Well kids, it’s half-time for 2009. I made few predictions back at the beginning of January and I thought I’d take a moment and revisit those predictions to see how my Nostradamian abilities have fared thus far. And……away we go!!
Predictions
Bernie Madoff Ponzie Scheme will exceed $50B- As the final answer could take years to figure out considering if the value of losses should be based on actual investments or the valuations of the fake investments. Honestly, I’m not sure why they are even debating this, but it would seem the actual money invested should be the given valuation. So far, investigators and the SEC have increased the losses to $65B in the past couple of months. So far, I’m partially correct, but that could change either way.
Nationwide Increase in Tolls- A few states have announce state wide toll increases, however, the increases are nothing out of the ordinary and certainly not a nationwide epidemic. I assumed an increase would occur in order to offset tax revenue reductions from employment and sales taxes. Still six months left to change.
Worldwide Number of Billionaires Falls Below 1,000- Unless there is a massive rally in the markets around the world, I should be just fine. The number at the beginning of the year was about 1,125 and as during the month of May, it was announced the number fell below 800. I should be safe on this one.
The British Pound will fall below the US Dollar in value- It is a good thing I’m not trading in currencies. Yahoo Finance posted the exchange rate as $1USD equal to 0.681 British Pounds at the beginning of 2009. It has come down a little and currently sits at 0.610. The British Pounds has not nosedived (yet) and the US Dollar is sucking a little more than I thought. With no interest rate hike in the near future by the Fed., I will most likely be wrong.
The Dow Will Break Through 7,000 in the First 100 Days- I was very accurate with this prediction. I was scary accurate last fall when I said the DOW would bottom around 6,500 sometime during the late 1st Quarter of 2009. March 9th, it closed at a low of 6,440.08. It closed below 7,000 on March 2nd for the first time at 6,763. No magic formula for that prediction; just a gut feeling and a little bit of luck.
More Ridiculous Bailouts For Big, Stupid Companies That Suck- I’ve actually stopped keeping track. Unless you’ve been living under a rock for the past six months, you know this one is dead on. Anyone could’ve predicted that. The scary thing is the amount of money outlay has heighted the threat of inflation. The really scary thing is that the Fed isn’t going to hike the interest rate in the near future and they stated they do not feel inflation is a threat. Wow, wow, wow, wow, holy F’ing WOW!!
One of the “Big 3” Auto Companies Will Fail or File For Bankruptcy- In most cases, 2 out of 3 ain’t bad, but when we are talking about the Big 3 filing for Bankruptcy protection; well, it’s bad! I should’ve left the fail part out, because I knew the Gov’t wouldn’t let any of these idiot companies go out like Bear and Lehman, no matter how much money they had to print!
At Least One European Country Will Drop the Euro- No one yet, but I’m still betting on Italy to be the first and go back to the Lire. Don’t count out Spain, Germany or Ireland, either.
Predictions that Most Likely won’t Happen in 2009
England will default- If the British Pound goes down, this will happen, but no real danger, yet.
AIG will Fail- As long as the Gov’t is still handing out monopoly money quantities of bailout money, AIG should be safe.
Unemployment will reach 20%- As of now, we’re hovering in the 10% range, which most economists are saying will be the peak. Unless something huge happens or they start computing the rate the way it used to be prior to “Wild Bill” (Clinton), then this number is unlikely.
Oil will Drop Below $25- I was close just over $32 was the low. It is sitting at about $70 currently and should settle somewhere between $80-$90 by the end of the year, unless something very unexpected happens.
China’s Economy will Blow Up (Not in a Good Way)- I’m still convinced that China is the most overrated economic producer in the world. If the US Dollar experiences high inflation, you could see some black clouds hovering over China, since they are sitting about ½ Trillion in US Treasury Bonds. Their record keeping and earnings reporting guidelines are poor, which can lead to easy book cooking and other sketchy ways of reporting company financials.
Housing Market Recovers- At this point, it seems as though the housing market has stopped the freefall in prices, but a recovery of the losses sustained over the past 18 months is much further off. The market has basically stabilized and hopefully will resume the historic 6% average annual appreciation.
Oil Exporters will Figure Out how to Protect their Tankers from Pirates- I’m still sticking by my idea of Bo and Luke Duke riding shotgun on these things and when a speed boat approaches, they crank back their bows and blow these guys out of the water. I would have suggested the A-Team, but they apparently aren’t best shots around. How can it be that during the shows run, they failed to actually shot anyone despite firing about 2,000 AK-47 rounds per show at the bad guys? The only way they would work is that the sun glistening off of Mr. T’s gold chains might blind the speed boat driver and end up crashing into the side of the tanker. Face it (no pun intended), since Hannibal has been deceased for 15 years, no one is around to devise a solid plan to foil the would-be pirates. Even if he was still around, smoking cigars on an oil tanker is probably not the safest thing.
The National Debt Reaches $15 Trillion- Still not likely, but we are now sitting at a smidge under $11.5 Trillion instead of smidge under $11T. Unless a wave of massive bailouts happen, which is very unlikely, then we will not come close to $15T. Unless things change, we will reach that mark in the near future.
The Government Issues Another Stimulus Payout- No word on whether any payout will be given. The government is more concerned with keeping unemployment at bay, rather than giving out $600 checks to everyone in hopes that they’ll visit the mall and spend it.
Gold will Top $1,000 per Ounce- Gold is currently at about $940 per ounce. The price has been driven up due to investors using it as a hedge against inflation, rather than going with defensive stocks. This shows that until investors feel confident about the market, the price of gold could still go higher.
Keep an eye on these for the second half of 2009.
Wednesday, July 1, 2009
Wednesday, June 17, 2009
T.E.D.’s Excellent Adventure!
You’re probably wondering why Bill wasn’t mentioned in the title of this segment. Well, the TED I’m referring to is the TED spread. The TED spread is the difference in the yields between T-Bills and the short term bank lending rate. When the sh*t hit the fan last fall, the yields on T-Bills were beaten to death by the sharp increase in demand due to the rotation of investors out of stocks and into T-Bills to wait out of the storm. Historically, the spread in a normal market is about 10-50 bps (0.1%-0.5%), but last fall saw record spreads over 200 bps (2%). Generally, the spread fluctuates according to the supply and demand of T-Bills.
So, you’re probably wondering why the hell I’m writing about this. Well, here’s the deal. The spread has been gradually shrinking since the end of the 1st quarter. As of the end of May, the spread was sitting at around 60 bps (0.6%), which means that the yield of the T-Bills is increasing. So, what does this tell us? The supply of T-Bills is increasing, which means that more investors are starting to take the money they parked into the T-Bills and are investing it elsewhere. What else does this tell us? Well, it tells us that folks are feeling more confident about the market and are starting to put money back into stocks, which could signal a broad rally and not suckers rally. It also tells us that companies are starting to issue bonds again, which gives rise to the credit freeze thawing. Several companies had bond issuances ready to go, but held them out of the market until they felt the demand was there.
Remember what I’ve told you before. The market tends to recover well in advance of the economy. If you wait for unemployment to drop and some wing-nut from the Fed. declaring the recession is over, then you will have missed the boat on the rally. If you recall, around this time last year, the Fed. finally announced we were in a recession that started in November 2007. I declared it in January 2008 as it was happening, not 8 months into it. Am I saying you should jump in with both feet? Hell no. Do your homework and buy in incrementally. Be aware of inflation and keep a healthy amount (20%-30%) on the sidelines in case things go south, so you can remain flexible and be able to scoop up any bargains that may come or at least increase any current positions and lower your cost per share. Tune in next time, when I discuss inflationary hedges and why gold may be a poor choice, let alone the consensus best choice to hedge inflation. Until then……Be excellent to each other and party on dudes! (you know I had to come back to that!)
So, you’re probably wondering why the hell I’m writing about this. Well, here’s the deal. The spread has been gradually shrinking since the end of the 1st quarter. As of the end of May, the spread was sitting at around 60 bps (0.6%), which means that the yield of the T-Bills is increasing. So, what does this tell us? The supply of T-Bills is increasing, which means that more investors are starting to take the money they parked into the T-Bills and are investing it elsewhere. What else does this tell us? Well, it tells us that folks are feeling more confident about the market and are starting to put money back into stocks, which could signal a broad rally and not suckers rally. It also tells us that companies are starting to issue bonds again, which gives rise to the credit freeze thawing. Several companies had bond issuances ready to go, but held them out of the market until they felt the demand was there.
Remember what I’ve told you before. The market tends to recover well in advance of the economy. If you wait for unemployment to drop and some wing-nut from the Fed. declaring the recession is over, then you will have missed the boat on the rally. If you recall, around this time last year, the Fed. finally announced we were in a recession that started in November 2007. I declared it in January 2008 as it was happening, not 8 months into it. Am I saying you should jump in with both feet? Hell no. Do your homework and buy in incrementally. Be aware of inflation and keep a healthy amount (20%-30%) on the sidelines in case things go south, so you can remain flexible and be able to scoop up any bargains that may come or at least increase any current positions and lower your cost per share. Tune in next time, when I discuss inflationary hedges and why gold may be a poor choice, let alone the consensus best choice to hedge inflation. Until then……Be excellent to each other and party on dudes! (you know I had to come back to that!)
Thursday, June 11, 2009
How And When To Get Defensive
What the heck does investing defensively mean? Why and when should we invest in such a manner?
Ah, these questions are very common and often addressed on such silly shows that appear on MSN, however, they are rarely ever explained in a manner that the average investor can understand. They merely spit out terms such as cyclical and business cycle to describe stocks. They probably use this, because they themselves have no f’ing idea what they are talking about.
Anyway, what does investing defensively mean? In the most basic terms, it means investing in companies that do well or are consistent during economic booms and busts. Basically, they produce goods and services that are needed regardless of the state of economy and market (a.k.a. non-discretionary items). Some of the best defensive companies actually perform better when economic conditions are poor.
Why should you invest defensively? The main reason for having your portfolio contain some defensive stocks is so you have a hedge for when the market takes a big dive. This will mitigate your portfolio from having a large drop and taper your paper losses. It also helps balance your portfolio.
When should you invest defensively? This question has a not so simple answer. It all depends on the person and their investment goals. If you are the type that doesn’t like a lot of risk, then your portfolio should contain mostly a diverse number of defensive stocks with a mix of bonds, cash and other equities. If you like a lot of risk, then you should probably only invest defensively, when you think the market is ready for a large drop (at least 10%). Then you would trade out your bull market stocks for defensive stocks. If you just the average investor willing to take a little risk, but not a lot of risk, then you should always carry some defensive companies in your portfolio. If you think the market is overvalued and due for a correction, then you would want to increase your defensive holdings to reduce your losses in the event of a large drop. If you think the market is undervalued, then you should look to lighten up on your defensive holdings and snap up stocks with bigger potential upside.
To further illustrate what defensive stocks are, I’ll list some examples and why they are considered defensive stocks.
Johnson & Johnson (JNJ)- huge product line from shampoo to over the counter medicine. Nearly all of their products will continue to be purchased during poor economic times.
Proctor & Gamble (PG)- basically, the same reason as JNJ, but their product lines deal heavily in beauty and health care. However, they also have food and coffee brands.
McDonald’s (MCD)- does well in any economy, but does extra well in poor economies, since people will sacrifice the health for cheap food.
Reynold American, Inc. (RAI)- one word, “Tobacco”!
Ah, these questions are very common and often addressed on such silly shows that appear on MSN, however, they are rarely ever explained in a manner that the average investor can understand. They merely spit out terms such as cyclical and business cycle to describe stocks. They probably use this, because they themselves have no f’ing idea what they are talking about.
Anyway, what does investing defensively mean? In the most basic terms, it means investing in companies that do well or are consistent during economic booms and busts. Basically, they produce goods and services that are needed regardless of the state of economy and market (a.k.a. non-discretionary items). Some of the best defensive companies actually perform better when economic conditions are poor.
Why should you invest defensively? The main reason for having your portfolio contain some defensive stocks is so you have a hedge for when the market takes a big dive. This will mitigate your portfolio from having a large drop and taper your paper losses. It also helps balance your portfolio.
When should you invest defensively? This question has a not so simple answer. It all depends on the person and their investment goals. If you are the type that doesn’t like a lot of risk, then your portfolio should contain mostly a diverse number of defensive stocks with a mix of bonds, cash and other equities. If you like a lot of risk, then you should probably only invest defensively, when you think the market is ready for a large drop (at least 10%). Then you would trade out your bull market stocks for defensive stocks. If you just the average investor willing to take a little risk, but not a lot of risk, then you should always carry some defensive companies in your portfolio. If you think the market is overvalued and due for a correction, then you would want to increase your defensive holdings to reduce your losses in the event of a large drop. If you think the market is undervalued, then you should look to lighten up on your defensive holdings and snap up stocks with bigger potential upside.
To further illustrate what defensive stocks are, I’ll list some examples and why they are considered defensive stocks.
Johnson & Johnson (JNJ)- huge product line from shampoo to over the counter medicine. Nearly all of their products will continue to be purchased during poor economic times.
Proctor & Gamble (PG)- basically, the same reason as JNJ, but their product lines deal heavily in beauty and health care. However, they also have food and coffee brands.
McDonald’s (MCD)- does well in any economy, but does extra well in poor economies, since people will sacrifice the health for cheap food.
Reynold American, Inc. (RAI)- one word, “Tobacco”!
Wednesday, May 27, 2009
Who’s Next: Bailout and Failure
Sorry for my long layoff. The market has not been doing much, so there really isn’t all that much to discuss. However, we are nearly five full months into 2009 and a lot has happened. As a matter of fact, it appears that two more of my predictions for 2009 may in fact come true. One is that one of the big three may fail. GM is under pressure to restructure its debt and cut expenses by June 1st and I do not think they will make it, but you never know. The second is that the Federal government may have to bail out California.
I’d discuss those situations further, but both are extremely complicated. I can summarize GM’s situation as dire and most likely will have to be taken over by the Feds, much in the same way as Fannie May and Freddie Mac. If not a take over, then bankruptcy is the only other option. If you own any GM shares, sell now and shame on your for holding them this long.
As for California, their main problem is the fact that the majority of the state’s tax income is directly linked to property values. When times are good for the housing market, the tax revenues are sweet, but when foreclosures and slumping housing values occur, then revenue is a little thin. The problem with California is not so much the lack of tax revenue post-housing crash, but what happened to the loads of money that came in from 2004-2007 when homes were overvalued? It was spent is the answer and the budget they are used to working with has a huge gap ($20+ billion) as a result. Way to plan for the future Arnold!
Anyway, enough of the bad stuff. I’ve got good news!! The market has stabilized and is up about 25% since the bottom in early March. Housing prices seem to have stalled and are no longer in a free fall. What does all of this mean? It means that we have about 6-9 months before we see the economy start to grow and unemployment start to shrink. We should see this recovery start between December 2009 and February 2010. Of course, it won’t be officially acknowledged until the middle of 2010.
Stay focused on the stocks you own and if you feel confident; start buying in slowly. Beware of the banks and other financial sector companies. I still think that there will be at least one large bank or financial institution that will fail before the year is out. Be sure to do you homework and understand the risks involved when investing. Patience, due diligence and having clear investment goals are the ingredients in choosing solid companies to invest in which are appropriate to your investment goals. Good luck and no matter how the market reacts, good or bad, always have cash on hand. If you are 100% invested, then you need to start selling some stocks or adding cash to your portfolio. Having all your money in the market constricts your flexibility. With a dynamic market that exists nowadays, you have to be able to make moves quickly and take advantages of the drops. No matter how good or bad the market is, you need to have a healthy amount of cash on the sidelines ready to jump into the game at a moments notice.
I’d discuss those situations further, but both are extremely complicated. I can summarize GM’s situation as dire and most likely will have to be taken over by the Feds, much in the same way as Fannie May and Freddie Mac. If not a take over, then bankruptcy is the only other option. If you own any GM shares, sell now and shame on your for holding them this long.
As for California, their main problem is the fact that the majority of the state’s tax income is directly linked to property values. When times are good for the housing market, the tax revenues are sweet, but when foreclosures and slumping housing values occur, then revenue is a little thin. The problem with California is not so much the lack of tax revenue post-housing crash, but what happened to the loads of money that came in from 2004-2007 when homes were overvalued? It was spent is the answer and the budget they are used to working with has a huge gap ($20+ billion) as a result. Way to plan for the future Arnold!
Anyway, enough of the bad stuff. I’ve got good news!! The market has stabilized and is up about 25% since the bottom in early March. Housing prices seem to have stalled and are no longer in a free fall. What does all of this mean? It means that we have about 6-9 months before we see the economy start to grow and unemployment start to shrink. We should see this recovery start between December 2009 and February 2010. Of course, it won’t be officially acknowledged until the middle of 2010.
Stay focused on the stocks you own and if you feel confident; start buying in slowly. Beware of the banks and other financial sector companies. I still think that there will be at least one large bank or financial institution that will fail before the year is out. Be sure to do you homework and understand the risks involved when investing. Patience, due diligence and having clear investment goals are the ingredients in choosing solid companies to invest in which are appropriate to your investment goals. Good luck and no matter how the market reacts, good or bad, always have cash on hand. If you are 100% invested, then you need to start selling some stocks or adding cash to your portfolio. Having all your money in the market constricts your flexibility. With a dynamic market that exists nowadays, you have to be able to make moves quickly and take advantages of the drops. No matter how good or bad the market is, you need to have a healthy amount of cash on the sidelines ready to jump into the game at a moments notice.
Monday, May 11, 2009
Managing Risk In Your Portfolio
Let’s get it all out on the table. We are totally baffled by what is going on in the market! The average person does not trade stocks, but rather will hold them for a number of years. We have two things working for us. One, the market is down and pretty much every stock is cheap. You can sit there and say two to five letters out and pick a winning ticker. Let’s put it this way geniuses; anyone who bought anything since January 1st, made money. That is just dumb luck or a very savvy person seeing a downturn turning further down.
Let’s be honest, no one saw the down turn (the big one in October) coming, except me. I missed the bottom by two weeks premature. I did not however, realize there would be a 25% hike from that bottom by mid-November. I figured the run would come in December. But, the market is a crazy thing. No one is immune to the carnage that can come from what the market can do. Diversification is the key; you need to spread your investments appropriate to your age and investment goals.
If you set some rules for yourself, you can remove the emotional moves that people make and ultimately keep yourself out of serious trouble. Setting up buy points and sell points can lead you to simply sell when the price reaches a certain point and buy when the price falls to a certain level. A lot of hedge fund managers operate in a similar manner. Keeping a certain percent cash level in your portfolio is also another way to tell yourself to buy or sell.
Rebalancing your asset spread can also help you sell off stock and take gains and buy more stock that has dropped. A very simple example is you own $50 of Company A and $50 of Company B. At the end of the month, Company A’s stock value is $60 and Company B’s stock value is $45. Your portfolio is worth $105 (up from $100). If you rebalance your portfolio, you would have to sell $7.50 worth of Company A stock and pick up $7.50 worth of Company B stock in order to have Company A and Company B’s value be $52.50.
Keep these little tips to help navigate the madness. Generally, using these tactics, will mitigate risk, but the trade off is that you will rarely buy at the bottom and sell at the top. The idea is risk management. Keep on keepin’ on!
Let’s be honest, no one saw the down turn (the big one in October) coming, except me. I missed the bottom by two weeks premature. I did not however, realize there would be a 25% hike from that bottom by mid-November. I figured the run would come in December. But, the market is a crazy thing. No one is immune to the carnage that can come from what the market can do. Diversification is the key; you need to spread your investments appropriate to your age and investment goals.
If you set some rules for yourself, you can remove the emotional moves that people make and ultimately keep yourself out of serious trouble. Setting up buy points and sell points can lead you to simply sell when the price reaches a certain point and buy when the price falls to a certain level. A lot of hedge fund managers operate in a similar manner. Keeping a certain percent cash level in your portfolio is also another way to tell yourself to buy or sell.
Rebalancing your asset spread can also help you sell off stock and take gains and buy more stock that has dropped. A very simple example is you own $50 of Company A and $50 of Company B. At the end of the month, Company A’s stock value is $60 and Company B’s stock value is $45. Your portfolio is worth $105 (up from $100). If you rebalance your portfolio, you would have to sell $7.50 worth of Company A stock and pick up $7.50 worth of Company B stock in order to have Company A and Company B’s value be $52.50.
Keep these little tips to help navigate the madness. Generally, using these tactics, will mitigate risk, but the trade off is that you will rarely buy at the bottom and sell at the top. The idea is risk management. Keep on keepin’ on!
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