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My Thoughts On The Market

July 10, 2019 by Jacob Sensiba

Let me start by saying that I have no clue what is going to happen in the stock market in the next 12 to 18 months, what I do know are several of the factors that have a say in what happens.

If you guessed that at least one of those factors has to do with President Trump, then you’re right.

Trade

The big elephant in the room. Honestly, I have no idea how this is going to pan out. Obviously, it behooves both parties to get this rectified as soon as possible, but it makes sense for China to hold out until the 2020 elections.

If they make a deal now, the US has more leverage at the moment and will probably be on the winning side of things.

If they wait until 2020, they have a chance of getting a Democratic president elected, and more than likely, they’ll reverse course on trade.

I think the odds increase that a Democratic president will win because if a trade deal isn’t reached, the market will negatively react and if the market tanks while Trump is president, he’ll be in trouble.

The US also decided to slap tariffs on European goods. This matters because if a deal is made with Europe, that gives the US that much more leverage. They won’t need China as much, and it’s clear that China needs us. We’ll see what happens.

Interest Rates

You may have caught wind of the most recent jobs report. We added over 200,000 jobs last month, which was much stronger than expected.

You’d think that kind of surprise would be good for the market, wouldn’t you? Unfortunately, the strong jobs report signaled a stronger economy than previously forecasted.

A stronger economy gives the FED less of a reason to cut rates this month. Where it stands now, I don’t know what they will do at the next meeting.

I was certain they would cut, but that was before the jobs number. I think it will benefit us down the road if they don’t. The reasons I think that have been explained before, but I’ll give you a synopsis real quick.

Typically, in the normal business cycle, rates will start [generally] low and consistently rise in tandem with economic expansion. Once the expansion peaks, the FED will cut rates to promote borrowing, which translates into spending.

Here’s the kicker. The prime rate (the rate the FED controls and the rate that affects all other rates) needs to be at a certain level when the FED cuts. If the prime rate isn’t high enough, then the FED won’t be able to cut enough to stimulate the economy.

What does this mean?

The current economic and political environment in the US is like nothing we’ve ever seen before. Our respective parties are at each other’s throats, which doesn’t make cooperation easy.

The unemployment rate is as low as it’s been in 50 years, inflation is crawling, rates are still ridiculously low, and the market is making new highs.

The FEDs impetus for raising or not raising rates is the level of inflation. It’s lower than their 2% target so they took their foot off the gas.

We are at the end of an expansion, which means a recession is most likely on its way, if not in the works already.

If you have less than 15 years until retirement and reallocate your accounts to be a little more conservative than usual. If you have over 15 years until retirement, I wouldn’t make any adjustments (allocate according to risk tolerance, time horizon, and goals).

Keep in mind that if you shift to more conservative and the market continues to rise, you’ll lose out on some gains, but if the market tanks, that conservative tilt should help minimize the damage.

What’s a Tariff and How Will it Affect Me?

July 18, 2018 by Jacob Sensiba Leave a Comment

Tariff. It’s a word that you’ve probably hear a lot lately, but do you know what it means, how it’s applied, and how it’ll affect you?

What is a tariff?

In its most basic form, a tariff is a tax on goods imported from other countries

Why are they used?

There could be several reasons why a country would impose tariffs on certain goods and/or certain countries. Here are several of them:

Protecting employment – This is the one you are hearing about right now. President Trump wants to place tariffs on Chinese made goods. This will increase the cost of goods, which could make employers manufacture the goods themselves, which could warrant more hiring and more working Americans.
Protecting consumers – Countries levy tariffs for this reason if they feel a product coming from another country could danger domestic consumers. For example, if we import chicken and find out this chicken could be tainted or harmful, a tariff could be assessed to this, and force U.S. citizens to buy domestically.
Infant industries – If a country has an industry or sector that’s just getting started, a country could impose tariffs on similar products in order to limit competition and help that new industry grow.
National Security – More often than not, this has to do with defense. Most countries will manufacture and supply it’s defenses with their own products for obvious reasons.
Retaliation – Like what we’re seeing right now. Countries will impose tariffs in response to tariffs being imposed on them.

How do they affect U.S. consumers?

Tariffs affect consumers in a few ways. The first and biggest impact is that goods and services could cost more.

For example, President Trump put a tariff on steel and aluminum. You know what uses a lot of steel and aluminum? Vehicles. The makers of those vehicles will then pass the increased cost down to the consumer.

Personal cars, farming equipment, etc. will now cost more as a result of those tariffs.

The other effect it could have is employment. As mentioned before, if imported goods cost as much or more as domestic products (post-tariffs) it makes U.S. employers manufacture those goods in The States.

With the rapid increase in product creation, these employers will need to hire workers to create these products.

On the flip side, it could also negatively affect employment. With the increased cost of goods, companies could lay off workers in order to reduce the impact of that increase in expenses.

How do they affect the stock market?

We are already seeing an impact on the market. People hear that their costs will go up, or they hear the phrase “trade war,” and they start to worry. We’ve seen an increase in volatility this year, and a lot of that is due to these talks.

Here’s the thing, a healthy majority of investing is psychological. So any news that frightens investors will have an impact on the stock market. Scared people sell, and level-headed and/or institutional investors buy at lower prices, hence the dramatic up and down movements.

Companies that import a lot of goods will see an increase in cost, which could hurt their bottom line. Also, companies that export a lot of goods could see decreased demand due to the retaliatory tariffs put on by China and other countries. Again, bottom line.

A lot of investors look at that bottom line to make investment decisions. If they see a decrease in revenues, they could sell.

Additionally, the tariffs placed by other countries on U.S. products could have a negative impact on entire industries/sectors, which could hurt the companies in those industries and their stocks as a result.

Conclusion

No matter your opinion of President Trump, these tariffs are a net negative for the consumer. The increase in costs to consumers could be much greater than the increase in domestic employment, which is one of the goals with these tariffs.

Whatever happens with this mess, it’s important to know what the tariffs will impact and how consumers, industries, and the economy will be affected.

For more information on how to plan for these tariffs, and for our disclosure visit www.crgfinancialservices.com.

More Changes for Payday Loans?

July 30, 2014 by Average Joe 2 Comments

I’ve written previously about some of the changes to payday loan practices in the UK. Maybe this is a harbinger of things to come in the USA?

Here’s the latest:

Payday loan sector members agree: Charter governing good practice but government regulation continues to loom in 2014

Businesses within the payday loan sector have taken many steps towards self-regulation since 2012, yet as continued government intervention in the industry looms, the topic of self regulation continues to be hotly debated.

Let’s focus on the self regulation charter agreed to by much of the UK payday loan sector in 2012. This will help us examine the impact this has had on the payday lending industry after 2012, so we can debate the issue. Here’s the key question: has the government has gone too far in the regulation of the payday loan industry? Maybe even better: is government intervention necessary?

A cynical take on the self regulation stance taken by the payday lending sector since 2012

A cynic might argue that as with any voluntary assumption of a self regulatory framework, the measures were designed to stave off government intervention in the regulation of the industry. It is just as easy to take the opposing stance and argue that self regulation creates enough protection for customers, thus dispensing with the need for further government regulation. However, whatever your stance on the self regulation assumed by much of the payday loan sector in 2012, there is no disputing that the self regulatory framework adopted has improved standards within the payday loan sector as a whole and made the experience of obtaining a payday loan a fairer, more transparent and easier process.

Self regulation within the payday lending sector: a new consumer – focused Charter

In 2012 much of the payday loan sector in England took significant steps towards agreeing a self regulatory framework. At the center of the framework was a consumer – focused charter which made voluntary commitments to fairness, transparency and responsible lending.

Specifically the Charter established commitments towards fairness, reasonableness and responsible lending that are agreed to by all governed by the Charter. The Charter specifically outlines a commitment not to encourage irresponsible borrowing, and imposes an obligation on lenders to inform customers of the suitability of payday lending, only for short- term lending requirements.

Other rights created by the Charter include a right to have payment arrangements explicitly explained and a right to have the implications of the loan fully explained before the loan is entered into. The Charter also provides customers protections in the form of notifications relating to any payments taken, and a notice period of three days is nominated as the minimum notice period required.

Other areas governed by the Charter include the freezing of charges and interest in circumstances where a consumer has agreed a reasonable repayment plan, and a commitment to deal with issues of financial difficulties sympathetically.

Your views

What are your views of the regulation of the payday loan industry? Have you used Wonga – the current top competitor in the payday industry? Do you have thought on where this industry is headed with the new regulations coming in or do you have you any experience of loan sharks? Please comment or reply so you can share you opinion on these hotly debated issues. Payday lending has been a controversial matter for some time, but given the recent regulatory changes affecting the industry the debates surrounding the regulation of the industry have intensified. Let us know what you think, and don’t be afraid to tell us what your view is!

Self regulation of the payday lending industry: is it enough and is it effective?

Clearly government intervention within the regulation of the payday lending industry in the form of the Financial Conduct Authority oversight policy shows that the government believes the industry should not be allowed to self – regulate. Perhaps, central to the new proposals for regulation of the industry is the rise in the number of people using payday lending services. In 2008 the payday lending industry in the UK alone was worth 900 million, and this has sky – rocketed to an estimated 2.2 billion in 2012.

Some may argue that too much regulation of any service industry is a bad thing and results in unfair outcomes for consumers, whose access to a full range of services is typically limited by strict regulation. People who can’t access services legitimately inevitably go looking for the same service elsewhere. Enter the illegal money – lender, and the pressure to resort to their services.

On the other hand it can be argued that the industry will contribute to debt problems and create other long term social problems, if left unfettered. Despite the commitments made across the board in the payday lending sector, many commentators argue that the measures have not been effective in tackling spiralling debt within the UK as a whole.

Stock Market Punishment: The First Lesson of 2013

January 7, 2013 by Average Joe 38 Comments

The podcast team is giving the interns a well-deserved week off, so lucky reader….YOU get a FREE extra blog post from Average Joe. I know. Pinch yourself. It’s real. Almost like our awesome rare Saturday post this week.

Look at what the media did to you again.

The sky is falling! Fiscal cliff! Doom! Stock market will be in shambles! Hide your children!

Big ratings for the financial channels, huh?

If you listened and moved your money out of the market, it destroyed your chances for a great return in 2013.

MAYBE you’ll recover if you jumped out before the big two-day run up in stocks. The chances, though, are against you: historically, if you miss the 10 best days in the stock market, you lose about 5.18%, or nearly half your return for the year. If you paid trading fees to avoid the “fiscal cliff disaster,” this only exacerbated your problem.

Here’s what the panicked investor missed in the S&P 500 last week:

December 31: 1.7%

January 2: 2.5%

January 3: –.03%

January 4: .05%

In short, if you missed two days last week you lost out on 4.2%. Those types of returns don’t come around often.

By the way, don’t go in the comments and tell me that “all you lost was a little time….” go back and read the stats above first. You lost a ton.

let’s calculate the cost of listening to the media on this one

Suppose you’re 25 years old and you have managed to save $10,000 into your 401k plan. You lost out on $420. Sounds like no big deal, right?

Let’s use the rule of 72 to determine just how much you really lost:

The rule of 72 says that if you divide the interest rate you think you’ll achieve into 72, you’ll come up with the approximate number of years it’ll take your money to double. Cool, huh?

Assuming that you wanted this money for retirement (401k, right? That’s not your “mad money” account….I hope), we’ll use age 70 for your withdrawal. We’ll also use a realistic return assumption of 8%.

8% / 72 = 9 years for your money to double.

So, that $420 you lost wasn’t really $420, was it?

It would have doubled when you were 34, 43, 52, 61, 70.

Your “little” $420 wasn’t $420. By 32 it was $820. At 41 it was $1,640. By age 50 you’d lost $3,280. At 59 the gap was $6,560. When you went for the money at 69 you had $13,200 less.

it gets worse

If you’re 30 and gambled $50,000 that the market would tank, it’s uglier. Let’s also use 9% rather than 8%, since people looking long term historically have used 10% as their assumption (which I believe is too high, BTW).

Check out what more money and a “little” one percent difference do to your loss:

Rule of 72 = 8 years for money to double.

Funds double at 38, 46, 54, 62, 70

$2,100 lost during two day run-up in market.

= 4,200 loss at 38, 8,400 loss at 46, 16,800 at 54, 33,600 at 62 and

…$67,200 at age 70.

On our “What Did We Learn in 2012” podcast, expert after expert told you the same thing: don’t listen to national media finance porn and don’t chase short term results.

If you did, I’m going to play Dr. Phil now: How’s that workin’ out for ya?

Photo: Joe Shlabotnik

A Look Into the Post-Election Crystal Ball

November 8, 2012 by TheOtherGuy 17 Comments

The votes are in and I’d like to congratulate President Obama on his re-election.

This was a hard-fought campaign on both sides, and since we now know who will occupy the White House for the next four years and the Senate and House for the next two years, some of the uncertainty we’ve been experiencing in the stock market should finally begin to dissipate.

Many of you are wondering what the future holds for stocks and the market – and while no one knows for sure – including me, I do have a couple of themes that I think will emerge (or continue) over the next few years.

Theme #1 – Corporate Cash on balance sheets

There are trillions of dollars sitting on corporation’s balance sheets that were awaiting the outcome of the election. Many were anticipating a Romney election which would’ve brought with it likely corporate easing, but now these large multi-national companies have to do something else with the cash sitting overseas. If they repatriate it, they’ll be subject to double taxation, much like they are when they issue dividends, and at the highest corporate tax rate in the world. What I expect in the near term is an increase in company stock buy-backs, which have the immediate impact of lowering supply of that company’s corporate stock.

Immediate effect: Stocks with large cash positions might be worthy investment positions and short term winners.

Theme #2 – CNBC’s Fiscal Cliff

The producers at CNBC can’t help themselves. The phrase “Fiscal Cliff” sells heaps of advertising, so you’ll hear this over and over in the upcoming weeks. Since the House controls the country’s purse strings, and the President and the House have very different ideas on how to spend money, I expect continued gridlock up to and through the so-called “fiscal cliff.” Obviously, this will be resolved at some point, but it will provide uneasiness in the markets until it’s behind us.

Immediate effect: Lots of waves in the financial markets. Probably higher VIX (volatility) index.

Theme #2 ½ – Budgetary Issues Related to the Above

I don’t know if it will be a retaliatory-type reaction, or just purely out of ideology, but I expect the continued gridlock in Washington to impact all of the sun setting provisions that have been put in different tax-law extension bills over the last several years. For example, I think the severe defense cuts will take effect at the beginning of the year and the entitlement spending to continue.

Immediate effect: See Theme #2.

Theme #3 – Weak Dollar and Quantitative Easing

The U.S.’s credit has been downgraded twice already, and it appears headed for another downgrade as we reach our self-imposed borrowing limit of $16 trillion. Obviously, the Congress and the President will just kick that down the road a bit, but that means continued weakness of the dollar compared to other currencies worldwide. This is bad news if you’re travelling to Japan or Europe for vacation, because our weak dollar buys less Euros and Yen, but the large, multi-national companies we discussed earlier will benefit from a weak U.S. dollar since they make money in all currencies. Secondly, our fearless economic leader, Big Ben, has promised to continue to print vast amounts of dollars as long as the government continues to run deficits. Looks like Ben’s printing money for a long, long time…which could lead to inflation

Potential Headwinds

If there are any market headwinds, it will be the short-term issues relating to the pending fiscal cliff and their respective tax increases. Undoubtedly, the 3.8% tax on interest, dividends and capital gains that takes effect in 2013 will have an impact as well as the continued implementation of Obamacare. Since healthcare is mandatory for those employees who work over 30 hours per week, expect to see companies continue to reduce their workforce’s hours to 29,as the CEO of Darden Restaurants (Olive Garden, Red Lobster, etc.) has already announced.

So What Does That Mean for Me?

I think the best bet for many investors is to continue to chase yield. With bank accounts earning nearly 0% and no rate increase on the horizon, the fact that the S&P 500 averages 2.2% will provide some base level of market support over the coming years. As confidence comes back, the market should also bounce back accordingly. It’s sad, but President Obama is probably a “lame duck” president, at least over the next two years, as the House will continue to block all attempts he makes at advancing his agenda.

Ultimately, it’s more of the same. The uncertainty should be ending, the weak dollar means good things for the large multi-national companies. I know many were surprised by the outcome, but we are a country that comes together. Let’s focus on the future and not on the past.

Investors Beware: What the 3 Biggest Brokerages Really Do With Investor Money

October 28, 2012 by Average Joe 17 Comments

Today’s guest post comes from Susan Lyon, financial analyst with NerdWallet. Thanks, Susan!

What do E-trade, Schwab, and TD Ameritrade all have in common? Aside from being the three largest online brokerages and some of the biggest brand names in investing, they also all charge investors upwards of $7.99 or more on the typical stock trade.

Think this doesn’t sound so bad? Think again. A recent study by NerdWallet found that over 17 million investors are overpaying $1.8 billion every year on unnecessary (and sometimes very complicated or hidden) fees with the largest brokerages.

In light of the ongoing ETF price wars, you’d think a little of this competitive spirit would trickle down into the trading sphere – but this remains to be seen.

Where Is My Money Really Going?

Brokerages all make money by charging commission: that much is plain and simple. But how much is too much, and is the peace of mind that comes from trading with a brand name broker worth it, NerdWallet asks? The data says otherwise.

It’s easy to assume that a brand name brokerage is giving you top-notch treatment and the best money can buy, but NerdWallet’s study breaks down the top 3 brokerages’ financial statements to question this assumption. The key findings:

The big 3 online brokers spend a smaller percentage of their money on trade execution – what benefits the investor – compared to the little guys.
The big 3 spend far more on advertising and overhead expenses.

This data breaks down expenses at major brokerages by trade execution (what matters to the investor the most) versus advertising, employees, physical, legal and indirect costs:

Lesson learned: active traders can meet their needs just as well by bringing their business to a new firm. The average investor doesn’t need most of the “extras” offered by the big 3 anyways. Why pay for something you aren’t even using?

Investors Can Avoid Fees By Shopping Around

The typical investor with these companies makes between 1 and 2 trades per month, so while a one off expense might not seem like a lot, we did the math and it really adds up. If the typical investor makes only one stock trade per month, of approximately 100 shares, their annual fees at the largest 3 brokers come out to be:

E-trade $119.88
TD Ameritrade $119.88
Schwab $107.40

To make shopping around for better deals quicker and easier, NerdWallet’s new brokerage comparison tool allows investors to compare their many options side-by-side to find the right fit for them.

How Do I Decide on the Best Fit for Me?

NerdWallet’s new tool allows users to do their research before they invest, so they are made aware of all hidden and unpublished fees upfront to avoid unpleasant surprises later on. Investors can search among the 74 brokerage accounts in the search tool by price, research, or data tools – whichever matters most to them personally.

The takeaway: just like in all personal finance situations, make sure to explore all your options before transferring your money.

Photo credit: Joybot

The Markets Reach 4-Year Highs…Now What? Protect Your Investments!

August 23, 2012 by TheOtherGuy 26 Comments

OG grabs the reins for his usual Thursday rant!

This week, the US equity markets quietly reached a “four-year high,” prompting many (including me) to question the validity of this recent rally. The market is up nearly 26% over the past 12 months. During this same time we’ve had:

– the dreaded “downgrade” of the US debt,

– the Eurocrisis, Spain, Italy, Ireland, and of course Greek near-defaults

yet most people won’t feel much richer if you ask them “how’s the market doing?”.

As a practicing advisor, whenever I hear “lowest ever” or “best ever” or “all-time” anything, I automatically consider the inverse. As CNBC, Fox News, CNN and Bloomberg keep us glued to their networks with fear and greed, I’m left wondering…

So I’ve begun thinking about protection strategies.
Today, lets talk about about a powerful tool: the Put Option.

Wait! Don’t run away! It’s actually a good way to shelter your investments AND it isn’t nearly as difficult as you might imagine. While many option strategies are pure speculation, this one is designed for the conservative investor…the one who wants to insure everything.

Let’s say the S&P 500 closed at 1420. We can go out and buy an S&P 500 index fund that mimics the index, (ticker – SPY). If you look up SPY on any finance site you’ll see today’s closing price and you’ll notice it trades at 1/10^th of the actual index’s price. Since we assumed the S&P closed at 1420, the SPY would close at 142.

Now let’s further assume that you’re okay with day-to-day volatility of a few percent here and there, but you want to prevent the catastrophic loss of 20% or more over a few trading days – the so called “Black Swan” event. What we want to do then is to protect our current account against future loss, or said another way, we want “the ability (or option!) to sell at today’s prices sometime in the future.”

Wouldn’t it be nice to say “I want a do-over” if the market collapses and our funds slide?

The tool that accomplishes this is called a put option and it allows us to do exactly that. We have to pay for this option, so let’s explore what that would cost. It might not be worth the price.

If we pull up January 13 Put Options for $130, we’ll see that we can buy those for $3. January 13 Put Option means that we can sell the options for $130 anytime we want between now and the third Friday in January. This represents about a 9.5% decline from today’s prices and the $3 price per contract means that we’ll lose another 2% to cover the investment.

Here’s how I figure all this out

1) I determine the amount at risk. There are many risks, but in this case we’re talking about stock market risk. If your portfolio is $100,000 and you have 50% in stocks, your amount at risk is $50,000.

2) Next, I decide how much downside I’m comfortable accepting. As we discussed, a 10% decline is tolerable, but a 20% loss is catastrophic. I decide to insure everything below a 10% loss.

(side note – why don’t I just insure it for the current price? The cost to do this is nearly always huge. It’s like insuring your house….having a deductible of 10% is much cheaper than insuring every instance.)

3) Next, I’ll find prices. Using today’s numbers, it would cost me $3 per share to cover everything below a 10% loss.

4) Fourth, I do the math, which isn’t difficult. Don’t let it scare you. My amount at risk is $50,000 divided by $142 (todays SPY price) is 352 hypothetical shares of SPY. Although options are priced per share, they’re purchased per 100 shares. I need to buy four contracts to insure all my amount at risk.

4 (contracts) x $3 x 100 = $1,200 or roughly 2.4%.

5) Now I make my decision, weighing each outcome. Lets list them:

Outcome #1 – the market stays flat or increases through January 2013. If this happens, I’ll forfeit the entire $1,200 paid for the option contracts, but would’ve had the piece of mind. Basically, an automatic 2.4% loss for insurance that I didn’t use.

Outcome #2 – The market declines, but less than 10%. In this scenario, because of my “deductible” amount, I also lose the entire amount invested in the option contracts. Insurance that I didn’t use.

Outcome #3 – The market declines greater than 10%. In this scenario, my total loss is limited to just 10%. If the market goes down 20% over the next several months, I cash in my option contracts to recoup some of those losses at anytime I want through January 2013.

6) Finally, I decide whether to pull the trigger. If so, let’s try to find an “up” day to do the trade to lower your cost a little. If not, I have to be comfortable with my decision and move on.

So now it’s your turn. What outcome would you choose? Would you buy the insurance? What do you do when you start thinking about “protecting” some gains?

Photo: Stock Market Bull – thetaxhaven

A Shaky Earnings Season Might Be Your Wallet’s Best Friend

July 10, 2012 by Average Joe 11 Comments

There’s baseball season, football season, the holiday season and, of course, earnings season. While the first three may fill you with happiness and (in the holiday case) good cheer, earnings season fills new investors with confusion.

Why do I bring this up?

I woke yesterday morning to a nerve-wracking CNBC.com headline: Investors Brace for Shaky U.S. Earnings Season.

What is Earnings Season? Is It Contagious?

The good news: earnings season affects you directly, but not in the harmful way you may think.

Earnings season is the time (quarterly) when the majority of companies that move financial markets with their results declare how well they’ve performed recently. This news is for the prior quarter.

It’s important, when listening to reports about earnings, to listen for any future forecasting and to also determine what might have been the culprit behind a great or lousy prior quarter. If it’s increased sales on the same-old widget the company’s always sold, fantastic! If the company had a one-time mistake, things might still be looking up. If products just aren’t selling or management is quitting, it might spell bad news.

What Do I Need to Know?

Corporate earnings reports drive the stock market. Sure, financial markets respond to other pressures, but over time the stock market is simply a reflection of the economy. So, if you reread the headline above, Investors Brace for Shaky U.S. Earnings Season, what does that really mean?

Based on the information I told you above, it means this: companies didn’t have stellar profits last quarter.

That’s not nearly as shocking a headline, is it? In fact, I’ll bet you already knew that.

Move On, Nothing to See Here…..

Many investors read the CNBC headline above and think: I’ve gotta sell right now! If you’ve read my ramblings before, you’ll know that I think the opposite. I’m looking to buy when prices are low and sell when they’re high.

Here’s what I recommend instead of having a panic attack:

1) Rebalance your portfolio. Here’s how it works: if you’ve determined how much stock and bond exposure you want (among other asset classes), skim off the areas that have done well to fill in non-performing areas. Low markets are ideal times to rebalance because you’ll reaffirm your long term strategy, take gains from performing spots and redeploy in assets you already own that are low today. Smart move. Then, schedule another rebalance six months from now on your calendar.

2) Look for buying opportunities. If you’re interested in investing, shaky markets are a great place to place your first buys. Make your list of stocks to watch. Wait for earnings reports. Read what companies report, and make your move! Don’t make a common mistake and go whole-hog on a “can’t lose” investment. I’ve been involved with too many “can’t lose” things. I also told my dad I couldn’t lose my hair like he did. Glad I didn’t bet on that….

Not excited to make your own stock picks? Read our pieces on how to evaluate mutual funds and how Exchange-Traded Funds work.

3) If you’re nervous, put defensive measures in place. Use stop losses on individual stocks and exchange traded funds. Monitor fund results more frequently and establish a “worst case scenario” strategy. Remember this: never buy or sell everything on one day or at one time. It’s safer to march in slowly and march out slowly. An orderly walk toward the exit beats a panicked race to the door. Often, down markets rebound quickly.

CNBC, like other publications, is in the business of selling advertising. If the elevator is labeled “Up” or “Down” it’ll be a smooth and steady ride, but I’m sure CNBC knows that “Soar” and “Plummet” garner readers…and then advertiser dollars.

A Chart that Frightens Me: Investing 101

June 5, 2012 by Average Joe 20 Comments

In the past several weeks, I’ve ground my axe on charts that are either misleading or actually say nothing.

Today, let’s counterpoint: I’ll show you a chart that makes sense to me AND fills me with more dread than seeing Aunt Ernestine in a swim suit.

…a rather unflattering swim suit.

I found this chart at FRED, an acronym for Federal Reserve Economic Data. This website is chock-full of charts and graphs direct from the government and financial institutions. And, as a bonus, they’re usually easy to understand.

Bonus!

Here’s the chart I’d like to focus on today, class:

So, if you aren’t familiar with Treasury Inflation-Indexed Notes, don’t start nodding off on me! I’ll have to send Aunt Ernestine over to sit on your lap.

That woke you up.

Let’s explain what the $%[email protected] we’re looking at here.

As you can see on the header, this chart shows the yield-to-maturity on a 10-Year Treasury Inflation-Indexed Note.

What’s a “Treasury”?

Investments that are simply referred to as a Treasury in the U.S. are products of the U.S. Government. They’re sold at an auction. The amount of the note is fixed (you buy in $100 increments), but the interest rate is what they bid on. If nobody bids, the government will have to pay a high return to lure investors. IF lots of people bid, the government is able to sell the debt for a lower price. Initially, this debt was priced at 1-1/4%. That’s a nice win for the U.S. Government.

As an example, if you have great credit, you do this with credit cards. Instead of jumping on the first credit card offer, you examine the interest rate. If it’s higher than you want to pay, you keep searching. Essentially, you’re pitting “investors” (lenders) against each other for the pleasure of holding your debt.

What’s a Note?

A note is a ten year bond. Once the bond is issued (this one was issued in July of 2010), it’s paid off ten years later.

Do you have to wait ten years to sell your bond? No. You’re allowed to sell early, but you’ll do it on the open market.

The open market conditions produced this graph.

What Does the Graph Show?

This graph DOESN’T show you the price of the ten year bond. Instead, it cuts to the chase. If the bond is sold initially for $100 (called the Par Value), and an investor will give you $105 for it, he should already know that he’s only going to receive $100 when the maturity date comes. Therefore, it’s a simple computation: if you over or underpay, what is the true interest rate you’ll receive?

This chart shows the true rate if you purchased this 10 year note today.

In short: the price is so high you’re guaranteed to lose money.

Ouch.

Why is this Frightening?

If investors are comfortable loaning money to the government, knowing that they’ll lose money, this means that other places to invest money are even uglier.

In short, we can discern:

– There is much constenation about the financial markets now

– Lots of investors feel comfortable losing a little money with the U.S. government

From that I infer that investors think they’ll lose more elsewhere.

Is This An Opportunity?

Clearly, there is less opportunity in Treasury Inflation-Indexed Notes than there is with Aunt Ernestine. However, some investors may think that this means that the panic has gotten so high that there are obvious opportunities elsewhere.

Maybe.

Remember that the majority of traders have more money than you and I. Professional traders work from platforms that spend more money on research than we spend on our homes. If you’re looking for opportunity, it isn’t apparent in this particular graph. You’ll need to look further.

Where Do You Look Next?

This chart leads me to want to see past correlations between the 10 Year Treasury Inflation-Indexed Note market and other financial markets. By viewing these, I might be able to better discern if this is simply panic or something bigger.

JP Morgan: Opportunity or Trap for an Investor?

May 15, 2012 by Average Joe 15 Comments

While gold seekers in the stock market chase the Facebook IPO like NASCAR fans after a Dale Earnhardt Jr. autograph, my attention is leveled at JP Morgan Chase. I’m wondering if their recent stock hiccup is an isolated mistake or the beginning of a larger crisis.

This isn’t how most new investors act. Most hear bad news and run the other way.

You can profit from investing well-placed dollars into investments while others panic. In fact, I think it’s fun to prey on investors who throw logic out the window and panic.

In 2004, when investors panicked and sold investments around the Indian ocean after the tsunami, I snatched up iShare Singapore stock exchange shares (ticker: EWS). This was an easy decision: while many of their trading partners were hit hard, Singapore was not. There was bound to be a ton of shipping to rebuild the region, all to Singapore’s gain.

While not a homerun, the stock was an easy win. I’m not looking for huge gains….I’ll take good gains while minimizing my risk.

I didn’t want to prey on the awful event….I was very happy to prey on the morons who thought this was a good time to sell their investments in Singapore. Do your homework before panicking.

The market is usually a fairly efficient beast (I don’t want to have the “efficient market” argument in the comments, so please save them for another site), but during times of panic there’s money to make.

So, after JP Morgan Chase announced a $2 Billion dollar loss last week, hopefully you also thought: “this looks like an opportunity.”

Not so fast, cowboy.

Before you invest money into ANY struggling company, you should understand the risks of this strategy. I do well because I pick my stock market spots carefully.

It looks so juicy, though!

Agreed.

On May 1, JPMorgan (JPM) was trading at $43.79. Yesterday JPM closed at $35.79. That’s a loss of over 18%.

If your thoughts immediately turn to “too big to fail,” you might be right (jokesters are out in droves with “too big to regulate” and others today).

As of July of 2011, JP Morgan was the eighth largest bank in the world, according to Reuters:

By many accounts, while $2 billion is large to you and I, JPM manages a stable of $2.2 trillion in assets and should be able to weather this storm.

Still, we need to do our homework before investing.

Follow These Steps

1) Understand the company, not just the situation. There will be news around JP Morgan in the next few weeks that I can almost guarantee will affect the stock price. Even if none occurs, it’s better to plan for news. Because you don’t know what the headlines will read tomorrow, have a solid a feel for the operation and scope of your target company to process how the news affects your position in the stock market.

Buying distressed companies isn’t about the initial purchase. You have to follow and respond to breaking news closely.

2) Evaluate the Risks

JPM could have severe penalties applied.
JPM may have broken the law.
Management may be forced to change (the Chief Investment Officer, Ina Drew, left yesterday).
Negative publicity could affect the performance of other divisions of the operation.

3) Sector analysis

You might find your dream company with an “oops” situation that’s easily fixable is in a nightmare sector where events are working against you. Any chance of a stock rebound is wiped out by prevailing conditions.

I thought this might be the case in early 2006. Ford pre-announced during their earnings report earlier in the week that they were going to unveil a major restructuring plan on January 23. Although layoffs aren’t a good sign over the long term, these quickly buoy the bottom line, giving hope to investors that the company will turn the corner. On the surface, this looked like a great event to invest in; a sure win.
There were significant downsides in the sector: at this time, the Detroit auto scene was in shambles. Auto supplier Delphi had declared bankruptcy only months earlier. Chrysler and GM were experiencing pain of their own. Did I really want to bet on a nice uptick in Ford stock over the short term when other auto news might sink my gains?
I explored the situation further. GM had already announced for the quarter a few days earlier. Chrysler had already experienced their blood letting, so I didn’t expect any short term news to disrupt what was looking like a quick trade.
In the final analysis, I made the trade, but because of the larger situation in the sector, I committed a much smaller portion of the portfolio than I’d originally intended. Plus, I became adamant that I’d set a quick turnaround on the stock. I’m usually a long term investor, but in this case, I was looking for a quick win.
I got it.
The morning of January 23, Ford announced a 30,000 job cut and the details of the restructuring. It was as large as expected. A stock that was trading at $7.90 the Monday before closed at $8.65 on the 25th. I was out, though, selling at $8.60. Nearly 10% in a few days was enough risk for me. This was one of only two or three times I’ve ever made a quick trade, and I don’t normally recommend it.

JP Morgan isn’t the same situation, but hopefully you understand my point: by analyzing other auto companies, I minimized the chances that news from them would work against me.

In the case of JPM, you’ll need to consider that state of banking. Is there any pending legislation that may affect performance? Is 2008 or a similar melt down in this sector or the wider stock market likely to occur?

4) Set defenses in place. Beginning investors should always work with a defensive strategy. I prefer a stop loss, but you may have other ways to reduce risk, such as the use of options. If you use a stop loss, you’ll want to give it a wide berth off the current price. Any stop loss placed within a few percentage points of the current trading level is bound to trigger due to the increased volatility of the stock.

Widen Your Lens

Because of a high credit rating, JP Morgan debt has been expensive, usually trading well above par value. If you feel JPM isn’t going to go bankrupt, then maybe looking for panic in the debt rather than the stock market is a better option. Here are some reasons I like trading debt instead of equity:

I know my end game (I’m guaranteed par value on the security at maturity as long as they don’t go belly up).
I can still sell on the open market.
I’ll receive dividends along the way, reducing my risk.

One such beast is a preferred stock. We’ll address preferreds in detail another day, but although they carry the name “stock,” a preferred acts much more like a bond.

A few questions to ask before investing in bonds or preferred stock:

What is par value. Many JP Morgan preferreds are trading at $25.50 or higher currently, while par value is $25 for preferreds (it’s $100 on most bonds).
What is the dividend? The stated dividend is based on the par value, so your dividend will vary from that stated on the preferred. If you’re using a website such as Bigcharts.com or Yahoo! Finance to evaluate the stock chart, the listed dividend is in fact the dividend you’ll receive at the current price.

Don’t just explore debt. Think further afield. Are there other companies that stand to win big because of JP Morgan’s stumble? Research these firms thoroughly before investing.

Final Thoughts

I’m not sure if I’m going to invest in JP Morgan. I’m more likely to buy here than in Facebook, a company with lots of hype and whose upside I don’t understand (most of my friends are tiring of Facebook, never a good sign for any product).

If you take anything from this discussion, I hope it’s the following:

– Think contrarian. When everyone else is running, ask “is this an opportunity?”

– Don’t buy immediately based on your contrarian “gut” reaction. Like buying a house or car, perform due diligence. Explore the company, the situation and the sector. Widen your lens to see if there are additional plays (such as debt or a competing company) that might make sense.

If this sounds like a lot of work, or individual stocks don’t fit your risk profile, stick with ETFs and mutual funds. Your chances of getting burned in your investment strategy is significantly reduced by staying diversified. Even if you do invest, don’t take large chances on “rebound” companies with significant portions of your portfolio.

Let’s pretend you were me: would you buy JP Morgan with a few “at risk” dollars? Are you jumping on this stock?