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Profitable Investing Tips has been a member since April 20th 2008, and has created 155 posts from scratch.

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Moody’s Debt Downgrade Will Only Make China’s Problem Worse

For the first time in thirty years Moody’s has downgraded China’s debt. Bloomberg discusses the ramifications of China’s downgrade from A1 to Aa3.

The downgrade of China’s debt by Moody’s Investors Service may push Chinese companies to borrow even more money from domestic banks as overseas debt becomes more expensive, increasing risks for the nation’s finance industry.

With growing indebtedness at home, compounded by a slowing economy, there’s a risk of a “negative feedback loop,” said Khoon Goh, head of Asia research for Australia & New Zealand Banking Group who sees state-owned enterprises and property developers feeling the biggest impact. The downgrade will particularly hurt airlines and shipping companies, said Corrine Png, chief executive officer of Crucial Perspective in Singapore.

China’s economy kept going during the 2008 financial crisis and thereafter by borrowing money. Corporate debt was 100 percent of GDP in 2008 and today it is 156 percent. State owned companies took on most of this debt so the government is at risk in case of defaults.

The underlying problem for China is its business model. For decades the land of managed capitalism has borrowed and grown as its markets expanded. But there comes a time when markets are saturated and add in the worst recession in 75 years. Then you have an obsolete business model and a lot of leftover debt. A lower debt rating means higher interest rates at a time when China’s debt is at historic highs. This could descend into a negative feedback loop in which companies borrow more and more money at higher and higher interest rates until they go bankrupt. What does this mean for the rest of us outside of China?

Economic Size versus Growth

The problem for the rest of us if China’s economy tanks is that China has been the growth engine for the last decades. Forbes notes that while China is 15% of the global economy it has constituted 25-30% of global growth. We can see now that this growth has come on the back of ever increasing debt.

Much of Chinese growth simply has to do with producing, buying and selling within China. However, China has been the world’s second largest importer next to the USA according to OEC report on China.

In 2015 China imported $1.27T, making it the 2nd largest importer in the world. During the last five years the imports of China have increased at an annualized rate of 2.3%, from $1.1T in 2010 to $1.27T in 2015. The most recent imports are led by Crude Petroleum which represents 9.4% of the total imports of China, followed by Integrated Circuits, which account for 7.48%.

How Moody’s debt downgrade matters to the rest of us depends on what we want to sell to China. Australia, for example, hurts every time China reduces iron ore and coal imports. And while the USA has a negative trade balance with China there are American companies that make money in China. For example General Motors’ largest market is China and not North America as it increases sales to 10 million vehicles per year. China’s problems with its debt may get worse and the fallout will affect companies and countries across the globe.

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What Would a Pence Presidency Mean for the Economy?

As troubles mount in the Trump White House the talking heads on TV have started to utter the “I” word, impeachment. As the independent prosecutor investigation proceeds into the question of coordination between the Trump campaign and Russian hackers this issue will linger. No one is really predicting a Trump exit and a Pence presidency just yet but a year ago no one was predicting a Trump presidency! On the outside chance that things go from bad to worse for the 45th president what would a Pence presidency mean for the economy and for the stock market?

Different Economic Messages

The stock market has rallied after Trump’s victory based on the hope that his economic plans will stimulate the economy. For the time being tax cuts, stimulus spending, repatriation of offshore corporate cash and massive deregulation are largely on hold due to dysfunction White House. If tomorrow we all wake up surprised to find Pence in the White House what will be different regarding the economy? Politico said during the campaign that Trump and Pence are peddling competing economic messages.

Donald Trump looks at the economy and sees a “crippled” America, a nation ravaged by incompetent leaders who’ve betrayed the working class – especially in the rust belt, ground zero for the loss of manufacturing jobs.

But one of those rust belt governors, Indiana’s Mike Pence, has spent years touting his state’s economy, noting a drop in unemployment, an increase in factory jobs and a growing workforce.

The problem for Trump is that talk is cheap but getting legislation passed through congress can be difficult, especially when you have routinely insulted everyone with whom you need to work. But what happens if Trump leaves and Pence comes in? Pence will not feel obliged to follow through on all of Trump’s rhetoric. And the Governor from Indiana has experience in crafting legislation and working toward its enactment. The mere thought of a functional White House could be a boost to the stock market. And Pence is more likely to be happy getting something tangible instead of wishing for everything and getting nothing.

Will There Be a Sigh of Relief?

The Trump presidency has been one of continuing drama, lots of talking and little accomplishment. Whatever one thinks of Pence, a Pence presidency would probably be less flashy and more centered on getting the job done. As such one might expect the stock market to react positively. On the other hand if Pence takes over and dumps most of Trump’s economic promises as unworkable the market could correct strongly. We could see a post-Trump economic slump as all of the wishful thinking attached to his promises evaporates.

What Is Pence Doing Right Now?

Business Insider gives us a hint as to what is on the VP’s mind as he started a PAC.

Vice President Mike Pence launched a political action committee last week, which raised eyebrows amid fresh turmoil in the Trump administration.

Some have questioned whether the vice president’s new leadership PAC, which was noted on the Federal Elections Commission’s website Wednesday, was aimed at promoting a possible future presidential bid at a time when some conservatives have started whispering about the possibility of President Donald Trump’s impeachment.

“No Vice President in modern history had their own PAC less than 6 month into the president’s first term,” Roger Stone, Trump’s longtime political adviser and confidant, tweeted Friday. “Hmmmm.”

This does not necessarily mean than Pence is getting ready to be president but on the other hand it does look suspicious.

What Would a Pence Presidency Mean for the Economy? DOC

What Would a Pence Presidency Mean for the Economy? PDF

What Would a Pence Presidency Mean for the Economy? PPT

Is the Economy Strong or Weak?

The stock market is a forward looking institution. That is to say investors and traders buy and sell based on their beliefs about what tomorrow will bring. However, the eventual price of any given stock always moves toward its intrinsic value, its value based on forward looking earnings. Looking forward the market has moved up with the election of Donald Trump because investors have expected to see tax cuts, infrastructure spending, repatriation of offshore corporate cash and a lot of deregulation. But not all sectors of the economy are doing well so the stock market advance is not spread out across all stocks. And when the Trump economic band wagon gets stuck in the mud of its own making the market drops back. No matter what the politics of the day the US economy is what drives stocks. Is the economy strong or weak? The New York Times notes that stocks tumble as chaos roils the White House.

Stocks in the United States were down sharply in midday trading. The Dow Jones industrial average, the Nasdaq and the Standard & Poor’s 500-stock index each were down more than one percent.

Here are the reasons they cite for the drop in stock prices.

One) Trump firing an FBI director after asking to have an investigation dropped involving a Trump advisor and Trump sharing sensitive intelligence information in a chat with the Russian ambassador. How this affects stocks is that investors believe that the government will get bogged down these issues and the economic agenda they dreamed of will not be enacted.

Two) Economic weakness is more of an issue than the market would indicate. Most of the run up in stock prices has been from a few tech stocks while car makers and retailers are hurting.

The VIX options fear index is up 20% after resting at low levels. Investors are looking beyond the hype and seeing a weaker economy. Will this be the end of the bull market and if so how bad could it get?

Trump Bump to Backlash

Remember that the market always looks ahead. Optimism has driven stocks up but pessimism could take things down in a hurry. CNBC looks at a possible inverse Trump effect.

Major investors are “somewhat cautious” as they wait to see whether President Donald Trump and Republican leaders on Capitol Hill can deliver on promises of lower taxes and massive business deregulation, Starwood Capital Group founder Barry Sternlicht told CNBC on Monday.

Sternlicht described what he called the “inverse Trump effect” on the economy — the idea that uncertainty over the details of the president’s polices is holding back investors. “If I’m an individual and I know my capital gains tax is going to drop I might just wait to sell stuff,” and sell into a more favorable tax environment, he argued.

As a result, Sternlicht said there could be fewer real estate transactions “until this is cleared up.” Investors also could be waiting to sell stocks, he argued.

The U.S. economy is on a good trajectory, but investors want to know “the rules of engagement” before making big money decisions, said the chairman and CEO of Starwood Capital, which has $52 billion in assets under management.

As we have said time and time again, investors like to know the rules and have a plan. The longer chaos rules in the White House the longer business decisions, investments and the economy will be held in check. The down side is that if none of the economic hype comes to pass the correction could be significant.

Is the Economy Strong or Weak? DOC

Is the Economy Strong or Weak? PDF

Is the Economy Strong or Weak? PPT

Are Cyber Security Tools Worth the Price?

The current ransomware attacks spanning the globe have taking down computer systems in schools, offices, hospitals and factories. According to Reuters cybersecurity stocks are up.

A global “ransomware” attack disrupting factories, hospitals, shops and schools spurred investors on Monday to buy up stocks expected to benefit from a pick-up in cybersecurity spending by firms and government agencies.

The cyber attack began spreading across the globe on Friday and by Monday had locked up computers in more than 150 countries, with experts warning of an even wider impact as more employees logged on and checked e-mails.

European Union police agency Europol said on Monday the attack had hit 200,000 machines.

“These attacks help focus the minds of chief technology officers across corporations to make sure security protocols are up to date, and you often see bookings growth at cybersecurity companies as a result,” said Neil Campling, head of technology research at Northern Trust.

In London, shares in cloud network security firm Sophos (SOPH.L) jumped more than 7 percent to a record high and security firm NCC Group (NCCG.L) rose 2.9 percent.

The current attack has to do with a flaw in mostly older Microsoft systems but this is just one of many attacks by hackers looking to take your money, your personal information or your personal photos from your computer files. When simply downloading and installing the available software fix from Microsoft two months ago would have avoided the trouble most folks are experiencing now, there are always new threats. Paying for cyber security tools and services is a bit like buying insurance. Are these tools worth the price when you want your assets and information to be safe?

Cost of Protecting Your Computers

A couple of years ago Bloomberg looked at a bill for cybersecurity of $57,600.

How much should a small business spend to protect against cyber villains? I asked Eric Montague, president of Executech, an IT firm in South Jordan, Utah, for an estimate. While the answer will vary, depending on the type of business-not to mention the relative optimism of its owner-Montague’s response offers a useful baseline: Some $57,600 a year for a 50-employee company.

If you want to protect your business or your trade station computer you could get by with a $1,200 firewall that will probably last 5 years. If you trade online you are at risk of being hacked. How about getting cyber insurance for a few thousand or more? Or how about routinely changing your password and not downloading junk from social media to your business computer?

And How about Investing in Cybersecurity Stocks?

Maybe you cannot totally avoid a cyber-attack on your computer but can you, perhaps, make some money investing in stocks of cybersecurity companies? CNBC discusses the issue.

CNBC analyzed the last 15 major cyberattacks using analytics tool Kensho. A week following the hacks, shares of Barracuda Networks, F5 Networks, and Fortinet posted the biggest average gains.

A month after an attack, the major cybersecurity players did even better as demand for their services increased. Barracuda, FireEye, and Fortinet, along with Proofpoint, were big gainers, on average, a month out.

Over the longer term these stocks seem to fade when cyber threats are not in the news. FireEye traded for $80 a share three years ago and sells for $16 now. Similarly Barracuda Networks traded at $45 a share two years ago and trades at $22 today. F5 Networks looks better as it is trading near the top of its 20 year range at $130 a share. Fortinet has been going up for a year and trades at $40 a share but it was briefly up to $47 two years ago.

It would appear that cyber security tools are worth the price if your risk is great and that cybersecurity company stocks are short term bargains when you have a crystal ball and buy immediately before the next cyber-attack.

Are Cyber Security Tools Worth the Price? DOC

Are Cyber Security Tools Worth the Price? PDF

Are Cyber Security Tools Worth the Price? PPT

Has Over-Regulation Been Killing the US Stock Market?

In the last forty years the market capitalization of all stocks listed on US exchanges has risen from $704 billion to $27 Trillion. Forty years ago there were nearly 5,000 stocks listed on US exchanges and that rose to about 7,000 by twenty years ago. Today there are 3,600 listed companies in US markets. How is it that while market cap has gone up forty-fold the number of listed stocks has fallen by a third? Business Insider discusses the case of the missing US stocks.

The U.S. seems to be the only developed country that lost so many stocks. Most other countries actually gained around 50 percent.

This matters because the U.S. stock market accounts for a little over half of the entire global equity market, meaning a huge (and growing) number of investors and fund managers now have fewer options to choose from than they did only a couple of decades ago.

The article cites three reasons for a decline in the number of listed US stocks.

  1. Mergers and Acquisitions
  2. Growth of Private Capital Investment
  3. Increased Number of Federal Regulations

M&A is easy. Two companies become one in a takeover. And private capital has allowed many companies to avoid going public or put off their IPO until they have grown significantly. The article notes that Apple went public four years after starting out in Job’s garage while today the average age of a tech company at IPO is 11 years. This is a function of available private capital but also increased costs associated with getting listed on a stock exchange. The end result is that only large well-funded companies have the wherewithal to do an IPO.

However, regulation, accord to Business Insider is the real culprit.

Sarbanes-Oxley Act

In 2002 in the wake of the Enron and WorldCom scandals congress passed the Sarbanes-Oxley Act. Investopedia explains.

The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

The rules and enforcement policies outlined by the SOX Act amend or supplement existing legislation dealing with security regulations. The two key provisions of the Sarbanes-Oxley Act are Section 302 and Section 404.

Section 302 is a mandate that requires senior management to certify the accuracy of the reported financial statement. Section 404 is a requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 has very costly implications for publicly traded companies as it is expensive to establish and maintain the required internal controls.

The bottom line regarding this law is that it is proportionally more expensive for small startups than for larger companies and thus inhibits the growth of the sort of companies that feed into to market to make it grow.

Dodd-Frank Wall Street Reform Act

In the wake of the 2008 market crash and Great Recession congress enacted another law to clean up bank lending. Unfortunately the victims of the law have been small companies. The Federal Reserve Bank of Dallas writes that Small-Business Lending Languishes as Community Banking Weakens.

Community banks are key providers of loans to small businesses, which are important contributors to the local economy and international trade. While regulatory burden on small banks and its impact on lending has received attention, it is difficult to isolate the most significant driver of sluggish small-business lending.

Business Insider writes that the answer is easy. Banks simply don’t want to deal with smaller (less than a quarter million) loans because the cost of compliance with Dodd-Frank is the same for all loans large or small.

The end result of all this is a lot fewer but much larger publicly traded companies

Has Over-Regulation Been Killing the US Stock Market? DOC

Has Over-Regulation Been Killing the US Stock Market? PDF

Has Over-Regulation Been Killing the US Stock Market? PPT

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