A New Town

I apologize to the few of you that come and read these blogs - I haven't written in a while. That's largely due to the lack of an internet connection, but also because I've moved. I gave up waiting for the phone to ring while I was in Idaho and headed down to Las Vegas about a week ago. I felt living where I wanted to work would give me a better chance at starting a career.

So far it's been a stressful job hunt. I've only been in town for about a week, but I spend many hours in the library researching and applying for jobs. I haven't limited myself to professional positions either - although I would love a PR job. The trouble is there are many qualified people out of work these days and jobs everywhere are scarce.

I've had several interviews for a variety of job types: restaurant server, office assistant, marketing rep...some of these I'm still waiting to hear back on. Today I got a legitimate callback on a marketing position with MasterCraft and have an interview on Friday! Think happy thoughts!

All in all I am in good spirits. I'm happy that I'm giving this life a real shot instead of being passive about my future. It was hard to leave my girlfriend Alicia in Moscow, but I needed to begin my life/career.

I have not given up in investing and I remain almost entirely invested still. Today we saw a huge rebound after yesterday's awful market showing. Economic pundits have begun to predit a bottom to the market, but I remain cautious.

I'm holding on to the couple of put options I own (through November anyway) because I think things may still go lower. But the moment I get a job and a paycheck, you'd better believe I'll be snatching up as many depressed shares of good companies as I can!

Brace Yourself For The Aftershock

Before I get into this post, let me apologize if I come across as overly negative. I genuinely believe in capitalism and a long-term positive outlook to the stock markets. That's why I continue to add to my stock positions, even as the markets crumble and businesses fail.

But there's no point in trying to convince yourself it's not raining when you're getting drenched. Beating your head against the wall will not change the fact that our nation is in a recession and things are going to need some time to get better.

Our current mess is due in a large part to sub-prime lending and the subsequent repackaging and reselling of those securities. But I believe the sub-prime mortgage mess is only phase one. Phase two is option-ARM (adjustable rate mortgage), and I think we'll be feeling this aftershock in the not so distant future. I wrote last month about the option-ARM mess here, but an article on the Motley Fool caught my attention. Kristin Graham wrote an article titled "The Next Housing Catastrophe Waiting to Strike" and it includes some interesting research about the looming option-ARM crisis.

I strongly recommend you read the article, but since I'm sure some of you won't, I'll paraphrase.

First, take a look at this graph.

As you can see, in 2007, many sub-prime mortgages rates began resetting. This means the low introductory rate that many homeowners were enjoying reset to a higher default rate. Consequently, the monthly mortgage payments went sky-rocketing, and now we are where we are.

But look at the graph again and you may notice in mid-2009 many option-ARM mortgage rates begin resetting. According to Graham's research, some $500 billion in option-ARM mortgages are going to have their rates reset between 2009 and 2012.

That's a lot of resets, but that's not even the scary part.

According to Graham, the average Californian homeowner with an option-ARM currently owes 109% of the value of their home. Roughly 60% of option-ARM mortgages are in California, Graham says. When the monthly payment jumps, how many people do you think are going to stick around when they owe more than their house is worth.

It's their own fault. By not making the full monthly mortgage payment (as option-ARM's allow you to do), they set themselves up for disaster.

However, as we have already found out, one person's mess can really stink up the backyards of all of their neighbors.

So while I continue to advocate seeking out good companies with solid fundamentals like a high return of investments (ROI), I am afraid things will only get worse for the short term.

You are left with several options, and these can vary in terms of return and risk. For a low risk and low return for the short term, you can seek out bonds and CD's. In fact, some places are paying in the 4% range for a 1 year CD so shop around.

Those with a slightly higher risk tolerance can look into put options like I do. With put options, you are betting that the share price of a company will decrease over a certain period of time. These days, that's not too hard of a guess. But options include risks that many people aren't comfortable with. I would encourage anyone considering options to read about the characteristics and risks of options.

The old money in your mattress can work too, although it's hard to get much growth that way. I would encourage anyone to at the very least seek out a high-yield savings account or money market account. For example, INGDirect offers a 2.75% savings account, or a 4.00% 12 month CD. That 4% over the next couple of years might let you sleep better at night than risking the wild waters of the stock markets. Either way, starting to save today will allow the miracle of compounding interest to pad your nest egg.

Holdings Update Take 2

Well after yet another monumental day of losses on Wall Street, I thought I'd keep up my promise to inform you faithful few what your's truly owns....

As of closing time October 15, 2008 I own shares of:
- Actuate Corp (ACTU)
- American Oriental Bioengineering (AOB)
- Enterprise Products Partners (EPD)
- Global Industries LTD (GLBL)
- General Steel Holdings (GSI)
- Intellon Corp (ITLN)
- Melco Crown Entertainment LTD (MPEL)
- NovaMed Inc (NOVA)

I also own put options for GSI, Alcoa and The Great Atlantic & Pacific Tea Company.

For a rough introduction to put options, you can refer to my previous post here.

On Monday, feelings were good and optimism was high on Wall Street as the markets flourished, with the Dow, Nasdaq and S&P 500 all climbing over 11%. Well today it rained on our parade, with the markets giving up those gains begining yesterday.

Such is the state of the market these days. Brief moments of upward movement, followed by punishing days of freefall. If you look at my holdings(the non-option ones), you can quickly see that my portfolio has taken a large hit too.

But I haven't stopped investing.

There's a technique that's called dollar-cost averaging. Basically, you plan to buy shares of a company in stages. For month one, you buy $200 worth of shares and continue to do so for a certain amount of time. Many investors buy in thirds - or for 3 months. That way, if in the short term the share price falls, you can scoop up more shares for the same amount of money ($200). The flip side is if the share price rises, you're getting fewer shares for your money. The idea is that you protect yourself against short term price drops and can average out your cost basis (cost you've paid per share).

It's fortunate that I've continued to pick up shares along the way, because almost all of my initial purchases are now deeply in the red. The theory goes, if you liked the company at $15/share, you must love it at $5/share. Of course, if the value is dropping for a valid reason (i.e. the company is going bankrupt) then you should likely sell. But with the current market conditions, many good companies are being thrown out with the bathwater. It's up to us to go find those opportunities.

A Safe for Safety?

In my previous post I wrote about put options as a way to hedge risk in times of uncertain markets. It's a bit tricky and options trading isn't for everyone, but you CAN make money in times like these.

As you may be hoping, there are other options when it comes to investing in wild times like these. For example, sales of Campbell's soup (CPB) have profit up 46% on the year. With inflation driving prices of many consumer goods up, middle-America appears to be loading up with some old-fashioned staples.

Another example of the times is sales of safes. Companies like Sentry Safe and Gardall are reporting sales increasing 50% over the previous year. Unfortunately for us, Sentry Safe and Gardall are privately held companies, but they serve as examples for what we should be looking for.

Some people may be concern that as the nation's economic situation deteriorates and jobless rates rise, crime will rise too. This is a pessimistic view, but it may pay to be prudent.

Self-defense and law-enforcement tool maker Taser (TASR) is currently suffering from a lawsuit stemming from an incident in 2006, but can we imagine Taser's sales increasing? The share price is down nearly 67% on the year, but that could represent a good entrance point.

Now I'm not necessarily recommending you run out and buy shares of Campbell or Taser, but perhaps it wouldn't hurt to take another look. After all, Campbell is only down 2.46% on the year, compared to 36% for the Dow. Campbell has also paid out its quarterly dividend this year - a friendly 2.93% and recently announced it was raising it's dividend 14%.

With the market as crazy as it is these days, consider what sort of companies can profit in downturns and sell goods or services that people won't cut out of their budget. Dollar stores are reporting booming business these days. Dollar Tree (DLTR) is up 35% on the year.

It's currently hunting season here, so best of luck bagging a solid company!

Limbo Time! How Low Can You Go?

Perhaps it's time to dust off your Chubby Checker Limbo Rock album and find a broom stick... It may be time to get low!

After an abysmal market performance on Monday (10/6), Mr. Market followed it up by falling another 5%. In fact, all three indices (Dow, NASDAQ, S&P) suffered 5-6% losses.

Needless to say, these brutal days on the street can be rough on us average investors. It's not fun to watch your stake in a company fall lower in value, day after day. That's why I invest with a long-term mindset, and I understand that short-term falls are not unexpected.

That being said, wouldn't it be great if there were a way to protect yourself from the short term losses. There is. They're called put options.

In markets as volatile as these, it sometimes pays to employ other trading techniques other than the simply buy and hold. That's not to say buying and holding won't work out in the long run. After all, that's what we're after. But why not protect your investment a bit and earn some money while you're waiting for the long run?

Simply stated, put options represent the "option" to sell a stock at a certain price at a later date. You don't need to own the stock itself, but you're agreeing that on XX/XX/XXXX, you'll sell shares of the stock at a set price.

An example: Let's say Google (GOOG) is trading at $345/share right now. You think that in the long run the share price will go up, but think in the short term the price may fall. In markets like todays, that's not a bad bet. So you can buy a put option contract which generally represents 100 shares at a certain price. For the March 2009 expiration date, you can buy a put contract at $39.50/share, with a strike price of $320.

This means that for $39.50/share, you're buying the right to sell 100 shares of (GOOG) at a price of $320/share, on March 20, 2009. It will cost you $3,950 to buy that contract (100x39.50). It's important to remember that options are just that, options. You have the option to sell those 100 shares, but are not required to.

In fact, the real value with options comes from its leverage. Let's say prior to March 20, 2009, Google's share price has dropped below $320/share. Your put option is now in-the-money and has gained in value. Now if you'd like, you can close your position, thereby forfeiting your right to sell those shares later down the road, but pocketing the profit.

I'll give you a real example from my own portfolio to explain better. I own shares of General Steel Holdings (GSI). Due to the growing global financial crisis, building slow-downs and a variety of other factors, the stock price is quite depressed lately. But I also own put options of GSI. I own put contracts for the November 2008 expiration date, with a strike price of $7.50. This means in November, I can sell my 100 shares for $7.50/share. It cost me $2.05/share to buy this, so roughly $215 per contract after commission.

Since I bought the contracts, GSI's share price has fallen quite a lot. However, this means my contracts have increased in value since my strike price is above the share price. While each contract cost me $205, minus commission, it is now worth $320/contract. If the share price stays low and the date for my sell option gets closer, the value will continue to increase.

Of course, there is the chance that GSI's share price could increase, and my option will lose value, but what do you think is most likely in the next two months? It's a rough sea out there, but there are still ways to make money. Think of put options as a way to protect your investment in a company.

As always, this isn't a recommendation for GSI or for its put option. This is also a very very brief introduction into one of the many ways to use options to invest. Options can involve greater risk and are not for all investors. I implore you to do your own research and talk to a financial advisor if you'd like. There are many financial professionals out there who know gobs more than I do. But I want to make sure you aren't running from the market with your tail tucked. More than 80% of the companies publically traded U.S. stocks are down this year. This includes solid companies like Apple and General Electric.

These current lows represent a great time to get invested into a solid company. Ask Warren Buffet. But also consider protecting your investment for these short-term downturns.


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A Sub-10k Day

I woke up this morning and turned on my laptop, ready to face the day and catch up on the news from the East coast. MSN Messenger started up and on the news of the day pop-up thing that comes with it, I was stunned to see a headline about the Dow falling below 10,000 points.

Immediately I headed to Google Finance to check out what the heck was going on. By mid-day the Dow, NASDAQ and the S&P 500 were all past the negative 8% mark.

But since Congress passed the bailout bill, we should be rebounding in the markets, right? Not exactly. The bailout was designed to prop up banks and support the broader economy. It was created to avoid depositors running on the banks in a mass account withdrawal. It was not intended to boost the individual prices of individual stocks. Ebay's income statements and business fundamentals haven't changed because of the bailout.

The 10,000 point mark is "psychologically important", according to many economists and financial experts. The last time the Dow was at 10,000 was in March, 1999, when it was on its way up. 10,000 points itself doesn't mean much. But since it's been 9 years since we've been at this level, it does show that our progress since '99 wasn't sustainable at that rate.

Remember, this mess was created because of a bubble in the housing and mortgage industry. Eventually bubbles pop. Markets correct themselves.

It was a painful day in terms of my own holdings. Fortunately I own not just basic shares, but other somewhat tricky market things like options - more importantly, put options. In a very brief explanation, that means I can still make money even if the share price drops.

What does today mean for the average investor? Well, the broader markets rebounded in late afternoon trading today, making their way back towards a less frightful -3.5 to -4.3% range. Individual stocks rallied, with some ending up in positive territory on the day.

This simply goes to show that the market can be a wild beast. Trying to time the market bottom is virtually impossible, as I wrote about in this previous blog. An investor's best bet is to take some time finding companies with a sound business plan. Look for companies who have produced solid earnings growth, year after year.

In times like these, take a look at dividend paying companies like Johnson & Johnson (JNJ), Coca-Cola (KO) or Enterprise Products Partners (EPD). All three of these companies have at least a 2% dividend, paid each quarter. While all three are not immune to a broad market downturn, dividends can be a nice way to offset the selloff, especially if you re-invest them. As always, this isn't necessarily a recommendation to run out and buy these three companies, but perhaps taking a look at their cash flow and income statements wouldn't hurt.

Regardless of the broader market and the current recession, there are a great many companies in the world who operate solid businesses and manage to make money year after year. When companies like these get swept up in the turmoil of the greater market, it creates opportunities for investors like us who understand it won't always be like this.

Take a breath. Realize it's not the end of the world. McDonald's (MCD) won't go bankrupt anytime soon. Look for the value in good businesses and invest with confidence for a brighter day.

Early Birds and Children's Toys

I just read this fairly distressing article about the jobless rate and the state of the economy. It hits home since I'm a recent college grad and have been job hunting for months now, unsuccessfully.

The article got me to thinking about investing though, and what we can do to protect ourselves against harsh times like this.

Virtually every financial advisor would tell you to have at least 3 months of salary set aside in case of an emergency. This is sound advice, and something I'd love to be able to do - if I could start my darn career!

But accumulating 3 months' salary to simply set aside can be a daunting task. We all have numerous bills to deal with every month, and let's not discuss if you have children! I once read an article that said the average cost to raise a child in a typical middle-class lifestyle could reach upwards of $1 million after 18 years! Scary!

That's why I believe getting started early on an investment account or some type of savings is incredibly important. Even if you don't have children yet, you may face that mountain of financial responsibility someday. Wouldn't you feel better if you had some cash to buy your daughter a stuffed animal?

Most of us can probably find a way to save $50 a month. For some of you, that could simply be brewing your own coffee and not stopping by Starbucks so frequently. I took a look at what $50 a month could bring you, over the past 12 years.

To begin with, $50/month since January 1996 is $8,050 total. But if we put that money into a company we're familiar with, say Johnson & Johnson (JNJ), today that would be worth $26,910.50. And why not buy Johnson & Johnson? After all, they make a ton of products that you'll probably buy for a new child like no-tear children's shampoo.

A return of 234% isn't something you should expect from every investment you make, but JNJ has many of the attributes of a solid company that you should look for. They pay a healthy dividend of 2.78% and have paid it since 1987. Their CEO has been with the company since 1998, and the company has a net profit margin of over 18%.

While this isn't necessarily a recommendation to run out and buy Johnson & Johnson, perhaps it couldn't hurt! My point is simply that the earlier you start investing money into companies with solid fundamentals, the sooner you can sleep better at night, even if a financial crisis like this current mortgage mess comes along.

>> By the way, I run all of the "what if" simulations through the website I invest with, Sharebuilder.com. They don't pay me or anything to recommend them, but I wholeheartedly do so. This link will take you to their "What If I Had Invested" tool, and it's free to use!

Bailed out... what now?

Now that our government has passed a version of the $700 billion economic bailout plan, investors are wondering when the market will start to reflect that positive news. This week was the third worst week ever, in terms of points lost. Many investors saw investments wiped out as they bet financial giants like WaMu would recover or be helped by the bailout.

Yet the real issue behind this whole economic mess is the housing bubble. The markets likely won't make a full recovery until the housing market has hit the bottom. And when is that, you might ask...

Well, over the past 8-10 years housing prices soared. Meanwhile, wages and salary played the part of the tortoise and slowly crept along. It's unlikely that the housing market will bottom out until home costs reach a reasonable level. That's not to say that stories like this should be expected very often.

So what's the average investor like you or I to do? If the markets aren't going to cooperate, should we just pull our money out of stocks and hoard the cash?

Well let's take a look at an example of a well-known company over the past year: McDonald's. You could say that the golden arches operate a fairly recession-resistant business. No matter the state of the economy, we're going to crave our Big Mac's and those deliciously over salted french fries.

Starting on October 1, 2007 with a $100 investment in McDonald's and putting another $100 in each month to date, we'd end up with a total investment of $1,300 and a total market value of $1,368.30. While a 5.3% return may not seem like much, compare that to a negative 23.61% return from the S&P 500.

It hasn't been a pretty year in the markets, but as you can see, there are still some great companies out there.

Another example of a smart money move right now could simply be putting your money in a money market account. I opened one for my girlfriend the other day with just $500 and overnight she had made 8 cents in interest. Not too bad for doing nothing.

My point isn't that you should by McDonald's (although it may not be a bad choice). You also shouldn't hide your head in the sand and wait for the government to sort out the economic mess. What you should be doing is seeking out good companies with solid fundamentals and a management team with their investors best interest at heart.

For those interested, I look for companies who have a long history of paying dividends (increasing them ideally) and management teams who are invested in the company themselves and have been with the company for a long time. A relatively low price to earnings ratio (P/E) and a high return on equity (ROE) are also good to look for. You can find all of this information very easily on a website like Google finance or the Motley Fool.

Happy hunting!