Finance Weekly Updates

Down we go again: Faint hope vanishes on Wall St.

NEW YORK — So you thought Wall Street might be out of the woods? Think again.

A surge of optimism that started a market rally late last year, mercifully quieting the stock market’s stomach-churning volatility, has vanished as economic recovery recedes further onto the horizon.

On Wednesday, stocks took a dive reminiscent of the terrifying jumps and drops of last fall, with the Dow Jones industrials falling more than 300 points before closing down 248.

It was the Dow’s biggest point drop since Dec. 1 and the first string of six straight down days since early October. The Dow is still 9 percent higher than its November low, but the bumpy decline feels all too familiar.

“It’s a good instinct to start a New Year off with optimism,” said Art Hogan, chief market analyst at Jefferies & Co. in Boston. “But unfortunately that tends to fade in the harsh light of reality.”

So what happened?

Holiday sales turned out to have been worse than expected, the jobless rate exceeds 7 percent for the first time in 16 years, the global economy is eroding faster and corporations from Alcoa to Intel to Wal-Mart have disappointed investors.

Apple was the latest company out with bad news Wednesday, with CEO Steve Jobs saying he is taking a medical leave of absence.

“Right now we just don’t have any evidence to show that that free fall is over,” said Robert Dye, senior economist at PNC Financial Services Group in Pittsburgh.

For a time, it seemed like the worst might be over for stocks. After hitting a trough on Nov. 20, the major stock averages all rose by more than 20 percent within six weeks – the kind of rally that usually takes years.

The rally was driven in part by hopes for Washington’s aggressive fiscal policies and the upcoming change in the White House. But lately bears rule Wall Street again as one corporate report after another spreads gloom.

Like others, Dye thinks the market could fall back toward the low point of November. That was when the Standard & Poor’s 500 index reached its lowest close in 11 years, at 752, and the Dow reached its lowest in more than five years, at 7,552.

On Wednesday, the S&P closed at 843, the Dow at almost exactly 8,200.

Stock market recoveries usually precede economic recoveries by about six months. Translation: Investors don’t expect the economy to turn around before the second half of this year.

“Wall Street wants instant gratification, but economic cycles take years and an economic cycle like this is going to be deeper, longer and uglier than any one we’ve ever faced,” said Harry Rady, chief executive and portfolio manager for Rady Asset Management in San Diego.

Sam Stovall, chief investment strategist at S&P, puts it another way: Investors have put on their 3-D glasses, trying to figure out “the depth, the duration and the diffusion of this global economic slowdown.”

And not having much luck.

For now, Hogan says stocks may trade in a much narrower range than they did during the white-knuckle days of October and November, when the Dow routinely rose or fell by 500 points or more in a day.

That range is perhaps 8,000 to 9,000 for the Dow, and 825 to 910 for the S&P, Hogan says. But more bleak news from corporations or Washington could still steer it lower.

For those looking for hopeful signs, consider these:

– Only once since World War II have stocks bounced back 20 percent in a bear market without signaling the start of a new bull market, according to Stovall. That lends hope the surge could resume in the not-too-distant future.

– A huge amount of money that was pulled out of stocks in last year’s big sell-off remains on the sidelines and should re-energize the market at some point when investors see more encouraging signs, according to Liz Ann Sonders, chief investment strategist for San Francisco-based brokerage Charles Schwab Corp. At year’s end $8.85 trillion sat in cash, money markets and savings accounts, an all-time high, she noted.

Other experts urge calm and suggest putting the recent slide in perspective.

Robert Doll, global chief investment officer for the investment firm BlackRock, says the market’s latest swing down is normal and was to be expected after a 20 percent rise and some bad data.

“We’re going to get more bad data and we should expect some more selling squalls,” he said.

Just keep those rose-colored glasses in your drawer for a while.

Dye said stocks could fall again if Washington isn’t quick to come up with planned spending to boost the economy after President-elect Barack Obama takes office next week.

There is an expectation that we’re going to have an $800 billion package in place very quickly, he said. “If that doesn’t happen in a timely fashion that would be another negative for the markets.”

On Recessions and Depressions

What is the difference between a depression and a recession, and which are we experiencing now? Until the Great Depression, and for some time after, any downturn in economic activity was known as a depression. But in the late 20th century, economists and politicians were reluctant to alarm the public by using that loaded term, and so they coined the alternative, “recession” to denote a relatively minor economic downturn. Some have attempted to give formal definitions, based on the extent of shrinkage or the duration of the negative period. But the best definition remains the somewhat humorous one: “A recession is when other people lose their jobs. A depression is when you lose yours.” To this we may add, for the current recession: “A recession is when other people lose their homes, a recession is when you lose yours.”

The Year of the Flat Screen

Even with an atmosphere of restraint and a renewed commitment to fiscal responsibility, this may be the year when more Americans than ever get flat-screen TVs and computer monitors. It looks at though manufacturers have prepared too many for the holiday season, and will be forced to sell at rock-bottom prices. News of a federal investigation  into price-fixing schemes between manufacturers also portends an imminent downturn in prices. We are already witnessing heavily reduced pricing in the context of holiday sales, below the traditional $10/inch barrier, and consumers are unlikely to accept a return to old prices once they have experienced the new lows.

British Real-Estate Crisis Looms

If you’ve been to the UK in the last couple years, you know how expensive land is there. The country is small, populous and developed, all factors that contribute to legitimate rise in land cost. But lately prices seem to have climbed beyond reasonable levels. Analysts have observed that there is not currently enough wealth in all of England to cover the mortgage costs held by the citizenry. This includes bank assets! Were homeowners to experience a “call”, there would be a huge shortfall and many would lose their homes, to banks who would then be unable to sell them for anywhere near their supposed value. The banks, in turn, would default on their obligations to foreign investors.

This alarming situation could lead England the way of Iceland – a sudden and harsh awakening to national insolvency.

Will Social Security be There For Us?

One of the biggest challenges facing the Obama administration is restoring the viability of the US Social Security system. We don’t know exactly when it will hit, but for years there have been whispers of an impending Social Security crash. As the baby boomer generation hits retirement, they may strain the system beyond its breaking point. Obviously a weak economy in which the younger generation has trouble earning cannot help this situation.

Americans are looking to Obama and his incoming cabinet to find a solution to this potentially disastrous issue. Should Americans be unable to receive Social Security, their faith in their govenrment will be seriously weakened, and consequences will run far deeper than the immediate problem of supporting the elderly.

Some Retailers Benefit from Crisis

While most retailers find their profits shrinking, there have been some big winners this holiday season. Most notably, those retailers known to offer low prices and affordable value have found their market share growing, at the expense of luxury and elite vendors. Walmart, for instance, reported that it has seen an increas in its sale of flat screen TV’s, one of the most desired and expensive holiday gifts.

More shoppers are also turning to non-traditional venues such as Ebay and Craig’s List to find merchandise at recession prices. We may see a realignment in the retail space in which luxury brands, which had experienced growth for many years, may be dethroned by value brands in the coming period. We will need to wait and see whether manufacturers and retailers can stay solvent selling goods at the razor-thin profit margins such venues provide.

What Will Santa Bring Shareholders?

Traditionally, we expect an end-of-the-year spike in stock prices. Investors are people too, and they are impacted by the optimistic holiday spirit. We also know that many people allocate their investment capital on a yearly basis and make investments around the new year.

This year, though, it’s hard to know what will happen. Prices seem quite depressed, making a spike even more likely, but at the same time the atmosphere of uncertainty may override the usual holiday cheer, encouraging those who still have spare cash to hold it.

Interest Rates Fall, and the Dollar Follows

Everyone wants the Fed to take action to get the economy back on track, but now it’s starting to look like measures taken to help one area can do damage in another, complicating matters further.

This week the Fed slashed interest rates, a move intended to stimulate growth in the local economy. But the move also makes dollar denominated investments less attractive to foreigners, driving their money out of the country and forcing the dollar down against most other currencies.

Times are stormy now, and we may not see interest and exchange rates stable again for some while.

Green is the New Green

One of the variables underlying the current economic crisis is of course the price of oil. From airlines to SUV owners, to those who heat their homes with oil, everyone is feeling the wild fluctuations in this commodity. Although oil is down right now, all rational projections are that the price of a commodity with a limited supply and a growing global demand will rise over the next few years.

So how will businesses that rely on energy for transportation and manufacturing stay profitable? How can we sustain the globalized business style that has come to dominate almost every industry? The only answer is to go green. Once the province of mystics and die-hard naturalists with little regard for the financial bottom line, environmental concerns are finding increasing interest in the boardroom. At it’s core, enviromentalism is about reaping the maximum productivity from the minimum of resources, an orientation that an operations officer can easily relate to. As we move forward, we are likely to find substantive environmental improvements resulting from an increase in business and transportation efficiency.

Who is Too Big To Fail?

For the past few months, we have been hearing debates about whether Bear Stearns, AIG, Lehmann Brothers, Chrysler, Ford, and GM are “too big to fail”, the assumption being that, were they to fold, they would take America down with them.

The question is, how does an influx of taxpayer money prevent failing? Isn’t the root cause of the current failures to be found with management, both on the financial side as well as the business planning side? How will the new cash from Joe taxpayer be spent differently from all the other money that has already been blown?

The hard truth is, that no business is too big to fail, to the extent that taxpayers should bail them out. Once we take this approach, we have chosen the inefficient and beauracratic road of the USSR and other communist countries, where the government basically is a giant conglomerate of failing businesses, propped up by outlandish taxes.

America is too big to fail, and in order to keep it alive, it must be quarantined from any mismanaged business. Other businesses will always rise on the ruins of today’s bankrupcies, but if we shy away from confronting the consequences of our actions, we will just be inviting a catastrophic day of reckoning at a future date.

The Sun Belt Lures Northeastern Realty Refugees

“Realty Refugees” are people who face homelessness as a result of the fall of real estate prices. Many of these people have “underwater” mortgages, debts that exceed the current value of the house. It’s getting to the point where some will be forced to sell their houses for whatever they can, then look for a new home.

But even in this depressing situation, there is a lifeline. Many houses in the northeast are still worth far more than comparable properties in southern cities like Charlotte, Atlanta, Austin and Phoenix. Some realty refugees from the north may find they can maintain their standard of living, IF they are prepared to relocate.

For those who have just lost a job, this may ironically make the transition easier!

The NIR Group LLC. Diversifies

PIPES used to be a novel and innovative financial sphere, yet over the years it has become one of the run of the mill investment fields. The NIR Group LLC., headed by Corey Ribotsky, has diversified its activities into fields of social and philanthropic involvement, and also into the world of Hollywood.

Ribotsky and his group have produced two Hollywood movies that were released in 2007, and he is one of the first – if not only – top financial and investment experts to be interview on MTV.

Corey Ribotsky relates to Groundhog and American Cannibal in this MTV interview – click here.

Who will be the next Soros

World-famous investor George Soros is said to have made a billion dollars by shorting the british pound in the 1980’s. Since that time the pound climbed back up to 2×1 against the US dollar. But in recent weeks it has fallen sharply, along with most European currencies. Now the big question everyone wants to know is: “How low can it go”?

Of course you can never know what will happen for certain. But there are strong indications that the financial crisis, may lead to a longer and deeper recession in Europe than in the USA. Even before the crisis hit, many felt that the pound was overvalued and that real estate values in the UK had reached unreasonable levels from which a fall was unavoidable.

So for all you aspiring billionaires out there, this may be your chance to short the pound and be the next Soros!

Obama on Trade

US President-elect Barack Obama is widely hailed as representing a new, more humble American approach to the rest of the world. He has been hailed in many nations as a visionary of globalization and more receptive to collaboration with a wider range of partners.

But does this necessarily mean he’ll encourage free trade?

His voting record is actually far more protectionist than one might think. For instance, he has come down in favor of a variety of tarrifs on goods imported into the US. He’s also been known to use withholding of trade as a lever to enforce other values such as human rights, as in the case of Columbia, or to punish other nations for manipulating their currencies, as in the case of China.

So although he has been hailed as the embodiment of global progress, there is reason to be concerned that, especially during tough times, he may adopt a more isolationist economic policy in order to benefit us US businesses and workers. Whether this policy will be effective or backfire remains to be seen.

Leveraged Investments |Day-Trading | Current Economic Crisis

Is Leverage Dead?
The liberal use of leverage was a major factor in the current economic crisis.
However, use of leverage can sometimes be justified for short-term, technical traders,
provided it is paired with appropriate position size and a responsible, automated stop-losses policy.

Leverage, a euphemism for borrowing money to invest in risky ventures, was the turbo-charge behind outsize profits in the boom years. And it was the fuel that made the fires flare that much higher when investment banks crashed and burned.

Have we seen the last of heavily leveraged investment?
For the short term, it would seem so. Even if some investors are still brazen enough to play the leverage game, it appears that for the time being banks and other sources of capital are unwilling to be so free with their money.

There will not be money available to borrow for risky ventures in the same quantities as in the past.But in the longer term, we can expect to see leverage making a comeback. One particular area where leverage is very useful is in day-trading based on technical analysis. Technical analysis is notoriously unreliable as a determinant of long-term price movements. Yet without leverage, it is not realistic to use technical analysis for intra-day investment positions, because the fluctuations are far too small to generate returns that justify the investment of time and energy inherent in active trading.

By heavy use of leverage, investors can amplify the quantitative impact of small intraday technical fluctuations, which are actually the most reliable technical trading opportunities. The use of leverage per se should not be viewed as an inherently risky approach. The critical question is what percent of an investor’s available capital would be lost on a given position in a worst-case scenario. When heavy leverage is used, the investor should check to be sure that he could not lose more than 1 percent on the same position, or on parallel, concurrent positions, which are expected to act in concert.

Setting an automated stop loss and refusing to readjust it is critical to enforcing discipline in this regard; without it, an investor is risking all of his principal in every position.

Technical Analysis, Technical Traders, Automated Trading

Basics of Technical Analysis
Technical analysis is the evaluation of patterns in the historical price of a stock, currency pair,
commodity or other financial instrument in order to determine likely future moves.
This type of approach is distinguished from fundamental analysis, that focuses on studying the forces currently at play and likely to influence the value of the asset.

A fundamental analyst would examine the balance of payments and profitability of a corporation,
along with industry factors that appear likely to impact upon the sector in which the corporation is active.
In the case of a currency, a fundamental analyst would consider a far wider range of considerations impacting upon the viability of the state’s government and economic systems.

A technical analyst disregards all of these factors and studies the asset price alone.
A historical chart is generally the easiest format in which to make sense of price data.

While there are a number of elaborate theories about Fibonacci numbers, stochastic indicators,
and other mathematically complex approaches, some of the simpler technical analysis tools are much more intuitive and seem to reflect the basic elements of group psychology that are active in a trading environment made up of a large number of individuals.

For instance, technical traders consider certain price points to be support/resistance levels.
A price that has in the past been difficult to exceed, or to fall below, can function as a moment of reflection for the masses of traders.

So if a stock has risen repeatedly but failed to exceed $47, it is likely that when it touches that price, it will pause. Should it break through even a little, it will continue on rising until it encounters another resistance point. Support levels serve the same function for a falling price.

With the advent of automated trading, it became possible for investors to give an automatically triggered order that takes effect when a price exceeds a given level. This allows sellers to acquire an asset the moment it exceeds a resistance level, when it is strongly expected to continue its upward trajectory.
This is known as trading breakouts.

World financial turmoil affect crude oil prices

Oil prices are now above $91 a barrel, after hitting the eight months low because of significant global economic concern, this concern limits to growth and undermines the global demand for crude oil Space with a world financial crisis still going on animist suspect that oil prices will stay low. In the last three months we have seen that the investors expectations about oil demand have turned completely around as financial crisis and turmoil has sparked serious concerned and foreseen a recession that could have developed in the US and spill into Europe. Green energy enthusiasts are concerned that the lower the prices will go the less investment there will be to rid the US from dependency on oil. 

What’s Next for the EUR/USD?

What’s Next for the EUR/USD?
For the past three years, Americans have watched in shock and horror as their currency fell increasingly far behind the Euro, an upstart currency that seemed destined to supplant the greenback as the prime world currency. Indeed, some Europeans had even been clamouring for a reexamination of the status of the US dollar as a global reference currency for the international finance community, as established under the Bretton Woods agreements signed by the G8 after the Second World War.

But now it appears as though the trend is reversing itself. A number of factors related to the current financial crisis appear to strengthen this reversal.

US investors, shaken by the subprime crisis and unable to borrow as liberally as in the past,
are pulling their money out of investments in Europe and developing countries and bringing them home, converting them back to dollars.

The US, as a federal government, is also expected to be able to address the crisis more coherently than the fragmented EU, which shares a currency but not a government or a policy-making apparatus. Add to this the global fear of risk, and investors from all over the world are running to US Treasury Bills as a source of shelter in bad times. In doing so, they also convert their local currencies to dollars.

The US economy recovered far faster than Europe from economic downturns in the previous half century, and many assume that will be the case this time around as well. This means that what little investment capital now exists is headed for the states, an additional source of upward pressure on the value of the dollar against the Euro.

It may seem unfair that a crisis which originated in the USA should strengthen the dollar against other world currencies, but for the foreseeable future, that does appear to be the outlook.
Currency traders and individuals with holdings in multiple currencies should factor in this projection when determining their positions for the coming years.

Warren Buffet |US Stocks, US Equities | Investment Banks

Watching Warren
Omaha-based investment guru Warren Buffet recently made a rare public proclamation.
In a New York Times editorial, he encouraged others to follow his suit and buy up US equities,
in the belief that the current panic has depressed their values far beyond fundamentally justifiable levels.

He revealed that he himself now has nearly 100% of his personal fortune invested in US stocks.
He admonished his readers to remember to be ‘fearful when others are greedy, and greedy when others are fearful’.

This seems like sound counsel, and fairly intuitive to committed contrarian investors.
But what Buffet didn’t emphasize in his editorial is the specific identity of the stocks he has recently picked.
Notably, he recently invested in two major banking powerhouses, Goldman Sachs and Wells Fargo. On reflection this investment is easy to understand.

Even as the public is disturbed and distracted by news of the falls of such titans as Bear Stearns and Lehman Brothers,that news has a silver lining. The field of investment banking, even as it narrows, will not disappear.
The fall of irresponsible brokerage houses means more opportunity and profits for their more prudent competitors who have weathered the crisis.

To put it differently, America will always have to bank somewhere, and it now appears that the somewhere will be with Wells Fargo and Goldman Sachs.

If shares of these banks are now depressed, it is only a result of irrational panic and fear.
This creates a rare opportunity to buy up shares at an artificially discounted price.
In short, for those who can get a grip and suppress the instinct to flee for cover,
now is an excellent time to follow Buffet’s example and load up on shares those investment banks
that appear poised to swallow up the market share left on the table when others failed.

Could A Run On The Banks Occur?

One of the most powerful images of the Great Depression is of the tragic run on the banks. When depositors became panicked that banks could not cover all of their obligations, they stampeded to withdraw their money. They were correct- the banks could not pay back all of the depositors, and as a result they went bankrupt, taking the depositors money with them.

In the wake of that crisis, the current FDIC insurance system was established. This system allocates a federal guarantee of $100,000 per account.

It is intended to ensure that depositors can have full confidence that their savings will not be lost, even in the unlikely event that their bank should fail.

Under this system, US banks have been considered among the most reliable in the world.
However, as we enter a period of unprecedented financial turmoil, many depositors are wondering whether they are adequately protected in the event of a systemic failure of the banking community.

In order to examine this concern, we need to understand some of the distinguishing features which differentiate the current banking climate from the one which existed in the time of the depression.
The most prominent feature of the current system is the extent of integration and interconnectedness,

both within the US and on a global level.

This creates a situation where the entire nation and indeed the entire world are one large and interdependent system, so that a failing in any one area has the potential to bring the rest down along with it.
Gone are the days when one could avoid a local recession by investing in an overseas boom.

Second, much of the investment capital circulating today is managed electronically, which means that transactions happen at much greater speed.

Thus, a downward trend which might have taken months to play out can now occur within hours.
Both of these factors mean that a panicked sell-off today can have calamitous repercussions that far exceed those of the great depression both in extent and in speed.

Given this background, some more cautious investors raise two alarming issues.
First, even if depositors individual accounts are guaranteed by the government, how would the government possibly administer the distribution of funds in the event that the entire banking industry were to implode, and records were lost or inaccessible?

In an era of electronic records, couldn’t critical data be lost or distorted to the point where a reimbursement of depositors would become infeasible?

Second, is the US government’s own financial house in adequate order to serve as guarantor for the deposits of its entire citizenry?

During the Bush years, unprecedented government spending led to the accumulation of over ten trillion (yes, with a ‘t’) dollars of national debt, a staggering and unprecedented sum.

Add to that the hundreds of billions the government is pledging for various bailout and stabilization packages, and a troubling picture emerges. It appears that consumers have overspent and then left the banks holding the bill, the banks have done the same to their investors, and now, the investors are doing the same to the federal government. Passing along responsibility to a higher echelon does nothing to resolve the underlying lack of wealth.

In light of all these factors, some are beginning to doubt the realism of implementing FDIC insurance, should it ever be needed. When asked what is the best position in which to weather  the current crisis, one clever analyst remarked, “either cash or fetal”. More Americans are beginning to wonder whether perhaps they will find themselves in the latter, wishing they had selected the former.