Stocks To Go Long On

Ok kids, it's time to see what the heck you can buy in a market that is overvalued.  But if the market is overvalued, how can there be good buys?  The great thing about an irrational market is that there are always good buys in an upmarket and bad buys in a down market.  The first thing I do is take a look at down sectors and try to find companies that are only down because the sector is down. 

Currently, there are a couple of sectors that have beat up pretty badly despite the run up the market has had in the first quarter of this year.  The most beat up sectors have been financial, materials and energy.  Yes, even though gas prices and electricity have been up, the sector overall is down due mainly to natural gas and coal.  So, lets take a look at these sectors and see what is the best stock to purchase from each.

First, we'll look at the Financial sector and the king of value right now is Bank of America (BAC).  Yes, I know this is the largest bank in the world, so there cannot be very much growth for this stock, right?  You are correct sir, but we are talking about value, i.e. "undervalued" companies.  BAC is trading right around $9 per share.  It is up from its low of just under $5 in the past 52 weeks, but it is still way, way undervalued.  Looking at its financials, it has the most cash and also the most debt of any company in the world.  It has about $600B in cash and about $650B in debt.  The cash total comes out to about $56 per share and BAC is currently trading at just under one-half of its book value.  So, if BAC was trading at the value of its underlying assets minus its debt, it would be trading near $20 per share.  I've always felt this company was a mid-twenties stock.  The debt is alarming, but it is mainly due to BAC taking over Countrywide.  BAC has a huge stockpile of real estate that, once housing starts to turn around will become a huge cash cow when it starts unloading its inventory.  However, BAC will be up for a decent drop next month when Moody's lowers BAC's credit rating to just above junk bond status.  All the dummies will see that announcement and start dumping BAC, which is when the savvy investor will pounce.  I currently own BAC and the most recent buy I made was at $6.61.  I've never sold this stock and am looking to increase my position after the drop. 

Next up is the Materials sector.  Peabody (BTU) is a coal company and has been beat up excessively due to the decrease in demand for coal and the new EPA standards for emissions.  I believe the reaction to the slight decrease in coal demand and the new emission regulations are not the big hurdle that investors believe it is and have overreacted by dumping this stock.  It has a 52 week high of $69 and is currently trading just under $28.  I believe this stock is valued in the $85-$95 dollar range currently, so it is trading at a steep discount.  I do own this stock and currently am looking to add to my position.  Coal is going to be around for a long time, since it is so cheap and China, India and other developing nations are going to be driving up the demand and price. 

Finally, we have the Energy sector.  Chesapeake (CHU) has been beaten up to the tune of about a 33% drop in the past year.  CHU has continued to grow its assets and pay down debt.  The ship has been righted with this company as they were running massively in the red as recently as 2009.  This stock is cheap right now and the company is on the road to success.  Plus, Chesapeake is mainly known as an oil company, but has acquired large inventories in natural gas, which will position the company well, when the demand for natural gas begins to climb as the price of oil gets too high and forces consumers to think alternative energy.  Unlike the previous two companies, I do not own any stock in Chesapeake.

Just a reminder, these are stocks to go long on.  When I say going long, I mean that you should plan on owning these stocks for at least ten years.  They are not geared as trades, but if you do try them as trades, proceed at your peril. 

Market Correction Is Inevitable!

Of course, any vague statement like that can be justified like anything from Nostradamos.  Regardless, the market correction is coming at about a rate of 10% to 15% in the next three months.  In case you have not been paying attention, that means the broader market has been overvalued for over a year.  The job reports are insufficient to confirm an economic recovery. 

Greece and the rest of Europe are a time bomb.  Everyone seems to think that other countries lending other countries money is going to help.  But if, the other countries are trying to lend other countries money, in which, either of these countries has any money, then you have a trend that defies explanation. 

But, what do I know?  1+1 equals 2.  Not in today's world.  I have to cut this short, because it is embarrasing to be apart of such horse hockey (thank you Harry Morgan), so be it. 

Here is your long term investment.  Coal is totally out of favor.  By BTU.  I own this stock by the way, but coal is totally out of favor.  Anything else, jump ship.  Good. Luck.  I own BTU, btw.

Greece's Bailout: Delaying The Inevitable

The recent bailout of Greece orchestrated by the European Union (specifically Germany) helped Greece avoid defaulting on its debt.  The roughly $170 billion (USD) bailout helped reduce Greece's debt ratio to 121%.  Pretty sad state for Greece when the US, who is terrible with its debt, has a debt ratio of roughly 90%.  Even with the "Bailout", Greece's credit status was dropped from CCC to C.  For those of you who do not know the credit rating system, a C rating is basically a junk bond.  The sad thing is Greece is going to default anyway, so the EU just flushed $170 billion down the toilet.  Greece has made some changes to its financial policies, but more needs to be done. 

Europe is broke and the US is not doing much better.  The economic world we live in is made up of deficit spending and bailing out everyone.  The fact that deficit spending is a term that we are comfortable with is alarming.  All the politicians talk about reducing the government's deficit spending, but no one ever talks about eliminating it.  Spending has to be reduced everywere, but the geniuses in power cannot seem to agree on what to cut.  The reason why, is because they do not want to offend the special interest groups and hinder their chances of getting reelected.  We all know that the main job of a politician is to get reelected. 

On a more positive note, the market is overvalued, so we should see a pull back when investors start ringing the cash register and taking profits.  If that doesn't occur, then we'll just have to wait until Greece defaults and then we'll see the big pull back that market needs to get back to a more reasonable level.  Good luck!

Europe: Ice Skating Uphill.

Europe, as we know, is in deep trouble.  Debt is the obvious reason, but the more perplexing problem is how it got out of control.  The main problem is excessive borrowing and now it is at a point where the largest economies in Europe cannot produce enough income to pay down their debts.  In short, everyone is broke. 

So, what is the solution?  Obviously, cuts need to be made as well as taxes need to be increased to help bring the debts under control.  The problem with the solution is that the public is saddled with bailing out their home governments, while the governments are at fault.  Deficit spending must become a thing of the past and surpluses must be run as often as possible.  Otherwise, debts will continue to rise and countries will begin to default on interest payments and cause a trickle down effect that will throw the world markets into a tailspin. 

The US looks at Europe as a tragedy, but we should be weary of the fact that we as a country will be in the same boat if our financial management continues down the path we are on.  Currently, spending cuts are the only real answer to righting the ship.  Increasing taxes is not a viable option, with the present state of the economy, as the American public needs as much disposable income as possible to help pay down their debts and pump some money into the economy. 

Another major issue that could benefit the country in the long term is rewriting the corporate tax code.  The corporate tax code offers too many loop holes for major corporations to skirt paying taxes.  The corporations either sit on this money or reinvest it into the company in the form of research and development or issue it as dividends to attract more buyers of its stock, therefore raising the stock price. 

Originally, the primary reason for these loop holes in the tax code for corporations, was to give them more of their profits to invest in job creation.  Unfortunately, that plan has backfired as the large corporations are not using the tax code advantages they have to create jobs.  Small, privately held businesses create 75% of new jobs currently.  Until the tax code is rewritten and spending is reduced in the short term, the American public will ultimately have to deal with heavy tax increases to help control the increasing national debt. 

The American public needs to take care of what they can control.  Pay down your debts, increase your savings and prepare for hard days ahead.  Things will almost surely get worse, before they get better.  Italy is a primary example of where we are heading as a nation financially. 

Occupy Wall Street- Problem or Not?

Occupy Wall Street is now two months old and what has it accomplished? On the positive side, it has spread throughout the world to some fifteen hundred cities and it gives a face to the unemployment issues our country is facing. On the negative side, there have been hundreds of violent crimes commited by people participating or criminals using the encampments to their advantage as an area that is hard to police. When we see demonstrations like this (picketing, sit-ins, etc.), we have to wonder if this is the most effective way to produce the desired change.

In order to engage the desired change into becoming a reality, you have to understand the opponent. The opponent of the 99% is Wall Street and the rest of the remaining 1%. The opponent, being super wealthly, value money. Rather than standing around with signs and chanting about how unfair the wealth gap is and how Wall Street is made up of a bunch of crooks, you should do something to affect their cash flow.

According to Forbes, the top 400 income earners in the United States derived a vast majority of their income from dividends paid from their stock holdings. Since we know this about the 1%, then we need to ask ourselves how to change their dividend windfall. Dividends are paid from retained earnings. If the revenue and profit fall for a company, the company will tend to reduce or cut out the dividend completely. This will in turn reduce the dividends paid out to stock holders. If the dividend is reduced, some holders of that stock tend to reduce their holding of that stock or sell their entire position. This inturn will increase the supply of shares for sale and thus driving down the stock's price.

Now, on to Wall Street. Wall Street earns money from the trading of shares on the market. Each time a stock is bought or sold, Wall Street makes money. Therefore, the more volatile the market (high volume of shares trading) the more money Wall Street makes. The largest stock traders are the institutional traders (mutual funds, hedge funds, etc.). In order to limit the amount of shares they can move around, you have to limit the amount of money flowing into these funds. Most of the money comes from 401(k) (IRA's, too) contributions. If you stop funding your 401(k), then the money pouring into these funds will dry up and the market will come to halt as the volume of shares being traded will significantly decline. The lack of shares being traded will hurt Wall Street in the pocket. Then and only then will Wall Street actually listen to what the public is saying. Simply insulting Wall Street and milling around outside of their offices will not change anything.

If not funding your 401(k) seems too extreme and not financially responsible, then take a look at your debt portfolio. Most of the debt we are carrying (aside from our home and car) has interest rates that far exceed what we are gaining from our 401(k)'s. Look at it this way, if you invest in the market via a 401(k), you could lose money or gain money. If you instead use the 401(k) contribution money to pay off your 12% credit card debt, every dollar you put toward that debt will give you a guaranteed 12% return. Remember, paying off debt is just as important as putting away for retirement.

You have to be smart with your money. We all work for a finite salary for a finite number of years, which means the amount of money we will earn in our lifetimes is finite. The more you pay towards interest from debt, limits what you can save. The faster you pay off debt the more money you'll have left over in the end. There is one exception. If your interest rate from debt is below the interest rate you can get from a fixed interest savings account, then you should fund the savings account and pay the minimum payment on the debt.

As it stands with Occupy Wall Street, nothing is going to change. The movement is filled with unemployed people who do not know what else to do and that is sad. On the other hand, these folks may have to take a job that is beneath then once their unemployment has run out, until things improve (if they improve at all). Lastly, I firmly believe things are going to get worse in the short-term, before they get better. Hang on tight!