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    The 1 rule stock market insiders are richer than european royalty

     

    I was watching Oprah the other night. She was covering the reality of the crappy lie called the American Dream that says just work hard and everything will be Peachey keen in the land of the free and the home of the brave. She pointed out that 1% of the U. S. population now control 40% of the all American wealth. If you are not born into that 1% today, she pointed out, then it is much harder today to work your way into it. You have to work a lot more hours for a lot less pay and your extra hours are just making the 1% richer. Meanwhile if you have the right connections — especially if you are able to enter that special band of thieves called corporate insiders and play your corporate politics right — then you are instantly propelled to the top. Today with our hideously corrupt corporate governance system supported by divisions of corporate attorneys serving insiders and paid by unwitting public Joe shareholders membership pops you right into Oprah’s 1%. So what can you do if you weren’t born into the Johnson & Johnson family and don’t have a “richer than God” old money American dream trust fund? The answer is you have to learn to buy very low and sell very high like the robber barons did in the 1800s. I know times are tough on the American middle class but there are ways for you to get ahead. First of all you have to stop chasing pipe dreams. Ignore the get rich schemes like multilevel marketing, derivatives, and real estate short selling junk people will bring your way — all endorsed by some major public figure that make the con artist at the top rich to suck you in. Learn to take your financial future in your own to hands and make the market pay you. How do you do this? Well, first you have to stop thinking like a cow. Most people in the public make all of their opinions based on what the group has decided is right. You have to stop doing this and take the attitude that the public as a group is a pretty stupid mass of livestock heading up the cattle chute into the inside corporate executives financial slaughter house. Right now the chute is closed because the stock market has recently crashed making stocks cheap — insiders are loading up while the media is strangely bereft of “stock market rags to riches dreams” it hyped up to suck people in to the market in 2000 when insiders were dumping on the public. Learn to get really excited about the market when everyone hates it. Right now the stock market has crashed and you don’t hear any good news out there. Ever wonder why? The big forces behind Wall Street, the secret buying consortiums, the inside corporate executives, and the experienced individual investors who are smart enough to know to buy, buy, buy when stock prices are extremely low and the Wall Street media machine is strangely quiet. There are a lot of really good companies out there at extremely low prices ripe for you to buy, buy, buy!!!

         
    The advantages of day trading

     

    Historically, stock trading has been the domain of professional traders. Trading has been in essence a "private club" with restricted access. Day trading has changed that. For the first time, amateur traders have the tools (real time quotes and order execution) to compete with the professionals. Speed advantage of day trading The key advantage of day trading is its speed. Now the technology is advanced enough to afford day traders the ability to receive and observe real-time price quotes tick by tick and to send electronically an execution order directly to the NASDAQ market maker. Electronic order execution is fast. Confirmations are received in seconds. Exiting trades is as easy and fast as entering the trade positions. Control advantage of day trading The other key advantage of day trading is the control of trading. Day traders are always in control of their own trading. They are their own brokers. They examine the financial data, ascertain the trends, and make their own decisions to buy or sell. Day traders do not have to worry about the price slippage. They monitor market prices tick by tick. During trading, at any point of time the trader always knows the stock's best BID or ASK price. Going home "flat" At the end of the trading day, day traders close all of their trade positions and go home "flat". Day traders do not need to worry about a "long" or "short" position - because they do not have overnight positions. Without any open positions, day traders do not carry any overnight risk exposure.

         
    The art of trading how to trade during a consolidation or congestion phase

     

    When stock prices start to move within a certain range, falling to established lows and then rebounding up to established highs and fall back again, the stocks are said to be in a consolidation or congested phase. Most of the time, typical consolidation patterns can be seen, with the most common one being the rectangle pattern or sometimes called a price "corridor" or channel. When prices start to drop, traders get nervous and weak holders will sell their stocks so that they will fall to a support level which other traders will consider a good price to buy. From that level, stock prices will then rebound, often with volume as support comes into the stock. As the price of the stock improves and increases, it will reach a peak where traders who have purchased the stock at lower prices will sell. At the same time, weak holders who have purchased the stock at higher prices may wish to bail out as their losses are narrowed with the improved prices. At that point in time, resistance is encountered and the stock price then tops over to form a peak. When you connect the support prices and the peak prices where the price tops over, you will find the pattern of a channel or a rectangle. During consolidation phases, prices trade within a range formed by the bottom of the channel or rectangle and the top of the rectangle or channel. Technically, the use of oscillators will be suitable for trading within congestion phases. The key is to identify the bottom of the channel and to buy closer to the bottom of the channel and to sell as prices reaches the top of the channel or rectangle. A common mistake newer traders commit is to continue to use their trend following trading system during a congested phase and encounter a lot of whipsaws as prices oscillate between a small range. When you transit from a bullish market and moves into a bearish market, be contented with smaller gains which come from trading the congested and consolidation phases. Fall back upon oscillators to track your stock prices and trade them in relation to their location within the price rectangle pattern that you can easily identify in your stock chart,

         
    The case for value stock investing... what if

     

    Wall Street Institutions pay billions of dollars annually to convince the investing public that their Economists, Investment Managers, and Analysts can predict future price movements in specific company shares and trends in the overall Stock Market. Such predictions (often presented as “Wethinkisms” or Model Asset Allocation adjustments) make self-deprecating investors everywhere scurry about transacting with each new revelation. “Thou must heed the oracle of Wall Street”… not to be confused with the one from Omaha, who really does know something about investing. “These guys know this stuff so much better than we do” is the rationale of the fools in the street, and on the hill (sic). What if it’s true, and these pinstriped super humans can actually predict the future, why do you transact the way you do in response? Why would financial professionals of every shape and size holler “sell” when prices move lower, and vice versa? Would this pitch work at the mall? Of course not. Now lets bring this phenomenon into focus. Hmmm, not one of these Institutional Gurus ever doubts the basic truth that both the Market Indices and individual issue prices will continue to move up and down, forever. So, if we were to slowly construct a diversified portfolio of value stocks (My short definition: profitable, dividend paying, NYSE companies.) as they fall in price, we would be able to take profits during the following upward cycle… also forever. Hmmm. Let's pretend for a (foolish) moment that broad market movements are somewhat predictable. Regardless of the direction, professional advice will always fuel the perceived operative emotion: greed or fear! Wall Street's retail representatives (stock brokers), and the new, internet expert, self-directors, rarely go against the grain of the consensus opinion…particularly the one projected to them by their immediate superior/spouse. You cannot obtain independent thinking from a Wall Street salesperson; it just doesn't fill up the Beemer. Sorry, but you have to be able to think for yourself to stay in balance while pedaling on the Market Cycle. Here's some global advice that you will not hear on the street of dreams (and don't get all huffy until you understand what to buy or to sell as well as when to do so): Sell into rallies. Buy on bad news. Buy slowly; sell quickly. Always sell too soon. Always buy too soon, incrementally. Always have a plan. A plan without buying guidelines and selling targets is not a plan. Predicting the performance of individual issues is a totally different ball game that requires an even more powerful crystal ball and a whole array of semi-legal and completely illegal relationships that are mostly self serving and useless to average investors. But, again, let's pretend that a mega million-dollar salary and industry recognition as a superstar creates Master of the Universe quality prediction capabilities…I'm sorry. I just can't even pretend that it’s true! The evidence against it is just too great, and the dangers of relying on analytical opinions too real. No one can predict individual issue price movements legally, consistently, or in a timely manner. Face up to this: the risk of loss is real; it can be minimized but not eliminated. Investing in individual issues has to be done differently, with rules, guidelines, and judgment. It has to be done unemotionally and rationally, monitored regularly, and analyzed with performance evaluation tools that are portfolio specific and without calendar time restrictions. This is not nearly as difficult as it sounds, and if you are a “shopper” looking for bargains elsewhere in your life, you should have no trouble understanding how it works. Not a rocket scientist? Good, and if you are at all familiar with the retailing business, even better. You don’t need any special education evidentiary acronyms or software programs for stock market success… just common sense and emotion control. Wall Street sells products, and spins reality in whatever manner they feel will produce the best results for those products. The direction of the market doesn’t matter to them and it wouldn't to you either if you had a properly constructed portfolio. If you learn how to deal unemotionally with Wall Street events, and shun the herd mentality, you will find yourself in the proper cyclical mode much more often: buying at lower prices and, as a result, taking profits instead of losses. Just what if… Coming next: Developing a Value Stock Watch List and Profit Taking Targets.

         
    The china factor

     

    Unless you have been in a cocoon, you most likely are aware that China will in all probability become the next economic superpower in the world. The country’s economy is on steroids, growing at close to double digits over the past few years and this is not expected to change. And if you understand the vast size of the country’s economic engine, you would also understand that China is a place where you need to have some capital invested. Of course, at the same time, you also need to fully understand the risk factors associated in investing in a country where the economy and corporate structure is strictly under the control of the communist-led government. The concept of an open economy in China is debatable as there is the constant threat of government intervention at any time to suit the political agenda. Yet the risk is probably warranted given the vast growth opportunities that lie in the country for both multi-national companies and investors looking for some diversification outside of their borders. This region of the world will become the next big boom in economic growth as long as the Chinese government is willing. A report just published by the Development Research Center of China's State Council estimates that the country will report GDP growth of about 8% annually from 2006 to 2010. Based on the numbers we have been seeing, this estimate seems to be reasonable. The report estimates that China’s GDP based on 2000 prices will hit USD$2.3 trillion by the end of the current five-year period in 2010. In the subsequent 10-year period from 2010 to 2020, the report calculates a decline in the annual GDP growth rate to around 7%, which is still quite respectable. For investors, the estimated numbers are staggering but then China must be able to manage any inflationary and growth-related issues going forward as the country becomes richer. The country’s middle class of several hundred million strong is booming as citizens move from the countryside to the cities in search of opportunities to increase their wealth. As Chinese citizens make more money, they become more consumption driven. This in turn pumps up the demand for both domestic and foreign good and services. That’s why we are seeing such a mass flow of companies into China searching for growth opportunities. The bottomline is you need to be in China at some point. In future commentaries, I will examine some of the key Chinese stocks trading as American Depository Receipts (ADRs) in the U. S.

         
    The difference between down and out

     

    : As turnaround investors, I prefer to invest in companies that are down but not out. This is important because a lot of times, investors misunderstood the two. Often times, these two types of companies are trading near or at their 52 week low. But the similarity ends there. Company that is Down. This is the company that experiences problem and it seems like it can weather the problem. It just needs time to right the ship and get back on track. How can we be certain that the company can weather the storm? The ultimate guideline is to look at the company's balance sheet and income statement. Does the company have a positive net cash?

    Is the company expected to post a profit? If the answer is yes to both questions, then the company in question is most likely is just down, but not out. Company that is Out. This is the company that experiences problem but its future existence might be in doubt. It might right the ship but by then it might be too late. As a result, shareholders will be wiped out and lose 100% of their investment.

    How can we be certain for the company that is out? Again, we have to check the ultimate guideline, which is the balance sheet and income statement of the company. Does the company have a negative net cash? Is the company expected to post a loss for the foreseeable future?

    If the answer is yes to both questions, then the company in question has the high probability of being out of business. Using analogy without illustrations are confusing, in my opinion. Therefore, I will choose one company for each situation. Please do not treat this as a buy or sell recommendation.

    This is merely my observation as someone who had watched these companies for a while. Pfizer Inc. (PFE) might be categorized as the company that is down. Stock price slumped to 8 year low this week due to weak sales of its drug franchises and tepid guidance. Management has refused to update guidance for 2006 and beyond due to uncertainty.

    So, let's look at Pfizer's balance sheet, shall we? The latest information on Pfizer shows that the company has $ 15 Billion of cash and equivalent and $ 5.517 Billion in long term debt. In other words, Pfizer has $9.5 Billion of positive net cash. How about earnings?

    Is Pfizer expected to post a loss? Nope, it is expected to post earnings of $ 1.95 per share for year 2005 or $ 14 Billion of net profit. Profit is plenty while balance sheet is solid. Pfizer clearly is a company that simply has a small bump in the road.

    How about AMR Corp (AMR)? This is an excellent example of a company that is out. Looking at the balance sheet, AMR has a negative net cash of $ 9.5 Billion. What this means is that it has $ 9.5 Billion more long term debt than it has cash. Is AMR profitable? Not a chance.

    It is expected to post a loss of $ 4.36 per share for 2005 or $ 714 Million. It doesn't look pretty. High amount of debt and big loss is the recipe for a company that is down. If AMR doesn't turn its ship anytime soon, it might be forced to file bankruptcy. To consistently make money, investors need to be able to differentiate the company that is down and company that is out. Weed out the company that is out and your investment return will be so much better.

         
    The different types of stock markets

     

    There are many different stock markets in the US. In most circumstances, the main markets that you will hear of are the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the NASDAQ. The markets are basically where people and companies trade securities. The market is the arena in which the players gather to trade. The New York Stock Exchange has been around since 1792. It is located on Wall Street in New York City. The NYSE is the largest and best-known stock exchange in the country. It also has very stringent requirements for companies to join its listings. A company must be financially strong and show signs of being an industry leader to join the NYSEpanies strive to belong to this market, and even pay annual fees for membership. When a brokerage describes itself as a member of the NYSE it means that the firm has bought a seat on the floor of the NYSE. This means that there is actually a employee on the floor of the exchange buying and selling stock. This is an expensive investment for a firm, costing well over a million dollars. The American Stock Exchange is similar to the NYSE in that it conducts its trading on a trading floor. The floor is filled with traders who buy and sell securities. The AMEX has been located in Manhattan since 1921. It is known as a major exchange for not only stocks, but also options. You will tend to find slightly riskier and smaller stocks listed on the AMEX, which operates under the NASDAQ-AMEX Market Group, a subsidiary of the National Association of Security Dealers. NASDAQ, or the National Association of Securities Dealers Automated Quotations, is the youngest of the three major markets. It may also be the one you have heard the most about through the news. It lists just about every stock in the industry, but it is best known for listing technology companies. In fact, it is where you will find many major technology stocks, including Microsoft and Intel. It was launched in 1971 and was the first over-the-counter stock market. It links buyers and sellers via a computer network. Brokers and dealers will market the stocks by maintaning an inventory in their own accounts. They will buy or sell when they receive an order from an investor. You will find that start up companies that are issuing stock in an initial public offering will often list on the NASDAQ. When it comes to buying stock, knowing where to find certain types of stock is important. Each market often specializes in slightly different types of stocks.

         
    The friendly trend technical vs. fundamental analysis

     

    The authors of a paper published by NBER on March 2000 and titled "The Foundations of Technical Analysis" - Andrew Lo, Harry Mamaysky, and Jiang Wang - claim that: "Technical analysis, also known as 'charting', has been part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis - the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper we offer a systematic and automatic approach to technical pattern recognition ... and apply the method to a large number of US stocks from 1962 to 1996..." And the conclusion: " ... Over the 31-year sample period, several technical indicators do provide incremental information and may have some practical value." These hopeful inferences are supported by the work of other scholars, such as Paul Weller of the Finance Department of the university of Iowa. While he admits the limitations of technical analysis - it is a-theoretic and data intensive, pattern over-fitting can be a problem, its rules are often difficult to interpret, and the statistical testing is cumbersome - he insists that "trading rules are picking up patterns in the data not accounted for by standard statistical models" and that the excess returns thus generated are not simply a risk premium. Technical analysts have flourished and waned in line with the stock exchange bubble. They and their multi-colored charts regularly graced CNBC, the CNN and other market-driving channels. "The Economist" found that many successful fund managers have regularly resorted to technical analysis - including George Soros' Quantum Hedge fund and Fidelity's Magellan. Technical analysis may experience a revival now that corporate accounts - the fundament of fundamental analysis - have been rendered moot by seemingly inexhaustible scandals. The field is the progeny of Charles Dow of Dow Jones fame and the founder of the "Wall Street Journal". He devised a method to discern cyclical patterns in share prices. Other sages - such as Elliott - put forth complex "wave theories". Technical analysts now regularly employ dozens of geometric configurations in their divinations. Technical analysis is defined thus in "The Econometrics of Financial Markets", a 1997 textbook authored by John Campbell, Andrew Lo, and Craig MacKinlay: "An approach to investment management based on the belief that historical price series, trading volume, and other market statistics exhibit regularities - often ... in the form of geometric patterns ... that can be profitably exploited to extrapolate future price movements." A less fanciful definition may be the one offered by Edwards and Magee in "Technical Analysis of Stock Trends": "The science of recording, usually in graphic form, the actual history of trading (price changes, volume of transactions, etc.) in a certain stock or in 'the averages' and then deducing from that pictured history the probable future trend." Fundamental analysis is about the study of key statistics from the financial statements of firms as well as background information about the company's products, business plan, management, industry, the economy, and the marketplace. Economists, since the 1960's, sought to rebuff technical analysis. Markets, they say, are efficient and "walk" randomly. Prices reflect all the information known to market players - including all the information pertaining to the future. Technical analysis has often been compared to voodoo, alchemy, and astrology - for instance by Burton Malkiel in his seminal work, "A Random Walk Down Wall Street". The paradox is that technicians are more orthodox than the most devout academic. They adhere to the strong version of market efficiency. The market is so efficient, they say, that nothing can be gleaned from fundamental analysis. All fundamental insights, information, and analyses are already reflected in the price. This is why one can deduce future prices from past and present ones. Jack Schwager, sums it up in his book "Schwager on Futures: Technical Analysis", quoted by Stockcharts: "One way of viewing it is that markets may witness extended periods of random fluctuation, interspersed with shorter periods of nonrandom behavior. The goal of the chartist is to identify those periods (i. e. major trends)." Not so, retort the fundamentalists. The fair value of a security or a market can be derived from available information using mathematical models - but is rarely reflected in prices. This is the weak version of the market efficiency hypothesis. The mathematically convenient idealization of the efficient market, though, has been debunked in numerous studies. These are efficiently summarized in Craig McKinlay and Andrew Lo's tome "A Non-random Walk Down Wall Street" published in 1999. Not all markets are strongly efficient. Most of them sport weak or "semi-strong" efficiency. In some markets, a filter model - one that dictates the timing of sales and purchases - could prove useful. This is especially true when the equilibrium price of a share - or of the market as a whole - changes as a result of externalities. Substantive news, change in management, an oil shock, a terrorist attack, an accounting scandal, an FDA approval, a major contract, or a natural, or man-made disaster - all cause share prices and market indices to break the boundaries of the price band that they have occupied. Technical analysts identify these boundaries and trace breakthroughs and their outcomes in terms of prices. Technical analysis may be nothing more than a self-fulfilling prophecy, though. The more devotees it has, the stronger it affects the shares or markets it analyses. Investors move in herds and are inclined to seek patterns in the often bewildering marketplace. As opposed to the assumptions underlying the classic theory of portfolio analysis - investors do remember past prices. They hesitate before they cross certain numerical thresholds. But this herd mentality is also the Achilles heel of technical analysis. If everyone were to follow its guidance - it would have been rendered useless. If everyone were to buy and sell at the same time - based on the same technical advice - price advantages would have been arbitraged away instantaneously. Technical analysis is about privileged information to the privileged few - though not too few, lest prices are not swayed. Studies cited in Edwin Elton and Martin Gruber's "Modern Portfolio Theory and Investment Analysis" and elsewhere show that a filter model - trading with technical analysis - is preferable to a "buy and hold" strategy but inferior to trading at random. Trading against recommendations issued by a technical analysis model and with them - yielded the same results. Fama-Blum discovered that the advantage proffered by such models is identical to transaction costs. The proponents of technical analysis claim that rather than forming investor psychology - it reflects their risk aversion at different price levels. Moreover, the borders between the two forms of analysis - technical and fundamental - are less sharply demarcated nowadays. "Fundamentalists" insert past prices and volume data in their models - and "technicians" incorporate arcana such as the dividend stream and past earnings in theirs. It is not clear why should fundamental analysis be considered superior to its technical alternative. If prices incorporate all the information known and reflect it - predicting future prices would be impossible regardless of the method employed. Conversely, if prices do not reflect all the information available, then surely investor psychology is as important a factor as the firm's - now oft-discredited - financial statements? Prices, after all, are the outcome of numerous interactions among market participants, their greed, fears, hopes, expectations, and risk aversion. Surely studying this emotional and cognitive landscape is as crucial as figuring the effects of cuts in interest rates or a change of CEO? Still, even if we accept the rigorous version of market efficiency - i. e., as Aswath Damodaran of the Stern Business School at NYU puts it, that market prices are "unbiased estimates of the true value of investments" - prices do react to new information - and, more importantly, to anticipated information. It takes them time to do so. Their reaction constitutes a trend and identifying this trend at its inception can generate excess yields. On this both fundamental and technical analysis are agreed. Moreover, markets often over-react: they undershoot or overshoot the "true and fair value". Fundamental analysis calls this oversold and overbought markets. The correction back to equilibrium prices sometimes takes years. A savvy trader can profit from such market failures and excesses. As quality information becomes ubiquitous and instantaneous, research issued by investment banks discredited, privileged access to information by analysts prohibited, derivatives proliferate, individual participation in the stock market increases, and transaction costs turn negligible - a major rethink of our antiquated financial models is called for. The maverick Andrew Lo, a professor of finance at the Sloan School of Management at MIT, summed up the lure of technical analysis in lyric terms in an interview he gave to Traders's "Technical Analysis of Stocks and Commodities", quoted by Arthur Hill in Stockcharts: "The more creativity you bring to the investment process, the more rewarding it will be. The only way to maintain ongoing success, however, is to constantly innovate. That's much the same in all endeavors. The only way to continue making money, to continue growing and keeping your profit margins healthy, is to constantly come up with new ideas."

         
    The golden pendulum formula

     

    “In 1581, Galileo, while attending services at the Cathedral of Pisa, observed a chandelier swinging back and forth. Energized by shifting air currents, the chandelier moved in a variety of arcs and amplitudes. Thus was born the concept of the pendulum which Galileo used as a time measurement device in his later experiments” The pendulum formula is a belief that, in any investment area, the herd instincts of greed and fear are prevalent, that virtually all extremes return to a natural equilibrium point or gravity center, and trends and cycles of these tendencies can be identified and measured. Uncovering the full spectrum of trends, cycles, equilibrium points and fundamental values of the market is vital. The results should be in harmony with natural growth, maturity and regression. An investor’s primary mission is to determine extremes of values, either long or short, that will result in a return to the current "gravity center" or an equilibrium point and thus a profitable trade. To this end, all decision lines, formulas and concepts must be fully integrated and calibrated to result in accuracy, precision and profit. Fundamental Formula: Many invest in gold and silver and resource stocks due to our huge trade deficits, unsustainable consumer debt, housing and stock market bubbles, etc. In 2003, John Embrey outlined 15 fundamental reasons to own gold at goldmoney/en/commentary/2003-09-26.html. Those reasons are still valid today and provide a type of insurance policy against potential financial disasters. Evaluating gold, silver and resource stocks is not easy. Some are producers. Others may have a defined resource while others are explorers or prospect generators. In general, there are 10 areas in the gold and silver area in particular, that must be considered, evaluated and positively answered. 1. Management, their vision, experience and partners 2. Location of property 3. Infrastructure 4. Number of holes drilled 5. Number of potentially mineable ounces from measured, indicated and inferred resources. 6. Open pit vs. underground 7. Metallurgy issues 8. Political considerations 9. Finances, net present value & potential share dilution 10. Feasibility study planned or in progress A more detailed analysis of these guidelines and other issues by Kenneth Gerbino can be found at 321gold/editorials/gerbino/gerbino060804.html Technical Formula: Outside of the fundamental criteria for owning gold and silver stocks, there are measurable trends, cycles and behavior that allow investors to participate and profit from the pendulum swings into and out of this area. Studies have shown that 60% of a typical stock price change can be directly attributed to the movement of the overall market. Therefore, it just makes common sense to be on the right side of a market trend. To that end, it is wise to first focus on an index trend before considering individual gold, silver and resource issues. Also, if we are planning to invest in any market arena, then it goes without saying that we need to reduce the risk, improve the probabilities and employ a more disciplined and original approach. My market direction indicators and advanced market behavior formulas are designed to assist me for just such a purpose, and I simply call it Pendulum. It is a personal tool box, as it were, to guide me in technical decisions. The concept of trend is basic and using or developing an indicator that demonstrates a trend is essential. I recommend the MACD (moving average convergence divergence) found in most popular programs. In my work, I use my own modified form of the MACD which I called TSL (Trend Signal Line). Like the MACD it assists in determining trends but without as many whipsaws. For obvious reasons, it is very important to develop one’s own indicators so as to avoid getting the same results as everyone else. Let’s look at an example. One of the more interesting concepts is to display a trend and cycle in one integrated view. One can therefore see the longer primary trend and the short term cycle within that trend. The red TSL is the trend signal line noted above and the SRA, my own speed and acceleration cycle indicator. Here is an example from the May 2005 low in the XAU index. Please see…. marketpendulum/pendulumconcepts. html for a chart description. As you can see, it did quite well and allowed an early entrance into a profitable trend. So I would encourage all to develop their own indicators and formulas. Today, my Pendulum tool box measures the swings in the market, their amplitude, force and energy while recording the motion of emotion across an equilibrium point or gravity center. The concept of gravity center is a central feature of Pendulum and is found throughout nature....that force of nature that compels both human behavior and physical objects to find their equilibrium point. Results: Using the concepts and criteria above, I employ two model portfolios, one gold/silver and the other resource stocks. The gold/silver portfolio is up an average 265% since 2002 and the resource portfolio 74% since its 2004 inception, a very satisfactory result for my purposes. Conclusion: We have discussed using key fundamental data and original technical trend criteria as the basis for stock selections in the gold/silver and resource investment areas. It is not easy, takes time and effort, but for the serious investor, it can be the golden pendulum formula for potential success.

         
    The grand daddy boom in uranium

     

    Approaching his 50th year in the uranium business, the quiet but assertive Chairman and Chief Executive of Uranium Resources (OTC BB: URIX). Paul K. Willmott talked to us about the current uranium bull market. Willmott discussed the third uranium bull market he’s experienced with both exuberance and caution. Interviewer: How do you feel about the rising uranium price? And how high do you think it will go? Willmott: Looking at the oft-quoted number of over $100/pound, that number came out of an analysis from a gentleman at MIT (Thomas Neff, MIT Center for International Studies). What he did was use the high point of 1980s with a time-value of money, and came up with $100. I am not saying that the prices could never get to that level. I’d never say that. There could be a price spike, and there are a lot of things that could or could not happen. The prices will rise to cover projected and estimated costs of production. It will also get to a level that will induce people to invest in companies, or for the company to invest in the business to get a rate of return. Interviewer: How are the production costs different now as opposed to then? Willmott: If you go back to the 1980s, the majority of the uranium was being mined by underground mining methods. Underground or open pit methods were used here in the United States: most of it in New Mexico, a lot of it in Colorado and Wyoming. The cost of production in those days was somewhat in the mid to high $20’s. When you put a rate of return on it, it got the market price up into the high $30’s. Since then, the major mining in Canada now is not at Elliot Lake or at Bancroft, Ontario, both underground and where it was before. The majority of uranium mining now is being mined in high grade ore bodies in the Athabasca Basin, which back in the 1980s was basically unknown, unexplored or unfound. In the United States, there is virtually little or no underground mining of uranium. It’s all done by low-cost ISL. Same as in Kazakhstan. You still have open pit mining of low-grade ore bodies, but those are very inexpensive to mine as in Africa. You also have byproduct in Australia. Interviewer: Are you saying uranium prices are determined by production costs, not supply concerns? Willmott: The big point is the major cost of uranium today is significantly less than what it was in the 1980s. If you go back to my basic premise, which is that price rises to cover cost of production, I don’t see that you can make the comparison of taking the high point in the 1980s and transposing it over today on the time-value of money basis, and coming out with something over $100/pound. That’s not to say the market could not get over $50/pound. I think it very well may. I think it will be the spike or an anomaly. And I think it will ultimately fall back as production comes on to the current demand of uranium. Interviewer: What about Asian demand? Willmott: There’s lot of talk about reactors in China, in India, Russia, and elsewhere. Talk of reactors in Europe staying on longer. That could prolong the cycle. I think that you will find over the next 5-7 years there will be enough uranium discovered, or discovered, put into production, licensed and permitted, to meet our current demand for uranium. That cycle may get prolonged a lot longer as these other (nuclear) plants may or may not come on. Interviewer: Won’t the U. S. alone put an additional squeeze on the current uranium inventories by building another 10, 15 or 20 reactors? Willmott: No, because if you look at the lead time on the announcement of these plants, the lead time to get these plants on, I think you’re looking at five to ten years at best. The I don’t think it’s going to be as long for the Chinese, because they don’t really have environmental concerns, regulatory concerns or intervener concerns. It certainly would put a crimp on existing and forecasted production. In terms of the long-term needs, they will ultimately be met. The current prices today are impacted by the current needs and some perception about the future. Interviewer: TradeTech LLC recently announced, in a news release, that a large percentage of the spot uranium price rise in 2005 came from speculators and investors? Willmott: If you look at what spot demand is, compared to the long-term demand, usually the spot is around 20 million pounds. Last year, I think it was around 30 million pounds. (Editor’s note: On January 27, Trade Tech reported slightly less than 30 million pounds for 2005.) That’s 20-30 million pounds of demand out of total demand of 180 to 190 million pounds. Of that demand, this past year, around 10 million – that’s the latest number I know – came from speculators, hedge funds, and the Uranium Participation Corporation (TSE: U). Certainly, it was a very major influence of a very small part of the market. Every week, everybody is excited about what the spot price is going to be on Monday night for UXC or Friday night from Trade Tech. It’s a little bit of the tail wagging the dog. Most certainly, the demand of 10 million pounds or so by the hedge funds had a very significant impact on the spot market for 2005. Interviewer: But will this speculative uranium buying continue? Willmott: Some of these people were able to get in while the spot price was in the low $20’s. Now that the price is at $37.50/pound, they’ve done quite well. If this price increase plateaus, and I project the spot price to be about $40/pound by the middle of this year, and then I’m not sure. I don’t know how long it will take to get up to $50. It might go up quite rapidly. What you’re going to see, as you can see with some of the (publicly traded) stocks out there, I think the major increase could very well be behind us. You will get an increase, but it certainly will not be in the couple of hundred percent increases that we’ve seen in 2005. Interviewer: Is the oft-quoted $100/pound number realistic then? Willmott: The uranium spot price is going to go to some level where there will be enough money brought in by investors to do the necessary exploration and development. There may be a price spike along the way. My feeling is it’s just not going to climb up and get over the $100 range that a lot of people are talking about. It could be a price spike, but I don’t think it’s sustainable. Interviewer: After the price spikes, or runs higher, where do think the uranium price will settle? Willmott: As the prices rise, on a longer term basis, there will be production that comes online, as is always the case. I am on record as having said that the price could very well get up to a level where it’s $50, $60 or $70/pound. But it will ultimately fall back to a level that more represents the cost of production. If you look at the places where they are exploring for uranium now, in Athabasca, and you look at the current costs of production, it’s my feeling that somewhere in the high $20’s or low $30’s is where the price will ultimately be for uranium. I think it’s going to take anywhere from five to seven years, may be ten, before production gets to that level. And that’s in today’s dollars. Interviewer: Have prices become unrealistic in the uranium sector? Willmott: I think there’s a lot of speculation out there, which may be a bit unrealistic. That’s more in the stock prices. Certainly, the need for uranium is there. I just think people are over-reacting as to what’s going to ultimately happen. Interviewer: After World War I, a British army major in the Belgian Congo discovered uranium oxide with concentrations as high as 80 percent. That very quickly ended the long-term radium boom in the Colorado Plateau, an element which had been extracted from uranium. Could a major discovery end the recent excitement in this bull market? Willmott: I don’t think any single discovery, whether it will be in Athabasca or elsewhere, no single discovery is going to overcome the total supply that is ultimately needed. Interviewer: You’ve talked about Kazakhstan. Do you believe this is the wild card for the world market? Willmott: Yes, it is. There are very large, very economic deposits there. They’ve made some very grand plans on what they’re going to produce. I personally don’t think they’re going to get there, not in the time frame they state. Then, of course, there are the uncertainties, such as the political. I can’t reflect on that, but there are uncertainties there. I don’t think they’re going to put on production as fast as what they have stated. I don’t think there is any single source that will do it (alleviate the supply shortage). I think it will go a fair distance in filling the shortfall or projected shortfall. I don’t think it’s going to satisfy it. But, you’re looking at somewhere around 80 or 90 million pounds of supply shortfall. Even if they get up to 25-30 million pounds, that’s not going to be enough. Interviewer: Do you believe a bust will follow this excitement? Willmott: Yes, but when you say bust, a lot of it is going to depend upon a market that doesn’t relate to current supply and demand. There’s a lot of supply out there that people will tout. Like “here come the Kazakhs,” or “the expansion of Olympic Dam,” or those type of things. Most supply and demand projections that we’ve been using in the company, and are using, have already anticipated these things. They’re not unknown ore bodies. The ore bodies in Africa, they’ve been known for a long time. Rossing staying on has been known for a long time. Midwest Lake has been known for a long time – it was found 22 years ago. Cigar Lake was 22-23 years ago. A lot of the production you are seeing now, which is coming on and people are getting excited about, have been known and have been factored in for supply and demand projections for a long time. Interviewer: How does the record price rise in 2005 compare to sustained high prices in the 1970s and early 1980s? Willmott: I think that the 2005 price rise is a reflection of the shortage that is there. In the 1980s, the shortage, the price rise, then, was on a perception basis. The perception was that all of the utilities were going to get into nuclear power. I remember Eisenhower saying it was going to be too cheap to even meter. What happened was that all of these utilities were going to build all of these nuclear reactors. And then they realized the reactors were going to need uranium. That created a pseudo demand. Interviewer: Why do you call this a false demand? Willmott: The utilities all wanted to get into nuclear power. They made that decision. They then needed uranium to run their reactors. What happened then was the U. S. Enrichment Corporation told the utilities, “Look, if you want to get your uranium enriched, you are going to have to sign up for it now, basically on a take or pay contract.” With all of these grandiose plans, the utilities signed “take or pay” contracts with the USEC to supply uranium and to get it enriched. During the period, while they were committing, there was such a demand for uranium by all of these utilities that it caused the price to go up. Interviewer: And then there was Three Mile Island. Willmott: The demand for nuclear power went away after Three Mile Island. But, the utilities had already committed with mining companies to buy the uranium and they had already committed with USEC to enrich it. When the bloom went off the rose, there was no need for the uranium. The demand for the uranium went away, but the uranium kept coming out. That created a huge overhang that caused the prices to plummet and stay down for quite a number of years until the actual production was consumed. The “real” demand really turned out to be based more upon perception. When that perception died, the need for nuclear power died, but the supply kept coming out. Interviewer: What about the demand today? Willmott: Demand today is real. What is different in this cycle, besides the difference in the mining methods and the costs, which we’ve gone over, is that this is really a REAL demand right now. It’s coming from the utilities that realize there is an impending shortage of uranium.

         
    The interesting history of the stock market

     

    Talking about the Stock Market we seem to mean a different dimension, not a physical location. However, the Stock Market does have physical locations. Wall Street, also known as the Dow, or the NYSE, is located in New York Wall Street is the Address(or is it?) Many people think of Wall Street and the Stock Market as one in the same, and indeed, it used to be that way. Dutch settlers initially built a stockade here in 1653 for defense purposes. In 1685 the stockade was torn down and a street was built called Wall Street. In 1790 the first Stock Exchange was founded in Philadelphia which became the model for the New York Stock Exchange. In 1817 the NYSE was officially opened. The NYSE was moderately successful till the early 1900's when the market entered a boom period which lasted more or less until 1929. This boom period of course could not last forever, things were so out of kilter that people were mortgaging their homes and leveraging themselves to the limit to buy shares. The boom period crashed in 1929 and caused the Great Depression. The 1929 Crash was caused in part by the fact that the Stock Market was virtually unregulated, which it remained even until after the market crash of 1987 which saw the Dow suffer what was the largest losing day in the Market's history. Black Tuesday - October 29th, 1929 On Black Tuesday, a record of 16.4 million shares were traded and the ticker tape fell behind two and a half hours. On Monday, the stock market suffered a record one-day loss of around 13 percent. On Black Tuesday, the market suffered a loss of about 12 percent and did not recover for 22 years. The economy eventually recovered from its catastrophic losses but the unregulated Stock Market practices that had partially caused the crash in the 1929 still existed and caused the stock market crash of 1987, which saw the Dow Jones suffer what was the largest single-day loss in the stock market's history. Today's Stock Market Today's stock market consists of about 500,000 computers all networked with dealers for the NYSE or market makers for the NASDAQ. Up until recently the Dow still used human intervention but at present all trades are computerized. The 2 most important stock market networks are the NYSE and NASDAQ. NASDAQ is a relatively new Stock Trading System that has been computerized since its inception, where market makers normally lead trades. It used to be that more risky stocks were traded on the NASDAQ than on the NYSE, but that distinction is fading. The difference between the NYSE and Nasdaq is in the way securities on the exchanges are transacted between buyers and sellers. The Nasdaq is a dealer's market, wherein market participants are not buying from and selling to one another but to and from a dealer, which, in the case of the Nasdaq, is a market maker. The NYSE is an auction market, wherein individuals are typically buying and selling to each other and there is an auction happening; the highest bidding price will be matched with the lowest asking price. All these computers are linked to computers worldwide. These computers can be found in banks, small businesses, and large corporations. These computers comprise the banking networks which make computerized transactions possible. To give you an idea as to how much gets traded: in New York City Stock Market Trades amount to over $2.2 trillion dollars daily How has the U. S. Stock Market done in Times of War? The worst Stock Market returns were achieved during the Vietnam War. If this happened because of the uncertainty of the times is a good question. Stock Markets do not like uncertainty and will act negatively. Returns during the Korean War however were excellent and averaged about 18% per year while 2nd world war returns averaged about 13% per year. The 1987 Stock Market Crash The crash of 1987 was one of the most remarkable financial catastrophies of the 20th century, perhaps since the start of the financial system several centuries ago. Why it was so strange because it should not have happened and even today we cannot fully comprehend that it did happen. Markets fell, an unbelievable 23%, and that they did so all over the world at the same time. It only lasted one day. There is no explanation. No definite reason for the crash has been isolated. The best that one can say is that there were too many similarities to the 1929 crash and that this became a self-fulfilling prophecy.

         
    The myth of the earnings yield

     

    In American novels, well into the 1950's, one finds protagonists using the future stream of dividends emanating from their share holdings to send their kids to college or as collateral. Yet, dividends seemed to have gone the way of the Hula-Hoop. Few companies distribute erratic and ever-declining dividends. The vast majority don't bother. The unfavorable tax treatment of distributed profits may have been the cause. The dwindling of dividends has implications which are nothing short of revolutionary. Most of the financial theories we use to determine the value of shares were developed in the 1950's and 1960's, when dividends were in vogue. They invariably relied on a few implicit and explicit assumptions: That the fair "value" of a share is closely correlated to its market price; That price movements are mostly random, though somehow related to the aforementioned "value" of the share. In other words, the price of a security is supposed to converge with its fair "value" in the long term; That the fair value responds to new information about the firm and reflects it - though how efficiently is debatable. The strong efficiency market hypothesis assumes that new information is fully incorporated in prices instantaneously. But how is the fair value to be determined? A discount rate is applied to the stream of all future income from the share - i. e., its dividends. What should this rate be is sometimes hotly disputed - but usually it is the coupon of "riskless" securities, such as treasury bonds. But since few companies distribute dividends - theoreticians and analysts are increasingly forced to deal with "expected" dividends rather than "paid out" or actual ones. The best proxy for expected dividends is net earnings. The higher the earnings - the likelier and the higher the dividends. Thus, in a subtle cognitive dissonance, retained earnings - often plundered by rapacious managers - came to be regarded as some kind of deferred dividends. The rationale is that retained earnings, once re-invested, generate additional earnings. Such a virtuous cycle increases the likelihood and size of future dividends. Even undistributed earnings, goes the refrain, provide a rate of return, or a yield - known as the earnings yield. The original meaning of the word "yield" - income realized by an investor - was undermined by this Newspeak. Why was this oxymoron - the "earnings yield" - perpetuated? According to all current theories of finance, in the absence of dividends - shares are worthless. The value of an investor's holdings is determined by the income he stands to receive from them. No income - no value. Of course, an investor can always sell his holdings to other investors and realize capital gains (or losses). But capital gains - though also driven by earnings hype - do not feature in financial models of stock valuation. Faced with a dearth of dividends, market participants - and especially Wall Street firms - could obviously not live with the ensuing zero valuation of securities. They resorted to substituting future dividends - the outcome of capital accumulation and re-investment - for present ones. The myth was born. Thus, financial market theories starkly contrast with market realities. No one buys shares because he expects to collect an uninterrupted and equiponderant stream of future income in the form of dividends. Even the most gullible novice knows that dividends are a mere apologue, a relic of the past. So why do investors buy shares? Because they hope to sell them to other investors later at a higher price. While past investors looked to dividends to realize income from their shareholdings - present investors are more into capital gains. The market price of a share reflects its discounted expected capital gains, the discount rate being its volatility. It has little to do with its discounted future stream of dividends, as current financial theories teach us. But, if so, why the volatility in share prices, i. e., why are share prices distributed? Surely, since, in liquid markets, there are always buyers - the price should stabilize around an equilibrium point. It would seem that share prices incorporate expectations regarding the availability of willing and able buyers, i. e., of investors with sufficient liquidity. Such expectations are influenced by the price level - it is more difficult to find buyers at higher prices - by the general market sentiment, and by externalities and new information, including new information about earnings. The capital gain anticipated by a rational investor takes into consideration both the expected discounted earnings of the firm and market volatility - the latter being a measure of the expected distribution of willing and able buyers at any given price. Still, if earnings are retained and not transmitted to the investor as dividends - why should they affect the price of the share, i. e., why should they alter the capital gain? Earnings serve merely as a yardstick, a calibrator, a benchmark figure. Capital gains are, by definition, an increase in the market price of a security. Such an increase is more often than not correlated with the future stream of income to the firm - though not necessarily to the shareholder. Correlation does not always imply causation. Stronger earnings may not be the cause of the increase in the share price and the resulting capital gain. But whatever the relationship, there is no doubt that earnings are a good proxy to capital gains. Hence investors' obsession with earnings figures. Higher earnings rarely translate into higher dividends. But earnings - if not fiddled - are an excellent predictor of the future value of the firm and, thus, of expected capital gains. Higher earnings and a higher market valuation of the firm make investors more willing to purchase the stock at a higher price - i. e., to pay a premium which translates into capital gains. The fundamental determinant of future income from share holding was replaced by the expected value of share-ownership. It is a shift from an efficient market - where all new information is instantaneously available to all rational investors and is immediately incorporated in the price of the share - to an inefficient market where the most critical information is elusive: how many investors are willing and able to buy the share at a given price at a given moment. A market driven by streams of income from holding securities is "open". It reacts efficiently to new information. But it is also "closed" because it is a zero sum game. One investor's gain is another's loss. The distribution of gains and losses in the long term is pretty even, i. e., random. The price level revolves around an anchor, supposedly the fair value. A market driven by expected capital gains is also "open" in a way because, much like less reputable pyramid schemes, it depends on new capital and new investors. As long as new money keeps pouring in, capital gains expectations are maintained - though not necessarily realized. But the amount of new money is finite and, in this sense, this kind of market is essentially a "closed" one. When sources of funding are exhausted, the bubble bursts and prices decline precipitously. This is commonly described as an "asset bubble". This is why current investment portfolio models (like CAPM) are unlikely to work. Both shares and markets move in tandem (contagion) because they are exclusively swayed by the availability of future buyers at given prices. This renders diversification inefficacious. As long as considerations of "expected liquidity" do not constitute an explicit part of income-based models, the market will render them increasingly irrelevant.

         
    The need for diversification in the stock market

     

    Copyright 2006 Richard Stoyeck Why is it that some people only buy one or two stocks? Others may have 15 stocks but have 50 percent of their investment assets in just one of those 15 stocks. In Wall Street we refer to this type of behavior as concentration. Some firms call it over-concentration. When this happens in a brokerage firm it is always considered dangerous. It is so dangerous, in fact, that if the brokerage firm is using a concentrated stock position as capital, then the market value of the security in question is given a haircut. This means that the full market value of the security is chopped by some fixed percentage in any capital computation. In other words, if you are over-concentrated, you don't get full value. Some of you may have margin accounts. As you know, StocksAtBottom advocates cash ownership of stocks. If you own stocks on margin, it is our opinion that you will get sold out on margin. Normally in a margin account you put up 50 percent of the value of the stock you acquire in cash. If equity falls below 35 percent, you get a margin call. Now, brokerage firms love it when clients have 15 or 20 different stocks in a margin account. If there are some bonds in that account, guess what, they love it even more. Why? Because brokerage firms know that stocks represent risky investments. Something can always go wrong in any one situation. Maybe something can go wrong in any two situations. It's tough to see something go wrong in 15 situations. That is the essence of diversification. SPREAD THE RISK AROUND. It makes a lot of sense. Some investors own 50 to 100 stocks. This is because they think they need that many to achieve the investment goals that they set out for themselves. In business school at a master's degree level they teach you that to achieve true diversification you need to own something approaching 14 equity positions. It has been the experience of StocksAtBottom that 6 to 10 different equity positions is sufficient to achieve diversification. The one thing we know for sure is that it's not one stock or two stocks. Own one or two and you get killed. Putting all your eggs in one basket We advise all investors to own several stocks and to own more than one sector. Own more than one type of investment (that means equities, bonds, real estate, cash, you get the picture) or you will have problems. Sectors refer to stocks with broad themes. Examples are: * Energy * Semi-conductors * Housing * Auto * Consumer * Airlines * Personal Computers * Technology in general If you own 10 stocks, but they fall into only 2 sectors then you really have not achieved diversity in your portfolio. You see, when they come to get Ford Motor, usually General Motors is not that far behind. By the way, it's great on the upside to own everything in one sector when that sector is going your way. There's probably not a greater high in the world than when everything you own is going up. On the flip side, when you are overly concentrated in a sector that's heading down, lower and lower every day, there is no worse emotional low. The depression can be almost unbelievable. There's also the issue of owning more than one type of investment. There are equity investments, which are stocks. There are real estate investments, and bond investments. There are also venture capital investments, precious metals, and others such as oil and gas. To a large extent, you achieve diversity in your investment strategies by owning different types of investments, as well as investing in different sectors. Let's go into a few real life examples. We at StocksAtBottom believe we have already made the equivalent of a lifetime of investing mistakes, so learn from a few of ours. Arrow Electronics It was Christmas week in the early 1980's. One of us was sitting at Bear Stearns as a limited partner at the time. We were doing very well as stockbrokers. It was the period of full commissions (no discounting), and clients were doing 10,000 share trades in $50 dollar stocks. Taking home an income of $500,000 to $1,000,000 in a year was no big deal at the time. We were loaded up on Arrow Electronics, a NYSE company in the semi-conductor sector. Business was fantastic, the future was bright, and things could not have been better. Since we were involved on the banking side as well, we had an open line of communication to the company. We knew we had a good thing going. The telephone rang on one of those beautiful days prior to Christmas when New York City is the place to be, Rockefeller Center all lit up with a 50 foot Christmas tree and all. "Hello." A harried response, "There's been a fire at the Tarrytown Hilton Executive Center, a lot of people are dead." "Okay, that's terrible, how does it affect me and by the way, what's for lunch today?" "Buddy, you don't understand," the dead pan voice says. "What don't I understand?" "The entire executive leadership of Arrow Electronics was in that fire." All of them, every one of them had been killed by this monstrous tragedy. It was the worst Christmas imaginable for the wonderful families of this dedicated group of execs. The families never recovered, the company never recovered in terms of the people that were left, and the stock took years to recover. It plummeted from $32 per share to $4 per share in a matter of days. The recovery was slow and hard, it was agony all the way back on this particular stock. Arrow Electronics is an example of putting all your eggs in one basket. It is an example of owning just one stock. SAB does not care how much you know about a company, things can go wrong and do go wrong. You simply cannot own just one company because the risk on the downside is too great. YOU MUST DIVERSIFY IN ORDER TO SPREAD THE RISK.

         
    The perfect timing to sell your stocks

     

    While quite a bit of time and research goes into selecting stocks, it is often hard to know when to pull out – especially for first time investors. The good news is that if you have chosen your stocks carefully, you won’t need to pull out for a very long time, such as when you are ready to retire. But there are specific instances when you will need to sell your stocks before you have reached your financial goals. You may think that the time to sell is when the stock value is about to drop – and you may even be advised by your broker to do this. But this isn’t necessarily the right course of action. Stocks go up and down all the time, depending on the economy…and of course the economy depends on the stock market as well. This is why it is so hard to determine whether you should sell your stock or not. Stocks go down, but they also tend to go back up. You have to do more research, and you have to keep up with the stability of the companies that you invest in. Changes in corporations have a profound impact on the value of the stock. For instance, a new CEO can affect the value of stock. A plummet in the industry can affect a stock. Many things – all combined – affect the value of stock. But there are really only three good reasons to sell a stock. The first reason is having reached your financial goals. Once you’ve reached retirement, you may wish to sell your stocks and put your money in safer financial vehicles, such as a savings account. This is a common practice for those who have invested for the purpose of financing their retirement. The second reason to sell a stock is if there are major changes in the business you are investing in that cause, or will cause, the value of the stock to drop, with little or no possibility of the value rising again. Ideally, you would sell your stock in this situation before the value starts to drop. If the value of the stock spikes, this is the third reason you may want to sell. If your stock is valued at $100 per share today, but drastically rises to $200 per share next week, it is a great time to sell – especially if the outlook is that the value will drop back down to $100 per share soon. You would sell when the stock was worth $200 per share. As a beginner, you definitely want to consult with a broker or a financial advisor before buying or selling stocks. They will work with you to help you make the right decisions to reach your financial goals.

         
    The stock market a brief primer

     

    For most people, the stock market is a scary thought because they have seen the devastating effects it can have when things go wrong. Stock plummeted after Enron, and even when mergers are announced as with the case of Chase and Bank One, the stock market feels the effects. Even DuPont has seen its stock prices drop when negative information is publicized, so the stock market, for the most part, is a fickle entity. How does a new investor avoid the pitfalls of the stock market? Research is the only way, and it’s no ironclad guarantee. That means before you invest, you adopt the habit or reading the NYSE and DOW reports in the daily newspapers as well as reading the business section of the newspaper for any reports that may affect the stock prices of a company you may be considering. Of course, sadly, utility companies are always making money, but they are doing it at the expense of consumers like you and me. For some people, investing in the electric or water company is the only place they feel safe, but with all of the mergers of electric companies, that isn’t even a very safe investment in the 21st Century. A new investor needs to do some heavy reading and studying before investing in the stock market. This is not something that should be decided impulsively, but rather needs fully researched over time. In addition to following the current trends in the stock market, the potential investor needs to also research past trends, and be sure to research far enough in the previous years to ascertain that the company stock is stable for the most part. This requires, as an educated guess, at least five years worth of research, maybe more if time allows. For those who have been in the working force for a few years, the trend has been one of difficulties, and sometimes the most stable company has seen their stock plunge during times of recession or bad publicity. In addition to checking the history of a company, and the stock market overall, a potential investor should check the trends of companies who have been involved in mergers to see how their stock fared before the merger was announced, afterwards, during acquisition, and after acquisition. After all, the potential for a company after a merger may be a negative one, so it’s important to know how the stockholders and potential investors saw the strength of the company. The price of a company’s stock is a measure of its strength in the economy, and without that, strength, the stockholders can force an unfriendly merger, whereby the stockholders take over the company. Once you have decided the safest investment for you to make, you need to decide on a financial advisor or broker. It isn’t wise to try to make a direct buy because although it may be cheaper, the services of a broker will prevent or lessen the financial loss in the event of a drop in price. A broker can see the trend and advise you to sell your stock in a given corporation based on trends that are showing. Unless you have learned a great deal about the stock market, there is no way you, as a new investor, can predict these things. The price you pay a broker for managing your account is well worth the peace of mind you will have in knowing your financial interests are uppermost in the mind of your broker. Even with mutual funds, if you have any stocks in your portfolio, which most mutual funds investors do, it’s important to have a broker who can move those stocks around in the event of a downhill trend.

         
     
         
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