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Day to Day Thoughts Of An Active Funds Manager
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  • If Banks Are Reeling, How is Real Estate Netting?

    Posted on May 14th, 2009 spicer No comments

    In today’s market environment, there is a dramatic divergence between banks and real estate. Banking stocks have been soaring for weeks, while investors are still too prudent to bank on real estate. Why is the difference so great?

    Interest Rates

    Interest rates on a 30 year mortgage are at their lowest in decades. Currently, borrowers with good credit can get a loan at a rate of less than five percent. However, banks are also making a goliath profit on these loans, as they borrow at a rate as low as .25% from the Fed and 1.86% from any number of other banks. Even at a price of 5% to the consumer, banks are making more on loans than they ever have before, and the spread between the discount rate and the retail rate is incredible.

    Uncertain Thoughts Are Certain

    Banks aren’t showing record profits from their new loans issued; instead, the profits are coming from loans that were previously written down but are now performing up to standard. Refinances are proving to be an excellent source of income as well, as banks work to steal loans from right under their competitors.

    However, it still takes tremendous motivation to convince someone to be responsible for a 30 year purchase. Homes may be inexpensive compared to one year ago, however, they still represent a value of multiples times the purchaser’s annual income. It’s hard to know what will happen tomorrow, yet alone thirty years from now.

    Oversupply of Homes

    The supply of homes is still much higher than the number of people seeking to move. The oversupply in suburban and urban rebuilds during the boom years is still pressing down on current prices.

    It took an $8000 tax credit before buyers finally became serious about sealing the housing deal. The oversupply problem will only be fixed with dropping prices or continued bulldozing of foreclosed homes, both of which are happening as we speak. Banks might just pull the housing market out of the toilet, provided they can supply enough credit to get buyers locked into mortgages.

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  • What Do the Unemployment Numbers Truly Divulge?

    Posted on May 11th, 2009 spicer 1 comment

    The first Friday of every month is certain to be a volatile ride. As investors attempt to “pre-game” the employment report and others jump on board the second the report hits the feeds, volatility in the market is certain, at least for one day. However, the impacts of unemployment are long lasting and will hurt generations to come as the eventual recovery seems to be farther in the distance.

    Employment Isn’t About the Here and Now

    When the numbers record even one job loss, it’s not just one job lost for one day. It could be months or years before that one previously productive member of the workforce re-enters back into the job market. As the number of employed people continues to soar, regardless of the pace, the fundamentals of the economy continue to sour.

    The Rate Matters – Not the Numbers

    April’s unemployment report showed that 8.9% of the present workforce is currently unemployed. Many more are working slack labor or part-time to make up some of the full-time shortfall.

    For the macro economy, however, the picture is much bigger. An unemployment rate of 8.9% means that 8.9% of people won’t be able to pay their bills, make mortgage payments, or purchase the products they may need or want.

    Banking Needs a Band-Aid

    Each month of negative growth in the job market is one more month that banks will not receive their monthly mortgage payments, which results in a number of new foreclosures. Many loans made during the real estate boom have not yet recovered enough in monthly payments that the principle has been recovered. Even with extensive bailout cash, the banks simply can’t withstand continuous job losses.

    Don’t Get Fooled

    When the reports surface, don’t be fooled into the one-time trading possibilities. The job market is a very important part of the economy because the reports practically show how productive the nation as a whole truly is. Even if we’re losing fewer jobs, there are still more individuals lining up at the unemployment counter.

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  • The Regression of Risk

    Posted on May 7th, 2009 spicer No comments

    As talking heads begin to discuss the potential end of the recession, there are many lessons to be learned about the last 18 months of economic slowdown. The lessons learned this time can better prepare investors for the future. Bubbles and market fallouts should be expected, and though rare, they do lend opportunity to the well timed investor.

    Gold and Treasuries

    Until last fall, investors never truly had as much interest in Treasury bonds as was seen during the credit crunch. Investors had previously fled equities as recessions loomed, but rarely did they fly into Treasury bonds. Previous recessions were marked by investors flooding into corporate debt to protect their wealth, and Treasuries were out of the question for all but the most paranoid investors.

    Gold’s run was particularly interesting; global turbulence in the financial markets and the fear of deflation actually sent gold higher, which makes little rational economic sense. Gold should have dropped during a deflationary period, as investors typically buy gold to protect from inflation – not deflation.

    The Next Step

    As with any market catastrophe, investors start dumping risk, and they move into “safe” investments. Knowing what is understood now about investor interest in Treasuries and how they responded to a credit crisis lends credibility to the idea that for all future recessions, Treasuries will be the safe haven choice. Any future economic crisis will without a doubt send investors fleeing back to treasuries and to even “safer” investments like gold.

    Munis Should Appreciate ETFs

    Outside of exchange-traded funds, investors had very little interest in municipal bonds, as shown by the spread between corporate debt yields and muni yields. With many localities facing issues with raising cash, primarily from slumping real estate values, investors were disinterested at best. Without the easy access that exchange-traded funds offered, there was little hope that many localities, especially in California, would be able to raise much needed cash.

    With its soaring popularity during the recession, exchange-traded funds will certainly continue to play an important role in how investors do business in the coming months to years. ETFs have secured a place in every portfolio as investors again think about the cost of carry, as well as the importance of diversification.

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  • How Chrysler’s Failure Will Impact Private Equity in Financial Markets

    Posted on May 5th, 2009 spicer No comments

    For many years, private equity has played a critical role in finding the fundamental value of any publicly traded business. After all, it is not until a takeover occurs that a business is sold for its true economic value, and often the sale is completed at a hefty premium to an already pricey business. Chrysler’s failure with private equity will spawn a new day in age with private capital; investors will again learn to be cautious, even with a business as large as Chrysler.

    Where Will Private Equity Venture Next?

    Private equity’s best investment is likely in the financial sector, where assets are as cheap as they are likely worth. However, if you’re confident in an imminent turnaround, the possibility to make large sums of money with mortgage-backed securities is still present. Recently, private equity has experienced a thirst for financial product companies; CVC Capital’s purchase of iShares shows the possibility for further consolidation in the financial service industry.

    Private Equity Had Poor Timing

    Private equity firms had incredibly poor timing with their most recent purchases. Several highly leveraged and big ticket purchases were completed with large amounts of debt. The most poorly timed were investments in media firms and newspapers, which flourished as businesses expanded and marketed their new products, but fizzled as consumers stopped spending.

    Private Equity Will Definitively Start Making a Splash

    Recessions always bring widespread consolidation as competitors buy their previous rivals’ assets for mere pennies on the dollar. Other businesses, for whom buying additional means of production makes little economic sense, gain from private equity purchases to form new corporations.

    IPO Heyday

    The IPO scene should soon liven up as investors bring cash back to the market. Outside of financial services and exchange-traded products, IPOs have been virtually non-existent with very few firms confident they’ll be able to raise sufficient capital. This should soon change as treasury yields drop to reflect the Federal Reserve’s interest rate policy and investors seek better returns for their stock of cash. In addition, while this will be no tech bubble of the late 1990s, alternative energy is starting to look marketable.

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  • How to Profit from the Reflation Trade

    Posted on April 29th, 2009 spicer No comments

    When macroeconomic indicators show neither inflation nor deflation, what happens to our currency? Reflation!

    Although the United States, through its monetary and fiscal policy, has added trillions of dollars to the financial system, consumer prices and other aspects of the economy show deflation, as consumers purchase less and value products at lower amounts.

    Inflation Imminent

    Inflation is the black cloud hanging over the market, which is getting ready to pounce. The mathematicians at the Fed say inflation isn’t occurring; prices are low, but we have yet to see consumers spend money. Secondary inflation, including rising prices, only begins after the general populace has a willingness to spend money.

    Compare the modern day to 1970’s stagflation; after everyone realized that the money supply was inflating, they started spending their money to make sure their currency wasn’t worth less the next month.

    What’s a Good Reflation Investment?

    Any financial instrument that is not currency-based is a good investment for the reflation trade. At this point in time, the most attractive investments are both gold and inflation protected treasury bonds, or TIPS. However, remembering back to 2002 when the reflation trade was again present, stocks fared relatively well as the economy improved.

    Banks Benefit the Most from Reflation

    The banking system, by far, has the most to gain than any other industry in a reflation trade setting. When the value of all assets rise, including their own devalued mortgage backed securities and poorly performing derivative investments, the result is improved profits and better quarterly results for the banking sector. If the industry didn’t come with the baggage or the smoke and mirrors of the modern stock market, the banking sector would be a great place to put your money – but only if you can afford the risk.

    Learn from History

    History suggests that the Federal Reserve does not have a good track record in removing inflation after it has been injected into the market. Although the Fed has a greater grasp on the market with its ability to sell the securities and treasuries which it has purchased, economics decided by one board of members is rarely a perfect policy. Just as credit was pushed into the system, it can be removed. Keep in mind the Great Depression was started by a contraction in the money supply by 33%, primarily lead by poor Federal Reserve decision making. Catch on the reflation trade while it exists, but don’t be afraid to bring it all back into your portfolio when inflation is official.

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  • How Legitimate Are Recent Banking Earnings?

    Posted on April 28th, 2009 spicer No comments

    To spectators, the banking industry appears to be staging a comeback rally. April earnings season was easy on the market, as many companies and banks beat expectations. However, can this round of earnings be trusted? Or are the numbers just a result of another mark to market bounce?

    The Fundamental Facts

    Economically, the fundamentals are grim. Thousands are losing their jobs each and every day, real estate continues to plummet, and as a whole, consumers just aren’t ready to part with their money as they were just one year ago. As a result, many loans that were previously paid on time, every time, are now showing up 30 days late or not at all. Banks are losing money on these loans, but when was the last time that any bank “wrote off” any bad loans? Months ago!

    Banks Aren’t Forecasting Losses – They’re “Revaluing” Them

    Previously, banks would set aside large cash blocks in their budget to cover any loans that went sour. This strategy allowed banks to set aside as much liquidity as they needed, and subsequently, investors could obtain a glimpse of how well, or how poorly, their investments were performing. Today, banks have much more flexibility, granted from the mark to market accounting rule change that allows them to value their portfolio however they please. If you were a bank representative in this scenario, would you forecast losses, or simply “revalue” them?

    The Bank’s Dangerous Valuation Power

    If you have an ability to arbitrarily value any asset you own, you would wield tremendous power. Any asset in your possession without a real and liquid market could be given a “make believe” value.

    For example, used refrigerators don’t have very liquid markets, and subsequently, you could value yours to be worth $20,000. Even if your refrigerator isn’t worth $20,000, you can state it on your balance sheet at $20,000 worth of assets, and you can account for losses against that $20,000 asset.

    Under this accounting system, you’ll always win, and so will the banks. The only way for banks to report any sizable losses is if their cash gets drawn down, or else they can instantly and easily “create” more wealth just by revaluing a certain asset. When it comes to banking stocks, caveat emptor.

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  • How to choose an index fund

    Posted on April 7th, 2009 spicer 1 comment

    Security-market indexes allow investors to compute total returns and risk for an aggregate market or some components of a market over a specified period of time. The computed return of the aggregate market is then used as a benchmark to compare the performance of individual portfolios. This makes sense because investors should constantly outperform the market. According to a basic assumption of portfolio performance evaluation, investors should be able to experience a risk-adjusted rate of return comparable to the market by selecting a large number of stocks of bonds from the total market. Benchmarking an aggregate stock market index does exactly that.

    Index funds are passively managed mutual funds that buy stocks and hold them in a portfolio that approximates the index. The most commonly trailed index is the S&P 500, consisting of 500 large companies selected by Standard & Poor’s, while the best recognized index fund is the Vanguard 500 from The Vanguard Group, which tracks the S&P 500.

    To choose an index fund, investors should primarily know which index the fund follows in order to be able to handle the risk and expected. Not all index funds have the same risk-return relationship. Moreover, the performance of an index fund does not exactly match that of the index because of management fees.

    The increased variety of index funds over the last ten years has also increased the flexibility in constructing a well-balanced portfolio made up entirely of index funds. Therefore, it becomes essential for investors to be aware of their numerous options.

    Considering the cost and the tax effects is another factor that needs to be examined. A common assumption about indexing is that all index funds are cheap because they do not demand the resources of active management. Yet, some index funds charge surprisingly high annual expenses. Moreover, another common belief is that all index funds are tax-efficient. Yet, it depends on the position that the index funds sell. Small positions do not obtain considerable taxable gains.

    Index funds offer diversification and lower fees than actively managed funds. Investors receive capital growth and a dividend income return similar to the market as a whole. Thus, index funds are the best solution for investors who believe that stocks outperform other investment classes and want to allocate their share investments without worrying about potential managerial flaws such as those that occur to actively managed funds.

    Conclusively, index funds are the best solution, especially for investors, who prefer long-term growth without having to pay much attention.

    About Guest Author:

    I work as a financial and investment advisor but my passion is writing, music and photography. Writing mostly about finance, business and music, being an amateur photographer and a professional dj, I am inspired from life.

    Being a strong advocate of simplicity in life, I love my family, my partner and all the people that have stood by me with or without knowing. And I hope that someday, human nature will cease to be greedy and demanding realizing that the more we have the more we want and the more we satisfy our needs the more needs we create. And this is so needless after all.

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  • Comparing Day Trading with Other Trading Timeframes (March/2009)

    Posted on April 3rd, 2009 spicer No comments

    From March 10 to March 26 of 2009, the market indices showed a tremendous climb. The S&P 500 was up 22%. The DOW was up 21%. The NASDAQ was up 19%. The S&P/TSX was up 17%. As of the March 27 close, the indices have retreated, likely due to profit taking to lock in gains after the rise in the past couple of weeks. This may be a pause, or it could be the beginning of a trend reversal. We do not yet know.

    I day traded 3 stocks on the TSX, employing long and short positions. I traded in 1000 shares of K (Kinross Gold) and TLM (Talisman Energy) and 500 shares of RIM (Research in Motion). The objective is to take price changes of $0.05 to $0.10 per position to yield $50 to $100 gains less $14 commission. My own rules are to take the gain if it is there. The shorter the time period, the better. Shortest duration was under a minute to buy, then sell a long position for an $86 net gain. Longest duration trade was held until the following trading day which is clearly not day trading! My rules are there for me to break and I ultimately have to account for my own actions and the resulting consequences. If I could hire a trader that follows rules without exception and whom I can trust to return gains of 15% per month, I would. Until then, I will have to do. Seriously, if I can only suppress my emotions and follow rules without exception, I would be far better off in trading performance.

    From March 11 to March 26, I made 15% net gain in my margin account. For that same period, following candlestick technical analysis, StockTradersPlace showed a 22% gain in K, 13% gain in TLM and 17% gain in RIM. So, my day trading under-performed the short-term candlestick indicators as well as the indices.

    I have stated this before and I say it again. If on March 11, I knew that the markets would go up by 20%, I would have entered into 1 trade on March 11 and sold out on March 26. Since we never know ahead of time how far a stock will climb and the precise timeframe, we resort to various trading techniques - day trading, short-term trading, longer-term buy and hold, options trading, technical analysis, etc. In retrospect, I can say that I under-performed with my day trading. However, day trading is a safe way to avoid the volatile inter-day price movement of stocks which is what an active trader has been facing prior to the recent run-up. Even during this run-up, you can see that it wasn’t an up candle every day. There were dips that suggested a reversal at a few points along the way.

    For me, I will continue to utilize day trading along with short-term inter-day trading as per candlestick indicated trends. I utilize whatever works, including equity options in the future if and when I figure out how to succeed with that.

    StockTradersPlace (http://stocktradersplace.com) provides a trend following system based on candlestick technical analysis. http://stocktradersplace.blogspot.com provides a “Stock Trading with StockTradersPlace” companion guide. Empower yourself and show that you can repeatedly execute winning trades using StockTradersPlace as an element of your trading tool box. StockTradersPlace provides viewable demo stocks for guest users and a 14-day free trial for sign-up to view all supported stocks.

    About Guest Author:

    http://stocktradersplace.com/david

    StockTradersPlace (http://stocktradersplace.com) provides a trend following method to boost your trading success. Use our stock trading method to execute winning trades on a consistent basis.

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  • Who’s Listening to Bernanke Anyway?

    Posted on March 26th, 2009 spicer No comments

    In the past few weeks, the role of the Federal Reserve has ballooned. Thanks to AIG bonuses, a “contracting” money supply, and increased involvement of the Federal Reserve in free markets, you would think Bernanke may have won a presidential election. Ironically, it appears that the more Bernanke starts to speak, the more the market begins to listen. Here’s a recap of Bernanke’s ability to move the markets over the past year.

    First Bank Failures – Bear and Lehman

    The markets were in panic as LIBOR rates soared with delinquencies on mortgage debt and the derivative time bomb began to unwind with AIG. This is when Bernanke started garnering attention from Wall Street as he spoke of the necessary evils of bank bailouts and orchestrated inflation to prop up the world’s markets. Traders hated him almost as much as Henry Paulson, and the markets tumbled a few hundred points every time Bernanke opened his mouth.

    The Fall Credit Crunch

    When the markets finally realized that they would be testing their lows, Bernanke’s addresses became far more important. However, each time he again opened his mouth to discuss new policies, the markets would tumble by several hundred points. After TARP, which was initiated by Paulson, the markets weren’t happy and took further nose dives.

    Today - Quantitative Easing

    For the first time in nearly a year, Ben Bernanke is starting to feel love from Wall Street, but only after new quantitative easing (inflation) steps were taken. For the first time in the crisis, it appears that Ben Bernanke has some kind of relevancy in the world markets.

    The Question is…Who’s Listening?

    Although Bernanke is finally riding the waves he wants on Wall Street, by practically moving the market with every recent step he has taken, it does pave the way for the question of who is really listening to the Chairman. Are the markets following Ben, or are they reviewing him? They hated TARP, hated most purchases by the Fed of mortgage-backed securities, but they’re loving inflation.
    Thus, the question remains: Wall Street, are we rating Ben Bernanke or only trying to make an easy dollar off what he says?

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  • Quantitative Easing Can Be a Big Win – If You Play it Right

    Posted on March 25th, 2009 spicer 1 comment

    News that the Federal Reserve shall expand its balance sheet by nearly a trillion dollars may have made Wall Street happy if only for one day, but it can make your portfolio happy too. The new plan to be employed by the Fed will be a boon for the right companies. The key now is to get in the market before everyone else does.

    Commodity Producers Are the Best Bet

    If you’re ready for some big moves in a bear market, the commodity producing stocks should be the first place to turn. Commodity producers enjoy natural leverage; that is, when the price of commodities rises, the profits and earnings per share for commodity companies rise disproportionately without any additional operational expenditure.

    For instance, were oil to rise again to $100 per barrel from $50, the result wouldn’t be a 100% increase in profits; it would likely be exponential. If it costs Exxon Mobil $40 to produce a barrel of oil, an increase to $100 would mean profits increase 500% from $50. If you’re opting for the ETF route, don’t buy USO to profit; instead, go with OIH and buy the industry, not the commodity. Likewise, for gold, don’t buy GLD, but GDX.

    Go the Extra Mile

    You could also seek out individual high-cost producers. These are stocks that have high costs for producing commodities, and as such, benefit far more when commodity costs rise. However, you have to be certain that commodities will rise; otherwise, these stocks lose money even with high production capacity.

    Want Some Volatility? Buy the Financial Industry

    Although the financial industry enjoyed some reprieve this week, there simply is not enough money to repay all of the bad debt on their books. An increase in the money supply will help many people on the borderline make their loan payments, assuming their income follows the rate of inflation. Fixed interest mortgages will easily be repaid, albeit at a lower rate than the market could obtain, but banks simply cannot write down all of their bad debt.

    Again, when considering the ETF route, you don’t need leveraged intra-day ETFs and ETNs. Instead, consider proven XLF, which tracks many of the larger banking institutions in the US.

    While the Fed’s plans hope to bailout the banks and the overall economy, your portfolio can take advantage of the influx of funds and enjoy the ride as well.

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