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About Jim Walker

Jim Walker has been a member since November 8th 2010, and has created 619 posts from scratch.

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Is Dr. Doom Right about the Markets?

There are contrarians who continually predict a fall in stock prices. The old joke is that even hypochondriacs get sick once in a while. Thus by analogy we might say that even the perpetual naysayer will be right about the market from time to time. One of these naysayers is Marc Faber also known as Dr. Doom. According to CNBC he predicts that stocks are set to plummet 40% or more.

If the man often hailed as the original “Dr. Doom” is right, the stock market could see another “lurch” higher – at which point investors may want to cash out quickly and run for cover.

Marc Faber, the editor of “The Gloom, Boom & Doom Report’ and a perennial bear, isn’t backing down from his latest dire prediction that would send stocks plummeting by 40 percent or more.

A drop of that size could take the S&P 500 Index down from Friday’s closing price of 2,438 to 1,463.

Mr. Faber is basing his prediction on the narrowness of the rally with so much capital thrown at so few stocks, namely the FANG tech stocks. The bright side, he says, is that when market bottoms out there will be plenty of bargains to pick up. So, what do others think?

Up, Down, Up and Finally a Crash writes about one possible scenario for a stock market crash.

After 8+ years of phenomenal gains, it’s pretty obvious the global stock market rally is overdue for a credit-cycle downturn, and many research services of Wall Street heavyweights are sounding the alarm about the auto industry’s slump, the slowing of new credit and other fundamental indicators that a recession is becoming more likely.

Few have taken the risk of projecting a date for the crash. Next February is a good guess, as recessions and market downturns tend to lag the credit market by about 9 months.

Read the article and follow his somewhat complicated graph and reasoning. A salient point in that he makes as that while the naysayers get rolled over with each successive market advance their warnings are remembered. Unfortunately everyone remembers at once at the top of the advance and massive selling becomes a self-fulfilling prophecy driving the market into a crash.

Who Else is Worried?

The Guardian writes that a steep rise in lending has caused worry at central banks.

World leaders have been warned to guard against another financial crash after a steep rise in risky bank lending over the past year that could threaten the stability of the global financial system.

The international body that represents central banks said a recovery in global trade this year and improving levels of GDP in most countries could create complacency and convince policymakers to ignore warning signs of excessive lending coming from the financial sector.

With only two weeks until the G20 summit of world leaders in Hamburg, the Bank of International Settlements (BIS) said politicians and central banks needed to keep financial markets in check to prevent another crash.

In the aftermath of the Great Recession it was China’s bet on growth and borrowing for expansion that helped support the global economy. Now that China has cut back on raw material imports many emerging economies are hurting and as China continues to pile on debt they may assume a role opposite the previous and drag the world economy down with them!

Is Dr. Doom Right about the Markets? DOC

Is Dr. Doom Right about the Markets? PDF

Is Dr. Doom Right about the Markets? PPT

Tips on How to Start Investing

The stock market crashed in 2008 and ushered in the Great Recession. Many who had investments in the stock market sold at huge losses and have stayed away ever since. And many have avoided investing in stocks because of the perceived risk of losing everything. But, the stock market has come back and is at an all-time high! If you missed out on the run up since the crash there is still hope but there are also pitfalls for beginning investors. Here are a few tips on how to start investing.

At What Point Should You Start Investing?

If you are putting money away for a rainy day or for retirement the sooner you start the better your eventual results will be because of the exponential growth that stock investments offer. But first take care of a few essentials. How to start investing in the stock market begins with putting your financial house in order. The high points are that the stock market outperforms other investments over the long term. And before you start putting money into stocks you need to pay off your credit cards because the interest you pay on those is more than a beginner can expect to make on his money in the market. Then you need a place to live and the mortgage interest deduction on your home is an excellent investment. And last before starting to invest you need a cash fund of three to six months income so that when you change jobs or have other expenses that you do not need to pull money out of the market just after a correction.

How to Start

Several years ago we wrote about how to invest $10,000 assuming that you inherit money or have put together that much.

In deciding how to invest 10,000 dollars let’s look at investment horizon, risk tolerance, growth versus income, and diversification as the first considerations on the way to deciding what is a good investment for our first stock. How we envision our investments will help us focus on the stocks that fit our needs. If we are looking to save money for retirement we may choose different investments than if we are saving for a down payment for a house and hope to have built up a substantial amount of capital in, lets’ say, five years. Our risk tolerance should be built upon our ability to absorb the loss of our investments in their entirety. Someone close to retirement may want to look at dividend stocks more closely than growth stocks and a younger investor will certainly want to cash in on the exponential growth of a strong growing company. Diversification is always important as it lets us benefit from growth in different market sectors and commonly cushions losses in one stock/sector with gains in another.

Once you have decided on what approach to take you need to pick stocks. Start with what you know. For example, physicians or pharmacists should be familiar with drugs and drug company products. That sort of specialized knowledge puts them at an advantage in picking stocks. Then a new investor needs to learn to determine intrinsic stock value. That is the value of a stock based on forward looking earnings. When that projected value is greater than market price the stock is a buy and when it is lower it is a stock to sell or avoid. No matter how great a stock tip may seem do your own homework before investing. Aim for a mix of dividend stocks that provide cash return as well as growth stocks with the potential for multiplying their value. And pay attention to your portfolio as you go because what was solid stock one month may be a sell the next.

Tips on How to Start Investing DOC

Tips on How to Start Investing PDF

Tips on How to Start Investing PPT

Which Supermarkets Will Survive? shocked the investing world by acquiring the high end grocer Whole Foods Market. Which supermarkets will survive as Amazon enters the $800 billion a year grocery market? CNN thinks the move will not work and purchasing Whole Foods will be Amazon’s Waterloo.

The one sector of the retail market Amazon does not have a significant toe-hold in is the gigantic $800 billion a year grocery market. That is until now. With the deal to buy Whole Foods, the online retailer now has a small slice of the grocery market (about 1.2%), which is dominated by a handful of firms like Walmart (14.2%) and Kroger (7.2%).

Clearly the large players are worried. The shares of the biggest supermarket chains fell by about 6% when the deal was announced.

So far, the deal has been great for Amazon. Usually acquisitions lose money for big companies. But Amazon immediately gained over $14 billion on its market capitalization when the deal was announced – that is more than the $13.6 billion the Seattle based company plans to pay for Whole Foods.

Years ago they taught at Harvard Business School that if you could manage one kind of business you could manage any business. It was that kind of thinking that led Xerox to buy an insurance company and then lose billions of dollars when a hurricane hit the Gulf Coast. Amazon accounts for 42% of all online sales. They have caused the unrelenting demise of bricks and mortar businesses. How will this work out? Which supermarkets will survive the head to head competition between Amazon and the likes of Walmart? And will any smaller operations survive? Interestingly it was the founder of Whole Food, John Mackay, who said that the grocery market will be Amazon’s Waterloo.

Are There Good Investments in This Scenario?

Knowing where Amazon’s boss, Jeff Bezos, is going to take this project is difficult because what Bezos does is experiment until he finds out what works and then he does more of that while continuing to experiment. It may be that every Whole Foods store will be an Amazon distribution point. The eternal problem for those wanting to develop an online grocery business is the perishability of produce, the fickleness of customers and the labor intensive nature of the business. There will certainly be losers as Amazon takes on Walmart but knowing who and what right is difficult. The New York Times sees Whole Foods as sustainably sourced guinea pig.

Amazon almost certainly doesn’t know yet how exactly Whole Foods will fit into its long-term plans. You can expect it to make few dramatic changes to Whole Foods in the near future. Instead, Mr. Bezos and his team will most likely spend years meticulously analyzing and tinkering with how Whole Foods works. They will begin lots of experiments. When something works, they will do more of that, then more, and then even more. They may take over the world all the same – and, in the process, probably usher in big changes to large swaths of the economy, affecting everything from labor to urban planning – but they’ll do it in ways we won’t be able to predict now.

What we do know from past history is that Jeff Bezos tends to succeed over time. The stock market saw this when all major grocery chains took a price hit on news of the Whole Foods takeover. Perhaps the ones who should worry are the big stores where Amazon’s automation experience will make inroads. And perhaps the smaller, neighborhood-based chains will do just find as economy of scale will not apply to their businesses so much as proximity and service.

Which Supermarkets Will Survive? DOC

Which Supermarkets Will Survive? PDF

Which Supermarkets Will Survive? PPT

Herd Effect on Global Investing

We recently asked why aren’t you investing offshore. US markets are overpriced and Europe and other regions may have more room to grow.

Buy low and sell high is the age old mantra for investing. With all the hype about bringing jobs back home, reducing taxes and spending on infrastructure, the best deals in stocks today are not in the USA but in foreign markets. Why aren’t you investing offshore?

But can you really get better results outside of the USA? Harvard Business School discusses the issue and says that global investments are still a good bet but there is more to the story. There may be a herd effect on global investing.

Investors in global equity markets have traditionally hedged their bets, casting their investments far and wide across the world. That way, if the market in one country or region stagnated (think Japan in the 1990s or Europe in the 2000s), they could make up the difference in other sectors that are booming.

However, as markets in different countries have increasingly moved in tandem or correlated, from 50 or 60 percent in the 1990s to more than 90 percent after the financial crisis of 2008, that strategy has seemed less and less worthwhile.

The world has become a smaller place. A given country may be experiencing growth but their stock prices may also have been already driven up removing any benefit for you to invest. If all markets are moving together then you might as well stay at home, right? According to the article home bias is short sighted and they site recent research.

The other possibility for increased market correlation is not because national economies have become more intrinsically similar, but because investing has become more global overall, so large equity firms are moving their money together based on the same sentiments. “Today, we have truly global asset managers that make it easy and cheap for any investor to invest in every market. This facilitates the transmission of investor sentiment across markets,” says Viceira.

This is the herd effect. The way to beat the herd is to know what you want, examine the fundamentals and invest accordingly. The writers say this:

“Being globally diversified is basically making a bet that the global economy will be in a better position in 20 or 30 years than it is today”

This is an approach for long term investors mimicking the likes of Warren Buffett who looks at economic growth as the engine that drives stock prices.

Don’t Follow the Herd over the Cliff

When commodities were hot everyone wanted to invest in the BRICS nations (Brazil, Russia, India, China and South Africa). Commodities are not hot and a lot of money was lost in pursuit of huge profits before the economy tanked. On the other hand those who invested for the long haul, putting a little into stocks every month and staying the course with solid companies did not lose much at home or abroad with the 2008 crash or when commodities collapsed. And most of them have recouped any losses and made profits with the recovery. Beware the herd effect on global investing and pick your stocks carefully, ideally sticking to American Depositary Receipts and looking for intrinsic stock value.

Herd Effect on Global Investing DOC

Herd Effect on Global Investing PDF

Herd Effect on Global Investing PPT

What Do You Do When Market Winners Start to Lose?

The stock market rally this year has been largely driven by the high tech darlings known as the FANG (Facebook, Amazon, Apple, Netflix and Google). The first take of many investors after Trump’s election was that industrial, construction related and bank stocks would benefit from his proposed economic stimulus measures. However, all of that has been slow to come if not absent as scandal and inefficiency drag the White House into the muck. Now the realization seems to have hit the market that the high tech darlings may be a little too highly priced and they have all dipped together. Our concern is what do you do when the market winners start to lose? Do you hold on, buy put options or sell and bank your profits? First here is an update on the state of high tech. The Financial Times writes that US tech stocks extend their losses as the week opens.

US technology stocks were under pressure early on Monday, leaving the sector that has led Wall Street’s gains this year poised for another day of losses after Friday’s abrupt rout wiped $140bn in market value.

Market strategists have for some time pointed to potentially stretched valuations for some of America’s biggest tech names, which have enjoyed a blistering rally this year. Until Friday the S&P 500 tech sector was up 21.9 per cent for 2017, compared with 8.7 per cent for the broader benchmark.

Investors have raced into tech, which is thought to provide vigorous revenue expansion even amid a lackluster economic climate, as expectations that a fiscal stimulus plan from Donald Trump’s administration will galvanize the US economy have faded.

Investors have put money into the high tech stocks because these companies are increasing their revenues and profits while other sectors such as retail have flat lined or fallen off. Nevertheless the eventual price of a stock is determined by its forward looking income stream and by the health or weakness of alternative investments. Interest rates are low so bonds are not an especially attractive option. When these market winners start to lose will they fall precipitously or will they merely correct by a few percent? The answer to that will determine whether you sell or wait for a bottom and buy more shares.

A Vote of Correction

Business Insider reports that another Wall Street bank downgrades Apple.

Apple’s stock price is falling after another analyst downgraded the company Monday morning.

Mizuho’s Abhey Lamba downgraded Apple from a buy to a neutral and lowered its price target from $160 to $150.

“We believe enthusiasm around the upcoming product cycle is fully captured at current levels, with limited upside to estimates from here on out,” Lamba wrote in a note to investors.

This analyst does not see disaster looming for Apple but does see the stock as overpriced. If you have been buying Apple in expectation of continual price appreciation you may want to rethink your strategy. Nevertheless Apple pays a decent dividend as in not going away so it can be looked at as a blue chip with dividend instead of a growth darling.

1999 All Over Again?

When the FANG stocks buckled at the end of last week CNBC commented that big tech companies look too much like 1999 not to sell and take a little profit. An asset manager discusses what to do when now and 1999 look all too similar.

How do I handle [tech sector overpricing]? By selling off little pieces of these winners at a time, by rebalancing into other sectors outside of technology, and cash. If I miss upside because of this, so be it. The latter side of the year 2000 was painful for investors. WorldCom, Qwest, Global Crossing, Lucent, JDS Uniphase, AOL, Yahoo, Excite and other hotties of their day, which had multi-hundred billion-dollar valuations, literally saw their values evaporate.

Remember the old saying that you do not have a profit until you have taken a profit no matter how a stock has run.

What Do You Do When Market Winners Start to Lose? DOC

What Do You Do When Market Winners Start to Lose? PDF

What Do You Do When Market Winners Start to Lose? PPT

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