Hope for Change

Does the Current S&P 500 Price Jive with Reality?

2012-08-09T17:52:00.000-04:00

If you watch the stock market closely each day and follow analyst reports from the financial media, then you have been inundated with talk about the Price-to-Earnings Ratio (P/E) of the broader stock market (i.e. - the S&P 500). The historical "average" for the S&P 500 is a P/E of 14-15. When I look at this "average" valuation, I assume that the possible risks that could hurt the economy are also "average". With the S&P 500 sitting right at the average P/E ratio, one should ask are we in an "average" period of global uncertainty? Given the crisis in Europe, China slowing, and the US sputtering along with a fiscal cliff hanging in the balance - I would say the risks are "above average".

Latest Fed Speak Shows Desperation

2012-08-07T17:41:00.001-04:00

Boston Federal Reserve President Eric Rosengren came out on CNBC yesterday to say that the Fed should start QE 3 by purchasing mortgages in order to lower interest rates for borrowers. Now, keep in mind that one Fed president's opinion is not a game-changer. However, let's pretend that the Fed's next option for QE 3 is to buy up mortgages to suppress interest rates. If this news were to hit, the markets would rally initially in expectations that "this time it's different". The really important factor is whether or not purchasing mortages will help spur the housing market (and hence the rest of the economy). Okay, if you haven't fallen asleep yet (then you're a nerd like me) - why would banks lend money out for 30 years at mortgage rates any cheaper than they are today? What will ensue, is the fact that banks will only lend to very high quality creditworthy borrowers, thereby suppressing the housing market. Even mortgage refi's will be depressed due to skeptical banks that would like to have a better return on investment than 2% for 30 years. P.S. - On a side note, does the Boston Fed Prez look like Craig T. Nelson from the TV series "Coach"?

S&P 500 Looking "Toppy"

2012-08-06T17:36:00.000-04:00

Today - the S&P 500 closed at 1394, just 6 points below the key phsychological level of 1400. Looking at the chart provided, this is a key resistance level to maintain the downtrend from the highs set in the spring of this year. If you are a bull, then selling at these levels may be a wise decision for the short-term. The next entry-point to go long would be at the 50-day moving average. If you are a bear, this creates an excellent point to go short and ride down to the 50 day moving average with the expectation that the S&P 500 will break these levels. There hasn't been any news out lately to justify a break above 1400-1408, but that could always change if a EU Finance Minister comes out and says "we are going to plan to make a plan" - unless the market wakes up and calls their bluff. Therefore, as a risk managment strategy - a trader should play the range of the 50 day moving average as possible support and the 1400 level as resistance. This may seem elementary, but the high-frequency trading machines have these levels as their trigger points either up or down.

A "Knight"-mare on Wall Street

2012-08-02T17:18:00.001-04:00

Knight Capital Group (KCG) has been in the news the past two days for a software glitch that has brought the company to its knees in a little more than 24 hours. The software malfunction caused the electronic trading system to rack-up hundreds of millions of dollars worth of losses, approximately half of the company's market cap. Currently, the company is considering bankruptcy options. It is amazing to me that a software glitch can bring down a billion dollar company in 15 minutes of trading. So what are the future ramifications from this event, and how will it affect your finances? The regulatory sharks are sharpening their teeth as we speak (or type), and the news will start to trickle out on how more regulatory measures are needed for financial institutions. The one positive that will come from this horrendous debacle is the fact that people will continue to question the use of machines over people to process orders. This also sheds light on how setting stop-orders and walking away from your computer could really bite you in the ace.

That Nasty Word - Stagflation

2012-07-31T18:06:00.001-04:00

Let's look at the U.S. economy like a "super-star" professional athlete. Much like a star athlete, the U.S. economy is always in the spotlight, and others look for leadership from said "super-star". That being said, global investors should focus on the performance of the U.S economy as a barometer. Here is what I am getting at, if an athletic phenom is taking a boat-load of steroids (much like the Fed pumping trillions of dollars into the economy) - then we should expect exceptional results (one would think). Instead, despite all of the inflationary printing of U.S. dollars by the Fed - the U.S. economy is putting out a whopping 1.5% GDP (and shrinking). The next question should be, what will happen when the Fed runs out of "tools" to spur growth? One answer may be that the Fed will never run out of "stimulus", as they can continue to print more money. The most important question is how markets will digest stimulus measures in the intermediate term. A term that you already know, but is not in the media currently - is stagflation (declining growth with increasing inflation). This is the worst scenario any central bank could deal with, as their hands are tied to make future policy moves. The way the economy has reacted to unprecedented stimulus measures from the Fed should be a clue that stagflation may be much closer than one expects.

A Possible Cure for Facebook's Mobile Issue

2012-07-26T17:54:00.001-04:00

I am sure the powers that be at Facebook have already considered this, but I think this could be the easy solution to their looming issue with the increasing migration to mobile viewership. In order to monetize mobile use, FB should look to Zynga's app model (I know - Zynga is a crap stock, but FB should take a slice of their strategy and implement it for their own benefit). Zynga has a free app and a paid app for their products. They are able to advertise with their free app, and offer a paid app without advertisements. FB may want to extract a part this business model and have a free app with ads delivered at certain times, and a paid app that has zero advertisements. Realistically, FB could charge for their non-advertisement app at say $10/year. I don't know about you, but if FB rolled this out - I would be pissed at first but then succomb to the fact that I access FB so often with my mobile devices that it would make sense to pay the $10 subscription fee per year. And for those who put their feet down, they will access FB less often with their mobile devices due to annoying ads popping up - thereby encouraging them to use their PC's to access FB which provides a better advertising environment for the company. Maybe Mark Zuckerberg will read this and hire me on as an advisor (as I have many more ideas for the company), but don't hold your breath!

Facebook Earnings Aftermath

2012-07-25T19:13:00.002-04:00

It would be an understatement to say that Facebook's earnings release tomorrow after the markets close will be closely watched. I have no opinion on what the earnings are going to be like, but I will try to give my views on how the markets will trade on the news. The first outcome would be if Facebook (FB) beats expectations. This would give some additional confidence to the markets, but stocks won't roar from it. The second outcome is that FB disappoints, on either current earnings or guidance. If this were to happen and the stock sells off massively - the markets will tank due to the residual effects on investor confidence, especially retail investors. Morgan Stanley (MS) will also tank, and they are at critical support levels on its stock chart. Again, I have no clue what FB will do tomorrow regarding earnings. I am only stating how I think the markets will treat either outcome.

Does Q-Easing Matter at this Point?

2012-07-24T20:52:00.001-04:00

The Fed's last gasp of air will be coming soon. Today's stock market rebound from rumours of more QE is even more telling. Now markets will digest that possibility and move on to more prescient matters. Even when the Fed inevitably announces QE measures, the market will fade from the pop because the "smart" money has already factored in the move and will look toward what is next (and who will support the markets going forward)...

Is Apple the Next Microsoft or Cisco?

2012-07-24T17:27:00.003-04:00

Think about it for a minute. Both Microsoft and Cisco became unrelenting powerhouses in their hay-days. They both continued to march higher based on their competitive edges and grew their market caps to extreme levels. MSFT and CSCO both had a "corner" on the market for their products, much like AAPL does today. At the peak of their moves up, these two stocks have essentially done nothing over the past 12 years. However, in the short-term - AAPL may be a stable stock to be invested in this chaotic market due to their relatively low valuations. Even so, I believe that this recent earnings miss and guidance disappointment will mark a long-term turning point for the stock, much like what MSFT and CSCO experienced in the early 2000's.

Is the Fed Giving Banks a Way to Unload Risky Assets?

2012-07-23T18:00:00.000-04:00

This may sound like a conspiracy theory – that’s because it is. I do not believe that this is really happening, but as an avid player of Chess – I like to look at things from different sides and 3-4 moves ahead. Okay, here’s the conspiracy……the Federal Reserve is pumping gigantic amounts of liquidity into the markets in order for the “too big to fail” banks to be able to unload risky assets at higher prices before the next crisis hits (and freeing up capital to boot). Once the sheet hits the fan, the banks will have “better” hopes of surviving. One good thing, if this is the case – it will be the trading robots that eat the losses. Imagine their drive home to tell their robot spouse...

Investors Should Be Wary Of S&P 500 P/E Ratio

2012-07-22T23:23:00.000-04:00

Every time you log-in to some financial news outlet, they have articles and live interviews with "analysts" who recommend buying equities in general based on a couple weak reasons. The most popular of those factors is perhaps the most flawed - the P/E ratio for the S&P 500. This number is compiled by dividing the price of the S&P 500 by the "expected" earnings of the companies that comprise the S&P 500 (with an emphasis on "expected"). The reliance of this model goes right out the window when corporate profits shrink. One cannot accurately gauge the direction of risk assets when the P/E is rising only due to declining earnings. The media will inevitably continue to mention the overall P/E ratio for the market, but as global economies shrink - it will be something the "analysts" speak of much less.

Technical Storm Brewing for Bank of America - BAC

2012-07-18T17:56:00.000-04:00

Bank of America Corporation - BAC will be the company that financial stock investors will monitor the share price of over the next week or two. If you look at the posted chart going back to mid June, you will see that the stock has been establishing lower highs and lower lows. If BAC is to break-out of this bearish trading pattern, it must close above $8.22. This scenario could very well come to fruition given the current erraticness of the markets. If you are a trader, the level to short has two different entry points at either a failure to close above $8.30 (with a tight stop at $8.40) or a break below $7.40 on a closing basis. On the other hand, if you wish to go long for a quick bump, then be careful and only do so if BAC closes above $8.30, with a tight "closing" stop just below wherever the 50-day moving average is at the time. I believe that the markets will be focusing on how financials trade over the next few weeks to get a gauge on how things will pan-out for the rest of the year. However, this point will only prove valid if we don't get any earth-shattering news out of Europe or China - then all "bets" are off.

A Shout Out for Fed President Bernanke

2012-07-17T18:58:00.000-04:00

I know many folks will think I'm crazy (join the club), but I think Bernanke has done an incredible job over-all. He came into office during the financial crisis of 2008-2009, and with zero help from Congress - he has managed to keep things afloat (for now). The economy is better stimulated through fiscal policies (taxes, etc) rather than monetary policies (The FED). Unfortunately for Mr. Bernanke, he wasn't privy to having a Congress that conjunctively passed fiscal policies to spur economic growth.

A Bubble No One is Talking About

2012-07-16T16:52:00.001-04:00

Bubbles form over time, and the majority of the media and investors are aware of the bubbles as they grow. However, despite the realization of the bubble – speculators continue to drive up prices for a seemingly long time before the bubble bursts. As we have seen in the past 20 years, bubbles that form always pop – and are violent when they do. There is a new “stealth” bubble that is going on right now in the markets. The difference between this one and the others from the past is that no one is talking about it or giving notice. I am calling this new bubble the “Hope Bubble”. It seems that with each passing day we receive negative news out of Europe, the global economy, or even the U.S. economy. What happens when we get this news? The stock market goes up in value. Investors are “hoping” for two things. The first is that the world’s central banks will ramp up stimulus measures thereby giving a pop to riskier assets. The second “hope” is that the global economy as a whole will have a “soft” landing and avoid recession. In order for the “Hope Bubble” to stay inflated and continue to get even bigger is for BOTH of these hopes to stay intact. If stimulus comes from central bankers, that will keep the bubble going. However, if the global economy starts to show evidence of a moderate to severe recession (which I believe is just a matter of time) – this “Hope Bubble” will burst and markets will plummet from all of the “Hoper’s” exiting the market.

Long-Term Head & Shoulders Top in S&P 500

2012-07-14T14:40:00.002-04:00

I pulled a maximum chart for the S&P 500, and noticed something peculiar. The index appears to be in the process of forming a long-term head and shoulders top that could bring the index down below March 2009 lows over the next 6-12 months. A head and shoulders top is an extremely bearish chart pattern. It involves an initial upward movement and minor retreat (forming the left shoulder from 2000-2003 with the S&P 500 peaking at 1498), followed by another upswing to new highs (forming the head from 2003-2007 with the S&P 500 peaking at 1526). The right shoulder is then formed by another move up, but not as high as the previous move higher (2009-NOW). If this pattern completes, I expect the S&P 500 to fall to 600 or less before there is a new long-term bull market for stocks. Otherwise, if the S&P 500 closes convincingly above 1526 in the coming months then the markets will be off to the races.

What's Next???

2012-07-11T19:47:00.000-04:00

The President takes over the Internet, I am not even going to comment on this, just forwarding the link below for your enjoyment: http://news.cnet.com/8301-13578_3-10320096-38.html

A Deadly Game of Politics

2012-07-10T17:18:00.003-04:00

Like a beaten dead-horse, the headlines continue to focus on news out of Europe and how they are handling the crisis. As we all know too well, politicians are far more concerned about being re-elected than the future of their constituents. We saw this in the U.S. Debt Ceiling crisis of last summer where politicians waited to the very last minute to make a deal while markets were crashing. The long, and complex European debt crisis is a bigger example of this. The politicians in Europe are more focused on keeping their jobs than solving the problem. They know that there has to be "blood in the streets" before making the tough decisions that are necessary to reverse decades of an entitlement culture. These changes will not fly with voters unless they witness how badly the markets swoon if not addressed. That being said, a forward-thinking person should expect that Europe will not act decisively until the stuff hits the fan. Therefore, as a stock market trader - I will not be optimistic until things get so bad that the European politicians are forced to make the tough (and derisive) decision to form a true fiscal union.

McCarthyism Revisited

2012-07-09T17:30:00.001-04:00

Everyone knows what McCarthyism is, and very few know the truth behind the controversy. After the fall of the Soviet Union, spy cables were shared with the U.S. - showing that nearly all of the people accused of conspiring with the USSR were correct. To this day, our wonderful public school system still indoctrinates youngsters that this guy was a crazy whistle-blower, when in fact he was dead-on. See link below and do your own research. http://www.wnd.com/2000/02/4020/

Double-Whammy for US Companies in Europe

2012-07-09T13:24:00.001-04:00

As the earnings season kicks off today for U.S. companies, there is going to be a common theme for those with operations in Europe. What we will be hearing is guidance that is weaker than expected due to a slowing global economy, in particular Europe. U.S. companies will be facing a double-whammy scenario going forward, that will materially impact their earnings and give more cause for concern (which will slow hiring "growth"). Not only will U.S. companies be hurt by a slowing European economy, but will get hit again by the falling Euro. Due to this likely scenario, I am not optimistic on where the global economy is headed.

Two Options for Europe

2012-07-07T10:46:00.004-04:00

The Euro Zone has two "viable" options that may actually work, but will ultimately fail over the long-term....The first option: All Euro nations band together like the "United States". The new name will likely be the "European Alliance".If this were to happen in the next couple weeks (not likely), the markets would sky-rocket. As we all know, this will eventually happen - but not until things get so bad that politicians are forced to implement radical ideas such as growth measures. The second (and final option), is for the EU to break-up.

Let's Go Back to 2008-2009 to Learn Some Lessons

2011-12-11T13:59:00.003-05:00

I apologize, as I will fail those who expect exact numbers and figures on the period of 2008-2009 where we were at the "brink" of financial collapse. Fortunately, there is a Google search tab at the top of this page that can aid you in your research, I only endeavor to describe concepts in this blog, and hear what other folks think - so I (and others) can be enlightened.

In order for you to form an opinion on this post, I respectively suggest that you use your incredible imagination to go back in time and think of how YOU felt at the time of the US financial crisis in late 2008-early 2009.

Two major things happened to "solve" the crisis. The first step taken was for the federal government to bail-out banks and auto-makers. The second step was to create a "stimulus" plan to help jump-start the economy.

At face value (at the time when assets were valued at half the price they are now), many nervous or soon to be retired folks were likely frightened about the standard of living they will have in retirement based on their 401k balances at the time (which some folks referred to as 201k's - bc of the 50% hair-cut they saw on their investment statements).

If you have used your incredible imagination to jump back to the time aforementioned above, then here is where you will take value from this long and boring post.

I agree whole-heartedly with the $700 billion bail-out plan for the banks, AIG, GM, etc. This statement will piss off conservatives (and Liberals - I really don't care), but they fail to realize one CRITICAL factor. Conservatives are the biggest opponents of Communism (and rightfully so). If the banks, and especially AIG - were allowed to fail, then we would all be speaking Russian in a few years. If you disagree, think of the game of Dominoes and how that works...

The funny thing that the media doesn't cover, whether it be "The View" or Fox News - is the fact that the majority of the TARP funds have been recuperated and will be at worst - a breakeven investment for US citizens. This fact does not make it right for the US government to step-in and use US citizen dollars to bail them out. However, desperate times call for desperate measures - and I fully back TARP.

What needs to happen is increased regulation of "financial firms". This has already happened to the extreme on many levels. However, is it wise to pressure financial institutions now when they are on their backs, or to enact more appropriate restrictions on them once they are have dusted themselves off and willing to go back to business as usual?

If you have made it this far in my blabbering, then give yourself a pat on the back (or two). I hopefully have addressed all of the concerns by conservatives and the OWS folks in regards to TARP. However, there was another $700 Billion plan pushed through upon US citizens from the current administration. The first one was logical (in my opinion) which was a part of the Bush legacy. The second part which was used to "spur" economic growth, was a complete farce and only the curent administration can take responsibility for.

Since we are still in the time-machine back in 2008-2009, let's look at the "stimulus" plan created by the administration. Let's look back at the crisis based on an anology of a patient that has been rushed into the Emergency Room with a heart attack (because that is where we were 3 years ago).

My thoughts would be to make a quick decision on this emergency (much like using shock-therapy to bring back the patient from their possible demise). "Shock Therapy" in this situation would have meant allowing citizens to keep 100% of their salary for 6 months. Calculate your own NET paycheck and add 30-40% on that to determine the amount of money you would have received (to save, invest, or spend - it is up to YOU). The reason I say this, is because this matches up identically to the amount of money our current administration has used for "stimulus" to build roads and bridges and turtle tunnels and under-water treadmills for shrimp (Google it)....

Triple Taxation of Company Dividends

2011-12-09T17:18:00.002-05:00

Many astute investors and folks who have retirement plans, or extra money to invest probably already know about the "double taxation" of dividend payments. Go ahead and "Google" the phrase "double taxation of dividends" and you'll have a decent understanding of this info. I'll break it down as briefly as possible here.

The US sports a corporate tax rate that is the highest (or nearly the highest) of any "developed" country in the world. The news headlines always berate companies for moving jobs over seas, but they fail to realize that money flows to places where it is best treated on a tax basis - much like consumers put their money in savings accounts that yield the highest interest rates....

The "double-taxation" of dividends is based on these facts. If you own a stock within a mutual fund for your retirement plan (which most of you do), or own it directly - you own the right to receive any dividend payments from the company (and may experience appreciation in stock price in favorable conditions).

Here is where the math comes in and where one may fall asleep. If you hold shares of companies in a mutual fund/retirement plan, YOU have a share in the excess profits of the company that can be paid as dividends. You in effect - own the company. The company pays a record-high corporate tax rate of approx 35% on profits - so you just took a 35% tax hit off the top. Then they reward loyal shareholders like yourself with a dividend. That dividend you receive is taxed at 15% (currently - but will likely go much higher). So, your share of profits from the company are taxed at an "effective rate of 45-50% or more).

Here is where my "triple taxation" statement takes hold - and no one else has talked about. Let's say you have some extra money to invest after you have already paid the income taxes on the cash. In this situation, you can buy a stock that pays a nice dividend, but you already paid income taxes on your paycheck of say 25% - then the evil corporation gets taxed at a 35% rate (which cuts into your possible dividend pay-out), and then you get taxed again on the dividends at a "low" rate of 15%.

And people wonder why the rich take tax loop holes (and move their businesses over-seas), and why the poor keep getting screwed. It all lies in our oppressive tax code....

Crisis in Europe

2011-11-23T16:57:00.001-05:00

There is a fire in our basement! Should we put it out or just sit back and hope that it fizzles out by itself...? Unfortunately there is a large can of gasoline in the basement that we forgot about - a highley concentrated supply of fuel that will explode and take everything down with it if we aren't brave enough to go down there and stamp it out before it spreads.

Should we just sit back and "hope" that the fire won't spread, or should we get off our rear-ends and go down there and put it out?

Unfortunately, everyone can agree that politicians in general will only act when the house is half-way burnt to the ground. The leaders and people of Europe must make some extremely difficult decisions, and they have to do it NOW. The longer they wait, the more costly the problem will become.

However, without going into all of the details and history as to how and why Europe has gotten to this point - I will explain some of the solutions being proposed in a general sense.

First, there is a tug of war going on between the fiscally responsible nations such as Germany - and the fiscally irresponsible nations of Italy and Greece. The Germans do not wish to bail out the fiscally irresponsible countries because they do not feel that it is fair to essentially pay for their sloth and bloated government spending programs when they have been so frugal and efficient with their own spending, etc.

One of the solutions being proposed is having the European Central Bank buy the faltering debt of Greece and Italy in order to keep borrowing rates artificially capped at levels that will allow them to refinance their debts that are coming due in the future. This is thought to be a way to stop the spread of the contagion of rising rates. There is a point to which the rise of borrowing costs for these countries will become so burdensome that they will be forced to default on their debts. Greece has already essentially defaulted on their debts, which has caused many trickle effects - but not as severe as the possible chaos that an Italian default would pose.

Italy's debt is approximately 6 times that of Greece's at $2.6 trillion (which is a sum of which the European Union can not bail out on their own). If Greece can cause as many problems as it has in financial markets, a default by Italy could be the beginning of a financial armageddon - as it spreads to the rest of the European countries (and then the rest of the world).

Another solution being proposed is to simply let the chips fall where they may by not taking any action.

Yet another solution being thrown around is to have the European countries create a single "Euro-Bond" that would consolidate the debts and rates into one security. This would be much like the Euro currency. This is the path that I believe is the best option. That is not to say it is a perfect answer to the crisis, but it is likely to be the only way that the contagion can be stopped in the short-run and begin the long road to recovery.

In addition to the issuing of "Euro-Bonds", there must be widespread economic reforms in the Euro Zone countries. Politicians talk of two ways to solve the budget problems they face (not enough tax revenues and too much spending). The problem is that by raising taxes, the economy will flounder and therefore make tax revenues decline. If the governments drastically cut spending, then the economy will falter as well because government workers will lose their jobs - companies will lose government contracts, which will cause a decline in tax revenues.

So it seems that Europe is in quite a conundrum here. What you will not hear as a solution (at least not as much as it should be being discussed) are ways to grow the economies of Europe and hence - tax revenues thereby lowering the deficits that caused all this mess. Politicians are scared to cut taxes, as they feel that would lower revenues (which has some merit). It is my humble opinion that they should start by making the act of doing business there much more attractive by drastically reducing regulations (both environmental and business). I am a conservative who is extremely concerned about the environment and how businesses act ethically (shocking, huh?). However, drastic times call for drastic measures. This solution wouldn't cost any material amount in tax revenues and would lower spending naturally as fewer guard dogs are needed. I do not believe that loosening these regulations should be a permanent endeavor, rather a temporary adjustment for a tentative time to encourage businesses to grow and hire more employees - thereby helping to reverse the spiral Europe is in.

There could also be some tax reforms done locally by the governments as they see fit. I also agree that there should be spending cuts in areas that are redundant and wasteful. However, I believe that Europe will experience it's greatest bang for the buck (or Euro) by dramatically reducing regulations across the board. I do not see any other way out of this, and would love to hear your opinions on this monumental matter.