Money Magazine - Three Reasons to Love the Slowdown

In a recent Money Magazine issue (still receiving this one for free), there was a feature in their "Economy Watch" section titled Three Reasons to Love the Slowdown.

The reasons are:

1. Stocks are more attractively priced
2. Interest rates will remain low for a while
3. Investment properties are a deal

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Money: Stay Cool When News Gets Scary

If you have been following this blog, you will know that I have been getting Money Magazine for free.  Here is reminder of how to stay cool when you get bad news.

The key points are:

• Know your history
• Know your portfolio
• Put it in writing
• Have a relief valve
• Put your core portfolio on autopilot

To view further details on Money Magazine's website, click here.

To subscribe, click below:

Fortune Magazine - Bruce Berkowitz - The Megamind of Miami

I am receiving Fortune at no cost (except my time to read it) and there was an article about Bruce Berkowitz, The Megamind of Miami.  It was a little long, but interesting.

I like the picture of him home office.  LPs, books, older-type of stereo equipment on the bookcases.

Click here to read it. 

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5 investing bubbles?

In this small piece on Yahoo! Finance which is actually from CNNMoney.com, they discuss five possible investing bubbles and each of their brief rationale.  They are as follows:

• China economy (yes)
• United States Treasury Bonds (no)
• Pure-Play Shale Rock Company Stocks (yes)
• Cotton (minor yes)
• Gold (yes)

Would I short any of these?  Probably no.  

 

Would I take money off the table if I had significant investments in them? Yes.

 

Would I hedge against them if I had significant investments in them? Yes.

 

For more details, click here to go to CNNMoney's website.

Click on the following link to subscribe to Money Magazine for 1 year with auto-renewal.

Wow! This is a tough market. Time to buy more?

If you have even been remotely watching the headlines, the market as measured by the major indices have all been down about 10 percent from the April 2010 highs.  This is where the mind starts playing tricks on you.  Should you sell?  Should you buy?

Logic tells you to buy when things are oversold (like they are now).  Think of it as buying something at a discount.

Here is a huge reason to stay invested or even allocate more of your money into equities.  The Hulbert NASDAQ Newsletter Sentiment Index is a measure how much "market timers" are recommending you invest in NASDAQ stocks.  A few weeks ago (May 4) they were recommending investing up to 80 percent of funds.  The current exposure reading is minus 45 percent .  You read that right.  They recommend shorting the NASDAQ with 45 percent of your funds.  This is a 125 percent shift in two weeks.

Click here to read the MarketWatch article on Yahoo! Finance.

Time to invest in Japan?

In the June 2010 Money Magazine issue, there is a section outlining how Japan's economy will benefit from the successes in China.

You will need to buy the current issue if you want to read all of the details, but here are three ideas on how to invest in Japan.

• VGTSX which has 17% in Japan (Vanguard)
• LLINX which has 30% in Japan (Longleaf Partners International)
• EWJ  which is an exchange-traded fund (iShares)

Click here to subscribe to Money Magazine for 1 year or 2 years.

Market Update / Huge Swings Caused by High Frequency Trading?

Last September, I wrote a post about a Forbes article that described High Frequency Trading.  You can view it by clicking here.

A New York Times article posted on Yahoo! Finance lists that as possibly a culprit in yesterday's huge price swings.  How else could some fairly reliable companies make the following price swings:

• Proctor and Gamble (Symbol PG) had a high of 62.67, a low of 39.37, and closed at 60.75
• Accenture (Symbol ACN) had a high of 42.30, a low of 0.01 (!!) and closed at 41.09
• They report Exelon (Symbol EXC) traded for one-hundredth of a penny, but on the historical prices chart, this is not shown.

These are huge price swings and most of them occurred in less than an hour. 

I had been posting that the market has been oversold for a couple of months and the trading this week has been dramatic.  I will admit that I was not as hedged to the degree as reported previously.

Click here for the New York Times article on Yahoo! Finance.

Start planning for tax hikes now

In the latest issue of Forbes (yes, I am still getting it for free), there is a nice summary of what to do between now and 2013 to try and minimize any effects of the tax hikes that will be hitting all of us.

There will be a new 3.8% "Medicare" tax on investment income and 0.9% Medicare tax on wages.

Here are some of the key points:

• Next year, money in FSAs, Health Savings Accounts, and Health Reimbursement Accounts may no longer be used for over-the-counter medications  unless your doctor has prescribed you to take them.
• In 2013, the maximum you can place in an FSA will be decreased to $2,500 per year. 
• In 2013, there will be an additional 0.9% Medicare tax on gross compensation (before any retirement contributions) above $200,000 (individuals) or $250,000 (couples).  
• In 2013 there will also be a new 3.8% surtax on investment income for individuals with more than $200,000 in adjusted gross income and $250,000 for those filing jointly.  This will apply to interest, capital gains, annuities, rents, royalties, passive activity income, and dividends.  Except will be retirement account distributions, capital gains from selling your principal residence and business income from a venture.  It will also affect trust income more than $11,200 that you do not distribute.
• In case you were planning to sell some of your long-term investments in future years for a major bill, consider selling them before the capital gains rate increases. Depending on your tax bracket, your long-term capital gains rate could be going from 0% to 10-20% or from 15% to 20%. Click here to view the table on Wikipedia

The Forbes article has a nice graph showing what the Capital Gains and Income Tax Top Rates have been from 1960 to the present and in the coming years.  Click here to view that graph.

For more details, click here for the article.

To subscribe to Forbes magazine, click here for 12 months (26 issues).

Yahoo! Finance: Top 10 Investor Traps / I Dodged the Reserve Fund

The article summary

Yahoo! Finance had an article provided by CNBC that listed the top 10 Investor scams.  They are as follows:

1. Ponzi schemes
2. Gold bullion and currency scams
3. Natural resource investments
4. Life settlements
5. Private placement offerings
6. Real estate investment schemes
7. Entertainment investments
8. Short-term commercial promissory investment notes
9. Speculative inventions and new promises
10. Leveraged Exchange-Traded Funds (ETFs).

Dodging the Reserve Money Market Fund

I would like to add one that I dodged for my mother.  She was "recommended" to move her dormant cash from a regular Money Market fund that was earning about 2.5 percent to a "Reserve" Money Market Fund that was earning about 4.5 percent.  When I reviewed the prospectus to find out what they were investing in, the red flag to me was that it was a "leveraged" Money Market fund.  They listed that they would borrow up to 25 percent for additional investments.  The purpose of a Money Market fund is stability and you do not get that with leverage.  

In 2008, it caught up with them and the "sacred" dollar value was broken.  

Advertisements on KNX1070

Obviously no one is going to advertise that they are selling a Ponzi scheme, but I frequently hear advertisements for Gold bullion and Life settlements.

List of related websites:

• Click here for the full article on Yahoo! Finance and details on each trap.
• Click here to be taken to the Reserve Funds website.
• Click here to read a USA Today article about the Reserve Fund falling below the dollar value.
• Click here to go to KNX1070.

Market Update

Just a quick update on my thoughts.

• Equity market averages have been consolidating.  The Dow Jones Industrial Average looks like it is in a tight trading range of about 300 points.  Look out when it breaks either way.
• On this post from December 3, 2009, I reported that Gold was just about as overbought as it could be and I was looking for a short-term target of $108 based on the Gold ETF with the trading symbol GLD.  It has hit that target and even a little more.  (Note that on that previous post, it appears that the link I inserted for the GLD chart updates every day so to know what the chart looked like on December 3, 2009, you would need to look at an archived chart. It looks like GLD is now consolidating nicely and it may be able to make a move in the next week or two.
• The Crude Oil ETC (USO) appears to be short-term overbought.  The risk/reward appears to be favorable to enter a position where you would benefit from a downward movement. I am not doing anything at this point. If the market moved another 5 percent higher, it seems like it would be even more likely to fall.

Stock markets are trading in a very tight range

Not sure where things are headed at this point.  A very tight range is now appearing which means it typically could break in either direction (hopefully up).

As a side note, I only held my long position for a short time and locked in my profits.  No complaints.

Looks like the DJIA is setting a base for a 400-point move

Just looking ahead...  It looks like the Dow Jones Industrial Average is setting a base to make a potential move.  Sure it may have a little more consolidation in the next day or so, but if everything continues as it has been, we could be around 10,750 in the next 10 trading days.  Call it an early January effect, a Santa Claus rally or what not.  Maybe it will be part of the $10 trillion sitting on the sidelines that I addressed in this earlier post.

At this point I think the risk and reward is leaning toward accumulating positions and increasing holdings.

Disclaimer:  I have a position where I benefit if the Dow Jones Industrial average increases in value.

How much farther can Gold prices go?

I heard a report that the bullish sentiment has been high for a number of days now. I found a report by Mark Hulbert that says the previous four Gold tops at bullish sentiments of around 57 to 65 percent with a subsequent drop in prices of up to 24.8 percent. Currently, the sentiment number is 68 percent (note that it is above the recent highs).

Obviously, any market can remain overbought for extended periods of time, but usually not for very long. Remember that when a lot of people are already bullish, the contrarian view is that there isn't much money on the sidelines left to drive up prices and thus, prices will fall. Looking at gold charts, a short-term correction would take it to just above $1,000 per ounce. This would make it about a 10 percent drop.

Click here for the Mark Hulbert article

Disclaimer: I don't directly control any investments in gold.

How much of $10 trillion will get the market going?

I came across this article in the LA Times by Tom Petruno where he reports that $10 trillion sitting in bank savings accounts, CDs, and money market funds.

Typically these accounts do earn only a paltry amount and if you take into account erosion from inflation and taxes, your return is usually a negative amount. This is actually a reported reason for the run-up in commodities. It isn't worth letting cash sit and lose money and so people are taking the risk in some of the commodities markets (such as oil and gold).

According to the Investment Company Institute, there was $3.339 trillion in money market funds (click here for that report). In reviewing the weekly flows in "long-term" funds, you can see that money is flowing out of equity funds and in to foreign equity funds and bond funds (click here for that chart).

My thought is that even though there has been a run-up in the equity markets and major indices, imagine what will happen if sentiment improves and the money starts to flow from money market funds and in to equity markets? If and when that happens, everybody needs to fasten their seat belts!

I couldn't find the article in the LA Times, but it is listed in an alternate website that you can read by clicking here. The main point of his article is to how to maximize the return of your idle cash.

For more information on the Investment Company Institute, click here.

Forbes article on High-Frequency Trading

Wow. 40 racks of servers overseen by traders backed by two separate power substations and 196,000 pounds of batteries and soon, also a 2,000-kilowatt diesel generator.

In this Forbes magazine (yup, still getting it free), this article talks about the equipment, locations and ideas to make money within milliseconds. Some have a direct fiber-optic connection to exchange computers. Why transmit via the internet?

All this equipment is needed to do "high-frequency" trades. To me, it's a bunch of arbitrage. The systems perform 2,000 trades in one second. It tries to catch 0.1 0r 0.01 cent differences, but catches the difference thousands of times each day.

Now the NYSE is exploring renting out space for similar connections directly to its exchange.

Just don't get it wrong 2,000 times in one second.

Click here to read the article.

What? Limited reward with unlimited risk?

I hope I never get caught in something like this. Here's a piece on "accumulator" contracts. Where you have a one-year contract to purchase a stock every day at a discount. In this example they said you buy a $10 stock for $8 (20 percent discount) every trading day for one year. Sounds great, right? It's a purchase at a 20 percent discount, but if you could sell, it's actually a 25 percent gain!

Here the problem. If the stock goes up five percent, the contract gets cancelled. So you bought a bunch at $8.00 and once it hits $10.50, you no longer can buy at the $8.00 price. On the flip side, if the price drops to less than $8.00, you actually need to buy even more. In some cases, double the amount. Talk about a way to try and support the price of a particular stock.

So the maximum reward is $2.50 and any capital appreciation/dividends beyond $10.50, but the "guaranteed" 25 percent return is gone. The risk is (nearly) unlimited.

Beware, and read the fine print.

Click here to read more details.

Wow! $8 for an Espresso (book that is)

Things are coming full circle with Google. First it scanned millions of books into its databases. Now it is making two million of the books that are no longer covered by copyright law available to a machine called "The Espresso Book Machine." The machine is capable of printing a 300-page paperback book in less than five minutes.

The machines themselves sell for $100,000 and there are lease options. Of the$8.00, $1.00 goes to On Demand Books (the manufacturer of the machine) and $1.00 goes to Google who promises to donate this to charities. The rest goes to the owner of the machine and to pay for variable costs (paper, electricity, etc).

Click here to read the article on Yahoo! Finance

Real estate (obviously) popped. What's next?

Here's a list of 10 possibilities as posted on a Yahoo! Finance article:

1. China
2. Green
3. Gold
4. Federal reserve
5. Trash stocks (risky stocks now overvalued)
6. Education
7. Subprime 2.0
8. Life insurance securitization
9. Commercial real estate
10. Emerging markets

Click here for more details

Ongoing saga at carmaker Porsche

Here's another interesting story about risk and reward.

Starting back in 2005, carmaker Porsche started purchasing shares of VW. It currently owns a majority (>50%) of the company directly by shares. They also controlled additional shares with options. Speculators had been betting that the shares of VW would go down. Once the news got out about how much Porsche owned, there was a squeeze because of the following:

• Porsche shares + Porsche controlled via options + Shares short by speculators was greater than outstanding shares of VW.

I can't find the articles, but it was one of the first times where profits exceeded operating revenue (sales from Porsche cars). Comments at that time were that Porsche had turned into a hedge firm. This was all because of the large VW position.

• Click here for the TimesOnline article in March, 2009 reporting Porsche profits.

Now it appears that risk is starting to catch up to Porsche and they are looking for a bailout via either a merger with VW or loan/investment from a Qatar investment company.

• Click here for the Yahoo! Finance article.

Another risk and reward issue. Porsche received a huge reported reward earlier this year, but now may suffer some risk. We'll have to see how the reporting profits go in the next few quarters.

Homes for less than $10,000 on sale in Detroit

Hmmm. Sounds like there's an opportunity and lots of people are taking advantage of this. It reports one person from California has purchased nearly 200 homes.

Click here for the article on CNNMoney.com.

Remember that Real Estate is not a liquid investment. This means, it takes time before you can access or convert it into something that is usable (think sell or borrow against). Compare against a highly liquid asset such as a bank account where you can deposit money into an account and withdraw the same money five (5) minutes later. After you make this purchase, how long will it take for you to "get out" of this investment?

Risk/Reward: Need to weigh the risk of needing liquidity and management issues (dealing with tenants, property management companies, trips to location of property, insurance, tax, liability or legal issues, etc) vs. the reward of potential monthly cash flows from rents and appreciation of the underlying asset.