Get Used to Europe Fears

Europe fears are here to stay. The US economy is doing a lot better. We are making all kinds of progression. The problem is that the signs are hidden behind the headlines in Europe. The EU is the biggest problem in the world and will continue to be for years ahead. The market will continue to experience volatility until everyone realizes that their problems are far from over.

The EU seemed like a good idea at the time. It was good for consumers, companies, and travelers. However, it is terrible for economies. Consider the following: Germany and Greece are two very different countries with completely different policies. If Germany, one of the world's largest exporters, were to experience a strengthening economy, interest rates might need to be raised to suppress inflation and keep huge fluctuations in GDP in check. Greece might be struggling with economic growth and needs lower interest rates to help further stimulate the economy. The EU has a single interest rate for everyone. Inflation might run rampant in a good economy or a struggling economy may never see light at the end of the tunnel.

Currency is another issue. Let's say the EU is going strong but one of the countries is having problems. The euro was one of the strongest currencies a couple years ago. If the euro remains strong, a struggling country would continue to struggle as it would be more expensive for other countries to buy the struggling country's goods. Sales would remain suppressed.

Countries in the EU find it easy to trade with each other. Banks are a primary source. A lot of banks in Germany and France have participated in financial transactions with Greece. Now that the Greece government is on the edge of default, these banks are facing the catastrophe of receiving nothing. The EU is so intertwined that if one thing fails then they all will get hit hard. It is the financial crisis all over again.

Fears about Europe are rampant because of the fact that everything is connected. Having one policy for all those countries is nothing but a recipe for disaster. Growth will be limited in some countries while others will get completely left behind. If something terrible happens in one country, you can bet the house that a few other countries will also be affected. Europe and the EU does not get the cash money stamp of approval. One bad apple will ruin the whole barrel.

Do Not Let Dreams Become Expectations

We all dream of getting that new Camaro, retiring on an island, and maybe even seeing the stock market soar. Some dreams, such as low unemployment, hefty consumer spending, and rising home prices, may be slowly changing into expectations. It seems like every month the market is expecting bigger and bigger numbers. I think this was a huge problem today that helped the DJIA sink over 320 points to end the week.

Sure, if you exclude census hiring, the numbers were mostly mixed. Instead of focusing on this month's numbers, why not look at the overall year? Jobs have been added every month this year after rising only 1 month in 2009. Our economy has formed nearly 1 million new jobs in 2010. Another important number is the fact that companies are working their employees longer hours putting many part time workers back on full time status. The economy is starting to walk again, but many people are trying to make it run.

We need to remember that we are not coming out of just any old recession. This was a recession that was on the tail end of a real estate collapse and financial crisis. These are both topics for another post. However, we cannot judge this recession based on previous experiences. Expectations should not be what we want them to be but instead what we think they should be. We have to remember that not all numbers the market does not like are bad. There were many positive things that came out of the report today. They were just hidden behind dreams and did not reflect reality. Do not worry about what the market thinks. Invest how you know things should be. Once the market figures out what is really going on, cash money is right around the corner.

Consumers Looking Resilient

At the end of May, the consumer discretionary sector was the only sector to have positive returns through the previous three months. The market has been largely skeptical of consumers since the recession as savings expanded while spending fell. Consumer spending is what normally drives the economy. We can only expect the economy to fully recover once the spending goes back up to normal levels.

The problem lies with current market pricing. Prices for many consumer discretionary stocks have risen significantly. The sector was one of the leaders in 2009 and is by far the best performing sector this year. But why? Consumer spending is still down and gives no reasoning to buy these companies. Consumer confidence and expectations have been up as of late giving reasoning to get more bullish on these stocks. So now the question becomes, where can we find value after the run-up?

There are a few companies I have traded in the past that I quite like: URBN, ARO, GES, and RL. All four of these stocks soared from March until May like the market. The past month has caused problems for the market opening up buying opportunities all over the place. URBN, ARO, and RL have all done well the past month with only URBN being virtually unchanged. This shows the strength of these companies with a chance to get strong companies showing little volatility right now. I think the real chance to make cash money lies with GES. GES was trading around $50 a few weeks ago, but now it trades at $36. I have owned this company a few times. With earnings just released and the market still trading low, this is a perfect time to get back into GES. You can just sit back and watch the cash money being made this summer.

Invest Your Own Way

The biggest thing about investing is that you have to find your own style. No billionaire got rich by investing in a step by step fashion that everyone knows about. Every style of investing has its own pros and cons. You just have to find one that complements the time you put into it and the risks you want to take.

I have been investing since I was 11. I have changed my approach several times. I have read more about investing while I was a teenager than most people have read in a lifetime. I started out with historical approach. Big companies with a history of dividends and adequate returns. I then changed to looking at nothing at but current returns. I was trying to find companies that were soaring. Each time I made and lost money.

Now I use a mix of those strategies to somewhat minimize my risk while maximizing my return. I find great companies that the market currently loves. I track a company for a couple of weeks before I get in so I know how it trades. The cash money is made when you see a company get hit hard with the market that previously was rolling. That is when you get in because you know the potential.

I have never used any value models. I have used some relative valuation to compare peers when charts look similar. Like I said before, money is made and lost with the market. Losing keeps your confidence from becoming arrogance. It is only worth it if you learn from your mistakes. I have a positive return over the past decade which is more than the market can say. I am only 21 years old. Cash money possibilities are endless. I just invest how I want to in a way that I feel comfortable doing. Never let someone tell you that you are investing wrong.

Valuation Techniques

There has been a lot of debate about how to value companies in hopes of finding great deal on the Street. Being a finance major, I have learned several of these ways in which to value companies. Different companies are valued different ways. One method to value a financial company may not be the same way to value an industrial company. The real problem lies with the methods themselves. Times have changed on Wall Street, but the valuation methods are staying the same.

One of the dated ways to value a company is by using the dividend discount model. I have several problems with this method. I just read a book written in 1940. The author worked on Wall Street and stated that any firms who dropped their dividend or even lowered it would be dropped from funds. Today, this would not hold true. Over half of publicly traded companies do not even carry a dividend. For these firms, the DDM is completely irrelevant. So why even use it if more than half our firms do not pay dividends? Even the firms that pay a dividend have a problem. Who is to say that one company is more valuable than another because they have a higher payout ratio? Sure, investors love companies that pay out dividends. These are normally the blue chip companies that are done growing. Why not invest in non dividend growth companies that statistically will reap greater returns? Dividends are nothing more than tax havens for the filthy rich. The majority of investors will rarely benefit from dividends given the low amount of money we put into companies.

Another method we learn is the residual income method. This is considered the method to use if nothing else works. If this is the last method to flee to, it is not going to give us a figure that is on the money. It is more of a ballpark number. Therefore, any target price we derive from this method will never be close enough to justify using it. We might as well just pick a number out of a hat.

The third method I am going to mention is the free cash flow model. I love free cash flow. This is really the only way to determine how a firm is doing and where all the cash really goes. The method merely states what the firm should be priced at given the free cash flow. It does not take into account where the cash goes. A company might look undervalued compared to this but if the cash is being wasted, obviously we do not need to invest in this company. The model does not state this so that is why it will not receive my seal of approval.

The final method (and the one I least hate) is relative valuation. This is nothing more than comparing a company to its peers. This is used in the overwhelming majority of research reports. I think the best way is to find a great industry and then look for a company with the best numbers and lowest relative ratios suggesting that it is undervalued. A company in a worst industry is never undervalued; it is always cheap.

I hate valuation methods for the most part. They all have some type of flaw. Numbers will not tell you whether the company is undervalued or just cheap. You have to look at the quantitative stuff first to determine whether the industry will hold up and cause the price to jump to where you think it should be. All of these theories are true part of the time; none of them all the time. They are, therefore, dangerous, though sometimes useful. I have never use a valuation method in my own investing techniques and I have done quite well for myself. Never let someone tell you their method is best. If it was, we would all be millionaires. There are different paths to make cash money. You just have to travel down the one you like the most.

Discount Rate Raised to 0.75%

The Fed surprisingly raised the discount rate by 25 basis points after the close on Thursday. Minutes from the meeting earlier this week showed the Fed favoring raising the discount rate as the first step toward monetary policy efforts. The discount rate is the rate charged to banks for emergency lending. The markets showed a mixed reaction as they opened lower in the morning but were able to end even on the day.

Raising the discount rate does not mean the Fed is going to start tightening the funds rate. Raising the discount rate is a good sign. It just means that financial conditions have improved to an extent that banks don't necessarily need emergency loans as frequently. The financial crisis was the first situation to cause a global meltdown and should be the first addressed to continue improvement toward getting out of it.

The Fed has continuously said that it will keep the fed funds rate lower for an extended period. With inflation under control and unemployment still high, we can expect this to be held true for another several months. There is no need to raise rates too soon, or we could be pushed back into a recession. Raising the discount rate is a first step toward implementing the recovery plan and will in no way hurt consumers.

As expected with a rise in rates, bonds prices fell. Equities were mixed as the surprise didn't take too kindly at first. We do have to remember that raising rates will admit an economic recovery is in the works. The dollar rose as expected. Maybe instead of making more cash money, we should just cash in on our cash money. Volatile times are ahead as the Fed is going to have to take this one month at a time as economic data rolls in. Since the dollar is going up, now would be a good time to take a vacation to the other side of the ocean before Europe gets its act back together.

Greek Debt Crisis: Part 2

Although Greece seems to be the underlying reason of the euro's rapid decline and Europe's inability to recover economically, problems are much much worse. The EU has a single montary policy for all its members. While Germany and France may be in a condition to start tightening monetary policy, Greece and Spain need the loose regulation a little longer.

It is important for the EU to either drop Greece as a member or help it out. If it leaves Greece behind, global markets and the euro will hit a brick wall. Spain and Portugal are two other countries who are also having trouble. Greece's problems are yet another extension of global worries following Dubai. If Greece is unable to lower its deficit, how many other countries may soon follow?

It is no longer a matter of what will happen to Greece. The new scenario is what will happen to everyone else in Europe who are somehow related to Greece in one way or another. It is important that Greece and the EU find a way to resolve these issues before the problems escalate. If Greece were to default, German and French banks would be the first to feel the effects. This is extremely bad news for the EU's biggest economies. In summary, Greece may be just the beginning of Europe's problems depending on how the situation is handled. Look elsewhere to make cash money.

Greek Debt Crisis: Part 1

The European Union has a policy that no member should have a deficit totaling more than 3% of its GDP. Greece is currently around 13% of its GDP. During recessionary periods, deficits should rise as governments initiate stimulus plans in order to get the economy up and running again. The real problem lies with the fact that Greece has only observed the 3% rule once in the past decade.

Greece has had a continuing problem with a higher deficit for some time now. As a result, many banks in Germany and France have lent Greece billions of dollars in support. The question has changed from "Will there be a bailout?" to "What are the details of the bailout?" A bailout is unpopular in Germany and France as they have both invested a fair amount in Greece and would shoulder a lot of the costs.

Greece is supposed to instill some clear cut ways to trim its deficit by 4 percentage points by March 16. If they are unsuccessfully able to do so, the EU will demand specific changes designed to bring in more tax revenue. Greece has already been selling bonds to raise money to pay off some of its short term debt. Its ability to continue to finance debt and install deficit reducing methods will determine how quickly Europe will emerge from financial and recessionary conditions.

Consumers Still Hanging On

Consumers have been struggling as lending stopped, foreclosures continued, and saving replaced spending. Even through all this, discretionaries led the pack in 2009. Looking forward into 2010, why should investors not continue to stick with them? As holiday sales impressed, there is no reason why consumer discretionaries cannot continue to help lead the market back to its highs.

Borrowing decreased for a 10th consecutive month as banks are still unwilling to lend and consumers unwilling to use plastic. No one would have expected discretionaries to perform so well with consumers not spending. As the economy rebounds and unemployment decreases, discretionaries are something to look for. With the large increase in valuation before spending even started to recover, this sector looked largely overvalued. This week's holiday sales numbers showed a reason to be optimistic.

Holiday sales and December sales were both up compared to last year. This should only be expected as last year we were in a recession and this year we are not. The overwhelming majority of retailers posted gains as inventory was cut and promotions ran rampant. We can only expect this to continue moving forward through recovery. Given the ability to increase sales during the strenuous holiday season, discretionaries are something to look at to make cash money in 2010.

Currencies and Commodities Part 2

Currencies and Commodities Part 1 discussed how the dollar is affected by the deficit and interest rates. We can expect the dollar to remain considerably low for the first half of this year as the deficit remains high and rates remain low. It is the second half of the year that we need to keep watch for.

Gold has been on a tear. As the dollar depreciates, gold is seen as a haven. Prices soared to $1200 an ounce before stepping back as the dollar rebounded. Mining has been a positive side effect. Cash money was made in precious metals and mining as gold soared. We can expect this to continue as long as the dollar remains weak.

Oil and agricultural commodities are supposed to continue to do well in 2010. These are also considered hard assets that can be used as a hedge against the dollar. Unlike gold which will falter as the dollar strengthens, these commodities should continue to rally. As GDP recovers in the emerging markets, demand for these will follow.

In summary, the dollar is weak and looks to be under pressure for the first half of 2010. It should begin to strengthen as an increase in interest rates become more prominent. Gold, oil, and other commodities can and have been used as a hedge against the dollar. As long as the dollar remains weak, cash money can be made be investing in metals, mining, energy, and agriculture as many investors suspect. However, the surge in agriculture should continue as demand around the globe for food increases. Invest accordingly.

Currencies and Commodities Part 1

Currencies and commodities are more entwined than most people think. With a lot of optimism toward energy and commodities for 2010, I think its only right to see why exactly these are the trades of the year. We will start with currencies to get to our current situation. Later we will follow up with commodities and the potential trades to make cash money.

The US Dollar had been on the fall before strengthening over the past month. I think we can contribute this to record deficits. Deficits affect currency markets more than anything else. As we saw stimulus, healthcare, and financial plans and bailouts roll out, the dollar took a hit as the currency depreciated. Going forward, if we are able to reduce the deficit, the dollar could continue to strengthen. Until then, corporations should benefit as a cheap dollar summons foreign investment and sales.

The more important factor is interest rates. The dollar kept falling as interest rates started to fall at the end of 2007. It continued its descent until the rest of the world started feeling the global recession as they too decreased their rates. This led to a rally in the dollar. As interest rates have remained at all time lows, the dollar has begun to fall again. It only rises amid talks of an interest rate increase. Looking ahead, interest rates are not expected to rise until Q3 at the earliest.

Gold, oil, and other commodities have been rallying and are expected to lead the market next year according to most investors. As interest rates remain low and account deficits remain high, we can expect this to occur. The only risk lies with any interest rates increases. I think we can put any reductions in the deficit on hold until the economy turns back around. Any economy is an economy to make cash money. You just need to take what is thrown at you and exploit it.