It’s Obama’s Economy Now! How Do I Invest?
By: Bob O'Brien at MyWealth.com
Well the first 100 days of the Obama Presidency have come and gone.
Regardless of your political leanings you have to give the Obama
administration some credit. We will avoid the next Great
Depression!
After a scary start in which the Obama administration did not
appear to have a real handle on the economic crisis, the
administration has settled in and has thrown every piece of
stimulus that they could find at this economy in order to avoid a
really severe economic meltdown.
Give Ben Bernanke a lot of credit for supplying most of the oxygen
for all those sighs of relief out there, his fearless printing
press has really made the big difference.
Unemployment is slowing, the stock market has stabilized, and the
Nasdaq is up 10% on the year. In addition, consumer confidence has
increased and that light we see at the end of the real estate
market tunnel is not an incoming train. That’s the good news!
The bad news is that major inflation and/or stagflation signs may
be starting to appear. Oil is up nearly 50% off its lows, the
dollar is starting to weaken, and interest rates are starting to
rise. These will be the major hurdles in this economic recovery,
and we cannot go on printing money forever.
We are still a long way off from a Healthy Economy!
What
can you do to protect yourself? Our Stock Investing
Advice is:
Be
careful in this stock market. Realize that this rally is a “government
generated rally” by historical amounts of stimulus. This is not the
time to go back on automatic pilot with blind optimism. There will
still need to be real economic growth and real profits from a lot
of sectors. This is where the education that you get in our
investing course really pays dividends.
Favor
small/medium cap stocks. Smaller companies tend to have more flexibility
than larger companies stocks and can bend much easier in the storms
ahead. Heavy inflation and new regulations will require a lot of
flexibility that the larger companies generally do not have.
Lean
towards emerging markets. China will most likely lead the world out of this
global recession, and there is a lot of money being poured into
these economies. The BRIC countries are loaded with opportunities
and having some money in the ETF’s EEM) and (VWO) should make for
great long term plays in your discretionary portfolio.
Protect yourself with
TIPS. Treasury Inflation
protected securities, (TIP) will be very popular when the heavy
inflation starts to hit, and we have already seen them jump when
Ben Bernanke revs up the printing presses. The inflationary threat
is very real, and on its way!
The longer term investor has seen the majority of carnage already
in this stock market, but there may be another big stock market
tumble around the corner. This recent rally has really been about
government stimulus and not about long term profits and economic
growth.
It’s easy to say that these profits and real economic growth will
be there in time, but only time will tell for certain as to how
quickly this economy will re-invent itself.
Bob O'Brien
Head Instructor
bobrien@mywealth.com
Today's
Savings:
Order Barron's Magazine and save over 40%
off the newsstand price.
Priceline.com Hotels - save up to
50%
What To Do In This Stock Market Rally?
Contributing Writer
instructor@mywealth.com
I wrote recently about the stock market and ETF’s. At the time of the first post (3/23) the S&P was around 750, and I recommended that the long term investor get back in the market. At the time of the second post (4/6) the market was at 820, having surged almost 10% in a matter of only two weeks. My comment on the market back then was: “At this level, I think the market is still relatively a good value”.
Now the market is up even more. Currently the S&P is at 870. That means it is up about 30% from its bear market low of 670 on March 9. Quite a rally and the question is:
Is this sustainable?
You can’t get a straight answer to this question from anyone. Some people will tell you to get out and others will tell you that we are in the early phases of a major bull run. What this illustrates is how hard it is for the average investor to “beat the market” and time when to get in and out of stocks.
Many active money managers will claim they have superior skills and magic crystal balls that tell them when to buy and sell. But the fact is
For those who like to study the market in a historical perspective, one of the most prominent valuation tools is the so-called 10-year Shiller P/E, named for Professor Robert Shiller at Yale. This measure smoothes out the earnings cycle over a 10-year period and this way avoids the bumps that the 12-month trailing or forward P/E has. The 10-year Shiller P/E is around 60 on S&P operating earnings.
So with the market at 870, you have a P/E of 14.5 That is a quite reasonable number; in fact it is slightly under the 200-year average of 16.
Historically, for those who invested at times when the Shiller P/E is below 16 the returns have been good. Professor Shiller ran the numbers and in this respect “good” means a 7-10% yearly return, which is what you can probably expect in the long run.
Make sure you have a Financial Plan and the Personal Finance Course will help you do just that!
Some investors sold out in a panic around the beginning of March as the market tanked. Those people are now sitting on heavy losses and on top of that have missed a 30% market rally. The lesson is age old and yet investors keep missing it: Do not let the market’s mood swings dictate your investment strategy!
The market is like an irrational drunk who stumbles along in the alley trying to get home from the pub. He will make wild swings back and forth but he will eventually get home. Keep that in mind as you grow your own investments!
For developing a sensible investing strategy make sure you check out our investing course.
If you put money in the market at regular intervals (so-called “dollar cost averaging”) and stay properly diversified (by using ETFs) and stay away from expensive active managers and mutual funds who promise to “beat the market” you are well on your way to a sensible investment strategy.
This brings us back to the initial question:
What to do with the rally? I can tell you what I have done. Mostly, I have done nothing. I simply do not believe I have superior market timing skills so I am not going to bet my portfolio on that assumption.
As you know, I recommend the average investor (with a million or less in liquid assets) use low cost ETFs to diversify. For those who like to speculate in individual stocks I recommend you limit this to a very small part of your portfolio. I have a small portion set aside myself for individual trades and here I have sold a little bit.
I had one stock which I thought was getting thrown out with the bathwater during the mayhem in the beginning of March. Whether due to luck or skill (probably luck), this stock has now quintupled and I sold it all. But it only represents about 5% of my portfolio and that is the only trade I have made.
I sold the particular stock because it is a financial stock and I am still uncomfortable with the health of the US and European financial sector. I also think the housing market has another nasty leg down (more on that in my next article) and banks will suffer in that scenario. In the rest of my portfolio I stick to ETFs which are low cost, diversified and let me sleep at night.
Overall I keep buying a diversified basket of stocks in my 401(k). Every month I max out the contribution to get the tax deduction and employer contribution. This is money that I won’t touch the next 20-30 years and with the market at a current P/E of 14.5 I am confident it will provide a nice return. This is my way of staying disciplined and following the three rules:
1. Use dollar cost averaging (add a fixed amount every month or so).
2. Diversify by using low cost ETFs.
3. If you look at valuations, use the Shiller 10-year P/E and buy when below trend
Do you have an opinion about the current market or don't agree with the author? Send us your stock investing articles.
Office Depot Stock Gains 177% in Three Weeks and There's More to Come!
A few weeks ago I had my eyes on Office Depot, Inc. (ODP) priced at nearly $0.70. On April 16th, 2009 the price is $1.94. That's a 177% RETURN!
Take a look at the stock chart from early March to mid-April:
The great thing about this stock is that it still has a lot of
upside potential left, even in the short-term because it has been
knocked down so far.
The reason why Office Depot's stock was (and still is) so cheap is
because they took a huge write-down on impaired assets four Q4
2008. I would bet that they decided to take these write-downs in
the midst of all of the financial company write-downs. This way
they look really good when things start to turn around in both the
stock market and the real economy.
The only problem with this stock is that the company and the office
supply industry as a whole has reached a high saturation level, and
it is not expected to grow significantly in the next two
years.
However, this stock is way undervalued for a solid household name
like Office Depot. Compared to its competitors, Staples and Office
Max, it is very undervalued, and has huge price discovery potential
for the future.
The investing advice to take from this stock analysis is that
Office Depot (ODP) can be a great short term play if you expect
earnings to be dismal for the Q1 2009 results that will be reported
on 4/28. It could also be a long-term (2-4yrs) investment; the
stock could potentially go back up to its 52 week high of
$14.40!
How
would you like to have a 640% return on your investment in 2-4
years?
There are very few
investments in the world that exist with this kind of return. As I,
Warren Buffett, and many other investors believe, this market has
presented opportunities of a lifetime.
If you would like to get started trading in your own online
account, try TradeKing or Zecco.com. They are both great services, so give one a
try.
Today's
Savings:
Order Barron's Magazine and save over 40%
off the newsstand price.
Economy Recovering? This Indicator Seems to Think So!
So you won’t know when the economy is turning by listening to the nightly news. So what can you look to?
Well, here is one widely watched economic barometer that institutional investors have used throughout the years. What is it? Copper
Now you may think, “What in the world does the price of copper tell us about the economy?”
With other leading indicators “ticking up” recently such as Housing Starts and Building Permits, I took a new look at copper as well to see what I saw. Here’s what it looks like.
Copper breaks its downtrend and heads higher for the first time in almost a year!
As you can see from the chart above, copper has not only broken its
downtrend but also its sideways range and is preparing to head
higher. Now how can that happen if there’s not more “copper buying”
going on around the world.
On top of this, it seems that crude
oil prices have finally stabilized too, and once oil prices
finally hold above $50 a barrel again, it should be another
“confirming sign” that the global economy has BEGUN the process of
turning around.
I say “begun” because it takes time for the U.S. and global economy
to be in “full bloom” once again. Therefore, the news will continue
to be dire for a while longer.
But
what does this mean for you? It means that if you
are a long term stock investor, these could be better times to be a
buyer (with cash, no margin buying) of ETFs and mutual funds if you
have at least a 5-10 year time horizon for the investment.
For
the currency investor, it means that you
need to be on guard for the “dollar party” to come to an end once
the world finally does realize that the global economy is turning.
This could help the AUD/USD, NZD/USD and EUR/USD for instance as
dollars are sold and commodities and inflation bloom once again.
The former two pairs do best when commodities stabilize and boom
once again…and the latter does good simply when the U.S. dollar
does not do good since it acts as the best “anti-dollar” out
there.
Looking
for more ways to polish your investing skills and
strategies? Stay on top of the game
with InvestorPitStop.com's stock investing strategies
and tips. Also, try the
investing courses for only $25 at www.mywealth.com.
SPECIAL
OFFERS:
Open an account at TradeKing.
Order Barron's Magazine and save over
40% off the newsstand price.
-Head Course Instructor at www.mywealth.com
Current Merger Arbitrage Spreads, M&A Deals
The area you can make money in is the difference between the current stock price and the buyer's purchase price (if cash deal). It must be paid in cash, because in this market if a buyer offers a stock for stock deal, then the buyer's stock price is likely to fluctuate. That can eliminate the premium if the buyer's stock price drops significantly.
Buy
Stocks Online for $0. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com
Here's a list of likely
Mergers / Acquisitions:
>Constellation Energy Group
(CEG
)-
in September this energy giant accepted an offer from Warren
Buffett's MidAmerican Energy
Holdings for $4.73 billion.
Constellation filed for a shareholder proxy to vote in favor of the
acquisition.
Premium offered: 13.2%
or $3.10
Cash offered per share: $26.50
CEG current price: $23.40
Expected closing: within 7 months
>Rohm & Haas Co.
(ROH)-
to be bought by Dow Chemical Company
(DOW).
Premium
offered: 9% or $6.45
Cash offered per share: $78.00
ROH current price: $71.55
Expected closing: Jan. 2009/ Very early
2009
>Foundry Networks Inc. (FDRY)-
to be acquired by Brocade Communications Systems
Inc. (BRCD) for $2.6
billion.
Premium offered: 10.59% or
$1.58
Cash offered per share: $16.50 cash
FDRY current price: $14.92
Expected closing: Fourth quarter 2008
>Puget Energy Inc. (PSD)-
this deal is pending Macquarie
Bank's ability to borrow $7.4 billion, which is not easy
in these rough economic times.
Premium offered: 15.25%
or $3.97
Cash offered per share: $30.00
PSD current price: $26.03
Expected Closing: End of Dec. 2008
I will
be following more mergers and acquisitions, so stay tuned for more
money making opportunities.
There are chances that these acquisition deals might not go
through, so these gains are not guaranteed, but
likely.
Special Free Week offer to either the Print or Online
editions of The Wall Street Journal!!!
Priceline.com Hotels - save up to 50%
Why Invest in Stocks?Find Out On Zecco.com Free Blogs, Forums & Trade.
Make Money on Mergers and Acquisitions
What happens in a typical acquisition is the buyer (acquirer/bidder) makes an offer to buy a company (seller/target) for more than the seller's stock price currently is (premium). This provides an incentive for the target company to accept the offer. As long as the offer is in cash and the deal is successfully executed, there are guaranteed gains for the target company's shareholders.
For example, the popular InBev acquisition of Anheuser-Busch presented a huge profit opportunity. InBev offered $70 in cash for each share of (BUD) stock. If you bought shares of Anheuser-Busch (BUD) on Oct. 29, 2008 (long after the acquisition announcement) at $59.83, you would be almost guaranteed a profit of 17%, or $10.17 a share. Now, with the stock at $68.50 as of Nov. 14, the merger presents only a 2.2% return. Annualized, that return is 13%, so it's still not a bad deal.
Opportunities like this exist more right now than in a more normal stock market because investors are fearful of stocks in general and are just protecting their money. This takes the focus away from situations in mergers as there is a "flight to safety". It is usually hard to find merger opportunities because the market is efficient enough that investors usually buy the stocks up to the offer price as soon as the announcement comes out. Now times are different, and you can take advantage of that.
Like Warren Buffett says, "Be fearful when others are greedy, and be greedy when others are fearful." Now is the time to be greedy when people are fearful.
Making money on acquisitions depends on a few main contingencies:
- The deal must be very likely to go through- research news and shareholder reactions to offers.
- A premium must be presented to the shareholders- the offer should be significantly higher than the current stock price.
- Cash offers are best and easy to value- stock deals can change value because of fluctuations in buyer's stock prices.
Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com
The Wall Street Journal!!! Special Free Week offer to either the Print or Online editions!
Priceline.com Hotels - save up to 50%
Value Investing Basics for Beginners Part I
The most famous value investor in the world is Warren Buffett, who has generated over 20% average annual returns since the 1970's. He has prided himself on finding "good deals" on good businesses. This stock investing strategy was mostly created by one of Buffett's teachers, Benjamin Graham. He wrote a book on value investing called The Intelligent Investor. This 600+ page book, much like a textbook, gets into the nitty gritty details of his investing strategy and how he came up with it.
Basics of Value Investing
1. Find a Great Company- Whether it's a company you buy products from, buys products from you, employs you, or if you just love the company, check it out. Also, if it's in an industry that you know very well than you should look into it. You want to love the company you are going to own. It has to be GREAT, not just good or okay.
2. Proven Business- How long has this company been around? It's hard to value a company when it has only been in business for a year. Usually a company that has been successfully in business for 10 or 15+ years makes a good candidate. The companies must be proven, successful businesses to be considered for investment.
3. Survivability- Ask yourself, "Will this company be around in 10, 20, 30 years?" If you cannot see the company being around in ten years, you have no business investing in their stocks; after all, you are buying a piece of that company. Say you and three of your friends want to buy a new $1200 HD-TV. Would you want to pay $400 for your stake if you thought the TV was going to die in two years? I hope not.
4. Uniqueness- What is unique about this company? Do they have some kind of competitive advantage? Are they better at some aspect of the business versus the industry? Are they the first in a market? Do they have any special patents, copyrights, or trademarks? These are the kinds of questions to answer when finding out about a company.
Suggested
Reading:
This article should give you something to work on for a little
bit. Stock investing can be confusing and difficult. Just slow down
and think of some really great companies that you'd be willing to
OWN not just hold the stocks of. Remember, value investing is all
about finding good, solid companies that are priced below their
true value.
Stay tuned for Part II because
I will be posting more on Value Investing Basics. Congratulations!
You now know the groundwork that value investing in stocks is all
about. Making you a better, more informed investor is my
goal.
5 Best Dividend Stocks
Even some of the best investors in the world are getting crushed over and over on their investments in this cruel, erratic stock market. Stock Investing can be very confusing, and it seems someone is suggesting one stock pick when the other says to sell that stock.
One way to ensure a return on your investment is investing in stocks that have a dividend. Some companies pay dividends that overshadow our recessionary market. My mission was to find high-yielding dividends from good companies for independent investors like you. If you want returns in this market, my stock investing advice to you is to consider dividend stocks.
After scouring the stock market for the best dividend stocks, I found:
5 Best Stocks for
Dividends:
1. Frontline Ltd. (FRO)-
this shipping company moves oil,
bulk, and metal ores and continues its earnings growth and dividend
growth year after year. This stock currently yields a
39% yearly
dividend (or $3.00/share
quarterly) at a price of nearly $30. Standard and Poor's estimates
the 12-month target of FRO stock to be $59. Even though the yield
in a year may be closer to 15-20%, that is a huge dividend! Also,
if you buy stock of FRO now, then you can enjoy the gain from $30
to almost $60 and have the 15-20% dividend. With a P/E of 3x
(average stock P/E is 10-14x) this stock is a money making
machine.
2.
SunTrust Banks Inc. (STI)- Suntrust's stock dividend yields 7.5%.
This large regional bank has held up
well compared to other banks during this stock market crisis. This
stock is well off of its 52-week high of $73.80, so it has a lot of
potential upside gains in the future. This is a solid company with
strong growth prospects in the future.
3.
Pfizer Inc. (PFE)- This drug company has a household name and
7.5% dividend
yield at its current price of
$17.10. With revenues of nearly $50 billion a year, you know this
company is going to be standing strong for a very, very long time.
Buy stock in Pfizer if you think a 7.5% dividend and a discounted
stock price looks like a great investment.
4.
AT&T Inc. (T)- Another stock with a household name, At&t,
has a dividend yield of
6.33%. Standard and Poor's
gave At&t stock the highest rating, 5 stars. This company
enjoys the exclusive right to sell the iPhone, which has boosted
its revenues. Realize that this stock is also priced low compared
to it's historical highs.
5.
Duke Energy Corp (DUK)- What would a dividend stock list be without a
utilities company? This stock yields a 5.9% yearly
dividend based on the Oct. 24,
2008 price. This large utility company has a market value of $20
billion. Duke Energy has been paying dividends on their stock since
1926. That should tell you how reliable this company really
is.
There are still ways to make money during this gruesome bear
market. Stock dividends can be a addition to your portfolio
strategy for stock investing. Realize that the dividend yields are calculated
as a percent of current stock market price and may fluctuate. In
rough times, buy stocks with higher constant dividend payments for
a stream of income or reasonable gains.
Special Free Week offer to either the Print or Online
editions of The Wall Street Journal!!!
Priceline.com Hotels - save up to 50%
Why Invest in Stocks?Find Out On Zecco.com Free Blogs, Forums & Trade.
