Investing vs. Trading - the Alcoa example – the follow up

Back on the 14th of April I decided to make an example of the position I own in Alcoa to demonstrate the difference between trading and owning. At the time I stated

“So here is the experiment. Just for the sake of mental masturbation, let’s assume I sell the stock today for $9.25, a gain of $1.77 or 32% net. In exactly 30 days we will say I will buy the stock back at the then current price. Let’s see if this makes sense. And then in another say 6 months from the theoretical buyback date we’ll take a look at the value then (if the stock does not hit my actual target). We can then evaluate which plan has created the best gain, net and not percentage.”

Based on the examplew above I would have sold the AA position for $9.25 from my cost basis of $5.55. The 32% total takes into account the cost of the trade and the taxes on the profit. Because of the 30 day rule the position could not be bought back until May 14th. Which would give me a repurchase price of $8.74 as of the close.
The difference is .51 cents or roughly 6% less than the sale price of April. Thus if we add in the 5% cost to repurchase the stock, the net added gain to me is 1%, granting a total gain of 33%.

While that gain is very respecatble, especially in a down market, having just held the stock my return to date is 70% at the time of this post (AA is currently $9.43). Had I made the sale for the trade and repurchased the position my current gain would be 3% (including the cost to repurchase the stock giving me a net cost of $9.18).

So in comparison, holding the stock would have me currently with a 70% gain, minus tax and sale cost becoming a net 40% gain. Trading the stock, with a repurchase, gives me a net 36% gain. While the difference may not sound large, it is taking net profit out of my pocket.

This also does not factor in the fact that if I had not repurchased the stock I would be out 6% of profit. If I purchased the stock one day later I would have had to buyback the position at $9.03, which including commission would plce me at a loss on the current price and drop my profit to 31%. And if for any reason I was unable to purchase the stock until today, I would be losing even more of the initial profit in the stock (a repurchase cost of roughly $9.90 net or a loss of 7% dropping the profit to 25%).

All of this ignores the fact that I had the option, if I held the stock, to have sold it at $10.50 – a 90% gain or a net of 60% as of the close May 6th. Not counting the fact that I recall the stock having an intraday high of $11. That is a home run in a bad market and horrible ecomonic environment.

Still the stock has not hit my first target of $15. So I have no intention of selling yet.

But the question is if trading a stock is better than buying and holding. In my opinion, buy and hold is always better if you have sound fundemental reasons for purhasing the stock in the first place. As this example shows, the net gain is better under all circumstances, by holding the position. Only luck could allow a better net return, potentially.

This is of course a theoretical example. Actual returns and strategies may result in differing returns. Objectives of your portfolio may be substantially different than those posed in this example. Any portoflio decision should always be discussed with professional.

But at least you may have a bit more insight to the question of investing versus trading. I hope this has helped.

Neil Cavuto dicusses the economy on the O' Reilly Factor

Neil Cavuto is a smart guy. There just isn’t a question about that. When it comes to the economy and stock investing, Bill O’ Reilly is out of his league. That was perhaps never more apparent than in the following video of the O’ Reilly Factor.



But the biggest thing I found in this video clip is the fact that President Obama has lied to the American public. And he is getting away with it.

President Obama stated he had a plan for the economic crisis back in late November, but we have yet to hear it. He stated that he would cut wasteful spending, yet he is approving of a spending bill with 9,000 earmarks. He stated that he would only go after the rich, yet his stimulus package excludes those over $75,000. And he stated that he would be open to comments and thoughts, yet he is actively ignoring the stock market and unknown numbers of investors.

President Obama has an agenda. He had it before the economic crisis, and before the election. He continues to follow thru with that agenda, even as it costs tens of thousands of jobs and the retirement of millions of Americans. That should concern more people than it is.

Neil Cavuto may seem harsh, or grim as O’Reilly states, but in fact he is being honest. I learned a long time ago as a stock broker, that is the least liked response. Even when you are dead-on correct.

When I spoke about the problems of Citigroup over a year ago, I was told I was stupid. When I discussed more than a year ago my fears for the economy, I was told I could not understand the big picture. Look it up, the facts are in black and white. So I understand how Cavuto feels.

The fact is that President Obama has neither given a reason, nor a soundbite to encourage investment in the market. He has ignored the well-being of millions of Americans today, with the promise of a better future for some in the unknown future. And according to polls right now, the public loves him for it.

People hate Bill O’Reilly when he points out the short-coming of President Obama. People hate Neil Cavuto for pointing out the ineffectiveness of the economic plans of Democrats right now (and Republicans when they were in office). And people just tell me they hate me of a list of reasons, avoiding any commentary on what I have actually said and/or gotten right.

What does that say about America? That we are so busy drinking sand and hiding our heads that reason is beyond us. The people that are going to pay for this is more than just homeowners like myself that are paying their bills and soon to be paying those of others. Our children, and soon their grand-children will be paying for the agenda of President Obama and the Democrat-led Congress.

I hope that President Obama saw this video, if not the actual program. I hope people around the nation saw this. Because at some point the Government needs to act as if they have a concern.

President Obama thinks stock market is a good deal he doesn't care about

There is nothing like watching the daily polispeak dance that politicians like to do. It is especially interesting when the dance is being done by the President. Few Presidents are as skillful with polispeak as President Obama, which says a lot.

I mean just look at how President Obama has handled the complete meltdown of the stock market. The Dow Jones Index, along with virtually every stock on any exchange, have nosedived down a vortex nearly every day since he was elected. But this is considered merely “day-to-day gyrations” that are of no consequence.

An almost total freefall, some 26% since the first trading day of 2009, is a minor happenstance. This is hardly worth talking about in the view of the President. And if you must speak about it, it is all the fault of the prior administration.

Of course President Obama started talking to the markets and the nation months before he was inaugurated. He was dictating economic policy and outlining his initiatives well over 60 days before he was sworn in. And he has effected economic policy changes as well as given somewhat direct guidance on what steps he plans to take in these troubled times. But the current effects on the economy have nothing to do with his Administration.

I mean let’s just look at what he has done so far.

His Secretary of Treasury has gotten the remaining $350 billion dollars from the Bush mortgage bailout. There has been no word on how that money is going to be spent, if it has not been already, but he has the access to it.

He let the Democrat-led Congress loose on a stimulus package that swelled from the day he was elected (then a mere $50 billion dollars) to the final passage of $787 billion dollars. The package is all money borrowed from the nation to be repaid by taxpayers with interest in the future. But everyone who receives a paycheck will be able to make an extra $13 a week for 4 months – if they are under the class of rich which is $75,000 for individuals.

But besides the non-lump sum of $400, the public is also paying for honey bee research ($100 million), and moving Government Agencies at $500 million a move, and research to find a way to create usable green energy (~10 billion dollars - just to find a way to make it, not a dime to actually implement it since it does not exist and may not for a decade), and $100 million for moving fish barriers in mid-West rivers among hundreds of other spending programs.

All of this is to ensure that the roughly 500,000 people who were laid off from Circuit City and almost every other major private sector company in January alone will still have a job. I’m not sure how since I doubt most people have degrees in biology, physics, engineering, and so on, but he said it so it must be true.

President Obama also told the world that he was going to increase the tax on investments in the stock market. Because the fact that interest rates are too low to invest in bonds was not enough. Plus he intends to tax the hell out of those able to afford to invest. So you can understand why the world has rushed in to invest in our markets.

But in case anyone just wanted to hold onto their cash, President Obama is authorizing the Government to essentially take over banks. This way the Government can ensure that loans are made – as well as who will receive them (by the way, isn’t that part of the reason we are in this mess?). Plus the Government can be right on hand to wherever people are putting their money.

But lest you try to give away your money, to charity, the Government under President Obama has another answer. The taxes are to increase on donations. Thus you can give away all your money to a charity, and still owe the Government a huge sum of money. Because under President Obama the Government is smarter than the public and will decide where your money should go and who can receive it. Even though the Government can’t balance a checkbook and most of the public can.

Still just in case any money is not accounted for the Obama Administration has a plan. By increasing the cost of energy, like gasoline and electricity, with taxes they can scoop up more money. Even though this means the price of filling up a car, heating a home, buying food or any other consumer item will increase as well. But remember the Government gave everyone getting a paycheck an extra $13 dollars a week for 4 months to cover the cost of everything going up. If you make under $75.000 and thus not rich.

Yes, all of this. Yet the stock market has continued to sell off like a waterfall. Why should anyone be concerned. It’s not like the stock market is a forward indicator of the economy.

Still, just to cover his tracks, President Obama is now talking like he cares about the IRA’s, mutual funds, stock investments and retirement funds of tens of millions of Americans. He has now stated that “buying stocks is a potentially good deal”. Isn’t that great!

Oh I can see the crowds forming a line to just jump into the markets, with money left over from I know not where. Considering the prospects he has laid out, it’s easy to see how you can make all of 10% - before taxes and commissions – in about 2 years. That’s only a LOSS of maybe 20% after taxes and commissions. Why wouldn’t anyone want to get on that train.

And that loss should coincide perfectly with the $2 trillion in spending cuts President Obama plans to make, if he does not continue with his plans to spend $3.5 trillion on the national budget. Plus every projection he has made – that his own economists think are improbable – comes true exactly as he has stated they should.

Polispeak is a wonderful thing. Because after stating all these things, driving away investors and making every industry of business cringe, President Obama maintains a 64% approval rating. Just watch him dance

Jim Cramer must be reading my posts

Like most everyone who can do math, I have spent many hours trying to figure out how President Obama will reduce the deficit, or spur growth in the nation, as he proposes $3.5 trillion for his budget. But I wanted to stop to discuss something I was just told.

It seems that around 6:45pm or so, Jim Cramer was asked his opinion of Alcoa. He stated that the stock is a speculative buy. Aren’t you shocked?

Well if you have been reading what I’ve said you wouldn’t be.

“There are companies in these sectors, or related ones, like Alcoa that trade at below book value now. This is an interesting value. But expectation of near-term growth is null. Yet at some point the vital raw goods will be needed, and demand plus speculation must drive the prices higher. And as that price rises, without another sector to compete with any real assurance, there will be a run..”

I know about Cramer's comment because I was just told about his comments from a friend that I was discussing the markets with earlier today. And my friend likes to keep account of the predictions and outlooks I have for the economy.

Now I know some people are looking at the market environment and thinking, ‘Alcoa may be cheap, but I want something that will move.’ It won’t happen.

President Obama has unveiled a budget of $3.5 trillion, filled with smoke an mirrors at almost every turn. Funded on the backs of the “rich”, which I take to mean higher taxes on the middle class. He is seeking to further stall any growth in investments with higher capital gains taxes. He is looking to crush the ability of private business to rebound with higher corporate taxes and Government intervention.

If anyone is looking at the market with the thought of a return horizon under 2 years, I feel they are foolish. It’s just not a reality. And even in that timeframe, assuming the pipedreams of Democrats are half-realized and just half-effective, the best return will average to about 15% after taxes.

But that is a matter for another day. I’m just going to bask a bit in the fact that Kramer is several days late and paying higher prices than what I called for. The difference may be minor, but the fact is that in this market, just getting vindicated is all you can really expect.

Where is the bottom?

Over the past several days I have been asked two questions over and over. Where is the bottom, and where would I invest? They are difficult questions, and I don’t have great answers.

It has taken the market 4 months to reach the lower target for the Dow Jones that I called for on November 18th 2008. Once it reached that point I expected another 500 point drop, which took a week. At this point some 55% of my predictions from last year have happened. And that is a conservative estimate.

Since that time I have spoken with many former stockbrokers, business owners, and investors. And from all these discussions, the political environment, and what I believe, I can say the following with confidence in my mind.

The Dow will flounder between 7100 and 6600 for as long as the next 9 months.
Any upside movement in the market will be temporary.
If any global political events heat up in the next 9 months, things may get far worse.
Gold and oil will run sharply first.
A major bank will fail.

Since the start of 2009, the Dow Jones Index has lost 20% of its value. This was predicated on a liberal Democrat taking office as President, a Democrat-run Congress, the addition of $800 billion (not including interest but rounding up slightly) in spending called a stimulus package, and the fact that some $350 billion of authorized bailout is pending use.

None of this is a positive for the economy. Every large investor and institution could see that. I believe that major investors took the time from October until December to pull out most assets from the market. December was a time when small investors entered the market, and some short seller closed their positions. Which led to an artificial rise in the markets, seen by small investors and some media as confidence in President Obama.

From Jan. 2nd and on (at the latest), I believe large investors have shorted the market – if not just before that time. I believe that they foresee little opportunity for an investment over the next 18 months. Bonds are worthless at these interest rates (especially if inflation grows even half as some expect). Corporations are troubled by negative growth for at least 2 more quarters, and the continuing credit squeeze. Thus stocks are inadvisable, generally.

But I do not see large shorts to close their positions yet. They are waiting for a signal from the Oval Office and Congress. IF the Obama Administration goes forward with creating a nationalized healthcare, costing tens of billions of dollars to start, and Congress goes forward with the currently whispered 2nd stimulus (of the Obama Administration), then the shorts will increase and the Dow will go far lower.

The result of continued spending is that tax rates for the “wealthy” and corporations must increase. Where else will the money come from? And wealthy is a relative term. Because as the just passed stimulus package has made clear $75,000 for singles and $150,000 of couples is the threshold. And since corporate taxes were promised to increase 10% during the Presidential campaign, that cuts the current profits. Including transaction costs and taxes, the Dow would need to go down roughly 800 more points to give a decent net profit. If the cost of the Government is increased the assurance of who will pay grows exponentially.And thus the profit needed must as well.

But a friend mentioned something interesting to me. The market is always wrong at the top and bottom. With maybe some 90% of the market negative currently, we must be near or at capitulation. Which I agree with. Except normally at the top or bottom of a market there is an obvious near or mid-term expectation. There is none now.

There is virtually no sector of the market that can be observed to have an obvious benefit under the current political plans. Nor in the current private markets. Thus there is no area for capitulation to rush forward to. Thus it will not happen.

When the markets do reach the profit point of acceptance, and close their positions, where will they invest?

It is my expectation that the safest and smartest positions to create are in oil and gold. Only in those 2 arenas are we able to see assured continuous demand. Every other sector is questionable on time and return. Especially in this political environment.

There are companies in these sectors, or related ones, like Alcoa that trade at below book value now. This is an interesting value. But expectation of near-term growth is null. Yet at some point the vital raw goods will be needed, and demand plus speculation must drive the prices higher. And as that price rises, without another sector to compete with any real assurance, there will be a run – latter to be followed by another crash in those sectors.

At the very best, I expect some sectors of the market to show better than expected numbers in the 3rd quarter. Those that took short positions and closed out long positions in mid-2008 might have the same result for the 2nd quarter, but that will be far fewer companies than in the 3rd quarter.

This is a recipe for very flat to downward trends in the market.

Still there is hope. But it takes a lot of patience, building of positions in small steps, and no expectation of a reward (ie a return of 15 – 25%) for 18 to 30 months from now.

There is my answer. Take it as you will.

Will satellite radio survive bankruptcy?

There is something I want to address that long-term readers or those who are familiar with my past might be aware of. I was a stock broker prior to being involved with investor relations and the formation of my company M V Consulting, Inc. And in those days I made many recommendations or reviews, but I never lied. Which is why I left the industry on my terms and without ever receiving a complaint.

But some may be familiar with some documents I have written since that time discussing one of my favorite positions, SIRI – Sirius Satellite Radio. I was very familiar with the entire industry of satellite radio, being involved with Sirius back when it was still called CD Radio and had yet to purchase the frequencies from the Government.

News has now come out that the company, Sirius XM Radio is in discussions to go bankrupt under Chapter 11. The stock is currently priced at around 11 cents.

I will not give a recommendation on this stock, as I am not a broker. But what I will do is share my thoughts on the industry.

Back in the early 90’s the concept of a radio format in which people would pay a subscription was unheard of. In fact I had many debates with then-fellow brokers over the merit of the concept. I am sure that many brokers in the early stages of cable television had the same battles. The first shares I bought in the company were for a client, under his recommendation, at $6.

I learned about the company, and the marketplace it hoped to enter. Facts about the industry include:

Regular radio has poor transmission
Range of any regular station is highly limited
Travelers cannot listen to favorite programming outside of a local region with few exceptions
There are some 100 million drivers in the nation, who spend on average roughly 2.5 hours commuting to and from work to home every day.

These facts and many other conditions in the economy helped raise the stock to $65 back then. To my knowledge that was the highest sale of any share of the stock ever, and it occurred in the after market.

Since that time the company has been plagued with rumors of bankruptcy or outright failure.

The stock has fallen in a similar manner to what is happening now before. And previously I thought it was an extreme buy. Far smarter investors and institutions had placed hundreds of millions into the debt and stock purchases.

But the economy was good then. Or at least better than now.

I still like the concept of satellite radio. I think it is a fact of the future, much like cable. And I envision television and/or on-demand movies being a future capability. But the current economy, and the addition of hundreds of millions in debt are serious problems.

It’s no wonder that 24% of the shares are currently being shorted. The market smells blood, in an economic vortex of pain. And with $1 billion in debt that needs to be repaid in a year where Democrats are hurting the economy worse than it already is – in my opinion – it has a daunting task in front of it.

So the question is can the company survive a Chapter 11 filing and come out the other side with a value?

Maybe. If the economy does not breach the levels of unemployment seen in the 80’s. If inflation does not roar like a lion. If any portion of the stimulus plan works better than most fiscal conservatives believe.

People will still need and drive cars. They will still have to commute long hours. And they will need entertainment for those trips. And the satellites and equipment already out there is an asset for the future. It just might not be for Sirius XM though.

So I will say simply this. As most brokers will state, a stock trading for pennies on the dollar is a gamble that something positive will happen before the company folds. If you are right you make a huge percentage gain, if you are wrong you lose everything. Some companies are worth that bet, others are not.

My ultimate opinion will remain my own. I will not make a recommendation. Qualified investment advisors familiar with individual investor needs are best to speak with on this matter.

Only one thing is always true in the market.

“Bulls and bears make money. Pigs get slaughtered. Never be a pig.”

The Dow Jones Index does not lie

Unless one of the better turn arounds of the stock market history occurs in the next 10 minutes, the Dow Jones will have fallen several hundred points, around the range of 7900 or less (a mere 300 points from a target I predicted over 3 months ago). This is happening at the same time that the Senate has pass the economic stimulus package created by House Speaker Nancy Pelosi, bloated by Democrats, and touted by President Obama. So I have to wonder, exactly which people involved with the economy think this is a good plan?

This plan, and the extensive bailouts that President Obama’s tax dodging Treasury Secretary Geithner, are proposing obviously have not convinced the critical group of Americans that good times are anywhere close to the horizon. Since these investors also represent a large portion of the small and mid-sized business owners in America, as well as the world, I expect only one thing. All the emphasis of gloom and fear drummed up by Democrats will actually come to pass. Just as a result of their actions, and not the inaction they claim.

Unemployment in the nation is bad. Not quite the nearly 11% level that the policies of the Carter Administration created, but President Obama and the Democrat-led Congress have just gotten started. We currently hover at 7.8% unemployment, with the seeming goal of 25% reached in the Great Depression getting closer to the crosshairs each day.

None of this has stopped any Democrat, including the President from pressing forward. We have waste and pet projects, call them earmarks by another name, and little hope of improvement. Just look at what is planned.

“$10 million for urban canals, $2 billion for manufacturing advanced batteries for hybrid cars, and $255 million for a polar icebreaker and other "priority procurements" by the Coast Guard.”

That says nothing of the $100 million to be spent on Honey bees and similar items I cannot imagine creating jobs.

“The plan that we've put forward will save or create 3 million to 4 million jobs over the next two years.” – President Obama

“The president's own economists, in a report prepared last month, stated, "It should be understood that that all of the estimates presented in this memo are subject to significant margins of error."

But the polispeak is great. The promises of improvement sound fantastic when you include supposed facts that no one can ever corroborate. And the inclusion of key words like “save” helps keep the polispeak from becoming an outright lie, while showing the absolute lack of confidence that the plans instill. Yet this is good enough for the average American that does not review transcripts nor listen intently to ever word. But those who invest and run companies do, more often than not.

“The economic stimulus bill would allocate about $20 billion to help hospitals and doctors transition from paper charts to electronic health records for their patients… By itself, the adoption of more health IT is generally not sufficient to produce significant cost savings, the Congressional Budget Office reported last year.”

Again it is the confusion of facts and expectations, without proof, that keep many Americans from noticing the horrendous ramifications of the stimulus package and continued bailouts. The examples are not limited to just these few statements, but a collection of comments to the public since Pelosi first stumbled into the idea of another stimulus package in October (then priced at $50 billion total), and the factual items in the nearly $900 billion (actually over $1 trillion when interest is included modestly) terms.

The Dow Jones Industrial index is a forward indicator of the mind of business and economic health. Often it overreacts to the actions around itself on any given day. And there will be more than enough pundits and economists declaring just that, if the major news media that has invested so much into President Obama bothers to investigate that much. But economists don’t work the stock market. Stock brokers and business owners do. And without the degrees, charts, and visions of Santa delivering a healthy economy they have concluded, since January 2nd, 2009 that things are going to only get worse.

So I ask you, who do you believe? Congress and the Executive Administration that routinely fail to pay their taxes, write bad checks, organize pay-offs, and lie about the job they were elected to do (Barney Frank)? Or the guy who signs your check, watches the economy in action every day at every tick on the Dow, and the guy that will give either of those 2 enough money to expand their business and employ more people?

I was a stockbroker, so my opinion is biased. But you can look at the facts and the carefully stated words for yourself. Just don’t look at the value of your 401K while you do so.

Dow 7600? Believe it

As the 4th quarter moves steadily towards the holidays and businesses across the nation collectively hold their breath, I decided to look forward to 2009. What are some of the things that I see coming economically in the new year?

Dow Jones Index at 7600. Yep that’s a bleak statement. It’s not what anyone is asking for in their wishlist to Santa this year (except a few masochistic short-sellers). This is definitely a lump of coal.

But I will say something that you really aren’t expecting. That’s the upside in my view.

The 4th quarter of 2008 is going to be bad. Very Bad. We all know it. We knew it when before Halloween businesses were already getting their Christmas displays in order. They needed sales that bad. And still do.

Unemployment is up, financial companies are laying off people in the thousands, and the prospect of inflation looms larger by the day. Add to that recipe a Democratic President (a historically bad indicator for the economy) who’s policies – based on his voting records – are extremely left leaning, a Democrat-led Congress, the worst Speaker of the House ever, and you get a big mess.

But there is the fact that over $1.2 trillion has been spent this year to bailout the mortgage and credit crisis. The money has been the worst spent money I have seen since Waterworld was made. And the fact that no one has control over how or where this money is being spent, just means that it is being spent poorly and ineffectively.

So all that is left to look forward to is the thought that the auto makers are now first in line to ask for their own bailout, to be followed by retailers, pharmaceuticals, airlines and probably every other industry in America. And Congress will likely pony up the money for each of them.

But let us not forget that Congress has included the people in their spend at will program. So far a 2nd stimulus plan is being conceived, growing from an initial hidden $50 billion, to $150 to $300, and now is being speculated at $500 billion dollars. Nancy Pelosi doesn’t just screw up, she does it with swings to the bleachers.

Any one of these things would not hurt the stock market that much. And the by-product of severely deflated oil prices would be a boon to business in the mid-term. But it’s all happening at once. Saving on energy doesn’t matter much when you have no sales revenue.

The weakness in the stock market can bee seen in that just before the presidential election, the big institutions watched the polls and sold to get out of the way before President Obama was voted in. His promises to raise taxes, and his historic voting record were not overlooked. The only pause in selling came to allow smaller investors a chance to buy into the market and raise prices for the next wave of selling. My guess is that most of the money is sitting in cash right now, waiting for an opportunity in anything but stocks. At least in the U.S.

This means that New York City will get crushed this year. Bonuses from financials are getting scrutinized and thus being cut across the board. That means less money in the tri-state area, and thus a bad Northeast holiday season. That means the east coast will suffer and the nation as a rippling effect.

I’m sure some believe the polispeak that Wall Street and Main Street are separate – a concept only politicians could come up with. But this is how I see it all playing out.

Holiday sales will be off from last years rate, further pressuring the Dow Jones Index. Unemployment will increase going into the New Year, and inflation will start to rise.

President Obama will get inaugurated and the Dow will drop 500 points. This is not a racial reaction, but a political one. Within a week or so of that date a $300 billion 2nd stimulus plan will be passes raising the market temporarily. Several forward indicators will suggest a negative 4th quarter and 1st quarter 2009. Home sales will drop again – due to fewer loan approvals. Home prices should drop in proportion, with foreclosures increasing.

Oil prices should stabilize at around $65 - $70 per barrel to start the year as speculation and alternative investments will drive the price higher. Gold and precious metals should all increase dramatically in a similar manner to that of 2008. Growth in China will likely stall as well, especially since the boost from the Olympics will have faded.

President Obama will be forced to state that he will not raise corporate taxes, and a smaller increase in capital gains will be proposed. Taxes will increase roughly 3% on all income groups.

HD television service will cause a disruption across the nation and millions realize they need different television set, and will spike retail sales – but this is a false increase in the economy. It will be read as a positive indicator by politicians though.

Several mid-sized financials will fail, blame will go to short-sellers and corporate greed. Increased regulations will be passed that will not address the potential for bad business decisions, and the markets will sell again in fear of a more socialized America. The first rounds of nationalized healthcare will be discussed. The national debt will run higher, the deficit even more so as new spending will have no check from Congress.

Confidence in the U.S. Treasuries will weaken, and several nations will begin to sell in hopes of buying national debt of England and a few isolated nations. There will not be a run on America as this would instantly plunge the world into a depression. But the fear will accelerate pressure on the markets. The Fed will lower interest rates again to counter these fears, and to again increase loan availability. Inflation will start to gain attention in the media.

Unemployment will hit a 20 year high, again raising fears of a depression. And Iran and Russia will take aggressive stances in the world stage. Oil will run on this fear, as will gold. But direct crisis will be averted for the time being.

I expect all of this to happen in the first quarter of 2009. It is my expectation that to some degree every item I mentioned will occur. The importance and effect of each of these items will depend on timing and reaction as they all play off of each other. But the net result will be a 7600 Dow Jones Index, or lower.

I expect that this will be the bottom of the market. Smaller investors will flee the markets, and discussion of Federal intervention to save 401K’s will begin. This will also be seen as socialistic, but the need will outweigh these fears. The market will likely hover in this bottom range for the 2nd Quarter.

I’m not sure what might happen next.

I hope that I am wrong an most of these expectations. I would love to see the market gain confidence and rally in the face of these events. I hope that President Obama can rise to the occasion and lift the economic and personal spirits. But that is yet to be seen.

If I am as correct as I was in 2008, then 60 – 70% of what I have said will occur, though not exactly in my timeframe. Take that as you will.

President Obama's first 100 days: a prediction

Ok, now that the Obama election win inspired drunkenness has passed the question for many is what is he going to do. Fantastic speeches, and pointing fingers at the past are wonderful ways to get elected, but mean nothing when you need to lead. What can we discern now?

Well we know that Obama is leaning heavily on his old Chicago political contacts. And so far they have been very non-partisan Democrats. I am speaking of Chief of Staff Rahm Emanuel. So that means that bi-partisan policies are likely going out the window right after President Bush exits the White house door.

This bodes well for House Speaker Nancy Pelosi, Harry Reid, and the Democrat-led Congress. They will have a field day passing all the laws they hoped for. Whether that will be good for the Average American is highly questionable.

Speaker Pelosi is relatively giddy right now, because he 2nd stimulus plan is well on the way of being passed. After her failure to slip the plan into the $700 billion dollar bailout (then only a mere $50 billion plan) without notice – and the failure to fund ACORN and other pro-Democrat organizations with any proceeds from the bailout (instead of paying back Americans) – Pelosi didn’t give up. Her next step was to approach the Bush Administration with a $150 billion stimulus package, right after the auto industry received $25 billion for their woes. When that also failed (something Pelosi has been familiar with) she got quite and waited for after the election. And just as was expected President Obama has promised that a 2nd Stimulus Plan, for at least $300 billion will be passed.

The problem here is that it won’t work and will either increase taxes, the national debt, or both (most likely). Why won’t it work? The same reason the first was a failure. The economy sucks.

The stimulus plans are in essence the equivalent of adding more water to a leaky bathtub. It doesn’t solve the problem, it just gives you more water on the floor. The first time most took the money and paid down on their gas and oil costs. A few were able to lower their credit card debt slightly, and a small portion actually went and bought something.

That was all before several massive banks and brokerages failed, Fannie and Freddie died (to the apparent amazement of Chris Dodd and Barney Frank), several industries started to lay-off jobs or close, and the auto industry walked up to the free money line. And just as many are in danger of losing their homes, if not more.

What will a second Stimulus plan do? Well since gas and oil are cheaper, pay down mortgages, go into the bank savings incase you lose your job, buy extra food in case you lose your job, pay down on the credit card debt in case you lose your job – notice a pattern? Buying Christmas or Easter (depending on when the checks go out) gifts just doesn’t rate very high compared to losing your job, and thus will not promote the economy.

Another thing we can expect that has been stated is higher taxes. Yes the start of that plan is the $250,000 bracket. But with over $1.2 trillion spent this year, and other $837 billion proposed in new program spending, and $300 billion at least of a stimulus plan, higher taxes is not an exclusive tax the rich option. And we know President Obama favors removing the President Bush tax cuts, so that’s 3% more tax for everyone above $31,850. Expect quite a bit more very soon. My guess, a net 7% tax increase across the board.

To go with the higher taxes, expect higher unemployment and inflation. Someone has to pay for the higher cost of business, and corporations will always be the last to accept that bill. So the higher costs of everyday goods and fear of losing a job really kills the stimulus plan – which was a dumb idea in the first place.

To further ensure that the economy rattles at the bottom of the barrel capital gains taxes are going to go higher. This expectation is already hitting the stock market. As I was saying to a friend and former stockbroker

“The smart money is getting out. They started once it was likely that Obama would win the election. They cleared most of their positions before the election, waited for mom and pop to buy into the market before the election to raise prices, and the second President Obama won they started to get all the way out. My bet is that we lose 500 points on or in the week of the inauguration.”

I mean why wouldn’t you hold cash right now. Bond rates are useless, and capital gains taxes means you need a 35% profit just to break-even, which in a good market is tough to nail down.

You can also expect to see even less revenue in the media arena. Because of the Fairness Act, which requires that any talk show or political program must be followed with equal time of the same format for the opposing side. Liberals may love to say that the election was a mandate, but since liberal radio and programs lose money faster than Nancy Pelosi can increase stimulus plan budgeting it seems to be nothing but bluster. Still Air America Radio has a final chance to hit the airwaves again (they went bankrupt in 2 years because no one was listening). Until the loss gets so excessive that radio stations get rid of both liberals and conservatives.

What a great plan. If you can’t get anyone to listen to what you have to say, shut down your opponents from speaking too. Even if people are listening to what they say. Because silence is more fair than debate and criticism. It also helps to cut down on people noticing that your policies do more harm than good.

So far if the prospect of rising inflation, fewer jobs, higher debt, lower stock market, and the continued prospect of losing your home haven’t got you excited - while losing the distraction and/or conversation of talk radio – you can smile at the thought of higher wages. A minimum wage hike is very likely to come early in an Obama Presidency.

The hike must happen early in my opinion because the economy will worsen as the year progresses, and all the goodwill President Obama has will evaporate as fast as stimulus checks hitting the consumer market. But higher employee costs will mean more money the corporations have to pass off to the consumer, and more people that will need to be fired to maintain current (or even slightly reduced) profit levels.

Most of all this are items I expected and discussed prior to the election. And just as I predicted President Obama is following every step of what I mentioned. And the outcome is becoming more of what is obviously a bad plan. But there is something that most did not expect.

There will be no healthcare reform. Not in the first 100 days, not in year 2. The nation can’t afford it. The Government is too inefficient to run it. And because Biden believes that the nation will be under duress within the first 6 months of the Obama Administration, we will be too preoccupied (so much for a President doing more than one thing at a time). That campaign promise is out the window. As is stopping jobs from going overseas. In fact more companies will choose to go to cheaper markets rather than pay the rising cost of staying in America.

So in the first 100 days taxes will go up, as will inflation. The economy will get worse, and the stock market will drop to about 7600 – a true rout. National debt will increase, several more banks will fail. The auto industry will get a bailout of their own (around $100 billion at a guess), and so will AIG (again). Domestic drilling won’t happen, because that would make energy cost cheaper – which President Obama has directly stated he does not want. And we likely will have an international crisis that will bring us close to war, and cause Europe to go bi-polar again and dislike President Obama - though not as much as President Bush.

That’s my prediction of the first 100 days. I hope that I am wrong. I really want President Obama to hit the history books as a great President. I’m selfish and Black. I want to see his historical image live up to his speeches. But his policies as they stand means it won’t happen.

A real long prediction, President Obama loses in 2012 to a Republican. His legacy will be worse than President Carter. Expect inflation at about 15% and unemployment to match. And as I said Average taxes will be at least 7% higher across the board. Hope you’ve been saving money.

Are tech stocks worth buying now?

Lately every pundit and expert discussing the market of lat has spoken about the financial companies. There is of course good reason for this but the really smart investors are looking in place that the general populace are not, for the next rally that will inevitably come to pass.

Following that line of reasoning I have written about how I found gold and coal to be solid buys. I also have stated that I think some financials are the best buys in the market. But I have to admit I got caught up in all the emotion and forgot to look at the tech market as well.

Now I realize that back in August I was discussing how technology stocks should not be limited to just companies that are directly tied to a PC or Mac. And my reasoning was sound , since technology is more than a computer and it’s funtioning. But if we were to look at the tech stocks that focus on computers what might be said?

Well there is eBay. This company might be the best buy on the market right now for this sector. Without having stores and storage facitlies overhead costs are always low. Since the purpose of the company is to facilitate trades interest rates are not a primary focus on their ability to do business.

Actually when you think about it, a messed up economy should mean good business for this company. As people worry about keeping jobs, and if they will have to take a pay cut or have reduced hours, the holiday season that is the 4th quarter is coming to bear. And kids love to see gifts on Christmas or Haunakah, because the economy means nothing to them. And parents love to see their kids happy.

So would you rather go out in the cold, spend money on gas (which is still high considering how much crude oil has gone down), and fight crowds to pay top dollar for the latest whiz-bang must have, or might you look for a refurbished version of that same item. Or perhaps a more traditional item? Or a nice gift for you spouse and/or significant other. Especially if that item costs less than in a retail store.

This is why eBay has had increased sale each 4th quarter for years. I really think this will do well as other brick and mortar store have a horrendous quarter.

What else might be interesting? Wll according to Toan Tran, an associate director of research at Morningstar in Chicago

“If you really were a long-term investor, and you really were to buy these stocks, go away for ten years and not look at them, any of the big-cap tech names look cheap now -- Microsoft, Oracle, Apple and Cisco -- they're all trading at extremely cheap valuations.”

Of course valuations are based on business and the rationality of the markets. Neither of which are good now. Still of the big names I would believe that Microsoft is a solid choice.

Microsoft has lots of cash on hand, which eases their need for credit in the near-term. They are a highly diversified company. And they provide a product (though often buggy) that is needed for most people to operate their computers with ease. Being the near monopoly they are has its advantages at times.

I also like Netflix. It’s a simple business model, basically renting movies. It’s a huge industry and the more people can’t spend money outside their home the more they want to be entertained in their home. So there is a stability there, if not a reason to expect increased sales. If jobs are sketchy, and especially if gas prices stay at present levels or go up, people want to be in their homes and save money. Since a trip to and from the movie theater can cost as much as $30 per person, a Netflix movie is a wonderful alternative.

Now these examples are not perfect. The credit crisis and the mortgage bailout will hit them hard like any other company. And the general malaise of the stock market will infect their prices as well. But looking at the long-term they will be fine I think.

These companies and others like them will be able to adjust more rapidly than traditional companies. They have goods and services that people need and/or want no matter how the economy is doing. Their costs are manageable and their structures have survived the internet crash so we have reason to believe that they can survive this.

The big question is when to purchase them, or any stock. That is the hard question. I am an old stockbroker, so I like to buy when the market is in a panic (check), there are big problems on the horizon (check), and after bad news.

The bad news will be 3rd quarter earnings which are about to be released. You can safely bet that the financial will all report painfully bad losses and missed expectations. So will several other major companies that rely on credit for their operations. So another sell-off should be expected. Add to that the likelihood of a President (if Obama is elected) that plans to increase corporate taxes by 10% while the economy is reeling, and the increase in inflation from the sudden federal rate cut today.

Put that all together and I look for the last 2 weeks or so of October through middle of November as a buying period. I expect that the market will pick up a bit in that time, so properly picked companies should establish new floors and trade from there.

All of this does assume that Europe and the rest of the world does not fall into a complete depression. And even a steep recession might alter things a bit. But the basic logic still works.

So do your homework, pay attention, and look where everyone is not looking yet. In every down market there are opportunities – you just have to work at it.

2 bad bailout deals out and what is next at bat?

The bailout deal that was rejected on Monday by the House of Representatives was a bad deal. And the result was a Congress divided, a media blitz, polispeak galore, finger pointing, and a 777 point drop in the Dow Jones Index.

Most focus on the drop in the Dow Jones. The media love to play that up. I even heard the number increasing as the night went on. Some newscasters call the drop “a nearly 800 point drop”, or “nearly a 1000 point fall”. Talk about exploiting the facts to gain viewership.

The fact is that nothing that happens will stop the drop in the market. The second that short-sales are allowed back into the market, bigger drops will occur. All that stopping these trades has done is increase the power of the drop. Because while the numbers look big right now, the actual affect is not nearly as big. That’s because of the current value of the Dow Jones Index. But as the Dow drops, these big sell-offs become more meaningful and powerful. And they feed a bear market like honey.

But the bailout, now trying to be spun into a “loan” by pundits and politicians, is horrible. Because it fails to answer 2 simple questions. How much is being assumed in bad debt, and how do taxpayers get repaid?

The first problem goes like this. Under the deal laid out on Sunday, at least 3 separate payments would be given to Treasury Secretary Paulson to buy bad loans. The value of what he pays for the loan is unknown. Would he pay the original price of the loan, the current value, the real absolute value? No idea, nor was one required by the legislation. Thus he could buy all the bad debt at the top price, ensuring taxpayers could never break even or be repaid.

The second problem is that there has been nothing said on how taxpayers get the money back. The money is coming out of our pockets. We know that. To the tune of about $10,000 per person. And it will likely be collected from higher taxes for EVERYBODY. But how are we to be repaid. Will we get tax credits in the future? Or a check? Or guaranteed lower taxes (though how much lower and lower than what level is yet another question)? If you can’t say how we will get repaid how can we believe we ever will.

To deal with these 2 major issues the politicians that were trying to rush this version of the bailout proposed this bit of eyecandy. Executives would no longer get ‘golden parachutes’. Yea! It’s nice that the Government is in effect starting on the path to regulate how much money anyone should be paid. It’s very socialist of them. Still I can agree that paying someone that bankrupts or severely damages a company millions is folly. Though I see no problem paying them is they create a bigger stronger more profitable company than they took charge of. But the legislation is unclear if a great executive doing a great job is free of the same stipulations and restrictions.

And all of this says nothing to the power suddenly endowed to the offices of Secretary of the Treasury and Fed Chairman. They get control of more money than 1/3 the countries of the world make combined. And if you think that Congress can watch over those positions and keep them in check remember that it was the brilliant and attentive eyes of Banking Committee leader Barney Frank that said in July of 2008 that Fannie Mae and Freddie Mac could not fail, and that he saw no problems in the financial markets.

And another unseen problem of the bailout deal that was thrown out is its effect on the nation. This deal would have effectively kicked out the last leg holding New York as the financial center of the world. And it still might happen. And with that loss of status means tens of millions of dollars lost to the nation and New York State.

This is not a game with obvious consequences. Some things have to be thought about. And because some of those most responsible for this mess don’t want the blame, they are insisting on the most speed in passing the buck and a deal.

The bailout will cost over $1 trillion by the time it’s all said and done. The stock market will fall as the dust settles and every industry with debtors lines up to be next to be paid. And eventually things will improve. Such is the nature of markets and trade.

But if the main questions I have asked are not answered in future bailout proposals, because of the rewording of what the deal is called, or political favor to a Presidential candidate, or rushing to soften the ultimate downturn of the bear market, or just because no one was smart enough to ask, then the real cost will be far worse than just the money thrown away.

Are mining stocks the safe haven from the bailout crisis?

There is no deal on the bailout of the U.S. financial markets as of this moment. Treasury Secretary Paulson is in the White House as I type trying to create a new plan. The Congress is busy trying to make their own plans as well.

That is the situation that the world markets will be facing tomorrow. And in the wake of this revelation I expect that the Dow Jones Index and other markets will retreat in the face of an unsure weekend. Which means that this is a great market for mining stocks.

I have already mentioned that I feel that coal mining is a great area for the future, based on the need of alternative sources of energy to crude oil. But when the markets are in turmoil, and with direct talk from the likes of Warren Buffett stating that the potential of failing to get a bailout deal done is akin to a financial Pearl Harbor, well there is just 2 place you can bet people will go – gold and oil.

Gold is the traditional hedge in worrisome times. And crude oil has gained in popularity as a hedge as demand has increased in China and other developing nations. Both of these items are limited commodities, and require mining to bring them from the earth that surrounds them.

In the immediate short-term gold will have to fluctuate to handle the demand for safety. Which means that the gold supply will diminish and mines work harder to make up the difference. In the short and long-term oil is both required for energy needs and depleting the finite supply.

And I have to say that mining stocks look great because of all these factors. Why?

There was an old saying from when I was a stockbroker

“You may or may not get rich looking for the gold vein, but if you own the picks and axes you’ll never go poor.”

Companies with proven assets in coal, gold, and oil are the picks and axes of this market and on into the future. The world needs these commodities for safety and energy. No matter the financial outcome, and perhaps because of it, these valuable commodities have to come up to the surface. And mining companies are the means to do so.

With the decreased liquidity in the capital markets, competition is reduced and weaker companies will be forced to merge with bigger and stronger companies. Thus supply will be centralized into fewer hands. With demand up, profits will increase.

Now some would say that this is a temporary blip. And were this the spring I would agree. But with winter and cold weather approaching, and the fact that a slow 4th quarter is all but guaranteed in the U.S. this small blip should last for 6 months from this point.

Plus the fact that a Democratic President has usually been met with a lower market day one. In this case, Senator Obama has yet to declare that the current bailout of $1 trillion (including AIG and Fannie Mae and Freddie Mac) will disallow his initiatives on healthcare and other social programs. So the damage, unless he changes his stance, will even be worse.

When you consider all this, I come to the conclusion that mining stocks are one of the few safe havens in this tumultuous market. If you disagree, please do let me know why.

Bailing out the stock market, and killing the economy

Don’t you love when the Government spends your money? And they do it on a scale so grand that you just have to stop and go wow.

Currently the Government has proposed the best deal Wall Street has ever seen. After having spent over a quarter of a billion dollars on Bear Sterns and mortgage loans and other financials (like AIG), it is now going to by every bad loan of every financial company. Oh joy!

Of course the stock market is flying. Every financial company will now have the chance to load up the Government with every single bad debt they can engineer to be connected to terms of the bailout. And the people working at these banks are far smarter than the Government agencies that will take over these debts. Instantly the books of each bank and brokerage and insurance company will look astounding. All relevant economic guidelines will look solidly in the black: book value, loan reserves, earnings per anything, and so on. All it took is what will be over a trillion dollars of taxpayer money.

Add to this the face that 799 companies in the stock market are no longer allowed to be sold short and you have a market that has no choice but to go up. Like I’ve always said the financials always lead the market higher. Sadly this is bollocks.

The market is artificially propped up right now. Without this bailout, which will hurt the economy for the next President (no matter who it is), we would have found a bottom. But that means once all the crap is done the market will eventually find that bottom, and then exceed it. Just like what happened after the internet bubble burst. Trying to cushion that lead to the real estate bubble and it’s bursting, and now this will lead to another bubble that will burst as well.

Perhaps my time as a stockbroker gives me better insight on this but this is bad. We are talking about over a trillion dollars that will grow and become a bigger problem the next time.

And the Presidential candidates are showing us how they will deal with that next problem now. Senator Obama is waiting for information, instilling no confidence in the market or for investors. Senator McCain is looking for people to blame, which has about the same effect. The only difference is perhaps the fact that since the President must look strong to give the markets any feeling of safety Senator John McCain is looking more Presidential.

But taxes look that they will get raised. It’s the only way to pay off $1 trillion dollars. That means Senator Obama will definitely increase taxes on everyone, massively. And Senator McCain will have to raise them to some extent.

Obama already wants to raise corporate taxes, and increase taxes of everyone from $31,850 and up at least 3%, and raise taxes on energy consumption, capital gains taxes, and payroll taxes. Add this bill and those numbers increase almost exponentially. He will undoubtedly equal or exceed the economic environment of President Carter.

For McCain we will see the likely removal of the President Bush tax cuts. Possibly increases on capital gains as well due to political pressure. This means slower growth in the economy and tough times – not like some want people to believe exist now but will actually exist by 2010.

Here is one thing that I would love to see. I believe that any owner or CEO of a company deserves whatever pay they can justify. There is no limit on what they can be paid, if they have created a profit for their company. But that does not mean they cannot receive a tax, similar to a luxury tax, for a bonus in excess of say $25 million.

If a CEO can grow a company 15% or more and thus ensure everyone connected with the company is safe that deserves a reward. If they retire and the company had netted a profit over their time at the lead, again they deserve a bonus. Because after becoming a CEO of some of the largest companies in the world is likely to be the last job they will ever have. But again the extreme bonus tax should exist. They will still receive millions, so they aren’t going to a poorhouse or changing their lifestyle.

But if a CEO fails to create a profit, they should be restricted in their pay as well. IF a company must be sold to save it, or is cutting workers to stay a float, then management has failed the company. If the company must be bailed out by the Government, the CEO has failed it. Again I can agree that the CEO deserves to be paid their salary, but not a bonus. And if they are leaving the company and created net losses their retirement package should reflect that. So instead of $100 million as an example they would receive say $1 million for each year they were on the job, and still have to pay the extreme bonus tax.

And when I say an extreme bonus tax I mean that say 50% of any bonus over $25 million dollars is split between the company and the Government. The split is 33% to employees, 33% to the corporation, and 33% to the Government. That scenario benefits the company and its employees, hopefully increasing profitability and shareholder confidence. It also benefits the nation. And I can’t see how any CEO that would have gotten say $34 million as a bonus would be upset because they got a $17 million dollar bonus.

But that won’t happen. Just like taxes won’t go up because of this bailout, or that there will not be another crash in the markets because the Government has intervened.

I predicted a 10,200 Dow Jones Index by December. I stand by that. I stated that 9,300 on the Dow in 2009 was possible, I still believe that. And I said that I think $160 per barrel of crude oil would happen over the winter, which may be overly aggressive but still possible. This bailout does not remove these possibilities, it enhances them. Greater regulation does not prevent future problems; it increases the cost of identifying them. Preventing short sales does not help the market, it hides the weakness. And none of these things prevents bad decisions which are honestly the key reason why we had the internet and real estate bubbles.

The only questions that are left are when will the next problem become evident, and how much will the Government spend to bail that out as well.

Financial stock weaken, but coal looks great

Back when I was a stockbroker (I know, it’s a bad word today) I had a buddy that love to quote this old brokerage saying.

“Bears make money, Bulls make money. But pigs just get slaughtered.”

Obviously the Board members of AIG, Lehman, Bear Sterns, Washington Mutual, and more than a few other financial companies didn’t know that saying.

But the blood is in the water and panic is in the streets. Ok, enough of the sayings. The fact is that the financial markets are screwed right now. We have hit my target of 10,800 on the Dow Jones Index – though not in my timeframe. My target of foreclosures has been exceeded, currently targeted at 9%. And my list of probable factors are being checked off 1 by 1.

So far:

1. Confidence in all financial will go lower forcing the need for more liquidity
2. Several institutions will fail - focused mostly on those dealing with housing markets first
6. Home foreclosure will hit 5.5%
11. Republicans will be blamed

Now that is only 4 out of 15 on my checklist, but they are the big ones. Gold is rising as a hedge to the dollar and to protect assets. As is crude oil. The Dow has nearly hit my December target of 10,200.

So what do we do?

I say buy. There is no greater time for profit than when everything is in a freefall down. Of course picking your time and which stock is essential. I like the financials, because the winners will rally strongly once things settle.

I would avoid Citigroup. They insure their own product and had massive exsposure to bad mortgages. I would avoid Insurance companies since I expect that regulation restricting their abilities to own other assets will be restricted shortly.

But what else is there to buy. In every down market something always goes higher. And there are always leaders on the way back up.

Coal is a great area. Energy is one of the top 5 issues on the minds of voters. Politically it’s a go to industry. Increasing coal use is positive because it means less foreign oil, increased business domestically, increased international trade, and cheaper energy prices to consumers.

Also if coal is liquified then we see the potential for a fuel that is carbon-nuetral as compared to oil. The cost of this process is about $35 per barrel equivalent to oil. That means a savings of some $55 or more dollars per barrel at current prices. Yet at this moment production is minimal.

And coal is plentiful. At current energy consumption rates there is enough coal to power the entire world for 57 years, or just the U.S. for 164 years. And did I mention that the U.S. has the largest reserves in the world. This says nothing of the coal-bed methane that is a potential energy source as well.

A couple of interesting names in the sector include:

Arch Coal
International Coal
Walter Industries
Peabody Energy
Patriot Coal
Massey Energy
Alpha Natural Resources

Now if we are seriously looking for options in this difficult market, taking into consideration political advantages, energy needs, stability, domestic economic benefits, and isolation from the turmoil of the financial markets we have to look at coal. It just seems like smart money to me.

The financial industry will be merging and bouncing around. There will be regulation and political fights about who is doing the right thing. The dollar and crude oil and gold will get stronger or weaker and then back. Smart money looks at panic and sees the road to profit in the future.

Eventually, perhaps even now, financial stocks are attractive but you will get lumps in the near-term. Gold is too emotional. Crude oil is where everyone is trying to get away from. But you like to get on the internet right? Like lights at night? Want to watch TV and stay warm? Energy is the answer, and Solar, wind, biomass and other alternative energy sources don’t exist – nor will they for at least a decade.

It makes sense to me. So like I used to say as a stockbroker

I love life!

Senator Obama speaks as financials fail

Today the economy is the big issue in the Presidential race. That’s not to say that the Presidential candidates weren’t paying attention to that before, it’s just that they are panicking to look strong now.

"The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It's kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters." - July 2008

Recently Senator Obama has been attacking Senator McCain about his positions on the economy, specifically that McCain stated the economy was ok. Senator Obama now states that he will reform regulation. He still maintains his desire to increase taxes for an undeclared amount of those Americans NOT receiving a paycheck but making them.

Well isn’t that nice. It’s very emotional polispeak, but it’s not worth much.

First consider that the real problem in the economy was created during a Democratic Presidency. The Clinton Presidency. The problems today are just the continuation of the internet bubble, which President Clinton allowed to happen. President Bush failed to resolve the issues, true, but the Twin Tower attacks altered the viewpoint.

In trying to cushion the pain of the internet bubble bursting, both Administrations, created the real estate bubble. Like all bubbles it too burst, but because most companies had not fully recovered from the first crash they took further damage now – especially in the financial markets.

"Just remember this, no matter what plan is announced oil is still nearly at all-time high levels, many mortgages are still failing and/or at risk of failing - and not all of them are sub-prime. Food prices are increasing as ethanol production is diverting corn and wheat to this less efficient alternative fuel source and with recent laws mandating increased usage on a national level we can expect even higher prices. The financial sector is not done writing-off their losses for making the bad loans, and more money will be coming from overseas to prop them up." - January 2008

Every time the Government steps in to bailout the stock markets, the worse they make the situation. Bailing out homeowners that made stupid purchases, without consideration of the potential consequences, hurts the economy. Regulation does not prevent dumb decisions, but politicians would like you to think so.

Banks fail every year, as to hundreds if not thousands of businesses and home loans. That in a good economy as well as bad. But this looks worse so people are more scared now than then.

But Senator Obama is essentially promising to go to the companies that are hurt and increase their taxes. He wants to add to the burden they have now. And that is supposed to employ more Americans, and provide more money to them. Add to that the fact he wants to put more people into the process.

Adding regulation means more people involved. These people work for an employer that cannot balance its books, and cannot efficiently manage any aspect of what it does. And has done so for decades. Were the Government a business it would have been bankrupt before I made it out of elementary school. And Obama wants to add to that.

"I would also remind people that the markets may soon be hit. If the minimum wage is increased, lay-offs and slower hiring will ensue. Unemployment will go up. Why? It's economics that should be apparent from high school classes; small businesses can't afford the increase. Yes those living on minimum wages will have more money, there will just be fewer of them for a while. Net result in my opinion is that unemployment will increase, as will welfare, and the economy will slow as fewer people will be spending the extra cash. That is no gain for many, at least for 3 years after the increase. Oh, did I leave out that there will be fewer small businesses, some closed due to the increase and others unable to start because the increase creates a ceiling of minimum cost that they can't cross." - November 2006

That is not to say that some don’t laws need to be changed. But America is not falling apart, like some would want you to believe. 90% of mortgages are being paid. Most businesses are running normally. 95% of workers are getting paid just like they did last week, or a year ago.

Right now the Dow Jones is down (2:30pm). That’s because the Fed failed to lower interest rates. Because the Government failed to interfere with the markets, as it consistently has, as expected investors are upset. Such is life in an industry that ebbs and flows on a minute by minute basis everyday.

But if the Government bailed out the banks, and lowered interest rates, and bailed out homeowners, would that be better?

If Senator Obama had his way, all the above would happen. And taxes for corporations, investors, and the AVERAGE American would all go higher. So how would that help anything? More people would be mucking up the markets, the debt would go higher, and you would have less money to pay your bills with.

"Add all that up and you have a stagnating market, with reduced sales, higher costs, shrinking profit margins, higher taxes, horrible bond rates, and depressed real estate values. I call that a real problem. Especially if the tight credit, higher fuel costs, and higher taxes cause more home mortgages to fail than just the 15% low-end estimate I posed earlier." - November 2007

Seriously people, listen to more than the well-time polispeak. View everything in the context it is presented in. Remember everything that the candidates have said in the past. The economy is not great, but it’s not the Depression either.

Predicting the U.S. economy for 2nd half 2008 and 2009

Well how much fun are you having today? If you hold investments, it may not be a fun day at all.

Back in the 4th quarter of 2007 I said I believed the Dow Jones Industrial Index would hit 11,000. I thought this would be a move in the late 1st to 2nd quarter. I was wrong… on the timeframe. But this is not a pat yourself on the back kind of moment.

With Indy Mac having failed and fears rampant over whether Freddie Mac and/or Fannie Mae will follow there should be no doubt that the Dow will cross into the 10,800 area on Monday. Add crude oil prices that are continuing to rise on fears from Iran and you get a bad situation. But perhaps the real culprit for this current situation is the Fed (Federal Reserve).

The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters.

Loan reserves must be raised at all financial institutions. That especially means Fannie Mae and Freddie Mac. And several institutions need to fail. That of course means that some people will lose their homes. Nothing can, or should be done about that.

When I some will lose their homes I don’t just mean the roughly 4% of homeowners that are in default. I include in that group those that will fail this winter due to the cost of heating oil increases. I expect that in total some 7% of homes are in danger of foreclosure this year. While it’s not a nice thing to say, they need to lose their homes for the economy to survive.

This is not unlike the enormous wash-out that occurred when the internet bubble broke in the stock market. Money was lost, as it should have been, and opportunities were created. Those that made bad financial decisions, whether corporate or individuals, lost and others benefited from that loss. It’s a standard cycle in the markets.

Of course what is likely to happen is that Congress (with it’s 9% approval rating – sure to go lower) will take taxpayer money and bailout homeowners and financial institutions alike. Thus more water will fill the leaky tub. Undoubtedly the current Administration will be blamed (even more than they should) and the war in Iraq (and possibly Afghanistan) will be identified as the cause of all these ills. Which is false.

The outcome will probably be a surge for Senator Obama, who prefers a bailout. This may lead to him being elected and higher taxes to pay for that bailout. And if anyone thinks a bailout of this size will be limited to just the top 1% of the nation they are insane.

I believe, looking at current factors several things are highly probable:

1. Confidence in all financial will go lower forcing the need for more liquidity
2. Several institutions will fail – focused mostly on those dealing with housing markets first
3. Interest rates will increase by 1pt by the end of 2008, increasing another 1pt early in 2009.
4. Crude oil prices will jump to maybe $160 a barrel by mid-September as winter starts, with a commensurate move in heating oil prices.
5. Gasoline will reach $5.15 a gallon
6. Home foreclosure will hit 5.5%
7. Bankruptcies will increase by 3%
8. Higher energy prices will be blamed for the further slowdown in corporate profits and significantly lower (negative) holiday sales in the 4th quarter.
9. A Democratic Congress will be re-elected
10. Senator Obama will likely be elected
11. Republicans will be blamed
12. Taxes will be increased for all incomes by 3% by 2009
13. Corporate taxes will be increased by 10% early in 2009
14. Inflation will soar unchecked by 3 - 5%
15. Unemployment will grow to 8.5% by December 2008

While each of these items may or may not happen they are all interrelated. I expect each item to happen, at least to the degree I stated, generally in the timeframe given.

As money tightens, gold will be a hedge and prices for all precious metals will soar again. Credit will get severely crunched, and credit card rates will fly. The debt load on the average American will increase from the current $6,000 to $8,500. Most of this increased debt will be from higher energy costs. Thousands of small businesses will shutdown.

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama – for the reasons stated – then I further expect a drop to 9,300 during 2009. A significant bear market indeed.

The main problem is that the solutions being looked at now raised taxes and increased liquidity, fail to resolve the actual problem. And the combination will weaken the dollar, to a point where holding U.S. bonds is unattractive. I won’t even mention the increase in retirees and Social Security.

But there is opportunity. I see the housing markets as a great buy, for those willing to hold for 5 years. Buys in the secondary city markets will probably do best having a lower purchase cost and holding value better.

Several financial stocks will be excellent buys. Some have far better balance sheets than others, but will be blasted by the same investor fears as those in bad shape. Companies like Citigroup are trouble spots as they reinsure their own loans and thus hide them better on the balance sheets. Financials will lead the markets down, but they also will signal the start back.

Coal will likely start to regain interest in the quest for alternative energy sources. I expect nuclear energy will also get a push, with at least 1 new nuclear plant being authorized to be built in 2009. I expect a call to switch to ethanol produced by grass and sugar to go initially unheeded until mid-2010. Further harming the ethanol push is the fact that there will be a glut of ethanol by mid-2009 through 2011.

Bond rates will be more attractive in 2009 than today with the likely increases in interest rates. Of course inflation rises will remove that benefit.

There may be other sources of opportunity but they will be guided by factors including but not limited to:

Iran
Iraq and Afghanistan wars
Crude oil prices
Heating oil prices
Inflation
Unemployment
Manufacturing and Industrial layoffs
Retiree growth rates
Healthcare costs
International political stability
Another terrorist attack on the United States

That is the outlook that I have based on what is currently ongoing in the world today. Some of this is just my on interpretation, some my deduction. But I believe that if only ½ of my expectations occur, the general outcomes as stated are accurate.

But look around and determine your own answers. Better to be prepared than taken by surprise.

American oil: 1970 or 2010?

How bad is the energy situation in America? We all are aware of the increases in the price of oil in the past couple of years. In fact there has been a massive amount of attention to every rise and fall of the price per barrel. That attention has of course translated into greater speculation fueling great price fluctuations, happier members of OPEC, richer brokers, and tighter margins for virtually every type of business in America.

But how bad is it? Does this compare to say the 1970’s and that oil disaster? Actually very well. In fact there is virtually no comparison. From 1970 to 1980 the price of oil went up 1566%. Again that was an increase of 15x in 10 years or 1.5x every year for that decade. In the past 10 years oil has increased a mere 300% or 3x counting today’s high.

So what other factors have been involved in the run up between then and now? Considering the fact that oil consumption in America has increased 21% since 1980 alone (I couldn’t find data since 1970). Of course that is 28 years or .75% a year. So that does not explain the price increase, especially when you consider that the price of oil only increased 33% from 1980 to 1990. So there must be another reason.

Perhaps it’s the fact that there is a limited supply of oil in the world. Knowing this, and the fact that the Middle East has no other major exportable good, it makes sense that as demand continues to be steady or increase the price will rise. But that still does not explain the recent dramatic (moreso due to media influence) increase.

Until you look at speculation. In the 1970’s perhaps 15%, maybe 20%, of the nation was involved actively with the stock market. In the 1980’s there was a huge increase in trading of everything, backed up with a healthy helping of movies from Hollywood fueling interest (recall Trading Places, Wall Street, Other People’s Money). As a result the investing populace doubled. Then with the tech bubble we saw the numbers swell to around 60-70%.

As these numbers swelled, more and more people became aware of alternative investment vehicles. Commodity trading along with spot trading became the new penny stocks. With an upfront cap of only 5% of the total investment oil was primed to run as the housing market had its bubble burst. And here we are today.

The only other major factor has been the fact that since the 1970’s neither Republicans or Democrats have done anything about America’s energy needs beyond polispeak. Every administration has talked about alternative energy sources, and funded no research. Each decade has passed without increases in domestic drilling while OPEC made more money. As the years passed the number of oil refineries has dropped to roughly half as many in operation today as in 1970. And speculators made money.

Why is America in an oil shock, and complaining about gasoline prices (which have had a fractional increase in price as compared to oil) – not to mention soon to be reeling from home heating oil prices? Because we have politicians that have been more concerned with fueling special interest groups (eco fanatics and oil companies alike) rather than the average American.

So what is our answer? What are we the people going to do? We can either sit back and accept yet more polispeak about creating advances while ethanol kills the Gulf of Mexico and sits unused in the 5 states that actually have it available to the public or we can get real change. We can either leave domestic oil sources untapped and penalize our economy or use oil and fund research for other sources. We can either do something or suffer the consequences of inaction and polispeak promises.

That is the choice in front of us. Every other option is just a stopgap answer that will placate anyone with a short memory and nothing else. Because the energy situation in America is hardly bad…yet. But soon it will be a real crisis, and one that will give this generation and the next an understanding of the 1970’s that will make them pray for alternative day fuel lines.

The aftermath of the Yahoo - Microsoft deal

If you have looked at the stock market (U.S.) lately then you cannot have missed a couple of things. Banks are still reeling, Lehman Brothers being the latest in a string of major financials that have had to seek out financing to shore up massive losses. Oil companies are getting a lot of negative publicity due to the election year politics. Energy alternatives are sparking another round of interest, as the generally do every election year for the past roughly 20 years.

But what has garnered a lot of attention is the sector that no one has really spoken about in some time. The technology arena. In particular the latest mega-deal, Yahoo and Microsoft. Everyone has heard some aspect of it, and opinions are flying.

Now the deal officially died last week. Microsoft won’t raise their price or even offer one for Yahoo. Yahoo for its part made a deal with Google, allowing ads from the leading search engine to appear on Yahoo for $300 million. So the shake up begins.

Microsoft has had it’s price raise because it won’t be buying anything, and stockholders will be happy about not having the books burdened with Yahoo. Google is happy as they seriously increase ad revenue with the increased exposure. The likelihood of increase revenues for higher ad fees and increased numbers are on the horizon and analysts will be checking the quarterly reports to see if a new trendline confirms this speculation.

Those looking at what may happen should keep an eye out on Yahoo. After failing to be bought by Microsoft, and only securing a deal that really benefits Google the shareholders are boiling. The desire for bigger profits is going to weigh heavily on the CEO and Board. Something is going to need to be done.

I expect that a couple more deals and the takeover of a smaller technology company will be in the air for Yahoo. Plus an expanded advertising sales campaign will likely unfold within the slow summer quarter showing better numbers as fall unfolds. If I am correct opportunity may abound in the disappointment this deal failing has caused.

But that is just one outlook. What do you think?

Creating wealth in the stock market - ideas

From time to time I am asked questions about the stock market, investing, owning a business, and other questions relating to generating and maintaining wealth. Most often the question for those without a high personal net worth is how to create wealth, and for those already on the path how to accelerate their growth. These are not simple questions and each has several different answers. There is no single blueprint that leads to wealth or a higher personal net worth.

Perhaps one thing I’ve noted is that anyone can create a net worth if they are willing to commit the time to it. Another universal fact, in my opinion, is that creating and growing net worth is based on time perhaps more than any other factor. I have virtually never seen anyone have a net worth that has not worked for it and spent time cultivating it. Those that have, either through an inheritance or a lottery win, generally have thrown away their wealth within 5 years because they have not built up the foundation for the funds they received.

One of the best rules of success, I feel, is something I learned from Napoleon Hill’s Think and Grow Rich. The principle is simple – Do what you do as well as you can, never worry about the money, and the money will come. It seems odd to some, but in my life I would say it has always worked. If you are not doing your best, you will never be paid as well and thus you will never have enough money or wealth for what you want. If you use your energy and time worrying about the bills or what is in your pocket, you have none left to generate the funds you need or want. Of course that is not to say that you don’t have a plan for your money, just not an obsession about that plan.

More directly I would generalize that for those looking to enter the stock market there are a couple of things you should do. Read the Wall Street Journal (or similar daily economic newspaper of high regard) for a year, ask for and read several (a dozen or more) mutual fund prospectuses, and get a stock broker you are comfortable with. While all that is happening, set a budget that takes 5-10% of your discretionary income (at least, more if it’s affordable) and set it aside in a separate savings account.

Now I say read the Journal because there is a terminology used in investing that is not used anywhere else. One of the biggest hurdles I hear is that people are unfamiliar with the terms used and thus are unnerved by investing. In reading the Journal daily you get a familiarity in learning those terms. (Don’t be embarrassed to have a dictionary at hand to define difficult terms, I did it and so have many – whether they admitted they started like this or not) In addition it will help you get a feel of the market and the cycle that occurs.

I recall that when I was a new stockbroker, I had a gentleman ask me if I had spent a cycle in the market. I had no idea what he meant, to which he laughed. He meant that I had been a broker for a year at least, and had seen the overall cycle of earnings reports, forecasts, reactions and other events moving the market.

Understanding the timing of the market is as important as understanding the terminology. You don’t want to buy stocks in the short-term to start with, but if you know that say the travel industry in the U.S. is weaker in the spring than say the fall or winter, you may get a better purchase price to start with. Another thing the reading will provide is the reactions that the market has to events. Whether it is a disaster, political unrest, missed earnings, or an unforeseen event companies have immediate reactions. While each reaction is individual it helps to know that missed earnings can lead to a drop in stock price for a short while, but does not mean that company is a bad investment long-term. A disaster could hit the market, but not affect long-term returns. And when a company is in trouble you can learn some of that wording as well. It’s not fool-proof, but it will help you sleep at night while others panic over something that could be minor. Trust me that I have seen this.

As you get familiar with the general market cycle and terminology read the mutual fund prospectuses. This will tell you about the goals of the mutual fund, the historical returns, the administrator of the fund, and the stocks that are – or can be – in the fund.

There are big differences in mutual funds. Some only buy bonds, some only large corporation stocks, or just banks, or just eco-friendly companies and so on. Some only look to preserve your money, some seek to grow at all costs, others are more balanced. There are funds that can buy penny stocks – considered the most speculative equity investment – others buy junk bonds – the most speculative debt investment – and some can use options – highly leveraged investments. There are funds that started on a great year for market returns (like during a market bubble) and therefore have great historical returns, improving the performance in bad years in their average, and others have been around for decades showing a more realistic return over time. Some advisors are hotshots taking huge fees for their names, others are unknowns starting out, and many are just working hard. All of this is important, to varying degrees on how well you can sleep at night and what performance you wish to have.

The last step is to get a broker. After spending time learning the terminology of Wall Street, and the reactions, and mutual funds that you are comfortable with, you now have a means to evaluate what kind of broker you want. Some are newbie’s and desperate to show performance and take risk. Some are seasoned pro’s but with huge numbers of clients. Some like to spend time talking to clients, some don’t. Some are better with a specific area in the market, like banking or biotech. What you are comfortable with will help reach your long-term goals.

And I believe a broker is necessary. The market is a constant, changing, gut-driven industry. A good broker can hear the unspoken words in an earnings report and be cautious, or have an eye for something the market will want in the future. They aren’t always right and it does cost money, but this is what they do everyday all day. It’s not a 9-5 job, and not everyone can do it. In my experience a broker may be wrong 40% of the time, but investors on their own tend to be wrong 70% or more of the time. And when you compare wins, investors on their own just don’t match up. But that is what I have seen with a good broker, which only you can decide for your self.

And I do emphasize starting to grow your wealth with mutual funds. The risk is lower and cost to invest is as well. It’s easier to add to a mutual fund position, and cost effective. The fee to a broker is not prohibitive, in my opinion. And it allows you time to see results and plan for future growth. You may not agree, but it’s one way to create a net worth and grow it.

Now this is just one suggestion for growing your worth. In the future I will mention others. They are all based on my experiences and those of friends and family. There is no guarantee they will be the key for you. I always advise speaking with a trusted professional in the field I speak about.

Hopefully this is the first step in helping you attain the worth you desire and deserve. If you have more suggestions or experiences to share, please comment. But always do what you do best; I believe that if you do that the money will come.

Jim Cramer - making money on ethanol when he doesn't want to

I was just watching Jim Cramer at 6pm on Tuesday. The stocks Cramer had been discussing included Monsanto, Potash and Deere. The subject was the increase in cost of food, international famine, and the glut of ethanol expected to be reported over the next several days.

The focus of the review of the potential for these stocks was primarily famine and the fact that because 35% of the grain production in America is being mandated to use for the creation of ethanol. There were in fact 5 stocks in the agricultural industry that were Cramer picks. Of note was the fact that Cramer mentioned that

“If I were a politician I would vote for ending using corn and grain, our food, for the production of ethanol… But I’m a broker so instead I will buy these stocks. If you want to help the world famine then buy these stocks and donate the profits to the U.N. world famine relief…” Paraphrased from the Mad Money program (if you have a video of this please let me know)

The argument is powerful and dramatic. Ethanol is a less effective means of fuel. That is a fact. And compounding that inefficiency by burning our food is in one point of view illogical. Especially when we have the example of Brazil where ethanol is created from sugar, thus not affecting the food supply or cost.

In watching this monologue from Jim Cramer I was struck by 2 things. I felt he really would rather that the world famine was being resolved by these companies as opposed to creating the roughly 164% aggregate increase in stock price since 2005 he noted. The other point was why other forms of renewable energy are not focused on.

In Florida nuclear plants shutdown and caused over 3 million to be without power mid-day. The price of corn is rising in commodity markets and supermarkets, as is beef. Ethanol is being mandated by the government even though it is more expensive and there is a glut of supply as it’s virtually impossible to find outside of the Midwest (mostly in 2 states).

Why then when all this is considered is the U.S. not seeking to promote wind energy, or solar, or any of a half dozen other ideas? Nuclear power is not green (due to the resultant waste) and problematic. Ethanol, as is currently being implemented, is counter-productive in multiple manners. What motivates the blind eye to all other forms of renewable green energy?

It doesn’t make sense to me. Ending corn as an ethanol base will not end world famine, but it may help deal with the problem. Wind energy does not harm anyone. Solar is plentiful and consistent. Biomass fuel is turning waste into a productive product. Shouldn’t we focus more on these answers?

I have to believe that when brokers, like Jim Cramer, are highlighting the fact that they would prefer to not make money in a stock or industry the public and government should take notice. When he, and others, would prefer to work harder to make money – which is his job – because of the international benefit then I have to say good for him and shame on the rest of us.

The options are there, and we need to take advantage of them.