Run Up in Gold vs. Run Up in Oil

The distinct uptrend in gold has gotten a significant amount of attention lately. When trying to analyze this movement, the surge in oil prices from a short while back seems to be a quite good point of comparison. I believe that the run up in gold has many of the same key drivers that the run up in oil did. I wrote these two pieces about two years back, during the surge in oil prices from about $30 a barrel to about $150/barrel:

http://enlightenedeconomist.blogspot.com/2008/05/real-cause-of-oil-pressure.html

http://enlightenedeconomist.blogspot.com/2008/06/real-cause-of-oil-pressure-pt-2.html

(Right click and open in new tab or window)

After reading these articles, do you think there is a valid comparison between the current uptrend in gold and the former uptrend in oil? Whether you agree or disagree, how does your conclusion affect your investment strategy?

(It may be helpful to discuss this with your teammates and post an answer as a team.)

10 Signs The U.S. Is Losing Its Influence In The Western Hemisphere

In this article Gus Lubin provides the stark reality behind why the US won't be the leader in the Western Hemisphere forever. Brazil is the first nation expected to pass the US. They produce over four times as much iron ore as the US, export twice as much beef as the US, are an important part of BRIC (Brazil, Russia, China, and India-all emerging markets with high potential), and are on good terms with Iran.

Besides Brazil, countries like Mexico, Chile, Canada, and Venezuela are also candidates to pass the US. The world's richest man is a Mexican. Chile produces 300% more copper than the US (which used to lead the world in this category). Canada and Venezuela are expected to pass the US in oil production in the coming decade. Finally, Canada, Mexico, and Brazil invest a greater share of their GDP in green energy.

Overall, this article paints a dreary picture of what is to come. The US, a world leader for many years, might soon relinquish its power even in the Western Hemisphere. Will this come to fruition? The facts are there. What does everyone else think?

High Frequency Trading

I am unclear about the recently publicized concept of high frequency trading, as to what it is, it's impact and what you may think of this method.

Stocks edge higher on expectations of Fed move

http://finance.yahoo.com/news/Dow-closes-above-11000-for-apf-3699233512.html?x=0

Business writer, Stephen Bernard talks about how the Dow Jones finished above 11,000. The Federal Reserve want the economy to get back on track. Since more people became unemployed, it gave the Fed "the window of opportunity to take action."


In this link, the Fed's want to get the economy back on track by:

"The Fed's goal, if it starts buying bonds again, would be to drive interest rates down further from their already low levels and spark borrowing and spending. Lower rates could also eventually drive investors into riskier assets like stocks or into currencies in countries with more attractive interest rates."


This goal of the Fed's seems to be realistic because if the interest rates keep on decreasing than the chances of starting the spending and borrowing will increase. There is potential in their goal because the Fed's motive could be appealing the the public. A problem that could occur is that if the investor actually does get stocks and has a huge risk that he could lose it all.


What does everyone think about the Fed's goal? Do you feel that it is the right thing to do?

A Cautious Generation Doesn't Want to Risk Investing

http://money.cnn.com/2010/09/07/markets/young_investors_risk_appetite/index.htm?eref=aol

In this article, CNN explores the new trend of younger investors. Now those in their 20 and 30s are unwilling to take risks in the stock market. Some have seen the stock market dive unpredictably and ruin people's invested money. So the question arises, as less and less people are willing to invest and take the risks in the stock market, how will that effect the market?

I think that younger investors totally have reasons to fear investing, and with the randomness of the economy, especially in our lifetime, there are obvious reasons to be skeptic. Personally, I am unsure if when I am old enough to spend some of my money on investments, if I won't just invest in safer mutual funds. 

I think that this will have a direct on the condition and growth of the current and future economy. I can see this causing the economy to stay low because of the lack of new investments. I can also see a more stable economy (for better or for worse) as a result.

Planning Your Team's Strategy

Not sure where to start? Consider the following ideas:

• Think of companies with whom you are familiar with their products/services.
• You may be very happy with your iPod - you would then check to see if Apple is listed on the NYSE or NASD. You can find this information on the "Investor Relations" page of the company's website. Sometimes you have to look a little harder, in the case of Apple, you have to click Media Info at the bottom and then there is a link to "Investor Information". On that page it tells you that the "ticker symbol" is AAPL and that it is listed on the NASDAQ. (Alternatively, you could go to Yahoo! Finance and type in "Apple" in the field next to the "Get Quotes" button check the drop down list before you click anything and you will see Apple (AAPL) come up on the list.)
• Some companies are wholly owned subsidiaries of public companies. This means that the company you like may not be public, but it is owned by a public company. Do your research on the parent company, and if you like all of their brands then you may want to invest.
• You play golf for instance, you might be happy with your Titleist golf clubs so you go to Titleist's website. At the bottom you see "NYSE: FO". Clicking that will bring you to their parent company, Fortune Brands, website. Titleist is not public so you cannot buy their stock, but Fortune Brands is. So if you like all of their brands; spirits, home security, and golf equipment companies, you would buy stock in Fortune Brands.
• Think of types of industries that seem to be doing well right now, or are poised to start doing well, and check the companies in that industry to see if there is one you like.
• We will go over this in greater detail at the second seminar.
• Decide if you want stable, mature companies that grow slowly but issue a dividend, or younger, faster growing companies that reinvest all their profits to maximize growth (and share price), or a blend of both.
• Maybe you have seen a company in the news that is getting its stock price destroyed because of bad publicity but you think that its underlying business is strong and now the stock is undervalued.
• Remember the first seminar; how do you know if a stock is undervalued?
• A good way to start is by comparing it with its peers on a P/E basis (maybe PEG)

Most importantly, talk about what you are thinking with your teammates on your Team Blog! We are monitoring each of your blogs and will step in to guide you when necessary. We will also pick out common questions/themes and write articles on this blog to address them for everyone. We know that this is new to most of you, so the biggest thing we are looking for is that you are collaboratively thinking things through before you do them!

"Unconventional Wisdom"? Stocks Supposedly Better Returns than Mutual Funds

http://online.wsj.com/article/SB10001424052748703465504575528630383122288.html

Market editor Dave Kansas describes a new emerging trend in long term investments. He is encouraging the market watchers to put their money toward dividend-returning stocks instead of the traditional mutual funds and government bonds. Now, I don't have any of my own money in any of those three investments (though I think my parents have a mutual fund and a few savings bonds) and I don't pretend to have a full understanding on any of them, but this new idea seems completely contradictory to everything the world has told us so far. We have been told frequently that mutual funds and savings bonds are the "safer" way to go if you are to put your money in a long term investment. Now Mr. Kansas appears with advice telling us to put all our long-term investments into the volatile stock market. I'm just a bit skeptical...

The only moderately convincing point I found in his argument was the fact that inflation adds reward to dividends, while strangling returns from interest in bonds and mutual funds. But what I find shady is the fact that he never describes the sheer risk you could place yourself in by following his dividend-milking program. He suggests setting stakes in five companies that return generous dividends and allowing these returns to pour in. It seems like such an easy plan, and the fact that it supposedly returns more than bonds or mutual funds makes the plan seem all the more attractive.

But what about the risk, Mr. Kansas? Nearly all the dividend stocks he suggests in his article are some of the biggest news-makers in America: McDonald's, Microsoft, Exxon Mobile, Coca-Cola, and more. I for one would be incredibly reluctant to put my money in any of the aforementioned companies (maybe Coca-Cola because I like an adequate supply of high fructose corn syrup in my digestive tract, but that's beside the point). All it takes is one issue leading to bad publicity, and any of the companies could come close to tanking. BP? Enron? No one could have foreseen Wall Street's darlings under such heavy media fire, and the stock market could barely withstand the hits either. In that respect, could anyone be so prepared as to put their investments in a pure dividend plan? I consider that a gamble beyond reasonability. To me, following the plan for dividend returns is akin to putting your money right in the hands of controversial media figures, and in a long-term investment, you're bound to run into trouble sooner or later.

Very interesting strategy...

http://www.cnbc.com/id/38738810?slide=1

It's a slideshow - make sure to read the text to the right of each slide. Please comment with your thoughts!

Mergers and Acquisitions

What happens to participating companies stock prices after a merger or acquisition? In most cases when a company announces a “bid” to purchase another company (target company), the stock price of the purchasing company will fall, and the stock price of the target company will rise. There are several reasons for this as stated below:

1. The purchasing company will need to pay a premium for the target company in order for the board of directors and majority stake owners to agree to the deal.

2. The purchasing company will also have to pay a premium in order to out bid any other potential buyers.

3. Market sentiment. A large percentage of mergers and acquisitions do not turn out as hoped. Research analyst and institutional investors (or minority interest share holders) may not feel that the acquisition will be profitable in the long run for the acquirer.

4. Arbitrage positions. Since investors know that the stock price of the acquiring company usually falls, and the price of the target company usually rises, they will buy stock in the target company and sell stock (short the stock) in the acquiring company to create a risk free profit (also know as arbitrage). This will result in more volatile changes in the stock prices.

For the reasons above being able to predict possible mergers or acquisitions can be very profitable.

Example:

On August 16, 2010 Dell announced a bid to acquire a company named 3Par, for $1.15 billion ($18/share). On August 13, 2010 (Friday) the stock price of 3Par closed at $9.65. On Monday morning before the market opened, Dell announced its bid to acquire 3Par for $18/share, causing the stock price to surge 86.5% to $18. On August 23, 2010 Hewlett-Packard came into the picture announcing a $1.6 billion or $24/share bid for 3par causing another surge in the stock price, increasing from $18 to $26/share on August 23, 2010. The bidding continued with Dell coming out with a $27/share and finally H-P announcing a $2 billion or $30/share bid that finally closed the deal. Looking at the chart below, you can identify the dates that each bid came out and the approximate amount of the bids by analyzing the increase in stock price.

Now lets see how this altered the stock prices of Dell and HP. From the charts below, during the period of bidding, both HP and Dell contained decreases in stock prices, even though these fluctuations were not as significant as with 3Par.

As shown from the above example, mergers and acquisitions can significantly change a company’s stock price. This is why many institutional traders try to predict possible transactions, such as the above, in order to take advantage of the huge price movements.

What to Consider When Buying a Stock

When an investor chooses a stock to buy, endless reasons as to why that investment should be made can be argued. But simply put, if an investor likes a company due to its profitability ratios, ability to grow, wide economic-moat, product(s), and great management, you have to ask yourself the following:

- Will you let headlines on the economy, politics, and regulation pressure you to sell what may be a shrewd investment?

Nowadays, a company can announce an increase in its dividend or say that they expect to be even more profitable in the months ahead (all companies forecast growth, profit, expenses, etc…), yet the company can be losing you money! It seems as if investors care more about employment data and “fiscal policy” (look it up) than what the actual management team of the company you are invested in has to say!

Look at the banks – it is arguably hard to make money in the financial sector due to new regulations from Washington D.C. and an unclear picture of what this industry will look like going forward.

Then you have Netflix (ticker: NFLX). This company has been up and up and up. Its business model, management team, and growth prospects are really keeping the engine fueled! When people choose to invest in this company, they are not thinking of employment data, new regulations, or interest rates.

Just remember, a company you are invested in may be profitable or have a great product, yet broader themes can bully it around. Will you be patient and hold - maybe even buy more, look at more data when analyzing the company, or let some political headline scare you out of what could be a great company? That is up to you to decide.

Broader economic data can be found at: http://bls.gov/