Best Stock Market Articles I’ve Ever Read

This two-part series by Bryant Urstadt is some of the best investing writing I’ve ever read. Bryant gives a run down of exactly what-the-f happened this Summer 2007. After reading these two pieces, "it all makes sense, man".

Part 1: The Blow Up

Teaser:

On Wednesday, August 8, not long after the markets closed, 200 of the smartest people on Wall Street gathered in a conference room at Four World Financial Center, the 34-story headquarters of ­Merrill Lynch. August is usually a slow month, but the rows of chairs were full, and highly paid financial engineers were standing by the windows at the back, which looked out over black Town Cars below and the Hudson River beyond. They didn’t look like Masters of the Universe; they looked like members of a chess club. They were "quants," and they had a lot to talk about, for their work was at the heart of one of the most worrisome summer markets in decades.

Part 2: The Blow Up

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(thanks, Ugly)

Is This Rate Cut Good for the U.S.?

As we all saw on Wednesday, the Federal Reserve made equal 25 basis point cuts to the Federal Funds Rate and the Discount Rate. While we are happy that core inflation is not going to be a large problem with this rate cut, and that we are easing rates in a growing economy where we just saw the U.S. economy grow at an annualized growth rate of 3.9%, I believe that many other problems will arise.

While lowering rates will bring along a lower borrowing cost I do not think that our economy needs this. Doing this will only bring people to spend more money on things they do not need. As we saw already companies that sold necessities like The Procter & Gamble Company(NYSE:PG) and Johnson & Johnson(NYSE:JNJ) have both been doing well though the subprime market problems.

Lowering rates now will also bring problems to the dollar and eventually make everyday products more expensive. This problem will arise in the future because with lowered rates the USD will keep depreciating. The Euro, Canadian Dollar, and the Yuan have all made decent gains over the past months against the US dollar, and will continue this appreciation with lower rates in the US. The weak dollar will also hurt oil prices and we now have the potential to see $100 a barrel oil prices in the near future. This means that if your heating your house with heating oil you going to be paying more then you’re used to seeing.

Bailing out the market by lowing rates is not a cure right now; it is only putting a band-aid on the problem. Lowering these rates is also telling reckless investors and subprime borrowers that the Federal Reserve will always be there in times of worry. These problems will not disappear by just pouring more money into them. Another big problem that arises when lowering short-term rates is that it hurts long-term rates. While giving people who have adjustable rate mortgages and lower reset price, people who can afford long term fixed mortgages are going to be paying higher rates. These continuous rate drops may only be feeding more problems to come in the housing market.

All we can do now is wait to see what the outcome is of these rate cuts. Often it takes months for our economy to realize the effects of multiple rate cutes. For now watch commodities closely as they are often a hedge against the stock market in periods of lowering rates.

Win Free Books When You Join our Mailing List

You may notice a new widget in the right sidebar. There’s a little form for you to join our mailing list. Do it now, and then I’ll tell you why.

What do we mail out over our mailing list? Nothing yet. We’re still figuring it out, but it will likely have to do with updates on what’s going on with the blog and stuff we’re giving away. One thing you can be sure of is that we will never give, sell, or rent your email address to someone else. We hate spam and don’t want to contribute to your inbox problems. We’ll never send more than a couple emails per month… if that.

We’re just looking to bring our community together in new ways. If you are an InvestorGeeks reader and support the articles we’re writing and the stuff we’re doing for charities, then sign up and become a “member”.

Speaking of give aways. People who sign up for the mailing list over the next month will have a chance to win a free copy of Active Value Investing, by Vitaliy Katsenelson (see our review here). We will choose a couple (exactly 2) winners at random. The grand prize will be a signed copy of Active Value Investing. One runner up will receive a non-signed copy of the book. It’s a great book that y’all should read and will look great on your trading desk (you do have one of those don’t you?).

The Fall of the All Consuming Yankee

The consumer is tapped out. After consistent 25 basis point increases to the Federal Funds Rate, we are finally starting to see the effects on the stock market.

Yesterday morning we saw three headlines that caught my attention. The first detailed Sears’ guidance for this quarter – a reduction from $2.12 to from $1.06 to $1.32 per share. These revisions are, at best, a 30% reduction and, at worst, a 50% reduction from their previous optimistic estimates.

Notably, declines were across all categories. If you follow the theory that the consumer is on thin ice, then it is hardly surprising to find big ticket items are not being purchased. Sears is having trouble selling new stainless steel fridges and widescreen TVs because consumers do not feel confident about their financial situation. The only sector that wasn’t hit as hard was women’s apparel and footwear – suggesting stressed housewives may be engaging in retail therapy.

The second headline noted that Home Depot is now expecting a 15% to 18% drop in earnings per share for fiscal 2007, as opposed to their previous guidance of 9%. This is a further example of a, supposedly wise, management team who were unable to predict the severity of the downturn.

All should take note – when pundits tell you the housing crash will be over by Q4 of this year, they are making a foolish guess. Furthermore, even if they are right, do not expect the market to rebound. Burnt fingers will not be so quickly back into the fire.

Home Depot’s response to this downturn was particularly ironic:

Home Depot, which has more than 2,000 stores in the United States, Canada, Mexico and China, said Tuesday it will open approximately 108 new stores in fiscal 2007.”

Lastly, this tidbit was to be found in Yahoo’s summary of the Best of Today’s Business:

More than 2 million subprime, adjustable-rate mortgages will be reset to much higher interest rates over the next several months, raising monthly payments for people with weak credit. In October alone, a record $50 billion in ARMs will reset, said Mark Zandi, chief economist of Moody’s Economy.com. Consumer groups fear this could spark a new wave of foreclosures.” (emphasis added)

Many commentators speak about the small impact of subprime foreclosures (e.g. here) as if somehow the problems stop with subprime. However, the problem is a continuum, beginning in subprime and extending all the way into Alt A.

The housing sector is in far worse shape than the experts on Wall Street realize – yesterday we saw a pull back in the market, and the futures this morning point to a similar flat or down day. However, over the past months, Wall Street has failed to price in the poor economic outlook. Yet, here is an example of the situation consumers face:

Arizona’s only publicly traded home builder must write off $100 million on land and operations after a second quarter in which home orders fell 28 percent and new-home cancellations climbed to 37 percent, according to preliminary numbers released Friday.

New-home cancellations have left the Valley’s housing market with at least 20,000 homes built but unsold. Builders have offered hefty incentives of $50,000 and more to sell the houses, but many potential buyers can’t sell their existing homes.

The result is a glut of homes for sale…”

Granted, Arizona is one of the worst locations, but it isn’t the only region to suffer this problem. While subprime mortgagees have low credit ratings, they don’t necessarily purchase in low socio-economic areas. Subprime foreclosure properties can not be neatly segregated into a single suburb.

We are just starting to see the fall out.

With Wall Street starting to show signs of reduced consumer spending, both due to fear and also due to rising costs (see “M3 money supply”), businesses will be reducing inventory and preparing for leaner times. This will sap at business confidence and reduce capital expenditure. As more home loans reset from teaser rates to rates approaching double digits, consumer disposable income will further decrease. If foreclosures continue to rise, we may witness further financial strain, as seen with Bear Sterns two weeks ago.

In short, the situation is unlikely to improve from here. The next 6 months do not look good.

If you haven’t already, take a look at the S&P500 over the last 6 months – notice the recent double top and the market’s inability to rise to new highs. My thoughts? Consider moving at least a portion of your holdings to cash if you can.

Philip John

This post is for entertainment purposes only. No part of this post should be construed to constitute investment advice. The author is not an investment professional and assumes no responsibility for any investment activities you undertake. Prior to undertaking any financial decisions, you should contact an investment professional.

Help a Fellow IG in His Support of The Arthritis Foundation

Steve, who blogs here and at UnderTrader.com, is looking for sponsors for the bike ride he will be doing in support of the Arthritis Foundation next Fall.

We will be riding bicycles along the coast from San Francisco to Santa Monica, California. It takes 8 long, tiring days! All it takes for you guys is a click on a website. I think that’s a fair trade. Even the smallest donation helps and it’s a tax write-off.

InvestorGeeks is now a non-profit operation, and we’ve donated $400 of our war chest to Steve’s cause. If you’re a fan of Steve’s or InvestorGeeks in general, or an arthritis-hater, please take a few moments to show your support as well. You can donate here. And just like in saving and picking up girls, every little bit counts.

Thanks.

Hear Me at WallSt.net

Kristin Friedersdorf, from WallSt.net, has posted her interview with me. Goto her Financial Blog Watch page over there to hear me talk about the history of InvestorGeeks and my lessons learned in trying to start a blog network.

I had a great (if brief) time on the phone with Kristin. Her other podcasts are worth a listen, so be sure to check them out too.

iPhone Part 2

The iPhone is stirred up controversy and there are people on both sides of the fence. The iPhone nags at me as being a lesson in how you can fool people by marketing.

Now I found the reason why I had this nagging doubt. Nokia is about to launch the N95 which would be an iPod competitor. Let me line up the features of both devices:

iPod:

Screen: 320×480 3.5″

Storage: 4 GB or 8GB

GSM: Quad band

Wiressless: WiFi, EDGE, Bluetooth

Camera: 2.0 megapixels

Weight: 135 grams

Dimensions: 115x61x11.6 mm

Special features: OSX operating system, single touch screen, iTunes, limited to Cingular.

Nokia N95

Screen: 320×480 3.5″

Storage: 160 MB expansion through SD

GSM: Quad band, Dual Mode 3G

Wiressless: WiFi, EDGE, Bluetooth, HSDPA

Camera: 5 megapixels, 20x Digital zoom

Weight: 120 grams

Dimensions: 99x53x21 mm

Special features: DVD quality video recording, 3G TV and Video streaming capabilities, 2nd camera for blogging, Carl Zeiss optics for camera, and Nokia Xpress solutions, available worldwide on all networks, *Replaceable batter (this one feature is hitting Apple hard)*.

I don’t know about the price for the N95, but it will probably be competitive with the iPhone.

What is obvious is that the N95 is smaller, lighter, more powerful than the “revolutionary” iPhone. What does the iPhone have? Harddisk space and iTunes, not much in my opinion!

If I had the choice between the iPhone or the N95 from Nokia I would choose Nokia because Nokia is a phone company!

AND this is why I feel the Apple stock price is over-inflated on this marketing hype! Add on the fact that iPhone is trademarked by Cisco and I am very skeptical the iPhone can make it in the market.

NOTE: I did not find the N95, but Tim Almond posted a blog comment about it. Thanks Tim!

E*TRADE Rollercoaster: Anatomy of a Merger

Below are some screwy screenshots from my E*TRADE account (you’ll also get to see what my E*TRADE portfolio looks like). Early this week, I setup a trade in Lucent Technologies (LU). It was a complete chart play. I haven’t been monitoring the stock fundamentally lately, but I recall my last analysis of it was something like “undervalued because people are still scared of the name.” Feel free to ask me more about my rationale behind the trade (or any of the others), but this post will focus on the odd things that were happening with my account as the merger between Lucent and Alcatel (ALA) played out today.

Late last night, I logged into E*TRADE to check some stocks and noticed that my account was short about $1300 from where it was end-of-trading Thursday. My E*TRADE account had just $6300 in it, so this was a BIG BIG drop. My heart sank in my chest as I clicked to get my portfolio report to figure out which one of my lame ass stocks just cost me $1300. Here’s what I saw:

portfolio_30NOV06_sm.gif
Looks like my LU stock is worth $0. Great.

What! Now remember my LU trade was just a short-term chart play, so I wasn’t even aware that the Alcatel deal was going to go down this week. I might have passed if I did. In any case, seeing the $0 value for LU shares, I knew that this is exactly what happened. A quick check at the news headlines confirmed this. Still, if my Lucent shares were at $0, where were the Alcatel (or ALU ADR) shares I was due? I decided to play calm and wait until morning to call E*TRADE about the discrepancy, but two things were playing through in my mind.(1) E*TRADE somehow forgot to credit me the new Alcatel/Lucent shares I was due.

(2) My stop on LU, which was at $2.49, triggered when the stock went to $0 and a market order was put through which sold my shares at $0.

Obviously #2 didn’t happen. The report showed that I still owned 500 shares of LU, they just weren’t worth anything. And later, I got an E*TRADE alert telling me that my stop order triggered but was invalid. Nice.

I checked my portfolio first thing in the morning and I saw a different picture, although one that was still a little odd.

portfolio_01DEC06_sm.gif
My LU stock has been exchanged for the ALU ADR, but it’s still worth $0. Hmmm.

It seemed I had gotten my ALU shares, 2561.475409 of them at ~$0.50. That seemed like a very odd price to give the new company’s stock. And the current price was still $0. Ok, I guess I just have to wait for the current price to come out, and I’ll get my $1300 back in my portfolio. Here’s what I saw a few hours later:

portfolio_01DEC06_2_sm.gif
Holy smokes. I’m rich, beeyatch!

Jackpot! The current price is in and it’s set at $13.35 (close to the old Alcatel price). I don’t know how I got my 2500 shares at 50 cents, but I now have $34k extra in my account…Now I wasn’t really naive enough to believe that I had really made a 2500% return on some excellent merger play. E*TRADE was still messing things up. Still, I had to try to sell those shares while I had the chance.

sellattempt_01DEC06_sm.gif
Can’t cash out yet.

Now I wouldn’t have confirmed the order if it let me, I just wanted to see what would happen if I tried. Although $34k is a nice amount of money… No, I definitely wouldn’t have wanted to get caught up in the drama that would ensue if I actually managed to sell those shares before anyone noticed. I once had an extra $40 credited into my account from an ATM flaw. It took the bank 3 months to figure it out, but they eventually did and took the money back. I didn’t get into trouble for overlooking the $40, but I can’t imagine the looks I would get if I tried to tell folks that I didn’t notice the $34k in my account that wasn’t there before. In any case, I wouldn’t have been able to put an order through anyway since trading was halted on the stock for most of the day.
Later in the day, my 2500 shares shrunk to 97.600093 shares bringing me back to around the $1300 I started this adventure with.

portfolio_01DEC06_3_sm.gif
Things are back to normal.

As a side note, I had trouble putting my stop (now $12.99) back in on the stock. I got a different error message, but I’m guessing you can’t put a stop order in while trading is halted. I’ll just have to keep an eye on this one.

sellattempt_01DEC06_2_sm.gif
Trouble setting a stop. I can count, can’t I?

So that’s my story and I’m sticking to it. I was a little shocked at moment, but kept my cool throughout the whole affair. I never really thought that E*TRADE had made a mistake, but they should do a better job of keeping their portfolio reports in check… or at least have some message saying that they won’t have conclusive data until…

The Buy List: Keep Track of the Big Guys

TheBuyList.com is a nice, simple website with just one purpose: to show you if mutual funds are trading the stocks you’re tracking.

Just enter a ticker and click a button. You’ll be shown a table of “recent” transactions of that stock made by “the top rated mutual funds”. The table shows you how many shares were bought or sold, the name and ticker of the fund, and the general “family” of fund.

Ebay at TheBuyList
A search for “EBAY” at TheBuyList.com on Nov. 14, 2006.

The same information can be found on sites such as Morningstar.com, but then you’ll have to pay high $100+ subscription fees for the privilege. TheBuyList is currently completely free, with just some tasteful and non-intrusive Amazon ads on the pages.

The one thing the site lacks which I would love revolves around those terms “recent” and “top rated mutual fund”. It’s not clear when the transactions shown were made or if all transactions are shown. And so it can be hard to infer trends from the data. But then that’s like getting a free Volkswagen and complaining that it’s not a BMW. I asked the site’s owners if they could show more accurate date data on the site, and this was their response:

The exact date of the transaction per fund is pretty hard to extract… We are working on it. We do process the data a couple of times per week and I believe that the transactions are pretty recent. The date of the update is shown on the main screen. We also maintain historical transactions every time we update the database, but right now we only display the data as of the latest update. As the portal section is fully built, there will be more features such as the capability to add stocks to a watch list to receive emails when there’s a transaction on those.

I do see a form on the current site allowing you to receive updates by email. This would be a good way to track the updates. You’ll know that the transactions have happened at least since your last update or so. And you’ll also have a historical record of the transactions to look at since TheBuyList is currently showing just the most recent transactions on the website.

TheBuyList is a great resource for some data you might not have had access to before. Use it to fight to good fight.