bellwether indicators speak loudly and attest of investor nervousness :

Read the full article here.

Time to Buy HPQ? A Resounding YES

2011-09-05T14:02:00.000-07:00

Given the current market woes with the S&P dropping by more than 4% and the VIX closing at 42, one would be foolish to recommend equities at this juncture. After all, none of the problems that precipitated the sell-off are solved, including the sovereign debt crisis in Europe and the future of the Euro currency as well as the chance of a looming global recession.

In addition, investors sent Hewlett Packard (HPQ) 10% lower after the tech bellwether reported earnings and detailed its re-organization plans. Trading at around $23 at the open, we ask a simple question: is it time to buy shares of HP? Our answer, a resounding YES because of the following three reasons:

Read the full article here.

A Heuristic Formulation of the Margin of Safety

2011-09-05T14:00:00.001-07:00

"The Intelligent Investor," one of my favorite books on investing written by Benjamin Graham, the father of value investing, and first published in 1949, is a classic that must be read by anyone serious about making money in the market (a less well-known book, "The Art of Speculation", by Philip L. Carret and first published in 1930 is right up there with The Intelligent Investor in my opinion, but a thorough analysis of the books' relative merits is for another day).

Perhaps if readers had to take a single concept away from Graham's book, it would be margin of safety. In his 1997 letter to investor, Warren Buffett compares the margin of safety when buying stocks to sound engineering:

Read the full article here.

5 Trades to Prepare for the Coming Global Recession

2011-08-05T14:09:00.002-07:00

In a piece we wrote last week, we argued that the U.S. economy was about to enter Japanese style prolonged stagnation. Further evidence coming out on Tuesday morning that showed an unexpected decline of .20 percent in consumer spending raises the prospect that the U.S. economy will enter a double-dip recession rather just a mere stagnation — pushing a fragile Europe and Japan into recession; and slowing down China’s and Korea’s growth substantially.

Read the full article here.

Netflix, Open Table: The Perils of Not Owning Content

2011-08-05T14:09:00.000-07:00

Open Table (OPEN) and Netflix (NFLX) have been the poster children of web-based businesses that captured and captivated the minds and the wallets of the momentum crowd that chased after their stocks. For more than a year, the stocks of both companies reached for heaven but couldn’t get there. So they have been falling back to earth, though Open Table has been falling at a faster pace, especially after Tuesday’s disappointing report that sent the stock sharply lower in the after market hours. Does it mean that Netflix will share the same faith with Open Table?

Read the full article here.

Are Silver and Energy Parting Paths with Gold?

2011-08-05T14:08:00.001-07:00

Are silver and energy parting paths with gold?

For more than a year, gold, silver, and energy have been trading in tandem (all ascending to the moon), propelled by record low short-term rates, two rounds of quantitative easing, a falling dollar, and the economic recovery—all feeding and re-enforcing inflationary expectations: SPDR Gold Shares (GLD) has gained 20 percent in the last year and 16.9 percent in the last three years; iShares Silver Trust (SLV) has gained 85.33 percent in one year and 25.3 percent over 3 years; Oil Service Holders Trust (OIH) has gained 62.3 percent over the last year, but lost 10.82 percent in the last three years.

Read the full article here.

4 Reasons that Will Make Me Buy Cisco

2011-07-02T14:27:00.001-07:00

The end of the quarter is usually the time when investors take a close look at their portfolio and see which stocks to drop and which ones to add. One of the stocks I have been looking to add is Cisco Systems (CSCO). The stock is down 13 percent for the quarter, compared to 0.4 for the S&P 500, bottoming at around $15. Does it mean that the stock is a buy?

Probably, yes, for the short-term, as the technicians see an upward trading opportunity. Probably not, for the long-term, as fundamentalists would like to see some of the factors that led into Cisco's fall reverse themselves.

As I wrote in a previous piece, Cisco's fall from grace was caused by four factors: A momentum shift away from internet and networking companies in the aftermath of the high-tech bubble of the late 1990s; the transition of the Cisco from and emerging to a mature company; growing competition from Alcatel-Lucent (ALU), Hewlett-Packard (HPQ), Juniper Networks (JNPR), Huawei Technologies Co.; and inability to keep up with competition.

Read the full article here.

The Perils of Momentum Investing: 3 Profitable Exceptions

2011-06-30T08:19:00.000-07:00

In a recent article “3 High Risk Trades to Avoid,” we warned investors about the perils of momentum investing, a strategy based on hype about an investment theme, a new product or a new industry that captures and captivates the investor mind-- at times when money is cheap. We did remind investors that the momentum crowd hyped with the potential of the telecommunications and networking industry in the late 1990s, falling in love with stocks like Cisco Systems (CSCO), Ciena Corporation (CIEN), JDS Uniphase (JDSU), and Ariba Networks (ARBA), suffered hefty losses once the hype faded.

Here we take a closer look at the fate of another momentum crowd hyped by the potential of sustainability industry in the early 2000, buying up the stock of alternative energy companies.

Read the full article here.

2 Ways to Play the Rebound in Financials

2011-06-30T07:30:00.001-07:00

Stock leadership rarely carries from one bull market to the next week. Tech stocks were roaring in the mid-nineties, got clobbered when the tech bubble burst in 2000, and did very little in the last decade. Bank stocks were the leading group of the last bull market between 2002 to 2007 with financial institutions reaping large profits from mortgage securitization and financial engineering. During this time period, the Spyder Financial ETF (XLF) outperformed the S&P 500 Index (SPY) by more than 40%.

Read the full article here.

When to buy stocks with low P/E ratios

2011-06-27T15:41:00.000-07:00

Buying stocks with low P/E ratios is one of the oldest strategies used by professionals and retail investors alike. Perhaps at its core is the idea that stock prices tend to "revert to the mean" in the long-run and companies that are in the dog house today should outperform over a 3 to 5 year time period. Financials and homebuilders stocks with low P/E ratio today fall in this category.

P/E's have certainly gone down in the past two months courtesy of the ongoing market correction. So is it time for investors to go back to the market and start buying stocks with low P/E's?

The answer depends on one's view of the economy and whether one is buying stocks of companies with cyclical earnings versus companies with steady earnings growth. Mechanically, a stock trades at a low P/E because of a disconnect between market price and earnings. Let us consider two very different scenarios:

Read the full article here.

The Dollar Rebound and What it Means for the Market

2011-06-26T08:58:00.000-07:00

After being in free fall for close to two years, the dollar is turning around, gaining against every major currency, especially against the euro. Is it just noise or a genuine trend?

We do believe that it is the second, for four reasons:

1. Monetary policy shift in the US. In its press conference two days ago, Fed Chairman Ben Bernanke made clear that, unless the economy weakens significantly, there will be no more QE3, so there will be no pressure to further lower long-term rates, which is bullish for the dollar.

2. Fiscal policy shift in the US. In recent speeches, legislators from both parties have expressed determination to address the country’s soaring debt, which is bullish for the dollar.

3. Flight to quality. With sovereign debt issues persisting in Europe, the US treasuries continue to be the safe investment for foreign investors, also bullish for the dollar.

4. Monetary tightening in emerging countries may be over. Monetary tightening has begun to slow down inflation and economic growth in emerging markets, which is bearish for those currencies.

What does an uptrend for the dollar mean for financial markets?

Read the full article here.

Time to Go (Bottom) Fishing?

2011-06-26T07:27:00.001-07:00

The appeal of the stock market is a function of both time and price. In terms of price, this correction is shallow at best, with no capitulation in sight yet. As far as time is concerned, professional and retail investors alike are getting weary of the lousy market action. Stocks have been declining every week for the past two months with the S&P 500 Index losing about 7% from its 52-week high of 1370 that was reached in late April.

While it does not feel that we hit bottom yet (on Thursday, the S&P 500 made an impressive reversal from the 1260 mark but Friday's action was terrible again with the S&P 500 Index losing 1.2%), two very different catalysts have the propensity to propel the market higher for the second half of the year:

1. The macro catalyst. Economic fundamentals will improve:

The negative impact of supply disruptions from the Japanese earthquake will diminish with Japanese firms ramping up production.
The Fed's monetary policy remains accommodative despite the ending of its government bond buying program - the so-called QE2 - and the Fed won't put the breaks on for an extended period of time. It is still watching the economic numbers carefully (especially the unemployment rate and housing numbers) and remains worried about the possibility of Japanese-style deflation.

2. The micro catalyst: Investors go bargain hunting.

Read the full article here.

3 Trades for the Post QE2 Period

2011-06-24T12:18:00.001-07:00

Every investor who has been around Wall Street long enough knows that there is a time to buy and hold, there is time to sell and stay on the sidelines, and a time to trade. Now is the time to trade.

From late 2001 to the mid of 2007, there was a time to buy and hold stocks, as a string of interest rate cuts by the Fed provided a market "put" that fuelled a positive investor sentiment that turn every news on the economy into good news; stocks climbed one hill after another rewarding investors who bought and held stocks.

From the late 2007 to early 2009, there was a time to sell and stay on the sidelines, as residential and commercial real estate collapsed, taking Wall Street along for the ride. But then the Fed returned, writing several puts to support the market, launching QE1 and QE2; the positive investor sentiment, the "buy-buy" mentality" returned on Wall Street: The economy gets stronger, stocks go higher; the economy gets weaker, the Fed goes on with QE3, and QEn, and the market goes higher.

Read the full article here.

4 Stocks that Beat Wal-Mart

2011-06-24T12:17:00.000-07:00

After beating Sears (SHLD) in the 1970s, Wal-Mart became the king of retailing, dominating rural America, and eventually expanding to urban areas and overseas, trashing other retailers on the way. With market dominance came scale, rising market shares, and bargaining power with supplies. That translated into lower costs and lower prices that re-enforced further dominance and rising profitability. Who would dare to challenge Wal-Mart’s dominance?

A few companies did, some successfully. In an article published in Harvard Business Review (“Outsmarting Wal-Mart,” December 2004), Darrell Digby and Dan Haas identify eight retailers that compete effectively with Wal-Mart: Target (TGT), Costco (COST), Walgreens (WAG), Best Buy (BBY), PetSmart (PETM), Dollar Tree (DLTR), Dick's Sporting Goods (DKS).

Read the full article here.

3 Sectors to Play the Coming Rebound

2011-06-22T08:20:00.000-07:00

Stocks have been lousy for about a couple of months and for good reasons:

Uncertainty about the survival of the Euro and fear of contagion if (when) the sovereign-debt crisis spreads to Ireland and Spain,
The Japanese economy slowing down after the earthquake and tsunami,
Congress' inability to reach a deal to lift the debt ceiling,
Weak economic numbers in particular for the housing and labor markets.

That being said, echoing the Goldman Sachs' call of 1500 for the S&P500 by 2012, I believe that stocks will keep going higher in the second half of the year for two important reasons:

Some shocks that triggered the selling are transitory and thus unlikely to persist. The Japanese earthquake was truly "unforecastable" and the Nippon economy will recover at least in the short-run.The Fed predicts better numbers for the economy for the second half of the year and monetary policy is still very accommodative.

Read the full article here.

Why Bondholders Should Share the Burden of a Greek Bailout

2011-06-16T13:44:00.001-07:00

Judging from the violent protests in Athens today, Greek citizens are angry. And they aren’t alone. Irish, Portuguese, Spanish, and German citizens are angry, too. They certainly have every right to be angry, as they are called upon to shoulder the entire burden of a bailout that breeds more problems than solutions. Bondholders should have to pay too, as they miscalculated credit risk by lending money to the Greek government at the same rate as they did to French and German governments.

The EU's ongoing policy that bails out member nations with heavy debt burdens is a dangerous game that threatens the economic and political cohesion of the euro zone and EU itself. It prolongs and generalizes the debt crisis; it injects an unhealthy dose of moral hazard into financial markets by transferring risks from bondholders to taxpayers; it pits one European member against another as neither bailout recipients or bailout providers are satisfied, for different reasons though.

Read the full article here.

4 Reasons Why Cisco Fell

2011-06-16T13:43:00.000-07:00

Of all investment success stories, one stands out: the story of Cisco Systems (CSCO). For more than a decade since the company went public on February 16, 1990, its stock was rising by leaps and bounds, soaring from a few dollars to $630 (when adjusted for nine stock splits). Cisco was in the right business the right time, driving the hype and buzz that propelled other networking and dot.com stocks to the stratosphere. But what set Cisco Systems apart from other companies are its business fundamentals, the ability to deliver innovative products; and its alliances with other major technology players, including IBM Corporation (IBM), EMC Corporation (EMC), Nokia Corporation (NOK), Intel Corporation (INTC), and Oracle Corporation (ORCL) that help the company dominate the Internet gear market. Yet Cisco's stock couldn't define gravity, falling from around $70 (after the last split in 2000), to around $15 today! What caused Cisco's fall?

Read the full article here.

3 High Risk Trades to Avoid: China Stocks, Commodities and Momentum Investing

2011-06-13T09:24:00.001-07:00

Trading in financial markets is always risky. Investors may lose part or all of the funds committed to a particular trade. But trade in some asset classes that had a big run up in the last two years is more risky than others, as traders are exposed to events that raise the probability of large losses (e.g., the disclosure of accounting irregularities, a change in government regulations, a change in the economic environment, and a shift in momentum). Here we identify three trades that fall into this category:

Buying Chinese stocks listed in the U.S. As we discussed in a previous article, buying Chinese companies traded in U.S. exchanges is a high-risk strategy, as these companies are subject to frequent changes in rules and regulations that undermine their ability to stay in business and maintain profitability. Smaller Chinese companies, especially those listed through ”reverse mergers,” are conducive to accounting fraud and manipulation. This realization prompted some discount brokers to take certain Chinese stocks off the margin list last Wednesday—resulting in hefty losses for popular Chinese companies, like Sina Corporation (SINA), down 11.28 percent; Baidu, Inc. (BIDU), down 3.2 percent; Youku.com, Inc. (YOKU) down 11.35 percent; and Sohu.com Inc. (SOHU), down 5 percent.

Read the full article here.

End of May, Beginning of June: A Seasonal or a Cyclical Correction

2011-06-13T09:23:00.000-07:00

The beginning of the month is usually positive for Wall Street, as new money from pension funds and automatic savings plans flow into stocks, especially as the world economy recovered from the subprime crisis of 2009. In the last two months, however, this pattern seems to be broken down, as Wall Street sold off both in the beginning of May and in the beginning of June. Is this just a seasonal correction, consistent with the old adage, "sell in May and go away," or a cyclical correction?

Declines in both months were broad, spreading to both, cyclical industries, the likes Caterpillar (CAT), General Electric (GE), and Walter Industries (WLT), and to nocyclical industries, the likes of Pfizer (PFE), Merck (MRK), and Novartis (NVS), which confirms a seasonal correction. Cyclical sectors, however, suffered more than noncyclical sectors. In the first week of June, for instance, the consumer discretionary sector lost 3.2 percent, materials 3.2, and industrials 3.1. Caterpillar and Walter Industries lost close to 10 percent of their value over the last two months, Freeport McMoRan (FCX) 12 percent, Ford (F) and General Motors (GM), Silver ETF (SLV) lost close to 35 percent of its value, and only the gold ETF (GLD) maintained its value, thanks to ongoing geopolitical events. This means that a cyclical correction is underway, accelerating and magnifying the seasonal correction.

Read the full article here.