Pension Reform Bill Saves the Stock Market

Today President Bush signed into law a bill that is designed to encourage 401K participation. There are many good points to this bill and estimates are that it will increase the number of people participating in retirement plans. The numbers are still foggy but you are looking at anywhere from 30% to more then double the current number of 401K investors.

Stocks rarely trade at what the company is worth. They generally trade at what people think they are worth – to a point. If you recall your basic Econ 101 classes, then you’ll realize that soon demand for stocks should start to rise as more new investors will be forced into the market. Mutual fund managers will have a wonderful problem of excess capital flowing in.

For those of us already in the market, and I hope that is everyone reading this site, it should be a good ride ahead. I am hopeful anyway.

Further Reading: Pension reform – Boon for 401(k)s by Jeanne Sahadi

Wal-Mart Buying a Revolution?

It was Thomas Jefferson who said: “Every generation needs a Revolution.” He was, of course, talking about the fact that every few years there comes a time where the old administration must be replaced by a newer one in order for our nation and liberty to survive. Every four years this nation has an opportunity for a revolution of sorts.

Soon in 2008, whether you love them or hate them, the old administration will be gone. What does this mean for the investor? It is impossible to predict all the possibilities that will flood in when a new President, and therefore a new vision, takes the oath on those gleaming white steps. Wal-Mart however is hedging its bets.

It is interesting to note that recently Wal-Mart started a voters education program in Iowa as a counter to wakeupwalmart.com. In case you are in the dark about wakeupwalmart, they are a political action group that feels, among other things, Wal-Mart’s practice of hiring only non-union labor is bad for America. They have many supporters in the Democratic Party. In case you are in the dark about Wal-Mart I can’t help you.

Many of WakeUp’s supporters will be running for office in ’08 and Wal-Mart feels a need to defend itself, especially in the all-important state of Iowa. Iowa is a key player for both parties and the winner of the Democratic primaries in Iowa has a good chance of being the next Democratic contender for President in 2008.

The interesting point in the Wal-Mart defense is this: while they talk about various presidential candidates and why they are wrong for bashing Wal-Mart, they left out one interesting runner, Hillary Clinton. The Honorable Senator from New York, and previous resident of Wal-Mart’s home state of Arkansas, is never mentioned, despite her support (on paper anyway) of WakeUp.

Maybe it was an oversight; maybe there are other reasons. I would simply suggest that if in 2008 we have our first woman President it might become a good time to look at picking up some Wal-Mart stock.

My Memorable Failure

Sherman, set the wayback machine to the winter of 1999! This was a time when everyone thought they were a financial genius. You couldn’t loose, or so we thought. I was a conservative investor even in those days but a co-worker was talking about a great investment tip he heard from a friend who had heard it from their doctor. That in it self should have been a sign.

My co-worker had heard about a company called Socket (SCKT) and while he wasn’t sure what they did, he was certain that they would do it well and their stock would skyrocket. I looked into the company and I must admit I was not impressed with their financials. They had been in the red for a long time but they did make a needed product. The stock was trading very low at around $1.29 so I bought in.

My co-worker’s friend’s doctor had been correct and the price soon started to rise. It kept going up and I was amazed. I went into work one day and asked for the latest news. I was told it would easily hit $50 so I put in an order to sell at $50.

It never made that mark; it stopped at around $49.50. Can you believe it? It would never see those heights again. Everyday my wife would tell me to sell, everyday I clung to a hope that it would go back up. One day my co-worker said the doctor was putting another $10,000 in because he heard it was going to go to $200. In a couple of days I sold at around $18 and I was so mad. I kept thinking about how I lost almost $3200 and how it had gotten so close to the magic number.

Lessons learned; there are many but here are a few for every investor.

  • If you ask a group of random people to pick a number between 1 and 100 they will almost always pick a whole number. That’s being human, it is the way we think but it is not the way the market works. When you decide to sell, sell.
  • The only two numbers that count are the price you paid and the price at which you sell, everything else is imaginary.
  • Finally, do your homework; a company that is in the red is a questionable investment. I am still working on this one and maybe I haven’t learned my lesson as I now hold a good bit of Fiat (fia) but I am thinking they can pull it off.

I wanted to write this short piece to share my mistakes and encourage others to share theirs; something very few people like to do. Hopefully we can set pride aside and learn from our failings. One last note; SCKT can still be bought today for about the same amount of pocket-change I paid almost 7 years ago. Maybe some day it will be worth $50 a share. I can only hope.

Invasions from the China Sea

I got an email from a reader at my other site asking about Geely Automotive Holdings Ltd (Google Finance). The author had already purchased over 19000 shares which might seem like a lot until you realize this is very much a penny stock. Still, the outlay for a young college student is significant and it probably brings up a topic for a good future article “Where the small investor should put his money?” We are not talking about that today because we need to answer the questions on Geely first.

The writer wanted a TA done on the stock and that is what we mostly do at HipEgg but here is the problem; Geely is not really a good stock for a technical analysis. At this point in writing I really started to go down two different paths and so I decided to split this article. If you want to do some reading on why Geely is not a good fit for a TA and some information on avoiding some TA pitfalls then go over to the companion piece at HipEgg after you are done reading here. Now on to the Geely Monster.

The car market in China is a fabulous land of opportunity and dreams. I am a bit of a car fan but I must admit that when I first started to think of cars made behind the silk curtain I was a little concerned about quality and style. I pictured an Eastern European knock off of a Fiat Uno. Fortunately this isn’t the case.

China has some good looking cars and I would assume well made. I can say that because in China they actively block foreign car manufacturers from entering. Take BMW for example. They wanted to sell cars in China but they can’t. Under the law they have to partner with a Chinese car company. In this case, BMW is in partnership with China Brilliance (CBA). CBA makes their own cars but they also manufacture a BMW line for China. CBA is learning important lessons like design, quality assurance and styling from the Germans. If and when they start to export they will probably do very well.

Information on Geely is harder to come by. Overall they do seem to be doing very well on the home front, sales are up and everyone is happy. Geely also seems to be one of the more aggressive companies looking to enter the global market place. They have already previewed an entry level model at the Detroit auto show. This car was a small 4 door with an expected base price of under $10,000 (Some have even put it at around $7500). The claim was that fuel economy would be around 33 to 35MPG which is nothing to write home about but far better then many larger vehicles. They are aiming for a release date of late 2007 to 2008 at this time.

The downside, they have yet to prove that they can pass air quality or US safety standards, although they claim to be on track to make these marks. There is also the unquantifiable problem of perception. Geely will likely be among the first, if not the first Chinese car to be seen in mass by the US public. How will a country so in love with BIG and so broke from fuel bills take a small Chinese econo-box? Hopefully we will see soon.

The long and short of it all is that I think there is potential for two or three major automotive behemoths to rise from the China coast, it will happen. I do not know if Geely will be one of those but it warrants further investigation and it is a company I would be willing to take a gamble on. Very few people outside of China have seen any of these vehicles. Information and research is harder to come by. For those interested in learning more about the products I would point you to http://www.chinacarforums.com/ . There are several companies in China now trying to position themselves for success. I think we as investors should be looking to add a little Chinese car company to our positions if we want to be successful.

Time to Panic?

Today, and the past few days have been hectic for the market. The price of oil keeps rising and I need to sell my gas-guzzling van. So do we panic yet and where is the market going? Over at HipEgg we did a review of the Dow.

I don’t know if a TA is the right tool for the over all market, I don’t know that it isn’t. If TA is correct then we are testing support and could be looking at a correction soon but that is not the point. The point is, there is profit to be made in panic. As the aged Templar said to Indiana “You must choose, but choose wisely.”

Happy trading.

Stepping it up with CDs

Certificates of Deposit are not for everyone but if you live long enough you will probably be considering them at some point. If you are going to invest with what banks currently call CDs then you should be smart about it. Using a technique called "laddering" or "stepping" you can improve your liquidity and maximize your returns over the long run by protecting yourself from downturns in market interest rates.

A quick scan of any banks listings of CD rates (see chart below) reveals nothing spectacular in their scheme unless you look at the details of the differences between time periods. Historically banks have tried to give you a little bump at the 6 month mark and there are good reasons for this. Banks are fairly certain of what the economy is going to do over the next 6 months but, obviously, risk changes in relation to time. The problem for us is that we want the higher returns of the longer investments, we like the safety of CDs and we don’t want to be tied down to a low interest rate if things start going up. We also would like to be tied to a high interest rate if things go down. Liquidity would also be a plus.

Time Rate Diff
3 Month 4.00%
6 Month 4.60% +.6%
9 Month 4.76% +.16%
1 Year 5.20% +.44%
15 Month 5.23% +.03%
18 Month 5.29% +.06%
2 Year 5.30% +.01%
3 Year 5.35% +.05%
4 Year 5.40% +.05%
5 year 5.60% +.20%
Source: Online. Week of 7/3/2006

Can we get all this? Sure, but like most things in life it involves compromise but compromise is not all that bad. What you need to do is use the “Ladder” or “Step” approach when buying CDs. I’ll explain in an example.

Let’s say you have $12,000 and you want to put it up in a CD because you like the safety. You don’t like the lack of liquidity but you are willing to compromise. So do you put it into a 1 year CD and roll it forever or a 5 year and not worry about it? 5 year CDs will pay more but what if the interest goes up by ¼% to ½% every year for the next several years? You really missed the boat on that one if you went 5 years. Maybe you’ll elect to put your money in 1 year CDs for the next 5 years-great, what if the points drop by the same rate instead of rising? You will be really hurting.

Now consider this; you put $2000 in a 1 year, 2 year, 3 year and 4 year CD and the remaining $4000 in a 5 years certificate. On maturity you would roll each CD into another 5 year CD. Your current rate of return would be about 5.41%, slightly better then if you had placed it all in a 4 year CD.

The benefit now is that you are also protected regardless of how the market reacts. If in the first year the market goes up across the board by ¼% your rate of return would now be almost 5.52% and if this trend continues then your return will move positively with the market.

In a down trend, if we drop by the same rate, you are still getting a 5.43% return so your money actually moved up in this case. Remember, every time a CD matures you are rolling into the longest time period, in this case 5 years.

Eventually, you will have $12,000 invested into five, 5 year CDs, each with a maturity date one year apart. You are getting the highest return possible and are still somewhat liquid.

The step program is a good compromise. It can be used over just about any length of time and is something I always do unless I know for certain that I’m only keeping the money for a fixed period and then moving it out.

One of the best places to use this is with our “3 to 6 months of salary for emergency fund”. Consider this; even if you lost your job you are only going to need 1 month worth of money at a time. I moved out of a money market into six, 6 month CDs each equaling about a months salary and ended up with a better return. Obviously I had to do some work to space them out correctly but I am very happy with the system.

Resources
The Money Market and you. Frank Sanders. InvestorGeeks.
Current CD Rates. BankRate.
Money Market: Certificate of Deposit (CD). Investopedia.

My .02? I wouldn’t be putting .02 into MSFT right now.

“Is now the time to jump into MSFT now that it is trading above its 30 day MA?” That was the question presented to me recently.

Before I go into the answer I wanted to take a moment to introduce myself. I am a regular poster over at HipEgg. On that site I post under the pen name Jym Khana. My real name is Kevin Hamrick and I have been involved in investing for, well, many years. I even spent a very little time working for a couple of the big brokerage facilities. Regardless of that fact, everything I am presenting is only my opinion. I am no longer working with or for any financial institution and if I post on a stock that I own I will make that clear. In this case, I don’t own any MSFT stock.

We are all probably cursed by having lived through the .COM boom & bust. The last time we saw such a market was back in the 20’s but fortunately, as painful and quick as the ride down was for us we still weathered much better then our grandfathers.

I say that we were cursed because now we still tend to see technology stocks as the great investment. In reality some are, but just because a company makes software doesn’t make it a better buy then a company that makes generators. With that being said, I probably have too many tech stocks in my portfolio because it is a sector I am comfortable with.

MSFT is one of those safe suggestions for a broker. Everyone knows the company, they all have heard how MSFT employees retired rich off of their stock options and so everyone still wants a piece. It’s the same security of name brand recognition which drives investors to invest that drives IT managers to recommend MSFT to CEOs. So should we be getting in today?

The market is an erratic place at times. Stocks go down because unexpected good news wasn’t better news. Stocks go up after some horrific news because investors think it can’t get any worse. Fortunately those are not the norms. How will the market interpret MSFT’s news? Have we seen the last delays of the next OS release? Maybe it is good that they are delaying, maybe it is a signal to customers and skeptics that they are going to get it right the first time. How about the money they are pledging to spend to fight the Google Monster? Is this good that they are willing to take an aggressive stance and invest capital to stay competitive?

I have to say, I am a conservative investor and at this time I still see no compelling reason to be playing with MSFT. I don’t think that we have necessarily seen the worse from this company. There is still a good possibility that it could go lower as the downtrend is still in place. I am staying clear for now and when I see something more positive I’ll reconsider my position.

Best of luck