First it’s foreclosures, then it’s Fannie and Freddie and then it’s Merril Lynch and AIG - when will it stop?

But more importantly than that, this rapid destruction of the American financial system has many people wondering how it got started to begin with?

That’s why I decided to write this week’s article in response to this question on TickerHound:

I. It all started in the housing and mortgage market:

Basically, lenders were loaning money to whoever wanted to buy a home. Credit score, income and assets became irrelevant terms as brokers and local lenders rushed to issue new mortgages.

It seemed like a relatively “low risk” strategy at the time to many banks. Reason being, they figured that even if people stopped paying their mortgages, the housing market was doing so well that folks could just sell the house for a profit and pay back the remainder of the mortgage.

And that’s really where the trouble started.

II. Then the Investment Banks Got Involved:

Mortgage Backed Securities (MBS) are nothing new on Wall Street. They’re sort of like bonds, meaning there’s a “principle amount” (the amount being loaned) and interest coupons (or payments) that would be paid monthly on the loan. However, MBS’s aren’t single loans.

Instead, these loans were really thousands of individual mortgages all pooled together to create a single, tradable security.

This is another reason why many lenders were happy to keep giving out mortgages to folks (even if they didn’t qualify). Local lenders knew that they’d be able to package up all those mortgages and just sell them right to the big investment banks and not have to worry.

The banks then turned around and would trade these Mortgage Backed Securities like they would a stock or a bond - trying to pocket profits in between each trade.

III. Bubbles

The basic assumption in this whole mess was that housing prices would continue to rise each year.

In fact, that assumption turned out to be pretty accurate. According to the S&P Case-Schiller Index, home prices nearly doubled across the country from 2001 - 2006.

That’s because it was so easy to get a mortgage, everybody wanted to buy a home. Thus spurring demand and in turn driving up prices further. It sort of became a self fulfilling prophecy, which in turn became a full-fledged housing bubble.

And just like any good bubble, it eventually had to pop!

IV. The “After-Pop”

So after the housing market finally started to tumble, the financial services industry went into a year-long death spiral. Here’s the basic sequence of events:

1. People couldn’t afford their mortgages anymore.
2. They couldn’t sell their homes for more than they paid due to falling prices
3. So they defaulted on their loans - this happened to millions of people!
4. The big investment banks which now owned all the mortgages suddenly realized that these “assets” were virtually becoming worthless in a very short period of time.
5. So the banks had to take massive write-downs on these loans. The way this works is the banks were considering these baskets of mortgages as assets on their balance sheets. Once the assets went from being worth $100 to $1, the banks basically lost 99% of their value.
6. When that happened it made it very difficult for the banks to get loans themselves (imagine applying for a loan when all you have is a pack of bubble gum and the clothes on your back - it’s not likely to happen).
7. When the banks couldn’t get their own loans they were either going to be forced into bankruptcy (Lehman Brothers) or had to be swallowed up by healthier firms (Bear Stearns, Merrill Lynch, etc.)

V. How the Government Got Involved

Ever since Bear Stearns went under the government has played a fairly prominent role in this whole mess.

But it wasn’t until we almost saw the implosion of Fannie Mae and Freddie Mac that the government really made its presence felt.

Fannie Mae and Freddie Mac are sort of like “buyers of last resort” in the mortgage market. They were established to maintain liquidity in these markets in the event of the large banks being unable to trade their Mortgage Backed Securities.

So in the end, Freddie and Fannie were sitting on trillions of dollars in bad home loans.

And while these companies were private organizations they were however government sponsored organizations. So if the government had let either one of these companies fail then it might’ve made it very difficult for the United States to keep selling debt to big foreign buyers, like China. Remember, it’s our ability to sell our debt to other countries that has been funding our country’s operations (e.g. wars, etc.) for the last several years.

VI. How AIG and Insurance Fit In

AIG came into the picture when it began selling “insurance” to the big banks.

This technically wasn’t insurance, but that was mainly due to clever wording on the part of AIG management. Because for all intents and purposes, they were basically insuring the mortgages held by the banks - this type of insurance was called a “Credit Default Swap”, or a CDS.

Basically, the banks would pay AIG a monthly fee and in turn AIG would promise to make the bank whole on any mortgages that defaulted (sure sounds like insurance to me).

At the time I’m sure this sounded like a good idea because everybody assumed housing prices would continue to rise.

Well we all know how that turned out and that’s why in the end AIG was left holding the bag for billions of dollars in bad loans.

VII. The Bailout

So that brings us to where we are today: On the eve of the largest government bailout of the private sector in the history of this country.

The implications for these actions are vast and complex.

On the one hand, the government has to do this; the alternatives are too disastrous to even comprehend. On the other hand, what type of message does this send to the banks going forward? That it’s ok to engage in risky, reckless behavior and they’ll always get bailed out in the end?

I think I’ll save the rest of my commentary for another post.

I hope this gives you a clear picture of why and how we got into our current predicament.

If you have any other questions on this topic feel free to go to TickerHound for the answers!

I’m sure you can relate - especially after the last few weeks.

But don’t feel bad about it, getting a little worried in tough times is pretty much par for the course.

The Dow and the Nasdaq have both taken a hit, and foreign equity markets aren’t doing much better.

I’m sure you’ve seen many of your profits go up in smoke - or even worse, many of your positions are now showing significant losses.

Sometimes I’m sure it almost makes you sick to your stomach.

We’ve all been there.

What helps get me through tough times like that and stick to my guns is to sit back and ask myself, “What Would Buffett Do?”

Warren Buffett is a man who operates a company that has generated more revenue per employee than any company on the face of the earth.

But yet, the company doesn’t produce a single product. Heck, “Corporate Headquarters” only has about 13 people in it!

Basically, Berkshire uses Buffett’s brain to generate massive amounts of wealth - all through investing in the stock market.

Would Buffett Get Nervous Now?

Now that the market has been going down the tubes since January, do you think Warren Buffett is starting to sweat? Do you think he sits up at night panicking about the stocks he owns?

Definitely not!

This is a man who has been investing for over 50 years. He’s been through countless Bull and Bear market cycles … do you really think a soft market makes this man lose sleep?

I can promise you it doesn’t.

So the real question is, “WHY doesn’t he get nervous? Is it because he’s been doing this for so long? Is it because he knows this is only a temporary ‘blip’ on the radar?”

Well, that’s only part of it.

The main reason Buffett isn’t sweating bullets now is that he only buys certain types of stocks. He only buys stock in companies that have certain characteristics. We’ll call them the “won’t keep you up at night characteristics.” The man only buys stock in companies that:

1. Have businesses that are simple and understandable
2. Have little to no debt
3. Have a strong brand name
4. Are leaders in their industry
5. And throw off a lot of free cash flow

Companies that have these characteristics run very little risk of going out of business, running into any regulatory issues, or having a new competitor come along and steal the market away from them.

The biggest point to take away from this is that Buffett goes out of his way to avoid investments that require him to jump over “9-foot hurdles.” He waits for opportunities where he can walk over “1 foot hurdles.”

Now what if you had a portfolio full of businesses like this?

Regardless of which way the stocks were going, you would know, in your gut, that you still owned a piece of a great company.

It’s at times like this when you can truly appreciate this approach to investing.

So What Would Buffett Do?

Well, I’ll tell you what he wouldn’t do.

He would not be nervous.

He would not lose sleep.

And he certainly wouldn’t be taking any unnecessary risks.

That means stay away from any speculative plays. There’s no need to take extra risk at times like these - regardless of your risk tolerance.

You need to find companies that are leaders in their markets, have strong financial characteristics, and are trading near their lows.

Buying companies like that will allow you to sleep at night. It’s like having an airbag in your car when it crashes.

Even if this market goes lower, holding onto stocks like these will put you in a great position when the market turns positive again. The strongest companies are always the first to turn.

Remember: In the short term, the stock market is a voting machine - over the long term, it’s a weighing machine. The stronger companies will ALWAYS outweigh the weaker ones.

Stay cool and stick to the game plan and the market will take care of itself.

Until next time …

A number of the TickerHound’s out there have been hounding for answers on topics ranging from retirement planning to the best savings accounts.

Coincidentally one of my close friends called me the other day and asked me to help him set up a 529 plan for his daughter.  He knew what they were and why they were a great way to plan and save for her college education but he just didn’t quite know how to find and evaluate different plans.

And to be quite honest, I’ve never set up a 529 plan in my life (no children for me…yet) so I wasn’t quite sure what the process was either.  But being that this was a dear friend, I decided to spend my Friday night on the web, hunting down information on 529 plans.

So if you have children, grandchildren or even close friends with children, then I highly encourage you to read this article carefully.  It will definitely come in handy as you start to get the “next generation” ready for college, no matter how far away that may be.

Step 1 – Go Solo or Use a Financial Advisor?

The first thing you need to decide when setting up a 529 plan is if you’re going to use a financial advisor or do it on your own via a direct-sold 529 plan administrator.

If you use a financial advisor you’ll either pay money in the form of a sales commission or a flat fee when you setup your 529 plan.  If you go with a direct-sold plan, you’ll avoid the commission.

But be forewarned, some of the larger 529 plans cannot be purchased directly, they can only be bought through a broker.

Ultimately, you could be successful going in either direction but here are some of the potential pitfalls you should watch out for:

• If you decide to not use a broker, you’ll be left to do all of the homework on your own.  It could be quite daunting to sift through paper work and prospectuses on several different funds.
• If you end up using a broker be forewarned that you won’t be getting access to the entire universe of 529 plans.  Brokers typically have existing relationships with a few select 529 plan administrators and while they might give you “options”, your options are pretty limited.
• No matter what you do, make sure you read the rest of this article so that even if you go for it on your own or with a broker, you at least ask the right questions.

Step 2 – States Make a Difference

Before you pick any 529 plan, first check to see if the State you reside in offers any type of tax deductions for 529 plan contributions.

If you’re contributing on a regular basis this could mean some extra tax savings come April each year.

Also, some 529 plans offer other “home state” benefits.  Some include matching contributions, state financial aid assistance, etc.  Here’s a great resource provided by Bankrate.com for evaluating 529 plans on a state-by-state basis:

http://www.bankrate.com/brm/saving4college/brm_sfcsearch.asp

Step 3 – Look Below the Surface

Not all 529 plans are created equal.  Reason being, a 529 plan administrator doesn’t just take your money and drop it into government bonds, they invest your money into a basket of mutual funds.

And as we all know, mutual funds have wildly different track records, expense ratios and fees associated with them.

So look before you leap!

Here are a few steps you can take to dig into the 529 plans you’re evaluating:

1. Get a list of all the mutual funds they invest in
2. Go to Morningstar.com and look up each mutual fund
3. See if the mutual funds match your own investing style
4. Then check their long term track records – and ALWAYS look at that track record relative to the S&P 500.
5. Finally, you’ll want to check out the mutual fund’s expense ratio relative to comparable funds.  Is this fund charging exorbitant fees?  Are they load or no load funds?  You get the idea

Basically, you’ll want to find the 529 plan with the best mutual funds (low expenses, solid long term returns, etc.).

Some Tools to Help You With Your Research

Again, if you’re going to use a financial advisor, I hope this article has at least given you enough information so you can ask your advisor the right questions.  And if you do decide to go it alone, here are some sites and tools that can definitely help you on your journey:

Bankrate’s 529 Plan Directory 
Bankrate.com’s 529 Plan Checklist
Morningstar.com’s Mutual Fund Research Page

Good luck and remember, if you have any questions go to TickerHound.com to get the answers!

We’re about to roll out a suite of widgets for investing related blogs and web sites.

So if you own a site or a blog and are interested in becoming one of the early users of these tools then please read on.

TickerHound Technology for Your Site

We know that there are many TickerHound members that have their own finance related web sites and blogs.

So early on in the development of TickerHoud we knew that we wanted to do something to help the financial publishing community. After a lot of discussion and brainstorming we decided to launch a suite of tools that would allow site owners to:

• Use TickerHound’s proprietary Q&A technology to connect with their community in a new way
• Drive new, targeted traffic back to their site
• Manage their site and community more effectively

We think we’ve done a decent job of accomplishing those objectives with our latest creation: The Knowledge Exchange Widget.(You can see a sample at www.optionszone.com - scroll to the middle of the page and check out the “You be the Expert” section)

But it’s not perfect yet, and that’s why I’m looking for your help.

As always, we’re looking to get as much feedback on our technology as possible. That’s why we’re looking for qualified TickerHound members to “test drive” one of our new widgets.

By getting in on our Widget Partner Program early on, you’ll get access to prime real estate on the TickerHound site and we’ll work directly with you (or your IT Team) to make the widgets picture perfect for your web site.

So if you’re interested in getting in on the action early, then please send an e-mail to contact@tickerhound.com and include the following information:

• Your name
• The URL to your web site
• And p lease indicate who maintains your site (you or another IT person)

We look forward to hearing from you!

How to properly research and find information on stocks on the web?

I’ve discussed the topic a bit in previous newsletters and blog articles, but I guess it might make sense to revisit the topic again.

In fact, it makes a lot of sense to do it now because since we launched TickerHound 7 month ago, I’ve learned about so many new websites and resources through some of the answers on the site that it’s time I shared them with you.

So here are some of the tools, sites and resources that I personally use when I’m researching a potential investment:

I. Charts

I’m not much of a technical analyst but I do use charts as an additional tool to help me to decide whether or not it’s the “right time” to buy a stock.

For example, I may have found a fantastic company that’s being dramatically undervalued by the market and I’m just itching to buy as many shares as possible, but then I take a look at the chart and see that it’s in a solid downtrend.

That’s definitely not a stock I’d buy right now – but after the trend reverses I’ll definitely be a big buyer.

So I like my charts to be clear, simple and easily customizable. My favorite charting system is BigCharts.com.

It’s a Dow Jones property and I find that their interactive charts are as good as any I’ve seen. It’s free, quick and convenient and has become an indispensible part of my investing arsenal.

II. Financials

Since I’m more of a fundamental analysts/value investor, this is an area I’m extremely passionate (read: picky) about.

Certain sites that claim to have financial data/analysis on companies usually fall far short of my expectations. I don’t mean to sound like a “finance snob” but it’s true. So I’ve personally compiled this list over the last several years.

Each site offers easy access to financial data and helps to quickly size up the company.

Google Finance – I find Google’s financial data to be fantastic for a getting a quick read on a company’s financial statements. Simply punch in the ticker symbol, scroll to the bottom of the page and click on any of the links to the financial statements for the company (Income, Balance Sheet, Cash Flow).

Here’s a link to Google’s balance sheet.

From here you can break down the data on a quarterly or annual basis and quickly switch between financial statements.

I find this area of the site to be extremely easy to use and definitely worth checking out.

Value Line – This is a service you have to shell out some money for, but I couldn’t live without it.

Not only does it give me great analysis on the company and its business performance, but I also get a quick snapshot of current (and historical) financial performance. What makes Value Line unique is that it distills all of this information into a single printable page.

That means I don’t have to click around or flip through 20 pages of information – I can simply pull up a single page on a company and immediately know how well they’re doing.

Value Line also calculates industry-specific metrics (like “Same Store Sales” for retailers) for you, which always makes it easier to size up a company relative to its industry.

This is an invaluable service for investors.

EDGAR – When you want to dig a little deeper, there’s no place better than going right to a company’s annual reports.

The SEC provides a handy utility for quickly pulling up a company’s most recent filings: EDGAR. Click here to check it out.

It’s a little difficult to use at first, but once you get the hang out of it, you’ll have a treasure trove of financial material at your fingertips. This is a “must have” for all investors.

III. News and Analysis

Digging through charts and financial statements is one thing, but numbers only tell so much of a story. There comes a point where you need to find out about the reason why a company’s stock took a dive 3 months ago or why its profits recently got cut in half.

And that information can only be found by scouring various news sources and the blogosphere.

So when I want to learn about the back story to a company’s financial and stock performance I’ll typically use the following site’s for my research:

SeekingAlpha – This is a great site that aggregates, filters and edits blog posts from across the financial web. You can find news and analysis on companies, ETFs, commodities, etc. from over a thousand different sources.

Many of the articles you’ll find here can’t be found in the mainstream press and it really helps get a glimpse behind the curtains on certain stories.

Google News – This is one of my favorite news search engines. You can filter by date, topic and even news source.

Your best bet is to use Google Finance and then track news on their interactive stock charts. That’ll give you a fairly clear snapshot of how a particular event impacted a company’s stock price.

IV. Stock Screeners

Here are a few of the services that some members have recommended for screening stocks – one of which I’ve also begun to use – that can help you find and discover new stocks to invest in:

MagicFormulaInvesting – This site dead simple. It’s the companion site to the book, The Little Book that Beats the Market by Joel Greenblatt, and it’s mainly for value oriented investors.

Basically, you tell the site what your minimum market cap is, and then it’ll use a preset stock screen based on a company’s Earnings Yield and Return on Equity to return a list of companies.

TIP: The list is in alphabetical order. If you’re looking to sort the list in a different way (e.g. highest earnings yield) then copy and paste everything directly into Microsoft Excel. From there you can slice and dice the list as you see fit.

CNBC Stock Screener – Here’s a stock screener that I had never even heard of before but now find myself using it all of the time (thanks to NYInvestor for the great recommendation)!

The interface is super simple to use, you can filter by almost any criteria (sector, P/E, profit margins, etc.) and it’ll give you a comprehensive list of companies on the fly.

It’s quick, easy and I can’t recommend it enough.

Click here to give it a try now.

Which Tools Do YOU Use?

So there you have it. That’s my personal list of investing tools and resources from across the web. It’s not the most comprehensive list you’ll find, but for the most part, it’ll get the job done.

And if you have any additions you’d like to make to this list, then please, click here to submit them now and share your best investing tools with everybody here at TickerHound!

What are some good sectors to invest in during an economic downturn?

It’s a question I’ve thought a lot about, and have written extensively on, for the last few months.

For me, it all comes down to consumer spending patterns.  Where are people going to cut back?  Where will they continue to spend?

As this economy continues to slide and the more I begin to realize we’re far from being out of the woods, I find myself starting to cut back on my own spending here and there.

Don’t get me wrong, I’ll still treat myself to a nice glass of scotch (or two) every now and then, but those “little extras” I’ve become so accustomed to suddenly don’t seem so important. I’m really trying to force myself to take less taxi’s, spend less money on gourmet coffee, etc.  And the one thing I find myself doing more and more these days is cooking at home.

I live in New York City and not only are there amazing restaurants everywhere, but they’re usually right around the corner and open until the late hours of the night.  So it’s been very easy for me to walk down the block for my breakfast, lunch and dinner.

But I’ve begun to break that habit and it’s done wonders for my wallet.

So that got me thinking, even if we do slide into a protracted downturn, people still have to eat, right?  And since they’ll continue to buy groceries – in fact, they’re likely to buy more now that eating at home is much more economical than going out – then it raises the question: which stocks stand to benefit the most from this trend?

I pondered this question as I munched on my eggs this morning and suddenly it hit me – eggs!  Who produces eggs in this country?

I don’t know why I never thought of it before, but I guess since the product is such a staple and lacks any type of brand recognition that it goes overlooked a lot of the time.  But as I began my research I found that there was, in fact, a company producing the lion’s share of eggs in this country:

Cal-Maine Foods (Nasdaq:  CALM)

Cal-Maine produces roughly 15% of the eggs consumed in this country, and its market share is steadily growing; the company has been consolidating this space with a number of well-timed acquisitions.  Cal-Maine has also capitalized on the more health conscious consumers by investing in low-cholesterol and organic egg products which typically go for premium prices.

Cal-Maine also has a rock solid set of financials to back it up too.  Operating Margins are north of 30%, Net Profit Margins are at roughly 20% and the company’s Return on Equity (a metric I love to use) is over 25%!

To put that in perspective, the average company in the S&P 500 has profit margins of 11% and Returns on Equity of 15% , so Cal-Maine is definitely running a tight ship.

But things haven’t always been this great for Cal-Maine and the other egg producers in the US.  They’ve had a little help from the corn market…

Due to the rising cost of corn, Cal-Maine and other egg companies have seen their feeding costs rise by 30% this year.  That may sound like bad news but since eggs are such a customary item on American breakfast tables, Cal-Maine has been able to raise its prices right along with its costs.  In fact, the company was able to increase its prices above costs and expand its margins and profits as well.

That’s why this company’s stock has practically doubled over the last 12 months – and many folks, including Barron’s, think it could double again.

I’m not sure about a double, but with a stock that’s trading at a $900 million market cap and paying a 8%+ yield, I’d still feel comfortable socking Cal-Maine away in my portfolio for a while.

But I’m also going to be keeping an eye on the corn market.  If the price of corn begins to come down in a significant way, you can bet that Cal-Maine’s profits and stock price will drop right along with it

I know that automated information aggregation, synthesis and analysis is all the rage on Wall Street these days. Banks, traders and hedge funds are all jockeying to get the news first, fastest and interpreted in the most efficient manner.

But with the announcement that financial “intelligence” firm, Monitor110 will be shut down, it gives me reassurance that TickerHound’s on education as opposed to information was the right path.

Case in Point:

This is currently the top headline on Yahoo! Finance (the largest financial portal on the web in terms of traffic):

Stocks trade higher on upbeat earnings results - Stocks are opening higher after stronger-than-expected quarterly results from names like Coca-Cola Co., JPMorgan Chase & Co. and United Technologies Corp. gave investors some reassurance about the health of the economy.

Ok, now if I were a regular Joe, I’d look at that headline and think, “Oh wow, looks like JP Morgan is pulling through and doing well despite all the turmoil in the financial markets.”

But that wasn’t the case at all.

In fact, the company’s year-over-year profits were off by 53%!

And the comments from the company’s CEO, Jamie Dimon, weren’t particularly optimistic either:

“the economic environment to continue to be weak — and to likely get weaker — and for the capital markets to remain under stress.” He added that “since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.”

I don’t know about you, but that doesn’t sound very encouraging to me.

But the stock still rallied - all because analysts expected JP to do even worse than they did!

Trying to trade stocks based on the assumption that “maybe this company won’t do as bad as everyone thinks”, is a sucker’s game. The media creates headlines like this to get people to read their articles and watch their TV shows…fuck that!

Investors need to tune out and rely on their own experience and their own education to make money in this market.

Mr. Dimon pretty much said, “things aint gonna get better for a while now, so don’t expect much from us.” The CEO of a company says that and what I really hear is, “Hey, don’t buy our stock right now, you can buy it later this year for much cheaper.”

Education, not information my friend…play this bear market, don’t let it play you!

So the question for many folks has become, are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

Calling a bottom premature?

In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer.  In other words, think about yourself and the millions of other Americans out there who are:

1. Watching the values of their homes drop
2. Spending twice as much at the pump than they did a year ago
3. Watching their net worth shrink by the day

And then ask yourself, has anything changed over the last couple of months?  Have things gotten any better or have they gotten worse?

Unless you don’t own a home, drive a car or do your own grocery shopping then you might be tempted to say, “Things aint so bad.”  But if you can relate to what I’m talking about, then you already know the answer to the TickerHound question.

Calling a bottom right now would definitely be premature.  70% of our GDP is driven by consumer spending.  You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

And just to show you where we are based on cold hard facts, here are 3 reasons why I know we’re not out of the woods just yet:

Housing and Real Estate:

Nobody thinks this story has completely played itself out yet.  Even the analysts that are on the more “positive” side of this debate still agree that we won’t see a bottom in the Real Estate markets until the end of the year.

And that’s being optimistic!

According to the National Association of Realtors’, pending home sales dropped by 4.7 percent in May…that is its third lowest month on record.  So things sure aren’t slowing down yet.

And even when the recovery does come along, many economists are predicting a protracted recovery period that could stretch to 2010.

The bottom line is, less wealth and free cash to spur consumer spending, the less relief we’ll see for the overall economy in the short run.

Energy Prices

Like I said before, unless you don’t drive then there’s a good chance the increases we’ve seen at the pumps have made a serious dent in your wallet.

Just last week the price of oil broke a new record, hitting $147 per barrel and $200 oil by the end of the summer isn’t out of the question.

Here’s why this situation won’t get better anytime soon:

If you were an oil & gas company, would you feel the need to go scouring the globe for fresh supplies right now?  I mean, you’re sitting back, pumping out enough barrels to meet demand and you’re watching the price rise along with your profits on an almost daily basis.

In other words, there’s no economic incentive (just yet) to dramatically increase the amount of oil these companies produce.  They’ll do so when our consumption of that oil drops below a certain amount.

But with all the pent up demand in countries like the US, China, India, etc., I don’t foresee that happening anytime soon.

We’ve all heard the argument that oil’s cheaper than it was in the 80’s relative to current income levels.  But at the end of the day, what really matters here isn’t the relative price of gas, it’s the perception of the consumer.

If they’re paying twice as much for oil today than they did last year, they have far less disposable income to spend on other things – which once again, can’t be good for the overall economy.

Relative Market Conditions

So the dictionary definition of a “Bear Market” is when the Dow falls by 20% or more.

We crossed the 20% mark last week.  The same goes for the broader S&P 500 index.  Therefore, by any yard stick you want to use, we’re in a Bear Market.

Now, let’s take a look at some of the previous bear markets we’ve weathered and see how far the S&P had to fall before it began to recover:

• From 1969 – 1971:  33% drop
• From 1973 – 1975:  48% drop
• From 1980 – 1982:  26% drop
• From 2000 – 2003:  48% drop

From this data you can see that from peak to trough, the average bear market will show a 38.75% decline each time.

Considering we just crossed the 20% mark, it’s fair to say we’ve got a ways to go before we approach the average.

Remember, These are Just Indicators!

The thing you really need to keep in mind is that all of this data:

• Home sales
• Energy Prices
• Market index levels

They’re all simply indicators of where we are.  The meaning you derive from them will depend on how well you know the markets.

For example, a seasoned value investor will look at falling stock prices like gold nuggets falling from the sky.  That’s because an experienced value investor knows that there’s TONS of money to be made when they can buy stocks on the cheap.

It’s like walking into your local super market and finding all of your groceries on sale for 50% off.

And a seasoned trader loves a market with direction (no matter if the direction is up or down) because the trader knows they can short that market all day long.

That’s why it isn’t a bad thing that this market hasn’t bottomed yet.  In fact, if you’re an intelligent person who’s interested in making money, then this could be the best opportunity you’ll have for a long time!

So equip yourself with the right tools, information and then go make the most of this market!

Why isn’t the iPhone in China?

Good question!  But I think the better question is, why isn’t the iPhone in China YET?

After months of failed negotiations between Apple (Nasdaq: AAPL) and China Mobile (NYSE: CHL) – the largest mobile service provider in the world in terms of subscribers – the companies parted ways.  And since then we haven’t heard much from Apple with respect to moving the iPhone into China.  Some may have assumed, incorrectly, that Apple was just going to ignore the issue for the time being.

But after Apple’s announcement on Monday, I think it’s clear that while negotiations between the two companies may be at a standstill, they won’t stay that way for long.

The Chinese wireless market is by far and away one of the most desired mobile markets on the planet.  This is a country with roughly 1.4 billion citizens and not even half of them have a mobile phone yet.

There’s a tremendous opportunity for growth here and Apple knows it.

So while a deal hasn’t been reached to bring the (genuine) iPhone to China yet, Apple’s definitely gearing up for it.

At Steve Job’s keynote the other day he presented the world with “iPhone 2.0”.

Aside from the widely covered feature additions like 3G wireless technology, GPS, reduced price point, etc., Apple unveiled a feature that I personally jumped out of my seat for, and it’s geared directly for the Chinese market.

Texting and E-mailing in China

Having lived in China for a period of time I can attest to the difficulty in sending Chinese text messages and e-mails from a mobile phone.  Typically you’ll have to type the message using a spelling system known as pin-yin.  Pin-yin is the transliteration of Chinese words into westernized spelling.

So if I wanted to type “hello” in a text message, I’d have to type “ni hao” using a western keyboard and that would then be translated into the appropriate Chinese characters.  Obviously the use of a stylus would make things much easier.  In fact, that’s exactly what Motorola (NYSE: MOT) had in mind when they launched the Motorola Ming in China two years ago.

And that’s precisely what Apple had in mind when they launched their Chinese character recognition software on Monday.

With the latest version of the iPhone I can use my finger to write out Chinese characters directly on the screen.  This will make writing text messages and e-mails dramatically faster.

So the real question becomes, what would it mean for Apple’s business if it secured a significant share of the Chinese handset market?

Well, let’s look to the Motorola Ming for an indication of what may be in store for Apple.

The Ming and Market Share

Estimates vary but the consensus is that the Motorola Ming had roughly 1% of the entire Chinese handset market at the beginning of 2007.

Given that China has a mobile subscriber base of 583.5 million people now, that would mean 5.8 million phones by today’s numbers.  It would be easy to make the argument that the iPhone has much more hype, demand, functionality, etc. built around it and therefore could reasonably capture more of the market than the Ming, but let’s be conservative here.  Let’s assume Apple is able to sell 5.8 million iPhones in China.

If Apple sticks to their $200 price point for the 8 GB model – which is certainly realistic considering the Ming’s price point was in the upper $400’s – then that would equate to roughly $1.16 billion in additional top line revenue for Apple.

And if you consider the “halo” effect Apple’s products tend to have (sell one product, you sell more of the others), then it’s easy to see how substantial adoption of the iPhone could turn China into an increasingly important source of revenue for Apple overall.

So when I saw this question on TickerHound the other day, my wheels began to turn right away:

Are there any publicly traded Web 2.0 companies?

For the most part the Web 2.0 “bubble” has been isolated to private transactions.  Meaning, we haven’t seen a serious tech bubble in the public equity markets like we did the last time around in the late 90’s.

There really hasn’t been much of an increase in the public markets at all.  If you look at where we were at the market peak in 2000 (Dow at 11,700 and the Nasdaq at 4,900) the Dow is pretty much even and the Nasdaq is still way off its high.  We haven’t seen any monstrous technology IPO’s since Google and there aren’t any gargantuan IPO’s on deck at the moment.

This might lead many to wonder what all the “Web 2.0 fuss” has been about?

Well, to be sure, there have been several high profile private and public transactions over the last few years that have certainly caused many investors to take notice.

For example, according to the National Venture Capital Association, 2007’s private equity and venture capital equity investments rose 10% from 2006 to reach $29.4 billion – the largest amount invested since the bubble popped in 2001.

And we’re seeing some serious activity in the public M&A markets as well:

• News Corp.’s (NYSE: NWS) $500+ million acquisition of MySpace
• Google’s (Nasdaq: GOOG) $1.6 billion acquisition of YouTube
• Yahoo!’s (Nasdaq: YHOO) has acquired multiple companies (Flickr, Del.icio.us, etc.)
• Time Warner’s (NYSE: TWX) $860 million acquisition of Bebo.com

Obviously some of these companies overpaid while some of them were probably great values.  MySpace’s $500 million buyout has already paid for itself due to a $900 million ad deal the company secured with Google.

So while these Web 2.0 companies eventually became part of larger, first-generation internet businesses, it’s clear that there has been some serious growth and profits being generated in this space for those that got in early.

But back to the original question, are there any publicly traded Web 2.0 companies?

Well, I think that question is slightly flawed.  It should be:

“Are there any publicly traded Web 2.0 companies AND are they worth investing in?”

The Answer:  Yes and No!

The pure play Web 2.0 companies out there are few and far between at the moment:

• Foldera, Inc. (FDRA.OB)
• VOIS, Inc. (VOIS.OB)

are probably the only 2 publicly traded stocks in the US that are pure play Web 2.0 companies.  However, you’ll note that neither company is traded on a major exchange.  You’ll also notice that neither company went through an actual public offering of its shares, or an IPO.

Both companies are the result of some crafty financial engineering known as a “reverse merger”.  This tactic is when a privately held company acquires a publicly held company and then merges itself into the existing publicly traded stock.

Typically, however, the publicly traded company isn’t much of a company at all, but more of a “shell” (as they’ve come to be known).  Meaning, the public stock has no real following, no real business to speak of behind it, etc.

There were a few Web 2.0 plays that were on deck to go public but have since been pulled.  United Online’s (Nasdaq: UNTD) Classmates.com spin-out was supposed to be a testing ground for web 2.0 IPO’s, but they pulled the plug on that one last year.

Another company, Synacor of Buffalo, NY, filed to go public last year but we haven’t heard much out of them either.

So the moral of the story is, while there might be a couple of publicly traded, small-cap Web 2.0 companies, I still don’t see any real investment opportunities there just yet.

If you’re looking for exposure to the sector your best bet is to follow the Google’s, Yahoo!’s and News Corp’s of the world.  But don’t think we’ve seen the last of technology IPO’s in this space.

In fact there are a few privately held companies that I’ve been watching for IPO announcements lately.

If Facebook or LinkedIn happen to go public, you could bet your bottom dollar that there would be TREMENDOUS demand for those shares.  Up until now, both companies have been closely held and limited to major institutions and Venture Capitalists for investment.  So be on the lookout, you still might have a chance to get in on Google-like profits again in the near future.