GM: Live to Die Another Day

General Motors (GM) has been in the news a lot for the past week as financial troubles grew for the automotive giant. Back in December, Congress gave GM a 3 month lifeline, pumping billions into the automotive industry. However, as the deadline approached, GM failed to reach negotiations with the union. Their CEO was ousted and the whole stock market suffered terribly.

If we had just refused to give GM money, they could have filed bankruptcy a long time ago and all this would have been over. GM claims bankruptcy would have been a lot more than what they were asking for to get back on track. GM does not deserve to get back on track! Had they been run by innovative minds and really meant that, the CEO would have still been there and they would not have had to file for bankruptcy now.

Obama had a press conference and said the government had no interest in running GM. This was a major positive. This took a turn from turmoil of the financial industry as the government has struggled to get banks on the right path.

The current bankruptcy plan calls for GM to split apart to retain the most profitable parts. Had this happened 3 months ago, we would not have wasted all that money for no apparent reason. Splitting the company now is a giant step forward. There is no sense to kept the company together as it is quickly losing marketshare.

Bankruptcy is the best thing for GM now. They are not innovative, they cannot keep up with the latest Japanese automobiles, and they do not deserve taxpayer money. Keeping the profitable jobs will be best as we try to keep unemployment from soaring. Final point, GM is not making itself cash money, you cash money, and will not make cash money in the future. Another lifeline allows them to die another day.

Intelligently Playing the Market

Losing some money today was expected. After a 500 point day in the Dow, it is expected that people will cash in on some profits. We really aren't too far away from our 6500 low 2 weeks ago. It is smart to take some off the top after a rally like we have had. One of the primary rules in investing is that you never profit until you sell. Taking profits out of a rally can be a good thing. We start to instill the emotional aspect of winning again and it feels good. However, this does not mean to cash in on everything. If a stock goes too high too fast, it is sure to correct itself. Remember to set that limit and then buy again after a 5-8% drop. This ensures you take that profit and then get in again at a lower price, essentially saving and making more money.

Losing hurts a lot more than winning. We think about what could have been and do not move on. Another great rule to stay emotionally balanced is to sell and not look back. After that sell goes through, don't torture yourself by seeing where the stock later ended up. No one knows what is going to happen after they sell. Losing money on a stock is not something to cry and then forget about. It is a learning opportunity. The best investors turn their previous failure into a future success. Learning opportunities are everywhere. You have to think smart and improve upon past mistakes to make cash money.

Toxic-Asset Plan: Bull in the Making

We have been waiting for significant news that reveals the conditions of the economy and the bailout to signal a legitimate rally. Other than a few things about home sales and oil, the economy has not had any terrible news lately. As a result we saw a stable rally over the past week and a half. The excellent news is that we now have some more details on the bailout and the toxic assets that are ruining balance sheets. This is why the market was up around 7% on the day and will continue to rise as the plan further unfolds and [hopefully] works.

Toxic assets, or legacy assets, are assets that have lost value and are on the verge of becoming liabilities. The legacy asset problem started initially with the housing bubble as standards became too lax and risks skyrocketed. As capital left these markets, these assets quickly lost liquidity. The proposed plan has both investors and the government injecting fresh capital into the system to get things running again. The mortgage sector is the primary problem that has to be corrected. Mortgages not paid led to foreclosures which led to assets that have lost value. The plan calls for private investors to team up with the government to inject liquidity into this market without the help of taxpayers through two different programs: legacy loans program and legacy securities program.

The legacy loan program calls for private investors to bid for assets. These assets will most likely be some kind of mortgage package from a bank. The private investor would split the equity portion with the Treasury 50/50 with the FDIC guaranteeing financing of the debt portion. The private investor would make all the calls with the FDIC closely supervising. This helps to rid banks of troubled assets and provide a more liquid balance sheet.

The legacy securities program combines financing from the Federal Reserve and the Treasury to allow private investors the chance to free up capital in order to stimulate fresh lending. The Treasury would provide a one-for-one match in equity plus additional leverage for the private investor to invest in these securities. This would free up capital and allow banks to lend to consumers again to help stimulate the economy.

These plans would not only help banks to rid itself of troubled assets, but it would allow balance sheets to become more liquidity and lending to flow again. This also allows private investors the chance to profit off these assets and taxpayers to dodge a bullet. As long as this plan works out the way its supposed to, the market should respond accordingly and give the rally a chance to continue making us cash money.

Optimism in the Market

The market has remained steady over the past week. This can only be contributed to new optimism in the market. A kind of optimism that has not been short lived as in previous rallies. We are starting to see the glass as half full instead of half empty. While we still have a ways to go to see an ongoing bull market, we may have the optimism we needed to go along with continuous good news to sustain this rally.

New details were released on how the Treasury is going to spend some of the bailout money. Details on the toxic assets plan are expected to come out tomorrow. Oracle also was one of the first companies releasing earnings news which also came out well. These are the types of news we need to continue a rally. The government also said that the economy is set crawl out of a recession by the end of the year. The more we see improvements in the bailout and the economy, the faster we can start making cash money again. Incidentally, the stock market tends to start recovering about 6 months before the economy so invest appropriately. Any functioning market is one to make cash money in. Let's take advantage.

Buying Tips in an Unstable Market

The market is wild and crazy more than ever these days. Not only have we had a rise above 7200 in the Dow, it has actually stayed there for more than a couple of hours. So many have been asking the question (including myself), is it time to buy? I addressed this question in a previous post so I will not waste your time with attempting to answer it again. I also realized that I had written a post about how to maximize your return when selling, yet had never talked about buying. So I want to talk about how to minimize risk in this market when buying a stock.

Trying to find a time to buy may be a lot harder than trying to find a company to buy. When I talked about selling, I mentioned limit orders. Limit orders can also be used to buy. Say you want to buy GE. GE has topped $9, but you think it will fall back to $7.50. You can set a limit order for GE at $7.50 and if GE does decline to said number, the order will then process and you will be a proud owner of GE shares at $7.50. Now you not only hedged against a decline in GE, you have also capitalized on it.

The way I want to stress buying in this market, however, is via dollar cost averaging. No one has a clue where this market will be a day from now or a month from now. Some say this is a bear market rally, others say its going to stay. Should it stay and GE not fall back to $7.50, you are now looking at buying GE at say $10. If you like a company for the long run and you simply try to wait for a pullback that never happens, you could be left behind. Dollar cost averaging allows you to get in when you want and still maximize return. Say you wanted to spend $5000 on GE. You go ahead and put in $2500 when GE is at $9. If GE then goes down, you put in the other $2500 and lower the total cost so you hedge yourself from being too far in the hole before you start. If GE goes up, you can just keep you original amount in and put the rest in something else, or you can hope it pulls back later on. Either way you do not miss the boat and you get exposure to the company you want. Should it be for the long run, do no be afraid to buy at a slight premium.

Trying to figure out the right time to buy is an art. These two simple ways allow you to hedge against some loss and maximize return by buying at the lowest point possible. If you think the stock is justified by trading at a premium, do not hesitate to buy. Any simple way of lowering costs will make you cash money. Trade accordingly.

Is This the Turning Point or Another Bear Market Rally?

Yesterday, the Dow crossed back over 7000 for the first time in a couple of weeks. Today, it crossed 7200. The question still hovers around us. Is this rally for real, or is it just another bear market rally? Stocks logged the highest gaining week since November. But what does this all mean? Will this rally continue? Is this the bottom? Is it time to make lots of cash money?

The turning point for stocks lies with the news of the economy and the financial markets. Look at the news that have given us four straight days of gains: Citi making money so far in the year, consumer confidence up, retail sales stabilizing. It takes lots of time for a bottom to settle. You don't just get several good days in the market and declare a bull. Yet, news like this will keep the markets in check for a while.

I don't want to be too quick to declare this a turning point or another short squeeze. Positive signs from banks, consumers, and reinstalling the uptick rule will defninitely help the market. However, there are still questions about credit, mortgages, and toxic assets. Until these questions get answered, I don't think we will see a true rally. Remember all those rallies and 'turning points' back in 2008? At the time they had some good news, but the good news only lasted a week at a time. Before putting your money back in, see what the news brings next week. We still have earnings season from the first quarter in several weeks. Don't just declare a turning point and put your money in. Wait for the biggest questions to be answered. See if the good news of yesterday prevails tomorrow. Until then, be cautious and question everything. The stock market tends to recover before the economy. Don't be a bear for too long, but don't turn bullish prematurely. There is always cash money to be made. You just have to be patient and choose what you think is right, not what everyone else thinks is right.

The Uptick Rule: Helping Stop the Downfall

The SEC chairman announced the plan to restore the uptick rule. Restoring this rule should return a little bit of confidence back to the market while helping keep the market from any sudden plunges. Let's take a quick look at the uptick rule and how the markets reacted when the rule was eliminated.

The uptick rule was formed back in 1934. The rule allows short sales only when the last price was higher than the previous price. If you wanted to sell GE and the bid was at 8.25, you would have to wait until the bid went up to short GE. You would probably want to put a limit at 8.27 so when the bid went up, the short immediately went through. This relieves stocks of sudden downward pressures to cause the stock price to plunge by requiring the stock to go up before you short it. Notice that the rule was initially formed in 1934 right after the 1929 crash. This rule was eliminated in July of 2007. We have not seen a fall like we have experienced over the last 6 months since the Great Depression when we formed it initially. When we saw firms like Bear Sterns and Lehman Brothers fall uncontrollably, the uptick would have slowed the decline and maybe saved some investors from steep losses.

The uptick rule should not be confused with naked short selling. Naked short selling allows the seller to put pressure on stocks without even buying the stock first. The ban, which was temporary and ended last fall, made the seller actually acquire the stock before shorting. This also relieved many financials from sinking too quickly. The uptick rule only applies to stocks, not ETFs or futures. Short selling is a very risky strategy. If you buy a stock and have it go to zero, you only lose what you invested. Should you short a stock and have it go up, you could lose much more than you have. I do not short and will not short, even in a bear market. Their are always bulls to be found. Should you find them, you do not only limit risks buy limiting your losses (unlike short selling), but you have a great opportunity to make cash money.

Rational or Emotional Take 2

After having some time to cool off and 'rationalize' how I had responded to the day's events, and to my previous post, I stand by my decisions but question the rationality, or rather the raw emotion, behind it. While I stand behind my final rational reasons for what I did, I would have to say that emotions affected the decision more than I thought they did originally.

When convincing myself I was rationalizing, I looked at a few select sentences in the news that told me what I wanted to hear. My emotions blinded me from seeing everything and as a result I limited the rationality we all need behind our decisions. For instance, the news said all shareholders on record as of March 11, 2009, by 7PM would receive the special dividend on March 12. As I went back and looked at the TWC website (the true soure of info pertaining to TWC), I found what the news should have said. To take part in the special dividend, one has to buy shares before March 9, 2009. They would then be recorded on March 11 to receive the dividend on March 12. While I was correct in my rational thinking that I would receive said dividends and that I should have set a stop limit beforehand, I was wrong by just accepting the first thing I read. If you really want to back up your decisions, you have to go to the source. I thought my decision was rational as most of it was, but my emotions clouded my judgement as I didn't check behind myself. I should add on to the previous questionaire (end of previous post) to always doublecheck the facts to make sure everything is how its supposed to be, not how you want it to be.

Some call investing a game, some call it gambling. I think it is a little bit of both. You can do as much homework as you want and be as rational as you want but the outcome isn't always what you may think it should be. The house can be compared to Wall Street. Things always seem to work out for the guys running the show. But in no way should you ever quit playing. That one good call you made will keep you coming back for more. Just remember that because something worked once doesn't mean it will work again. The more I keep playing, the more I learn and the more rational I become. Reading books and taking classes for this stuff will only teach you so much, and even some of that doesn't even apply to playing the game in real life. Experience is the only way to win. Don't get me wrong. You still need to do homework and evaluate the company. In the end, everyone will play. Only those who picked apart their failures and turned off their emotions will come out ahead. Only those will make cash money.

Rational or Emotional? You Make the Call

Today has been one of those glorious days when nothing seems to go right and looking back you learn a few things. I, like everyone else, lost a lot of money last year. After I lose money, I immediately start thinking of a way to make that money back plus some. When Time Warner first announced it was spinning off Time Warner Cable last year, I began brainstorming about when to buy, how much to buy, and what I could sell to buy. I learned that TWC was giving out a special $10.27 dividend when the split was complete. It was supposed to happen at the end of 2008 or beginning of 2009. I sold UNH and URBN right before Thanksgiving last year anticipating bad sales reports. I was right, there were bad sales reports, and these two stocks made the most sense to sell at that time. I actually sold UNH because I wasn't sure what Obama had in mind for healthcare reform, not because of Christmas sales. I immediately put that money into TWC. TWC has stayed pretty even for the last 3 months. The Wall Street Journal reported that shareholders as of March 11, 2009, at 7PM would receive the dividend from TWC on the following day. So when I got up this morning to see the open, I was really surprised and really pissed all at the same time that TWC was down $11. What was close to $20 a share was now trading at $7. It made no sense to me that 2 days before you had to be a buyer to get the special dividend, the stock would be down over 60%.

When I first saw that TWC was trading at $7, I just froze. I had no idea what was going on or why I had just lost $2,000. I then started scheming about which stock to sell to plunge right back into it to try and salvage what I could. What was originally supposed to be a trade to salvage most of UNH and URBN was now a trade to salvage TWC. I ended up selling RIMM. I really like RIMM and their products. So why sell? First, it was be easier to make up this loss than maybe MS or BAC. I wasn't in as deep here as I was in some of my other investments. Second, RIMM doesn't believe in themselves. Their predictions are always too low, they seem to be too conservative with numbers and products. If they can't believe in themselves, how can I then believe in them? That got me to thinking. Sometimes we don't believe in ourselves. If there is some goal we are trying to achieve, and we don't think we can do it, how is anyone else going to think we can do it? Third, rationality told me to do so. I needed to buy more. Why? When a company gives you free money to the tune of $10+ for every share you have, it is just plain stupid to not take advantage of. I decided I needed to double back in and halve my loss that I had taken so far. They are not canceling the dividend so why not invest more after a day like today?

When making decisions like this, you have to remember a few key things. First, does this make sense? Did buying a stock for a special dividend make sense? I think so. Second, is there a way out if the market, or I, decides to change its mind? How am I going to hedge myself against further loss? I wait until the end of the trading day on Wednesday and set a stop loss. If everyone decides to back out as soon as they get their money, I also am out along with all my money so I don't get pummeled again. Third, is my choice rational or emotional? I think what started out as emotional ended as a rational decision to lower my average cost and take advantage of free money. Who knows, that decision could earn me lots of cash money. At any rate, I learned a lot today. Although, none of it will matter if I refuse to admit this defeat or don't use this failure to ensure future success.

Biotech: The Possibilities Are Endless

The best growth spots occur when the economy is at its lowest. Why? If you can see growth when the economy is at its worst, the future only gets better once the economy gets back on track. Biotechnology has the potential to be one of the best performing sectors over the next 4 to 8 years. Why just 4 to 8 years? Obama is expected to lift the ban on stem cell research this coming week. A potential second term for Obama could give biotech companies another 4 years to patent their drugs. With all the R&D expenses biotech companies inhibit, a continuation of the ban could put some of the smaller companies out of business as capital dries up. Renewed energy to research and develop drugs, along with a renewed economy in the next year, could bring unlimited profits over the next several years for this industry.

Cancer is set to replace heart disease as the number one killer of Americans in the next few years. Additional research in stem cells could put scientists closer to a cure. Research has already showed that stem cells can replace damaged or missing cells anywhere in the body. If stem cells could be manipulated to replace and rid the body of cancerous cells, the possibilities are endless. Putting moral convictions and emotion aside, the drugs made by stem cell companies would bring in huge profits. With the elderly being the single largest age group in America, these profits could last for the next decade should R&D continue without problem. Even in a bear market it is possible to make cash money. You just have to keep an open mind.

Let Your Investments Resemble You

Every financial advisor has their own stock/bond allocation chart given a person's age. So if you were 20 years old, they might have you investing 80% of your portfolio in stocks with a large percentage in small cap. If you were 50 years old, that stock allocation might be reduced to 40-50% with an emphasis in large cap companies. While these might seem all well and good, there is a problem with the idea as a whole. Did you know that for those who are retired or who are getting ready to retire lost about 30% of their portfolio in the past year? Although that may have beaten the market, that doesn't quite seem like the optimal return to me when you are about to stop working.

Portfolio allocations have to resemble yourself. Are you a risktaker? Do you prefer dividends for yourself or R&D to grow the company? Are you investing in things you know or in things your advisor knows? One portfolio model does not work for everyone. Many people have gone to see an advisor and have had their portfolio dramatically changed. But did that advisor really know them or what they like? Obviously you do not want a portfolio full of risk when you are older and reaching retirement. However, some people do want to spend a little money on those small cap 'make or break' stocks. If you are set for retirement, you might not want any stocks at all. You have to do what is right for yourself. With the market as far down as it is, now might be the time to relieve yourself of bonds and swallow more stocks. If your portfolio is as far down as everone else's, then you might want to invest mainly in stocks to get that optimal return. Then again, are you a risk taker? You have to invest in yourself and the way you do things if you want to make cash money. Don't let anyone tell you otherwise. No one knows you better than yourself.

Have Stocks Given Us the Green Light?

A little over a week ago I wrote about why we hadn't hit the bottom yet. The market has fallen an additional 500 points in that one week span. The Dow and S&P have both hit 12 year lows. So now I ask again, is this the bottom? Is it finally safe to get in? While the market looks like an even better buy, the answer is still no. Why? For one, all the questions we asked before have not been answered. We have no more specifics on government involvement. Banks are getting more capital, but we still haven't seen a change in them. Consumer sentiment is down along with housing and manufacturing. The news has gotten worse so why buy now?

If you feel necessary to buy or adjust your portfolio, I would stick will large, blue chip companies. GE still has some problems but for that company to be at $8 right now is a steal. Microsoft under $20 is also a good buy. These companies are huge and will not go out of business. If you put these in your IRA, you have plenty of time for these to go up and give you great dividends. If you are just trading and want some growth, watch the dollar. With the dollar strengthening, commodity prices have been suppressed. If we see the dollar lose ground, commodities could be a big buy.

As for now, keep watching the news. With another quarter about to close in several weeks, earnings will be good to look at with any outlook given being the key. The market will not go up until we see positive economic indicators or see companies starting to see positive growth opportunities and give a positive outlook. A bear market is the perfect time to get yourself set to make some cash money. You just have to be patient and don't jump in too soon.