Dollar Cost Average: Stay away from Predicting

The truth about making money in the stock market is buy low and sell high. Quite simple eh ! But hold on, how do you really know when the market has hit bottom ? Can an investor really predict the bottom ? As a matter of fact hedge fund managers, mutual fund managers, private investment managers, market gurus, CEOs and analysts can't predict the bottom, nor can you and me. So how should we approach this problem ? It is actually a tough one. Predicting if the market has reached its bottom it not that simple. However using the Dollar Cost Average investing technique, you could protect yourself in a falling market. Let us learn how.

What is Dollar Cost Average (DCA)
Dollar Cost Average is simply putting a X amount of money each month into an investment such as a stock, index fund or mutual fund. Most banks will even set up a monthly automatic-withdrawals service. Dollar Cost Average is also ideal for the investor who doesn't have that big lump sum at the start but can invest small amounts on a regular basis. For instance, instead of investing a lump sum in one stock immediately, you might invest $2,000 in that stock at the beginning of every month.

Let us paint a scenerio
Let us say you have $5,000 to invest. Instead of investing the lump sum into a security, you decide to use DCA and spread the investment out by investing $1,000 a month for the next five months. This averages the price over five months, so some months you may buy fewer shares, each at a higher price, and some months you may buy more shares, each at a lower price. If the market is lower this month, you may lose money on the shares you bought last month, but this month you receive more shares, which, in the future, will help offset any losses. With DCA, you are able to take advantage of any low during these five months, guaranteeing you to invest at the very bottom because when it comes, you are simply doing what you do every month. Once the market turns around, which it is likely to do in the long term, you'll be ahead.

For example:

Month	Investment	Price/Share	No. of Shares	Profit/Loss
Jan	$1000	$10	100	$0
Feb	$1000	$5	200	- $500
Mar	$1000	$8	125	+ $400
Apr	$1000	$10	100	+ $1250
May	$1000	$12.5	80	+ $2562

From the table above it is clear that using DCA, you end up making $2,562 as compared to $1,250, had you invested in lump sum.

Benefits of Dollar Cost Average

• Reduces average cost per share: When you invest a set amount of your money each month, you buy fewer shares when the market is high and more shares when it's low. This reduces the average cost per share which eventually will help you gain better overall profits as the market increases over the long term.
• Reinforces disciplined investing: Dollar cost averaging requires the discipline to invest consistently, regardless of market fluctuations, which reinforces the habit of regularly setting aside money for investing.
• Market trend: The markets, even though they have bad days or even bad years, tend to go up over time. With dollar cost averaging technique, it is very likely you will go ahead in the longer run.
  
• Reduces fear of investing: Fear of investing at a market high can keep most investors waiting on the sidelines. With a dollar cost averaging program, you just follow the plan and invest on a periodic basis, without trying to time the market.
• No need to predict: You do not have to do any predicting! If you were to try to forecast the bottom, you could miss it altogether and risk putting your entire investment in at a bad time.

Conclusion: Next time you hear of a forecasted bottom, you can be confident that he or she is no more insightful than you no matter who the individual is. No person can predict market behavior. But you can be rest assured that if you use dollar-cost averaging, you are being prudent. Dollar Cost Averaging not only offers protection from market swings but also helps you can take advantage of the ever-elusive market bottom.

How to Determine Your Returns in the Stock Market

With all of the volatility in the stock market over the past several years, it can be difficult to determine how to devise an investment strategy to maximize your returns. To help you determine a reasonable rate of return to expect on your stock investments, it might be helpful to review some facts about the stock market.

Historical Returns
Stock market is a one place where you can make alot of money very fast as well as lose money at the same pace. Most of us make money on some stocks and lose on some others. What matters in the end is what returns can you expect on an annual basis. If you look at the history,

• 1926 - 2004, the average return from the stock market was 10.4%
• 1955 - 2004, the average return from the stock market was 10.9%
• 1980 - 2004, the average return from the stock market was 13.5%
• 1995 - 2004, the average return from the stock market was 12.1%

The stock market's historical return can change dramatically depending on the period considered. But over a period of time, on average, the return has been in double digits.

Market is cyclical
Stock market sooner or later reverts back to the mean. If the stock market has rallied up for a particular time-frame, it has also dropped later on significantly to even out the early gain. Before the dotcom bubble burst, the stock market had reached new highs. After the bubble burst, the stock market saw a significant downturn, helping to bring the averages back in line.

You can expect double digit returns in both markets, be it bull market or bear market. However to do that successfully you need to know how to time the market, that is, when to go long and when to short.

Past Performance as a Bad Predictor
The expected return rate from the investment is typically calculated by analysing the past returns, since no one can predict future returns. However, it's important to realize that those returns may not be replicated in the future. U.S. market saw excessive growth as it grew from a struggling nation into a superpower. That same growth rate cannot be expected anymore, especially with BRIC nations (Brazil, Russia, India and China) knocking at the door.

Buying stocks based on past performance will not ensure the same returns. With globalization and cut-throat competition, if the company is not in sync with current consumer needs, it wont survive, and eventually affecting your returns.

Inflation and Taxes
Inflation and Taxes are the 2 most significant items not accounted for in historical returns. From 1926 - 2004, the average inflation was 3.0%. Short-term capital gains are taxed at ordinary income tax rates of up to 35%, while long-term capital gains and dividend income are taxed at 15%.

Historical returns do not include several items that investors must deal with, especially inflation and taxes. Both factors need to considered to determine what returns to expect.

Individual investors returns
In general, return rate of investors tend to be lower than the overall market. A recent study found that investors in the NYSE and AMEX experienced annual returns that were 1.3% lower than market returns from 1926 to 2002, while Nasdaq investors experienced annual returns that were 5.3% lower from 1973 to 2002.

Pattern of actual returns
Even if you get the average rate of return exactly right, your portfolio's balance will depend on the pattern of actual returns during that period. Some years will experience higher-than-average returns, while other years will have lower or even negative returns. If you experience high returns in the early years, your portfolio's value will be lower than if those returns occurred in the later years. If you encounter negative returns in the early years, you will have a higher balance than if those negative returns came in the later years.

What does all this mean to an investor?
When designing an investment program, use a conservative estimated rate of return, since it may be difficult to earn the historical returns of the past.

Few of the important strategies to use for higher returns:

• Invest in business you understand and foresee growth
  
• Invest in a tax efficient manner
• Diversify your investment portfolio
• Consider international investments
• Evaluate your portfolio's performance atleast once a year

Conclusion: Everyone wants to maximise their returns in the stock market. However it is easier said than done. With the knowledge of historical returns, market cycle, past performance, inflation & taxes, individual investor returns and pattern of the returns you can make a reasonable guess at the return rates which is what matters at the end of the day.

Recommended Books:

• The Future for Investors: By Jeremy J. Siegel
• The Safe and Easy Strategy for Higher Investment Returns: By M. Edleson
• 101 Years of Global Investment Returns: By Elroy Dimson
• The Definitive Guide to Financial Market Returns: By Jeremy J. Siegel
  

(Source: Investorguide)

Bankruptcy: Good, Bad and the Ugly

When a person or a firm is unable to pay their ever-increasing debts, they can file for bankruptcy. Let us say Mr X filed for bankruptcy. This means Mr X's existing assets will be liquidated and he will be relieved of any liability. The reason why most people file bankruptcy is that their debts have reached a level where they cannot pay them back and only way out of it is a fresh start.

Last year in U.S. more than a million filed for bankruptcy. That number will increase this year due to

• Bad housing market (which leads to foreclosures & delinquencies)
• Bear stock market (with housing & subprime lending stocks leading the way)
• Possibility of a recession (as per Greenspan's comment)
• Energy prices (ever increasing oil prices putting extra burden on everyone)
• Increased inflation (driving up the prices of goods and services)
• Americans save less money leading to high debt to income ratio
  

Types of Bankruptcy

1. Chapter 7: Mr X can file for Chapter 7, which basically means that all his assets will be liquidated except few exempted ones depending on which state he lives (car, clothing, household appliances, life insurance, pension and work related stuff). The liquidated assets will be handed to the creditors. A trustee is appointed, who ensures that any assets of Mr X that are secured are sold and that the proceeds are paid to the specific creditors. Generally the secured creditors (banks) are the first one to get paid. After all secured creditors are paid, the remaing cash is distributed to any outstanding creditors with unsecured loans (bondholders and preferred shareholders).
   
2. Chapter 11: If Mr X had his own business, he could file for Chapter 11, which is designed largely for businesses. Under this chapter, a business will be continued to operate while a court approved plan is setup to repay the creditors back. A trustee is appointed just like for Chapter 7, but rather than selling of all the assets to pay back to the creditors, the trustee supervises the assets of Mr X and allows business to continue. Chapter 11 differs from Chapter 7 since in Chapter 11 the debt is not pardoned, but only the terms of the debt is restructured.
   
3. Chapter 13: If Mr X still has a regular source of income, he could file for Chapter 13 bankruptcy protection, which allows him to keep certain property while he pays off his debts under the supervision of a court-appointed trustee. The time-frame alloted is generally anywhere between 3 to 5 years. In 2003, U.S. citizens filed for Chapter 13 bankruptcy almost 500,000 times, making it the second-most popular form of bankruptcy behind Chapter 7.

The Good, The Bad and The Ugly About Bankruptcy
There few positives and negatives Mr X need to know before filing for bankruptcy.

The Good

• Distressed debtors can get rid of their debts, especially with Chapter 7.
  
• Bankruptcy may get rid of unsecured debts (A loan not secured by an underlying asset or collateral).
• Bankruptcy can stop foreclosures for homeowners, repossessions, deducting money from wages, utility service cancellations and activities of debt collectors against the debtor.
  
• Chapter 7 and 13 bankruptcies provide exemptions that allow debtors to keep certain assets, though those exemption amounts vary greatly from state to state.
• If a company is successful in chapter 11, it will typically be expected to continue operating in an efficient manner with its newly structured debt.
• The law forbids discrimination against those who have filed for bankruptcy, so a debtor cannot be denied a job, public housing or a driver's license on this basis.

The Bad

• Some debts (student loans, alimony, child support, fines and penalties) will not be discharged.
• Chapter 7 relief is available only once in any 8 year period.
• The rights of secured creditors to their collateral continues even though their debt is discharged.
• Debtor need to file the claim and pay a fee (adding extra expense). Debtor also need to pay a bankruptcy lawyer, and it can be difficult to find a good one, since some try to maximize their profits by handling cases as quickly as possible instead of giving debtor's bankruptcy the attention it deserves.
• If a company is not successful in chapter 11, then it will have to file for chapter 7 and liquidate.

The Ugly

• Debtor if found guilty of certain types of inappropriate behavior (concealing facts related to financial condition) will not be granted a discharge of debt and could possibly face jail time.
• File for bankruptcy will remain on your record for up to 10 years. This may make it difficult or impossible to obtain a credit card or a loan.

How Does It Affect Investors
Let us say Mr Y and Mr Z are investors with some stakes in Mr X's company Danger Inc. Mr Y is a shareholder and Mr Z is a bondholder of Danger Inc. Later on Danger Inc filed for bankruptcy. So what happens to Mr Y and Mr Z's investments ? There is a very high possibility that Mr Y and Mr Z will end up making a sizable loss over the investment.

Generally nobody invests money in a company facing bankruptcy. Add to that when the company declares bankruptcy, its stocks and bonds usually continue trading at extremely low prices. Mr Y will see a substantial decline in the value of his shares. Mr Y will stop receiving dividends if any. Mr Y will also not have any more say or voting rights in Danger Inc's restructuring plan. Mr Z would be holding bonds that are considered as junk. Mr Z will probably stop receiving interest and principal payments. Ouch...!!

List of Bankrupt Companies
Few known companies that filed bankruptcy are: WorldCom, Enron, Kmart, Silicon Graphics Inc., US Airways, Recently 4 subprime lending companies that filed bankruptcy are: People's Choice Home Loan Inc., Mortgage Lenders Network USA Inc., Ownit Mortgage Solutions Inc. and ResMae Mortgage Corp.

Conclusion: A debtor should understand the pros and cons of bankruptcy before filing one. In general, bankruptcy should be used only when there's no other solution. The 3 important types of bankruptcy are Chapter 7, Chapter 11 & Chapter 13. An investor should stay clear of companies declaring bankruptcy unless they have a solid reason to back their investments. There is more to bankruptcy that has not been covered in this post. I will address those topics in a follow up post. So stay tuned :)

Recommended Books:

• American Bankruptcy Law Journal
• Valuing A Business By Shannon P. Pratt
  

Products & Services:

• SogoInvest - $1 Stock Trades With No Minimums
• Trading Solutions - Financial Analysis and Investment Software
• Credit Solutions - Reduce Debt By 60%
• Payday Loans - Get Up To $1,500 Wired To You

(Source: Investopedia, Wikipedia)

The Art of Making Money in the Bear Market

In the bull market most of us make money, and in the bear market most of us lose money. Wouldn't it be nice to change that, and make money in the bear market. With the advanced investing technique called short selling, it is possible.

However the concept of short selling doesnt come easy to everyone. In general, people think of investing as buying an asset, holding it while it appreciates in value, and then eventually selling to make a profit. Shorting is the exact opposite where you make money when the asset falls in value. The return rates can be high from short selling, but its comes with the added high risk.

The Basics of Short Selling
When you sell a stock (say X number), that you do not own, but are promised to be delivered in future, it is called Short Selling. So how can you sell a stock you do not own ? Basically your broker will lend it to you. Sooner or later you must buy back the same X number of stocks (covering) and return them back to your broker. When you buy back the stock at the lower price than you sold earlier, you obviously made a profit on the difference. However if the stock price rises, you end up losing money.

Most of the time, you can hold a short for as long as you want. However, you can be forced to cover if the lender wants back the stock you borrowed. This is known as being called away. It doesn't happen often, but is possible if many investors are selling a particular security short. If there was any dividend distributed, you need to pay it to the lender of the stock. Also because you have loaned the stock, you are buying on margin, which means you will need to pay an interest.

Two main reasons why investors short are: speculating & hedging.

Restrictions on Short Selling
There are few restrictions imposed on stock selling so that investors can't sell short in a declining market.

• You cannot short sell penny stocks (under $1 stock).
  
• Most short sales need to be done in round lots.
• There are rules (uptick rule) preventing the short selling to take place unless the last trade of the stock is at the same or higher price.
  

Techniques Used
Short sellers use an endless number of metrics and ratios to find right stocks to short. Some use a similar stock picking methodology to the longs. Others look for insider trading, scandals, options backdating, changes in accounting policy, or bubbles waiting to pop. One indicator specific to shorts that is worth mentioning is short interest. This reveals how many shares have already been sold short. It's a dangerous sign if too much stock is sold short before you initiate a new short position.

Risk Factor
Shorting is risky business. Let us look at few reasons for high risk.

1. Over the long run, most stocks appreciate in price (inflation is one reason). This means that shorting is betting against the overall direction of the market.
2. Downward movement of the stock is limited (max it can go to zero), whereas the upward movement does not have any limit. This means that you can lose alot more than you invested, but you can earn a max of 100% in returns.
3. When trading on margin, if your account falls below the minimum maintenance requirement, you will be subject to a margin call and forced to either put more cash in your account or sell/cover your stocks.
   
4. If a stock starts to rise and a large number of short sellers try to cover their positions at the same time, it can quickly drive up the price even further. This phenomenon is known as a short squeeze. A short squeeze is a great way to lose a lot of money extremely fast.

Love Them, Hate Them
One cannot deny the valuable contribution short sellers make to the market. Short selling provides liquidity in the market, drives overpriced stocks down and helps balance the overall market. Short sellers are often the first line of defense against financial fraud.

On the other hand, short sellers aren't the most popular people on Wall Street. They are considered party poopers and are to be blamed for major market downturns. Some short sellers also use unethical tactics (short and distort) to make profits by taking short positions and then using a smear campaign to drive down the target stocks. Short selling abuse like this has grown with the advent of the Internet and the growing trend of small investors and online trading.

Conclusion: With the knowledge of short selling, you have added another trading technique to your toolbox. Short selling can be great way of making money in the bear market. You make money by short selling when the stock price falls. However short selling can be very risky and you should proceed with extreme caution. Short selling is not recommended for investors beginning their journey at the stock market.

Recommended Books:

• The Art of Short Selling - By Kathryn F. Staley
• How to Make Money Selling Stocks Short - By William J. O'Neil
• Short Selling: Strategies, Risks, and Rewards - By Cliff Asness
• What Is Short Selling? - By Tom Taulli
  

Products & Services:

• SogoInvest - $1 Stock Trades With No Minimums
• Trading Solutions - Financial Analysis and Investment Software
• Credit Solutions - Reduce Debt By 60%
• Payday Loans - Get Up To $1,500 Wired To You

(Source: Investopedia)

With So Many Options Where Does One Start

Last time I checked, the Nasdaq had more than 3200 companies listed. Following all of them is simply impossible. So what do most investors do ? Short-list a bunch of stocks they like and stick to them. How do you short-list which ones to invest from so many options ? Where do you start ? Frankly, there is no straight answer to that. The best thing would be to break these stocks into smaller groups and then decide how to proceed. Ok so lets break them into smaller groups. But wait...what criteria to use to break them into smaller groups. I found few of the important criterias that make the selection process much more easy.

Company Size
Break up based on company size. By company size, i mean their market capital. Market capital is nothing but the total dollar value of the company's outstanding shares. Based on market capital a stock can be a large cap, mid cap or a small cap.

Large Cap = Market cap of anything more than $10 billion
Mid Cap = Market cap valued between $1 billion and $ 10 billion
Small Cap = Market cap of anything less than $1 billion

The larger the market cap, the more established the company, which means more stable stock prices. Small cap and mid cap companies usually have a higher potential for future growth than large cap companies, but their stock tends to fluctuate more. In short, volatility factor goes down as the market capital goes up. Large caps are less volatile as compared to small caps. For an aggressive portfolio trade in small/mid cap. For conservative portfolio trade in large cap. Exxon Mobil Corp XOM has the largest market cap at $427 billion.

Sector
Break up based on company business. 12 known sectors are basic materials, capital goods, conglomerates, consumer cyclical, consumer non-cyclical, energy, financial, health care, services, technology, transportation and utility. This definitely takes you one step closer to your potential candidates. Again you can break the sectors into subsectors to make it that much easier to find the right match. (For example, you can break a Technology sector into subsectors like Computer Networks, Computer Hardware, Semiconductors, Computer Software...etc etc). Which sector to invest in, basically depends on your overall understanding of the sector. Say you understand the Technology and Energy sector better than the others, and think that most tech & energy companies will perform better compared to others. That means you have potentially narrowed down your search. However always remember that each of these sectors go through boom and a bust (For example, technology sector saw a boom before the dotcom bubble burst, energy sector saw a boom in recent years with oil prices climbing to record highs), so never put all your eggs in the same basket (do not buy all tech sectors).

Cyclical Stocks
Break up based on business cycles. Certain companies are like rollercoasters. When the economy is good, the profits are up and the stock price rises. When the economy is bad, the profits are down and the stock price falls (For example, the auto industry makes a profit when the economy is doing good, since consumers have more money to spend on new cars. Another cyclical industry is the housing industry). Investing in cyclical stocks can possibly give good returns if you can correlate an industry (say auto-industry or tech industry) with the current economy.

Non-cyclical Stocks
Non-cyclical stocks are the opposite of cyclical stocks. If you think you do not have sufficient resources to find out possible correlations between the industry and the economy, stick to non-cyclical stocks. Non-cyclical stocks would be in industries such as healthcare, food and utilities where the demand for goods and services is constant, since people always need health, food and electricity, no matter how is the economy performing. Non-cyclical stocks tend to do well during economic downturn, but actually sag behind cyclical stocks when the economy is booming.

Dividend Stocks
Break up based on dividend returns. Dividend is a good diversification for the portfolio. Even though the stock prices fall, the high dividend can offset the loss. High dividend can assure a steady income.

Technical Analysis
Break up based on technical analysis. There are alot of analyst/traders who buy/sell/short stocks based only on technical analysis. Technical analysis helps one understand the direction of the stock. Stock movement is predicted based on past performance. Also future estimated growth of the company is used a factor to look for long term stocks. You can group stocks based on P/E ratio, EPS and PEG. P/E ratio should generally be low, indicating cheaper stock price compared to earnings. EPS should be as high as possible, indicating high earnings per share. PEG should be as low as possible, indicating higher future growth. Technical Analysis is an excellent tool to pick potential candidates.

Conclusion: With so many options in the stock market it can be difficult to decide where to invest. By breaking these stocks into smaller groups using certain criterias can make the decision process that much easier. Company size, Sector, Cyclical stocks, Non-cyclical stocks, Dividend stocks and Technical analysis are some of the important criterias to use to find potential match.

Recommendation: Using these criteria you can short-list potential candidates. Infact ideally you can combine all these criteria to come up with the perfect list that matches your style of investing. Once you have short-listed them, preferably stick to them. Trade in and out of them as per the economic conditions. I assure you, you will find success !! I am sure i missed out few more important criterias and would love to hear from the audience.

Recommended Books:

• Profitable Patterns for Stock Trading
• The Economics of Financial Markets
• Financial Markets Tick By Tick
• The Single Best Investment: Creating Wealth With Dividend Growth
  

Products & Services:

• SogoInvest - $1 Stock Trades With No Minimums
• Trading Solutions - Financial Analysis and Investment Software
• Credit Solutions - Reduce Debt By 60%
• Payday Loans - Get Up To $1,500 Wired To You
  

Related Posts:

• Sector Movement: If Only You Knew When
• Which Sector Are You In...
• Are You In Sync With Ford ?
• What Is ExxonMobil Upto
• Stocks: Learn the A-Z About It
• Beware: Outrageously High Numbers...
  

(Source: Investorguide)

Money Markets: Reduce Your Risks - Part 2

As part of the money market post, let us have a look at few more worthy money market instruments. Just before doing that let me do a quick recap from the previous post.

The money market specializes in debt securities that mature in less than a year. Money market securities are liquid and considered very safe resulting in lower returns than other securities. Money market mutual fund is the easiest way to gain access to money markets. T-bills are short-term government securities that mature in one year or less. Certificate of deposit (CD) is a time deposit with a bank, which are safe investments with not so great returns. Commercial paper is an unsecured, short-term loan issued by a corporation with higher returns than T-bills because of the risk factor.

Bankers Acceptance (BA)
A bankers acceptance is a short-term discount instrument that usually arises in the course of international trade. Bankers Acceptance starts as an order to a bank by importer X to pay an amount to exporter Y at the future date (something like a postdated check). Once customer X and the bank completes the acceptance agreement, the bank keeps the acceptance (draft) in return for cash which is an amount less than the face value of the draft. The bank keeps that difference (like interest). The importer X will use that amount to pay to exporter Y.

The bank may hold the acceptance in its portfolio or it may sell, or rediscount, it in the secondary market. Also depending on the bank's reputation, importer X may be able to sell the bankers acceptance, that is, sell the time draft accepted by the bank. It will sell for the discounted value of the future payment. In this manner, the bankers acceptance becomes a discount instrument traded in the money market.

Advantage

• Bankers acceptances are considered very safe assets which can be traded at discounts from face value.
  
• They are used widely in foreign trade.
• If the bank is well known and enjoys a good reputation, the accepted draft may be readily sold in an active market.
• Does not need to be held until maturity, and can be sold off in the secondary markets.
• Maturities are generally between 1-6 months.

Disadvantage

• The only way for individuals to invest in this market is indirectly through a money market fund.

Eurodollars
Eurodollars have very little to do with the euro or European countries. Eurodollars are U.S. dollars deposited at banks outside United States. Eurodollars are not under the jurisdiction of the Federal Reserve, which means less regulation, allowing for higher margins.

A variation on the eurodollar time deposit is the eurodollar CD. A eurodollar CD is basically the same as a domestic CD, except that it's the liability of a non-U.S. bank. Again the returns are generally higher than domestic CD due to slightly higher risk factor.

Advantage

• Margins are higher since eurodollar market is relatively free of regulation compared to their counterparts in the United States.
• Maturity period is less than 6 months.
  

Disadvantage

• The average eurodollar deposit is very large (say few millions). This makes it out of reach for individual investors. The only way for individuals to invest in this market is indirectly through a money market fund.
  

Repurchase Agreement (Repo)
Repurchase Agreement is an agreement where the holder (repo seller) of a government security sells the security to a lender (repo buyer) and can repurchase it back at an agreed future date and price. Normally for short-term (30-days) borrowing a repo seller sells securities to the repo buyer in return of cash and agrees to repurchase those securities from the repo buyer for a greater sum of cash at some later date.

There are also variations on standard repos:

• Reverse Repo - Complete opposite of a repo. In this case, a dealer buys government securities from an investor and then sells them back at a later date for a higher price
  
• Term Repo - Same as a repo except the term of the loan is greater than 30 days.

Advantage

• They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk.
• Repos are popular because they can eliminate credit problems.
  
• Any security (be it T-Bills, Bonds, Stocks) can be used in a repo.

Disadvantage

• Bad credit check by the lender can be lead to fraud activity.

Conclusion: When the stock market looks volatile and too risky, money markets can provide an excellent alternative. Their short-term maturity make them more attractive. Obviously the returns are not very thrilling, but there are times when even the most ambitious investor puts some cash on the sidelines. I intend to write a post in future to compare the actual rates for different money markets.

Recommended Books:

• The Handbook of Fixed Income Securities
• The Bank Customer's Guide To Safe & Smart Investing
• Why The Biggest Stock Market Crash in History is Still Coming...and How You Can Prepare Yourself and Profit From It!
• Trend Trading: Timing Market Tides

Sponsors:

• SogoInvest - $1 Stock Trades With No Minimums
• Trading Solutions - Financial Analysis and Investment Software
• Payday Loans - Get Up To $1,500 Wired To You.
• Credit Solutions - Reduce Debt By 60%
  

(Source: Investopedia, Wikipedia)

Money Markets: Reduce Your Risks - Part 1

Most investors are hypocrites when it comes to the stock market. In the bull market they are raving about the stock market, where as in the bear market, they cannot stop cursing it. In the bear market alot of investors get out of the stock market and park their money in the money market, that offers an alternative to high risk investments.

Introduction to Money Market
Money market is one of the significant type of fixed income market. Money market securities are issued by governments, financial institutions and large corporations. These instruments are very liquid and considered safe. They are better known as a place for large institutions and government to manage their short-term cash needs. Because they are extremely conservative, money market securities offer significantly lower returns than most other securities.

How is Money Market different from Bond Market ?
The difference between the money market and the bond market is that the money market specializes in very short-term debt securities.

How is Money Market different from Stock Market ?
One of the main differences between the money market and the stock market is that most money market securities trade in very high amount which limits access for the individual investor. Also in case of money market, firms buy and sell securities in their own accounts, at their own risk, whereas in the stock market, a broker acts as an agent to buy and sell. Add to that, there is no central trading exchange in case of money market, but just transactions over the phone or electronic systems.

How to Get Access to Money Market ?
The easiest way to gain access to the money market is through a money market mutual fund or through a money market bank account. Some money market types, like Treasury bills, may be purchased directly. They can also be acquired through other large financial institutions with direct access to these markets.

Types of Money Market
There are different instruments in the money market, offering different returns and different risks. Let us take a look at the major money market instruments.

Treasury Bills (T-bills)
Treasury Bills are short-term securities (say 3-month, 6-month or 1-year maturity). T-bills are purchased at less than their face value. On maturity the full face value is returned. For example, if you bought a 90-day T-bill at $9,800 and held it until maturity, you would be returned $10,000.

To buy a T-bill, a bid has to be submitted either non-competitively or competitively. In non-competitive bidding, the full amount determined at the auction will be returned. With competitive bidding, based on the desired returns, the bid maybe a success or a failure.

Advantage

• Their popularity is mainly due to their simplicity and affordability.
• One of the safest investments in the world, since it is backed by U.S. government.
• They are exempt from state and local taxes.
• They are short-term investments instead of being locked for a longer time frame.
  

Disadvantage

• The returns from this investment are not great compared to bonds, certificates of deposit and money market funds.
• The investment cannot be liquidated before maturity date.

Certificate of Deposit (CD)
Certificate of deposit is a fixed term deposit, also known as time deposit. CDs are issued by commercial banks but can be bought through a brokerage firm. They have a maturity period ranging from 3-months to 5-years with a specified interest rate. Interest rates depend on various factors like current interest rate in the market, money invested, maturity period. A fundamental concept to understand when buying a CD is the difference between annual percentage yield (APY) and annual percentage rate (APR).

Advantage

• CDs have a higher yield compared to T-Bills due to their slightly higher risk factor. (ie. What is the bank goes out of business)
• Almost every bank offers CDs, which means they are easily accesible. This also means you have multiple options to get the best rates.
• CDs are relatively safe and will earn more than in a savings account.

Disadvantage

• CDs cannot be withdrawn instantly as desired similar to a checking account. A huge fine can be levied if the funds are withdrawn prior to maturity.
• The returns from this investment are not very exciting compared to many other investments.
  

Commercial Paper
Borrowing money from banks for a short-term can be sometimes frustrating process. In response to that, commercial paper gained popularity among corporations. Commercial paper is an unsecured, discounted, short term loan issued by a corporation. Maturity period is no more than 9 months.

Advantage

• Safe investment because the financial situation of a company can easily be predicted over a few months.
  
• Only companies with high credit ratings issue commercial paper.
• Higher returns than T-bills.
  

Disadvantage

• They are not afforable to everyone, since commercial papers are issued in the range of $100,000 or more.
  
• Small-time investors can only invest in commercial paper indirectly through money market funds.
  

Conclusion: When the stock market looks volatile and too risky, money markets can provide an excellent alternative. Their short-term maturity make them more attractive. Obviously the returns are not very thrilling, but there are times when even the most ambitious investor puts some cash on the sidelines. There are a few more instruments i did not cover in this post, which would be covered in Part-2. Hope this post opened your eye to money market securities. To be continued...

Recommended Books:

• The Handbook of Fixed Income Securities
• The Bank Customer's Guide To Safe & Smart Investing
• Trend Trading: Timing Market Tides
• Rich Dad's Prophecy: Why The Biggest Stock Market Crash in History is Still Coming...and How You Can Prepare Yourself and Profit From It!

Sponsors:

• Cellphone that will meet your needs
• Top Penny Stock Professionals - 90% Accuracy
  
• Largest Online Grocery Store

(Source: Investopedia)

Interesting Stories That You Missed

Over the past few days i came across some interesting news/facts which deserves some limelight.

Basic Material ETFs
ETFs that focus on large-cap companies with exposure to basic materials have had nice returns for the year. Why is that so ? Analyst believe U.S. economy is growing and a growing economy needs materials. Returns on the 2 popular ETFs are

• Vanguard Materials ETF (VAW) = 8.3%
• Materials Select Sector SPDR (XLB) = 7.5%

Top companies in both of these ETFs are: Du Pont (DD), Dow Chemical (DOW), Alcoa (AA), Monsanto (MON), and Phelps Dodge (PD).

Tax Efficient ETFs
Many of the newer ETFs are more specialized which could effect their tax efficiency in different ways.
Here are 5 funds that are top-rated for consistent returns and tax efficiency:

1. iShares MSCI Austria Index (EWO): 5-year return of 36% and over that time lost 0.4% to tax costs.
2. iShares Russell 2000 Value Index (IWN): 5-year return of 13% and over that time lost 0.5% to tax costs.
3. Vanguard Small Cap Value Index (VBR): 3-year return of 14% and over that time lost 0.5% to tax costs.
4. iShares Russell Mid Cap Value Index (IWS): 5-year return of 15% and over that time lost 0.7% to tax costs.
5. Vanguard Value Index (VTV): 3-year return of 13% and over that time lost 0.5% to tax costs.
   

China Raise Interest Rates
China's central bank said it would raise both its lending and deposit rates by 0.27 % points to bring investment and credit growth in check and help balance the economy. The one-year benchmark yuan deposit rate would rise to 2.79% from 2.52%. The one-year benchmark lending rate is to rise to 6.39% from 6.12%.

Energy Market
John Segner, manager of the AIM Energy fund, which has 17% average returns over the last decade said that the energy market will see a temporary improvement in the supply-demand balance in 2007, but will then return to a supply shortage in 2008 and 2009. Demand will continue to rise, driven by India and China, but supply from non-OPEC countries, particularly Venezuela, Nigeria, Iran and Iraq, won't rise sufficiently.

No Wal-Mart Bank
Wal-Mart Stores Inc. (WMT) is dropping its bid to establish a bank after months of heated debate over whether the world’s largest retailer should be allowed to gain the added financial power of a federally insured bank. Wal-Mart announced that it was withdrawing its application for a bank charter, which aroused widespread opposition from banks, lawmakers and consumer groups, and spurred debate within Congress and before the Federal Deposit Insurance Corp.

Top Subprime Mortgage Lenders With Q4 Originations

1. HSBC Finance (HSBC) - $12.3 billion
2. New Century Financial (NEWC.PK) - $12.2 billion
3. Countrywide Financial (CFC) - $10.1 billion
4. WMC Mortgage (GE) - $9.0 billion
5. First Franklin (Merrill Lynch) (ML) - $7.8 billion
6. Wells Fargo (WFC) - $7.4 billion
7. Option One (H&R Block) (HRB) - $6.1 billion
8. Fremont Investment & Loan (FMT) - $6.0 billion
9. Washington Mutual (WM) - $5.7 billion
10. CitiFinancial (Citigroup) (C) - $5.0 billion
    

Life Cycle ETF for Investors
TD Ameritrade (AMTD) plans to offer an ETF that rebalances frequently. The ETF will be a life cycle ETF with a target date for the investor, who will choose a year close to when he plans to retire. Life-cycle funds invest in multiple asset classes and become more conservative as time passes.

Cisco buys WebEx
Cisco (CSCO) bought WebEx (WEBX) for $3.2 billion. WebEx is a specialist on online conferencing and collaboration, and one of the most successful players in the software as a service segment. Buying WebEx creates a new point of competition with Microsoft (MSFT) which offers various collaboration tools of its own.

Microsoft buys Tellme Networks
Microsoft (MSFT) will buy privately held voice-recognition software company Tellme Networks for a estimated price of $800 million. The purchase will give Microsoft several promising new capabilities, particularly in mobile search. Tellme Networks already does more mobile search support than Google and Yahoo combined. Microsoft already offers a product that combines e-mail, instant messaging and VoIP into one voice-activated client; but the Tellme acquisition gives it advanced, enterprise-class speech recognition technology.

Wal-Mart Movies
Wal-Mart Stores (WMT) will team up with Fox Broadcasting to offer movies and television shows on its new online download service, and the collaboration between Amazon (AMZN) and TiVo (TIVO) to offer recordable content for download. This is bad news for competitors Netflix (NFLX) and Blockbuster (BBI).

Emerging markets ETFs
During the recent meltdown emerging markets ETFs were hit bad, but Russia seemed to be one of the hardest hit. The Russian RTS index is now down 9.6% for the year. This makes Russia the worst performer year-to-date among major global benchmarks. Falling commodity prices, particularly oils and metal puts more pressure on the Russian market as well as other emerging markets which tend to have a commodity-driven economy.

Recommended Books:

• ETF Trading Strategies Revealed
• ETFs: Structure, Regulation and Application of a New Fund Class
• How Walmart is destroying America And The World
  

Sponsors:

• Cellphone that will meet your needs
• Top Penny Stock Professionals - 90% Accuracy
  
• Largest Online Grocery Store
  

(Source: SeekingAlpha, MarketWatch)

Stock Option Backdating: Turn Back Time

Every now and then you come across some scandal in the news about stock option backdating. Media ranting about how the company management cheated the investors by backdating the stock options. Whether you understand stock options backdating or not, one thing you know for sure, that a bunch of crooks did something wrong and tried to dupe everyone and finally got caught. If you are not aware what that means or vaguely understand it...this would be good time to get it right.

Some executives would love to turn back time when it comes to their stock options. Do you know why ? Pretty straight-forward actually. The day the option is granted, some executives would love to backdate them, that is set them to an earlier date when the stock was trading at a lower price. What is the Result...Instant Profits !!

Lets explore what options backdating is and what it means for companies and their investors.

Company Do's and Dont's
Companies can issue and price stock option grants as they see fit, but this will all depend on the terms and conditions of their stock option granting program. Majority of public companies handle their employee stock options programs in the traditional manner.

• They grant their executives stock options with an exercise price equivalent to the market price at the time of the option grant.
  
• They also fully disclose this compensation to investors.
  
• They deduct the cost of issuing the options from their earnings as they are required to do under the Sarbanes-Oxley Act of 2002.
• The facts disclosed cannot be made unclear or confusing.
  

What investors care about the most is that all the details of the grant be disclosed (date of the granted option and the exercise price). The backdating concern occurs when the company does not disclose the facts behind the dating of the option. Therefore most companies avoid options backdating. Better safe than sorry. But there are some companies that have bent the rules by hiding the facts. The options backdating scandal seems harmless but it can prove to be quite costly to shareholders.

Costly After Effects of Stock Option Backdating

• Bad press after the accusation resulting in drop of investor confidence.
• Company's reputation becomes irreparable resulting in disinterested new investors.
  
• Restate their financials to reflect the costs associated with previous options.
  
• Lawsuit filed by shareholders for filing false earnings reports.
  
• Substantial fines levied by regulatory bodies for fraud.
• Executives involved may face penalties levied by the Justice Department (for lying to investors, which is a crime), and the IRS for filing false tax returns.

Anyone of these effects would cause the stock prices of the company to plummet, leading to substantial losses for their shareholders.

Few Real-Life Example
According to a study more than 2,000 companies used options backdating in some form to reward their senior executives between 1996 and 2002.

• Brocade Communications (BRCD) manipulated its stock options grants and then failed to inform investors. When finally brought to light, they had to restate earnings. They are also subject to civil and a criminal action. Although the company continues to defend itself against the charges, its stock has dropped by more than 70% between 2002 and 2007.
• UnitedHealth (UNH) reported that it would have to restate earnings for the last 11 years, and that the total amount of restatement could approach, or even exceed, $300 million.
• Network Appliance (NTAP) has secretly backdated options grants for several years. For seven years, a majority of Network Appliance directors & top officers engaged in stock options backdating.
  
• Apple (AAPL) last year looked at 42,077 stock-options grants made on 259 dates from October 1996 to January 2003. Of those, 6,428 grants on 42 dates were found to be not dated properly.

How To Keep Check on Option Backdating

• With the advent of Sarbanes Oxley, companies will be less likely to mislead investors in the future. Earlier an executive didn't have to disclose his/her stock option grants until the end of the fiscal year in which the grant was given. Now grants must be filed electronically within 2 business days of an issue or grant. This means that corporations will have less time to backdate their grants. It also provides investors with timely access to pricing information.
• Securities & Exchange Commission will not approve changes to the listing standards of the NYSE and the Nasdaq that require shareholder approval for compensation plans.

Conclusion: Stock option backdating is a dirty trick company executives try to pull. If caught, could be absolutely detrimental to the company, executives and the stock price. Stockholders' portfolio can take a big hit because the stock price has the potential to take a huge dip. Long term investors should keep themselves well informed about company compensation plans and granted options. Any early sign of trouble, would be a good time to get out of the stock and avoid future losses.

Recommended Books:

• The Insiders: The Truth Behind the Scandal Rocking Wall Street
• Trading for a Living: Psychology, Trading Tactics, Money Management
• We've All Been Suckered
  

Sponsors:

• Debt Consolidation for Today's Consumer - Reduce Debt 60%
• TurboTax - Get Your Biggest Refund from Taxes
• Bargain.com - Buy Homes for Bargain Prices
  

(Source: Investopedia)

Investing in ETF Options

What are ETFs

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

What are Options
A privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price (strike price) during a certain period of time or on a specific date. Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset.

Naked calls increase in value as the underlying stock increases in value. Likewise naked puts increase in value as the underlying stock decreases in value. Buying both a naked call and a naked put means that if the underlying stock moves up the call increases in value and likewise if the underlying stock moves down the put increases in value. The combined position can increase in value if the stock moves in either direction. The position loses money if the stock stays at the same price or within a range of the price when the position was established. This strategy is called a straddle. It is one of many options strategies that investors can employ. Options strategies can favor movements in the underlying stock that are bullish, bearish or neutral.

Recommended Books:

• Options, Futures and Other Derivatives
• Come Into My Trading Room: A Complete Guide to Trading
• Get Rich With Options: Four Winning Strategies

Related Posts:

• ETF: Something for those Lazy Investors
• Options: The Power Lies In Their Versatility

(Source: Wikipedia, Investopedia)

Subprime Lenders: Screwed Real Bad

Last few days the market is full of news about how the number of foreclosures are increasing around U.S. and how badly subprime lenders are screwed. I do not want to reiterate the same point again and again. Instead i will list a few interesting pointers/takeaways from this whole episode. But just before doing that for those who do not know what subprime is...

What is a subprime loan ?
This is a loan to someone with a bad credit history. These people pay higher interest rates, earning more money for lenders, so long as the mortgage payments keep coming.

Delinquencies & Foreclosures

• The delinquency rate for one-to-four-family houses rose to 4.95% of all loans outstanding compared with 4.67% during the 3rd quarter. The North Central region had an overall delinquency rate of 5.68%, the South 5.71%, the Northeast 4.59% and the West 3.18%.
• A record high number of homeowners faced a serious threat of foreclosure during the 4th quarter of 2006. Foreclosures were highest in the North Central region, at 2.02%. The rate in the Northeast was 1.16%, the South was 1.08% and the West just 0.63%.

Subprime Issues

• 7.78% of nearly 6 million subprime loans were seriously delinquent, since many borrowers have difficulty making payments when home price appreciation fades and interest rates on their adjustable-rate loans jump up from their original low teaser rates.
• At least 20 lenders in the subprime mortgage sector have gone out of business.
• Total subprime mortgages outstanding amount is about $1.3 trillion, of which $700 billion are held by private asset-backed securities issuers.

Stock Market Saga

• Homebuilders like D.R. Horton (DHI), Toll Brothers (TOL) and Pulte Homes (PHM) have cut the number of new homes built, but a large supply of existing homes is also forcing them to reduce prices or offer incentives. DHI, TOL & PHM stocks lost -14.4%, -12.2% & -20.1% respectively in the last 3-months.
  
• Countrywide Financial Corp (CFC) the largest U.S. mortgage lender, told its brokers to stop offering borrowers the option of a no-money-down home loan. CFC stocks sank -16% in the last 3-months.
• No. 2 subprime lender New Century Financial (NEW) warned that it faces $8.4 billion in loan repayment obligations. Its shares had already been badly battered over the last month on rising concerns of a possible bankruptcy filing. 1-year return was -95.81%.
• Other subprime lenders like Accredited Home Lenders Holding Co. (LEND) and Fremont General Corp. (FMT) are facing a major meltdown at the stock market too. FMT, have cited mortgage fraud, along with the softer housing market and loose underwriting standards, as contributing to a rapid run-up in delinquencies. FMT said it would exit the subprime business amid regulatory pressure, and severed relationships with 8,000 brokers.

Few More Facts

• The FBI is seeking to stem a rising tide of crime in home financing. They warned borrowers and lenders that mortgage fraud can result in stiff fines and prison time.
• Late payments for residential mortgages shot up by 15.6% in the fourth quarter.
• National inventory is 20% higher than last year, vacancy rates have soared and prices are down about 3%. With tighter credit, prices might fall another 5-7 %.
• Even though the housing market has slowed down, the U.S. economy and job market has held solid.
• Housing meltdown is bad news for investors in U.S. residential mortgage-backed securities.

Check Out The Video


So who is at fault. The lenders or the borrowers ?
Taking a loan is a give and take relation. The lenders were stupid/greedy to loan out an amount they knew borrowers could not afford. Lenders had all the information (W2, credit score, paystubs) they needed to make the right decision. The borrowers were stupid/naive to not understand their own financial strength. Borrowers made decisions without weighing all the possibilities and got burned out. Both are at fault.

Conclusion: Subprime lenders are already slaughtered, but what remains to see is how will rising mortgage delinquencies affect home prices overall ?

Recommended Books:

• How to Make Money Buying Distressed Real Estate
• The Beginner's Guide to Real Estate Investing
• Predatory Bender: A Story of Subprime Finance
• Real Estate Investing for Dummies
  

(Source: CNN Money)

Highest Rated Sectors: Did Analyst Get It Right ?

What are we looking at here ?
The most popular S&P 1500 groups. The table is self explanatory, so i will just point out few interesting things. The first column is the list of sectors most recommended by the Wall Street Analyst. The sixth column gives the overall percentage of buy recommendation. The last column is the stock that is most favored in that particular sector. As you can see Contruction Materials topped the table with 61.1% buy recommendation. Analyst are most bullish on Vulcan Materials Company VMC.

Construction Material Sector
Vulcan Materials Company VMC is currently trading at $116.01

• P/E = 24.76 (ranked #2 in the construction materials sector)
  
• EPS = 4.69
• PEG =2.31 (ranked #2)
• Dividend = 1.50% (ranked #9)
• Market Capital = $11.02 billion (ranked #2)
• Analyst recommendation of 1.4/5.0
  

All in all, pretty impressive record. Add to that their 1-year return was whooping +49.75%. No wonder analyst love it. Construction Raw Materials sector performance ? Last one year returns was +25%. Pretty neat...Analyst got it right.

Consumer Finance Sector
Second best is Consumer Finance according to all the analyst. Highest rated in that group is American Express Company AXP which is priced at $54.75.

• P/E = 18.29 (ranked #11 in the consumer finance sector)
  
• EPS = 2.99
• PEG =1.28 (ranked #9)
• Dividend = 1.00% (ranked #14)
• Market Capital = $65.28 billion (ranked #1)
• Analyst recommendation of 2.0/5.0

AXP has a huge market capital and ranked #1 in their sector. P/E and PEG all look good. But what matters the most for the investors is returns. Their 1-year return was a lousy +0.96%.
Consumer Finance sector performance ? Last one year returns was -1.65%. Pretty lousy...Analyst got it wrong.

What did we prove here ? Analyst do not get it right all the time. However at times they do not get the credit they deserve. Predicting stock markets is no easy task, especially with multiple factors affecting the stock movement. I checked out 1-year returns for all the listed sectors in the table above. 8 out of 10 were positive. Noteworthy were Water Utility with +25.94% returns, Aero & Defense with +23.01% and Energy Services with +15.21% returns.

Conclusion: Bashing the analyst for getting is wrong is always one of the favorite things to do for all kinds of investors. You and me need to understand that analyst do not get it right all the time. Obviously they wont. Otherwise they would have made billions and billions of dollars at the stock market. Analyst opinions & recommendations can be a good guide for investors to dig deep into the company stock. But it should not be used as an indicator to trade stocks. That brings us to the million dollar question. Are you going to trust the analysts and buy the stock/sector they are most bullish on ?

Recommended Books:

• Jim Cramer's Real Money: Sane Investing in an Insane World
• The Little Book of Common Sense Investing
  
• The Essays of Warren Buffett : Lessons for Corporate America
  

(Source: TickerSense)

China Gets Aggressive With Forex Reserves

Did you know China has more than $1 trillion in foreign currency reserves after posting huge trade surpluses year after year !! Add to that China's reserves is growing at $20 billion every month !! For China, that is simply spectacular, for U.S. well...sigh*

So what does China do with the 1$ trillion ? Right now they have invested approximately 75% in low-yielding U.S. Treasury securities and other dollar-denominated assets. The rest in euros and a small amount in yen. Returns on this investment has been less than 3% last year. Not quite exciting. But that is going to change....

Need a Change
China now plans to make better use of their reserves and reap in more profits. One way to do that is create an investment company, and that is exactly what they are upto. China will soon create one of the world's largest investment funds, with diversification in global stocks, bonds and commodities markets. It is estimated that they will allocate somewhere between $200 to $400 billion to this new venture. The company named Lianhui will buy 20-25% of forex reserves from the central bank for investment.

Why the Change ?
China wants to invest its reserves to support an economy that grew 10.7 % last year, without causing large swings in global markets. The trade gap has increased driving reserves to a record. The surplus and China's foreign-currency holdings have left the economy awash with cash, making it difficult for the government to slow lending and investment to curb asset bubbles. The nation is trying to slow investment and lending to curb inflationary pressures and asset bubbles in property and stock markets. The surge in money flooding in, forces the central bank to drain billions of dollars from the economy every month by selling bonds in order to reduce inflationary pressures.

Temasek Model
China intends to follow the model of Singapore's Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. Temasek Holdings average returns has been 18%. China would love to cash in on such returns.

Where to Invest ?
Chinese economists have suggested China might adopt more unusual investment approaches, ranging from stockpiling oil and other raw materials to spending more on social programs in order to encourage Chinese consumers to spend more and reduce dependence on exports. Energy firms such as China National Offshore Oil Corp, China Petroleum & Chemical might be good investment grounds too.

Is there a problem for U.S. ?
The U.S. Treasury who is responsible for the revenue of the U.S. government will take a hit if China plans to shift its investment strategy. A hit could be in the form of less assistance to finance multi-billion budget deficits and perhaps led to higher interest rates. Is this something U.S. needs to be concerned about ?

Probably not...with $20 billion a month in growing reserves, China can afford to keep buying U.S. government bonds while also channel a part into new investments. Analyst believe China is unlikely to diversify massively away from U.S. Treasuries to prevent the yuan from strengthening. The central bank buys dollars to prevent the value of the Chinese currency from rising from the inflows of export earnings. Diversifying away from U.S. Treasuries would mean selling dollars. They have a policy that they will allow gradual appreciation of the yuan, but no more than that. They don't want to see the dollar crash.

Conclusion: China is one unstoppable dragon. With $20 billion in growing reserves every month, they could diversify without affecting their investments in U.S. Treasury. By following the Temasek's model their returns will be in double digits. That just adds more to their cash reserves. However what is still unclear is what portion of their reserves will be diversified and what kind of adverse effects that would have on U.S. markets ? Any takers ?

Stocks/ETFs to watch: CNOOC (CEO), PetroChina (PTR), China Petroleum & Chemical (SNP) ETFs: iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ). Bonds: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). Currency: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE)

Recommended Books:

• Rich Dad, Poor Dad
• Lessons from the Front Lines of Doing Business in China
• Myths About Doing Business in China
  

(Source: Seeking Alpha, Bloomberg, ShanghaiDaily.com)

What is ExxonMobile Upto

Last year ExxonMobil (XOM) produced about 4.2 million barrels of oil/day. Is that enough ? Probably not. To add to their existing production volume, ExxonMobil has decided to invest in more than 20 new projects around the world over the next 3 years. This would bring in an additional 1 million barrels of oil/day to its volumes at peak production.

Capital Spending
Capital spending is projected to be around $20 billion/year through the rest of this decade. Isnt this something to worry about ? $20 billion/year for an extra one million barrels a day in production ? So what does Exxon have to say about that ? Probably nothing...Just that Exxon's volume will keep growing through the end of the decade.

So where does Exxon plan to invest ?
Exxon has an ownership interest in 40 refineries located in 20 countries. 20 new projects the company plans to invest in will be mature markets such as North America, Australia and the North Sea, as well as growth areas like the Middle East, Russia and West Africa.

Venezuela Story
Exxon has decided to turn over the control of a joint project in Venezuela's oil-rich Orinoco River region to its partner, Petroleos de Venezuela SA, Venezuela's government-controlled oil company, now that President Hugo Chavez has ordered the nationalization of all foreign-run oil projects. Exxon is also in talks with Libya to get access to the country's enormous oil fields.

Qatar Story
In another news ExxonMobil and Qatar Petroleum announced they were abandoning their joint gas-to-liquids project that sought to produce clean diesel from natural gas, instead focusing on providing natural gas to Qatar.

Earnings
Recently Exxon posted the largest annual profit by a U.S. company of $39.5 billion thanks to high energy prices as crude oil topped $78 a barrel in the summer. Stock prices stand at $71.12. The shares have traded in a range of $56.64 to $79 in the past year. However what bothers me is the capital spending.

Rants: Is Exxon a greedy corporation ? I mean they posted the largest annual profit, even though oil prices were down in the 4th quarter. It seems like Exxon would rather squeeze the consumers than take a hit themselves. Is Exxon for you ? With that kind of profit margins the answer is evident. Corporations like Exxon is going to make money year after year, doesnt matter what the oil prices are. Their 30 year chart will support my statement. The best thing to do would be to own Exxon stocks and make some money on their greed. Also the capital spending of $20 billion for the returns is simply outrageous. Is this some early warning for oil depletion ?

Stocks/ETFs to watch: ExxonMobil Corp. (XOM). Competitors: ConocoPhillips (COP), BP plc (BP), Chevron Corp. (CVX), Royal Dutch Shell (RDS.A), Total (TOT). ETFs: SPDR Oil & Gas Exploration & Production ETF (XOP), iShares Dow Jones U.S. Oil & Gas Exploration/Production (IEO) (Source: Seeking Alpha)

Recommended Books:

• Jim Cramer's Mad Money: Watch TV, Get Rich.
• Trading in Oil Futures and Options
• How the New Oil Industry Will Change People, Politics and Portfolios
  

Support this blog: Shop at the largest online grocery store.

Citigroup On a Buying Spree

Citigroup (C) bought the largest online bank in the world, Egg Banking at $ 1.13 billion. Citi got in return 3 million credit card customer and $ 18.6 billion in assets. Citi's total asset stands at $1.8 trillion.

So did Citigroup get a great deal ? In 2004, Bank of America (BAC) paid $48 billion for FleetBoston which had $ 196 billion in assets, J.P. Morgan Chase (JPM) paid $58 billion for Bank One which had $320 billion in assets, Wachovia (WB) paid $14.3 billion for SouthTrust which had $54 billion in assets. In 2005, Bank of America paid $35 billon for MBNA which had $ 123 billion in credit loans. In 2006, Wachovia paid $25B for Golden West which had $125 billion in assets, Regions Financial (RF) paid $10 billion for AmSouth which had $58 billion in assets.

When you compare all the recent mergers on cash paid/dollar assets acquired, it seems like Citigroup got a very good deal with minimum risk. It is acquiring an online bank with online assets, which can be combined with Citi’s current online technology or maintained separately. Egg's internet capability, customer friendly screen and customer friendly maneuverings makes it an asset for Citigroup customers around the world. Citi plans to use Egg's internet banking model for Austrialia, Japan, Singapore and U.S. markets. Places like India, Dubai and Poland will not use this model for now since they have a very good on-ground presence.

In other news Citigroup's $10.8 billion takeover offer for Nikko Cordial Corp, Japan’s third-largest brokerage, was rejected. Citigroup also plans to buy Bank of Overseas Chinese for $425 million.

Recommended Book: Jim Cramer's Mad Money: Watch TV, Get Rich.
Support this blog: Shop at the largest online grocery store.

Related Links:

• Citigroup, Taiwan Bank in `Aggressive' Talks on Stake
• Citigroup faces mounting opposition to Nikko offer
• Citigroup has major plans for Dubai
  

Foreign Investment in United States

In 2004, the total foreign direct investment (FDI) in the United States (U.S.) stood at $1.5 trillion, equivalent to $2.7 trillion in today's market value which represents approximately 10% of the total current market value of all publicly traded companies in U.S.

Geographic Breakdown

• European companies made up 65-70% of direct investment in the U.S., with United Kingdom (UK) leading the way. 1/3rd of the total investment from Europe came from UK, with $250 billion invested in 2004. UK, Germany, Netherlands and France were the top four investors in U.S. in that particular order.
• Asian and the Pacific firms had the next highest level of investment in the U.S., at approximately $219 billion in 2004. Japan accounted for 75% of the investment. Chinese & Indian investments in 2004 were minimal. However that is bound to change with a number of acquistions by Chinese and Indian firms.
  
• Canada finished in the third spot.
  
• Direct investment from Latin American investors totals $86 billion. The biggest presence from South American firms came from Panama due to it financial hub status. Brazil ranked #4 behind Mexico and Venezuela respectively.
  
• Investment from Africa and the Middle East were less than $10 billion, only 1-2% of the total foreign investment. Israel was the largest investor from the Middle East, with some $4.1 billion in investments. Kuwait follows with $1.2 billion.
  

Sectoral Facts

• 1/3rd of FDI in the U.S. is held in the manufacturing sector.
• 14% of FDI is invested in the financial services sector.
• Asian and Pacific FDI holdings in the U.S. manufacturing sector amounted to 12.3% in 2004.
  

Quick Review on Benefits of Foreign Investment

• Creates New Jobs: U.S. affiliates of foreign companies employ 5.3 million U.S. workers.
• Boosts Wages: U.S. affiliates of foreign companies tend to pay higher wages than U.S. companies. Foreign companies support an annual U.S. payroll of $318 billion. Some studies have found that foreign companies have paid wages in the past that were as much as 15% higher on average than wages paid by U.S. companies.
  
• Strengthens U.S. Manufacturing: 41% of the jobs related to U.S. affiliates of foreign companies are in the manufacturing sector.
• Brings in New Research, Technology, and Skills: Affiliates of foreign companies spent $30 billion on research and development in 2003 and $109 billion on plants and equipment.
  
• Contributes to Rising U.S. Productivity: The increased investment and competition from FDI leads to higher productivity growth, a key ingredient that increases U.S. competitiveness abroad and raises living standards at home.
• Contributes to U.S. Tax Revenues: In 2002, foreign affiliates paid $17.8 billion in taxes, which represented 12% of U.S. corporate tax revenues.
  
• Increase U.S. Exports: U.S. companies can use multinationals’ distribution networks and knowledge about foreign tastes to export into new markets. Approximately 21% of all U.S. exports come from U.S. subsidiaries of foreign companies.
• Helps Keep U.S. Interest Rates Low: The inflow of foreign capital also decreases the cost of borrowing money for domestic entrepreneurs, especially in the small- to medium-sized enterprise sector.
  

Some Major Acquisition In Recent Years

• Acquisition by Lenovo, the largest personal computer company in China, of IBM's personal computer and laptop unit.
• State-owned China National Offshore Oil Corporation's attempted acquisition of UNOCAL.
  
• State-owned Dubai Ports World's planned acquisition of P&O, the operator of many US ports.

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(Source: US Dept of State, Bureau of Economic Analysis, TickerSense)

Recent Developments & Rants

Microsoft gets hold of Medstory

Microsoft (MSFT) is purchasing Medstory Inc., a health search engine. Medstory enables users to search complex health and medical related topics on the web intelligently. Some noteworthy features about Medstory is their ability to filter out non-health results, provide effective granularity, allow audio & video search and their killer app. Medstory's approach is to not only provide a list of web pages but to synthesize the meaning of every user search in the context of health and medicine, and then share this knowledge with the user to help refine and guide their search.

Medstory will become the second acquisition for Microsoft's Health Solutions Group, which bought Azyxxi, a maker of healthcare software that displays patient information last year.

Rant: There seems to be an increasing demand for online healthcare information driven by aging baby boomers. Filtering out non health-related searches makes getting the right information that much easy for them. Microsoft is stepping in the right direction by acquiring Medstory. However they face stiff competition from companies like Healthline who provides health search services, Google (GOOG) who is developing a health information search tool, and former AOL CEO who is launching a healthcare portal called Revolution Health.

Related Links:
MSN's Medstory Story
Microsoft buying search firm in health-care push

Oracle Buying Hyperion
Oracle (ORCL) announced a deal to buy Hyperion Solutions (HYSL), a business intelligence software provider. Oracle will pay $52 a share in cash, or about $3.3 billion.

The acquisition is yet another multibillion-dollar deal in recent years for Oracle, who bought CRM software maker Siebel System and archrival PeopleSoft. Oracle executives are more enthusiatic about Hyperion deal because there is no product overlap unlike in case of PeopleSoft and Siebel. However Oracle will have to convince their customers that the Hyperion application will not be optimized for the Oracle database environment and rather that it will be optimized for applications that are important to their company, especially because most large companies have a heterogeneous database and application environment that requires a high level of open and ERP-independent software.

Rant: This addition could make Oracle a formidable force in the world of business intelligence software and hopefully help revive their stock. This deal puts Hyperion rivals Cognos (COGN) and Business Objects (BOBJ) under pressure due to stiff competition from Oracle and unlikely chance of a buyout. This could also mean bad news for rivals SAP AG (SAP). Oracle claims thousands of SAP customers rely on Hyperion and probably will not switch. SAP replied that the Hyperion acquisition will lead to more confusion among Oracle customers. Oracle's strategy, limited by its inability to grow on its own, has resorted to attempting to acquire customers.

Related Links:
Oracle Buys Hyperion Solutions for $3.3 Billion
Oracle Buys Hyperion but will customers bite ?

GE says Hold the Salt...
General Electric Co (GE) has joined the Algerian Government, and other Algerian bodies to build Africa's largest seawater desalination (removing salt from water) plant. This project is part of GE’s ecomagination effort, which is aimed at building innovative solutions to tough global problems, like water scarcity. This project will supply 25% of Algeria’s capital city’s population with desperately needed drinking water.

Rant: Full marks to GE for their effort on ecomagination.

Durable Goods Orders Decline Most in 18 months
In December 06 order rose by + 2.8%, where as in January 07 dropped by - 7.8%, reasoing being reduced demand for transportation equipment especially commercial aircraft and excess inventories. Commercial aircraft orders fell 60% while transport orders on the whole fell 18%. Ex-transport, durables were down 3.1%. Orders for core capital equipment were down 6%.

Rant: Decline in durable goods orders were labeled one reason for the recent meltdown at the market. Sigh*, another indicator to worry about.

Recommended Book: Jim Cramer's Mad Money: Watch TV, Get Rich.

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(Source: Seeking Alpha, Microsoft)

Are You in Sync with Ford ?

The entire auto industry year-to-year sales dropped 0.5%. The total market share of the U.S. Top 3 fell to 54% from 56.6%, where as Asian automakers up their share from 37% to 39.4%.

Facts: Vehicle Sales Year to Year
Asian Top 3 -> Toyota (TM) = +12%, Honda (HMC) = +3.2%, Nissan (NSANY) = +1.2%
US Top 3 -> General Motors (GM) = + 3.4%, DaimlerChrysler (DCX) = -7.7%, Ford Motor (F) = - 13%

General Motors was the only US Top 3 with positive sales of +3.4% helped by a strong launch of their redesigned models. General Motors managed to increase its market share 1% to 24.6% total. On the other hand Ford Motors lost -13% in sales. Toyota Motor sales were in double digits.

Ford to Sync
Research shows consumers are picking brands with strong records for quality and technical innovation. Ford has decided to respond to this research. Ford will work with Microsoft (MSFT) to develop a built-in audio system called Sync for 12 of Ford's models. Features include in-car communications and entertainment system that is designed to change the way consumers use music players and mobile phones in their vehicles. Users can access their digital music player or mobile phone using voice commands or the vehicle's steering wheel or radio controls. Add to that names and numbers in a mobile phone's address book can be wirelessly and automatically transferred to the vehicle. Sync can host nearly any digital media player, including the Apple iPod, Microsoft Zune, PlaysForSure players and most USB storage devices.

Conclusion: As you can see the 5 day auto-manufacturing industry is down. Investing in US automakers isnt the smartest thing in 2007 except for General Motors who were able to turn things around. What remains to see is can Ford do the same ? Asian automakers in contrast are having a good year.

Recommendation: Ford is going through a bad phase. They reported a loss of $ 17 billion last year. Operational costs, job losses, global competition resulted in a sales drop of -13%. Their EPS stands at -3.29 and weak analyst recommendation. Ford Motor is trying to resurrect themselves by loading their models with fancy gadgets. Is this going to help auto sales ? I dont think so ? Keep away...

(Source: Ford, Yahoo)

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Sony Playstation 3: Two Thorns Away From Glory

Sony Corp (SNE) creator of Playstation 3 has two thorns in their path to glory.

1. Nintendo Ltd (NTDOY) creator of Wii
2. Microsoft (MSFT) creator of XBox 360
   

PS3 has a hard drive to store game data and music and can play DVDs using Sony's Blu-ray high definition technology. PS3 sales took off very well in the early stage. However with the advent of Nintendo's Wii which features a unique motion-sensitive controller and Microsoft's XBox 360 which offers an extensive system for online play and high percentage availability, PS3 sales have been struggling ever since.

Problem with PS3
Gamers and analysts have praised PS3 graphics, but their high prices, shortage of console and weak line-up of games have raised concerns. Sony says that the Playstation 3 shortage will be eliminated by April/May, with another 2 million units on their way to the United States. Gaming sites claim of unsold PS3s. In response Sony CEO said that in many places the games are sold out. They plan to fill shelves across United States.

In January, Sony sold only 244,000 PlayStation 3s, compared to 294,000 for the Xbox 360 and 436,000 for the Wii.

A Gamer's View
Dr. Andrew Garrett, a game developer for EA said...

I make video games, currently working for Electronic Arts on the latest Command & Conquer. Last year, the prediction that the PS3 would be the dominant console, just like the PS2 was. That is no longer the case. The extremely strong performance of the Wii, combined with the miserable performance of Sony has revised pretty much everyone's expectations. Right now, most of us here think the Xbox 360 will be on top for this generation, with the battle for second place between Sony and Nintendo. Most of us still think Sony will beat off Nintendo, simply due to the older graphics on the Wii, but it's not a sure thing. My opinion - get the 360 and/or the Wii. Skip the PS3 unless there's a big change in the near future.

eBay imposing restrictions
In another story eBay (EBAY) in UK is imposing restrictions on the sale of Sony PlayStation 3 gaming systems due to high demand and their limited supply. eBay US had imposed similar restrictions during the fall holiday shopping season due to concerns over fraud/scam listings.

Conclusion: All three companies has clearly differentiated hardware and strategies. Who will win? Analyst believe that none of the 3 consoles will dominate the market in the next 5 years like the PS2 dominated previously. However, Nintendo's Wii will outship and outsell the 360 and PS3 in 2007 and 2008.

Recommendation: Stock prices of Sony Corp took a hit after the company paid $150 million to end a patent dispute with Immersion Corp over technology used in its game consoles and as investors sold exporter stocks on a stronger yen. Surprizingly Nintendo Ltd stock prices have suffered after the the Japanese government decided to sell its stake, about 1.4 percent of the outstanding stock. Microsoft stock prices are also seeing more of red than green, mainly due to Vista and global market meltdown. However in the longer run, the company that will sell the most gaming console would be the clear winner at the stock market, which to me in Nintendo Wii.

Web Links:

• Japan govt body to sell Nintendo shares
• Nintendo Shares Fall on Government Plan to Sell Stake
• Sony Shares Fall on Immersion Payment, Stronger Yen