Investment Playground.NET

The market moves on expectations. Not on true value or best practices. Only on the consensus expectation. If you can ignore all the interday hype - you’re a cool, calm, and most likely wealthy value investor. If not - you’re a hyper, fast-paced, and most likely wealthy trader. What the Fed does today will impact the market on a short-term level. The true impact of reducing interest rates takes about six months to manifest itself to the consumer. So what do you do about it — play the market today on a short-term call and formulate your expectations for the next twelve months.

Traders have pushed the market up nearly 1% since its low earlier this month. This is, historically, a big move. The reason is because traders are counting on the Fed to drop interest rates by another 0.50% today, after last week’s 0.75% cut. Totalling 125 basis points in a nine day period. If the Fed does indeed cut rates today by 50bp, you’ll see a moderate increase in the indices - but bear in mind this is what the index prices are EXPECTING. If you see a 25bp cut, the markets will tank by triple digits - only because the 50bp cut is already priced in. There’ll be a huge decline because they now are revaluing the market level, in addition to overreacting (this is Wall Street after all).

My opinion - the Fed has lost track of the long-term goal and will try and play the market themselves - resulting in a 50bp cut to prevent major losses in stocks and companies. Count on moderately severe inflation over the next six to eighteen months.

Word of caution: do NOT follow this posting if you are a person who has not developed the proper discipline to pay off credit cards according to a certain pre-set goal and style, nor if you have the financial capability to do so.

I’ll make this nice and simple. I got an offer on my current existing credit card for a 0% APR through to July of 2008. I just bought a ridiculously expensive car (which I love) at a 7.2% rate, the best in my Northeast US region. So is it smart to take a loan out on my credit card at 0% APR for a few months and pay down a few months of my 7.2% loan?

Well my answer is yes. ONLY IF you can succesfully manage your choices and pay off that credit card loan before paying any interest. If you pay a day of interest you’re eating into your savings REALLY quickly. Most people dont’ have this capability due to financial constraints, or more realistically they don’t have the discipline to maintain this payment. So proceed with caution.

First rule is read the fine print. This particular offer had a one-time 3% fee. I planned on paying off $1800 using this method, which meant immediately I’m being charged $54 for this service. Run your financial analysis and find out how much you can save, and how much it costs you.

In my case - let’s say I financed $27,000 for this ridiculously priced toy. At 7.2% and 60 month loan term, 5 years, my monthly payment is $537. After five years I’ve paid off the total principal amount plus $5231 in interest (bastards). Go to http://www.bankrate.com for amortization tables and payment amounts. If I add a one-time payment of $1800, it means the loan will be paid off in September of 2012 instead of January of 2013. Further, I’ve now paid a total of $4497 in interest, saving myself $728. Deduct the $54 cost of using this service and you’ve got your grand savings. Sounds like a pretty good investment to me. Bear in mind - the necessary cost that I must pay now is $300 extra per month to my credit card to pay off the $1800 balance before interest starts kicking in, in addition to my regular $537 car payments. If you can’t stretch yourself by the $300 more per month that I must do - you have to skip this plan. One month of 15% interest on a $1000 balance is $12.50, eating into your savings.

It pays to have good credit.

Footnote: Bear in mind - if you ever plan on using this card while you carry a 0% APR balance, you will pay interest on that new purchase you just made until you complete paying off the 0% first. It’s a game they play with you - if you pay off $x, that goes to the lowest APR category first, not the highest.

In managing your personal finances and investments - the most often overlooked yet most important thing you can do is map out your investment goals. I know this is a dry topic - but don’t think you can forgo it. The result of attempting to invest and grow your income without having mapped out a plan and goals is a mish-mash of half-complete investments and misallocated funds without exit strategies. Your goal list should be written out clear and plain in simple language. It also is not just a quantitative list of how soon you want to be a millionaire - an investment may be qualitative - such as getting your MBA or reading a few books on private equity, for example.

It might be fun to sit there and “try your luck” and hope to “win big” at some point with a fantastic real estate purchase or perhaps the best stock purchase you can dream for - but this isn’t planning. Quite contrary - it’s gambling. And this site will not teach nor bide in to gambling. Good things take time, a long time.

Your goal list should start with WHAT you want to accomplish and by WHEN. After flushing this list out, sort it out by short-term and long-term (under three years is short-term). Your next step is to flush out HOW for each item. From here, implement your PLANS by asking HOW yet again for each. Continue in this fashion until you have a clear attack plan.

My goals for 2008 are quite simple. I have a year-end amount that I must have saved up. I’ve given myself permission to invest this figure (with four zeros), but the true value on Dec 31 will be no less than my goal. I also intend on pursuing my MBA. Specifically, taking the GMATs and applying to select schools. There’s no better investment than investing in yourself. I also have a goal of finalizing my emergency fund in a high interest bearing account. Further - I’ve set an alert email to be sent to me everytime my credit card balance goes over a threshold that I set. You decide what’s more than manageable for you - my amount is $800 (you should be able to pay off the full amount every month).

So - what’s your goal list look like?

We wrote a blog posting last May when the S&P 500 was at 1505, calling for a high relatively soon. The market hit 1550 in August and 1560 in October. So yes - I’d say we were right in finding the “top”. It’s better to sacrifice a few points in profits in order to reduce your risk profile long-term.So what’s next: finding the bottom. I’m a big proponent of using history as a lesson in just about anything we do - including investing. Go over to www.bigcharts.com and follow along with me. When the market historically enters a state of euphoria, shortly afterwards you’ll see a massive correction down to the pre-euphoria state. That’s basically the whole lesson in a nutshell. In 1998 - the pre-euphoria level of the Dow Jones bounced between 7800 and 9200. On Jan 1 1999 the market entered a ridiculously transparent euphoria state when a blind leper could’ve made money back then - and rocketed up to 11,500 in the next twelve months. Then 9/11 triggered an inevitable meltdown when the Dow lost all those precious false euphoria dollars and fell to - you guessed it - the pre-euphoria level of 8755 - right in the middle of the trading range a few years prior. The market gradually rebounded and as prices get higher with time - the 2000-01 euphoria levels became a baseline for the next five years. Between 2005 and 2006 investors started to gain their confidence back (note for the future - this is the time you put all your money into anything and watch it grow). The market bounced between 10100 and 11100 for the next fifteen months. The last pre-euphoria high that I’m seeing was on May 10th of 2006 at 11,642 - the high. After some time, we lost track of what real investing is like (again). So I’m calling out two resistance levels for the Dow - it won’t go lower than these - 11,642 and 10,684.

Basically I won’t feel comfortable until the market closes at or below 11,642 - and at this point I’ll buy all the way down to 10,684.

And to prove our hypothesis - what the hell happened this week on Wall Street? The market traded consistently lower all year long until the 23rd of January we had a huge rebound - almost as if we bounced off some magical resistance number. At about 12:45pm on the 23rd of January - we hit the level of 11,649, and what immediately followed was a 300 point increase into positive territory. Do you see what happened?

Traders and technical traders saw the “resistance” level, and everyone bought back in. Eventually that floor at 11,642 will become a ceiling. And once that happens - I’m back in the game. Our research needs to close with this quick explanation: We can monitor the market and indexes (Dow Jones, S&P, and Nasdaq) to track the general direction of the market. Stocks usually follow somewhat in trend. However - “usually” does not mean stocks will always follow trend. So when we do our research to find tops and bottoms of the market - we are looking for the general trend of the overall market - thereby increasing our chances of success in picking individual stocks.

Doomsday scenarios. That’s all you hear nowadays. The worst housing recession since the Depression, oil prices at $100 a barrel, weak holiday retail sales, sub-prime meltdown, itchy trigger finger president, falling US dollar —– what else do you need to scare you out of this market??

So what to do??? First of all - turn off the TV. Traders don’t know anything. Traders do not invest, unlike the average American. In my opinion - traders are a bunch of gamblers who push the market in either which direction. What do you do? You invest. You buy good solid companies at attractive prices with strong growth prospects and historical backing (research the brilliant Warren Buffet, or see GARP investor). Traders don’t care about the fundamentals of a company - on the contrary they actually try and cash in on herd mentalities. Therefore spend less time watching the ridiculously daily volatile movements, and more time finding good companies that are recession proof.

We may or may not go into a recession. Strategists at Morgan Stanley today advised their clients to stay in cash. In fact on Monday, analysts and strategists at Morgan went as far as releasing this quote: “Our themes continue to be: patience, earnings recession, U.S. recession spreading global, bear market regime, don’t be lured into value stocks as most are likely to be value traps, much more monetary easing. We expect flat but volatile markets just as in the 1989-92 period — a real whipsaw environment for the market.” Regardless of how you feel about an upcoming recession - it’s time to start playing defensive in your investment portfolio. More specifically:

1. If you’re not in the market right now - stay out. Wait this one through and they start grabbing basement price stocks.
2. If you’re in the market with a sizable amount of funds, but you’re comfortable mid-term without having to pull anything out - then relax and watch the flames rise high as you claim dividends. As above - once prices get really low, start buying up again and this way you’re reducing your average price paid per stock. Of course - you don’t want to just relax as your stocks are tanking if you bought sub-par companies to begin with. But you didn’t do that - did you?
3. If you’re in the market and you’re nearing retirement or you’re near something where you’ll need access to capital - you may as well cut your losses here. Granted - at 12,000 levels it’s probably not a pretty loss - but technicals and historicals point to sub-12 - perhaps 11,500, as a floor.
4. Stick with stocks that are recession-proof. Global companies with plenty of exposure overseas. Or consumer staples such as oil, food, energy, utilities, transportation, etc. Do your homework - only the good or great companies are worth buying - and they’re tougher to find in this market.
5. Start saving. I hope to throw about eight or nine thousand dollars into solid companies once this is all over.

My pick for now: Hewlett Packard. A solid company that has built up a foundation underneath a fortress with strong international exposure, strong recurring revenue (from their Services division), and a pretty cheap price.