Financial Resource: Beginner Investing to Financial Independence!

Cash for Clunkers. Universal Healthcare. Social Security. Medicare. Medicaid. The list goes on and on. For every minor success, there is a complete disaster lurking in the wings. Meanwhile, the economy in the US is shrinking almost twice as fast as had been previously estimated, according to Bloomberg. And the stock market loves it.  The S&P 500 Index (SPY) is up some 12% since the beginning of July as we head into the Unemployment figures due out later this week. I wonder how “less bad” it will be this time around?? Which brings me back to the point: who is going to pay for all these “stimuli”?   As is no surprise to anyone with a modicum of common sense, tax revenues are plummeting as corporate revenues are down and unemployment continues to rise.  What’s going to happen when the government runs out of stimulus money if the economy doesn’t return to pre-recession levels?  Who’s gonna pay for this mess?  The US consumer’s spending represents some two-thirds of economic activity, yet has to be bribed into making purchases through programs like “cash for clunkers” or the “first-time homebuyer tax credit”. These are all temporary solutions creating artificial conditions that are giving consumers a false sense of confidence in the health of the economy.  Isn’t this what got us into this mess in the first place? How many first-time home buyers are going to be foreclosed on because they are unemployed? How many of these new cars are going to be repossessed because people are being laid off? Now the “beneficiaries” don’t have ANY transportation as they traded in their fully-paid-off hunk of junk for a nice shiny new vehicle which now has lost a third of its value because it will be marketed as a used car after it becomes repossessed! In the meantime, the government continues to rack up debt at a ridiculous pace and thinks that they will be able to pay for it all by taxing “the rich”. And corporations. What they don’t realize is that in doing so, they will make “the rich” less productive as the rich can afford to sit on the sidelines and not participate in productive activities while waiting for the next election cycle!!! Corporations are now global and because of technology can move operations overseas very quickly. They already pay the second highest corporate tax rate in the world here in the US. For what? This could even further reduce the tax base.  And that’s what this administration doesn’t seem to understand: that they should be trying to expand the tax base and not decrease it. It is unfortunate that politicians need to incite class-warfare in order to keep themselves employed. So what’s the solution?  Take our medicine. Do what’s unpopular.   Stop spending like drunken sailors, reduce taxes on the productive class (“the rich”) and corporations who employ people, and not raise them. Allow the free markets to determine prices, and not the government. Give people tax incentives to afford healthcare, go green, and make responsible purchases.  Because if the government continues to go down this path, they may find that there is no one left to tax as all of the jobs formerly held by “the rich” are now overseas or eliminated, and no one else makes enough money, if they are employed, to make a real difference to the deficit. Not to mention the unemployed. This could lead to a “tax revolt” whereby people refuse to pay because of all the frivolous spending that responsible (employed, hard-working Americans) do not take advantage of.  It’s time to reduce government, and not expand it. Now that’s change I could believe in!  

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A couple of months ago I wrote an article asking is the “Government doing too much?” There is no doubt about it, as historic action was needed in the past year, but when does it become too much? The “cash for clunkers” program has been a success, but never the less somebody is going to have to pay for it. Real GDP fell at annual rate of 1% for the second quarter, which is a real strong rebound from the last quarter with a 6.4% decline. Do these new GDP numbers really call for handing out $4500.00 for new cars!?! Keep in mind that this is money that comes off the back of the taxpayers, and not to mention, higher oil prices in the form of a weaker dollar. I have trouble going along here! These policies are really no different than going out for a couple of beers and not feeling a thing after a couple of them. So you keep kicking them back until, before you know it, you have drank too much and you’re an irrational fool, with nothing to look forward to but a hangover. Over-stimulating the economy can be the same thing; you have to be a little patient. If you over-stimulate before you know it, the economy is out of control with hyper-inflation, bubbles and then there is another severe recession. The “cash for clunkers” program would not have been nearly as successful just a couple of months ago, so what is the rationale for doubling down on a program that really serves no purpose anymore? You can’t say that the economy needs this kind of stimulus, because the economy is improving. In regards to the environment, who isn’t in favor of a cleaner, greener environment? A cleaner environment is not going to be achieved by bribing people with $4500.00 rebates. It may however lead to a national bankruptcy! There is no doubt about the reaction in the stock market though. Ford (F) was up nearly 15% on the news that the “cash for clunkers” program should be extended.

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 The oil inventory numbers came out yesterday and there was an increase of roughly 5 million barrels, 1 million more than the American Petroleum Institute’s (API) estimates. Consequently, the price plunged nearly 6% in its largest drop in nearly 3 months. But is this the whole story? Not exactly. Right now, there seems to be a lot going on with oil which could cause its price to drop even further. According to the Wall Street Journal, commodity speculators including hedge and pension funds, as well as ETF investors, were responsible for the wild oil price fluctuations, driving the price to a high of $145 barrel in July 2008. So we can be pretty sure that this price drop was not solely due to simple supply and demand. Let’s take a look at what’s really going on.  There are a few reasons why oil prices may be heading lower in the foreseeable future: The Commodity Futures Trading Commission (CFTC) is considering instituting position limits for speculators in the energy markets. In fact, there is a global push for regulation to reduce price volatility. Whether or not these regulations will go through or even have the intended effect is up for debate. While this may be a seemingly popular move, it could have a dilatory effect on other areas of the economy. On Monday, stocks in China sold off roughly 5% on speculation that the Chinese government will reduce the economic stimulus they had been providing as there is now talk of a Chinese Bubble about to burst. Should this occur, it could be a sign that their growth may be slowing thereby reducing their need for oil. If their growth numbers are directly tied to government spending, then it stands to reason that when the government reduces spending their growth will slow as well. Although I’m not really sure that anyone actually believes the numbers they report anyway. So what does this mean for the global economy going forward? Well a few things. Recently, there has been a positive correlation between the US stocks and oil, as seen in the chart below. So if you believe in these short-term correlations, it stands to reason that if oil is going to go down, US stocks will go down as well. And if US stocks go down, we can expect the US dollar to go up in value as the investors and speculators will move back to the safety of the US dollar.   So in this instance, I would be a seller of oil (USO) and the US market indices (SPY, DIA, QQQQ) and a buyer of the US dollar (UUP). Because one of two things is most likely to happen; either these correlations break down or government regulation/intervention unintentionally causes even more deflation than had originally been planned.  And this is why government controls on free market economies can have unintended consequences which can be more damaging then helpful. If the US government truly wanted to reduce commodity speculation, they would increase interest rates to stave off inflation and keep speculators from having to seek out ways to protect themselves from the government’s destruction of the US dollar. By keeping rates extraordinarily low for far too long, we are going to be moving in and out of bubbles for some time to come. Let’s just hope that it doesn’t blow up in their face. 

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Today, UBS reported that the Swiss National Bank, their central bank, may have spent as much as 35 billion francs ($32 billion) since March to stop their currency from appreciating. SNB Governing Board Member Thomas Jordan, was quoted as saying that the SNB will continue to intervene and halt any gains by the Swiss currency. And so far, they’ve been highly successful. They’ve driven the franc down 2.9% vs. the euro since the start of their interventions!You see, the SNB can sell “an unlimited” number of francs (their home currency) and buy other foreign currencies to hold their currency down. So what are they buying as they sell off these francs? According to the SNB’s web site, they’ve confirmed that they’ve increased their curerncy holdings 46% from 55.8 billion francs to 81.7 billion francs. This is no small sum. These guys are serious!Here’s where the SNB’s focus is at…and where yours should be too!So here’s what they’ve disclosed that they’ve bought.  U.S. dollar holdings rose from $13.2 billion to $19.9 billion (an increase of $6.7 billion. They reported that their euro holdings have increased from 20.3 billion euros to 32 billion euros (an increase of 11.7 billion euros). British pound holdings increased from 2.93 billion pounds to 2.97 billion pounds (40 million pounds…a far cry from the billions of the others). You can see where the central bank’s main focus has been. It’s been in selling francs and buying euros far more than anything else. Why? Because that’s where the bulk of their exports go to. The “high franc” was killing their export business which is crucial to their economy. Far more exports go to the rest of Europe than it does to the U.S. or even U.K. So the EUR/CHF becomes the primary concern on their “radar”. If you’ve followed my articles for a while now, you know I’ve been harping lately on this pair. Why? It’s not every day that you get an edge in your favor like this. The SNB hasn’t done a “solo intervention” like this since 1992. So you can see that this doesn’t happen every day. Therefore, you’d better seize these opportunities when they arise, because they won’t last forever. To my knowledge, I was the first one to start pushing EUR/CHF purchases. However, I’ve noted some other analysts along the way that have “hopped on board” with me. Lately, the Bloomberg Economists have agreed with this opinion. Also, Jessica Hoversen, an analyst from MF Global recently hopped on board too as she stated that, “The SNB has won its  battles, and they’ve given no indication that they are ready to end this policy”. She went on to say that she, “advises buying euros and selling francs when the EUR/CHF pair approaches its 200 day (simple) moving average.”In my opinion, they’ll continue to sell francs and buy euros for quite some time. Why? Because their central bank doesn’t anticipate their economy’s return to growth until sometime in 2010 after shrinking between 2.5% and 3% this year. 3 Reasons Why I Believe this to be the “Safest Play in the Entire FX World”!Therefore, I call this “potentially the safest FX play in the entire forex world” because you have a few dynamics working in your favor now that didn’t exist before. 1.      The SNB is spending billions  to sell francs and buy euros. Therefore, as you join that, you have huge “fire power” behind you as the deep pockets of their central bank backs up your trade. 2.      The technical downtrend has now been broken by just about any metric you’d want to use. The EUR/CHF pair trades above its 200 SMA. It trades above its 50 SMA (shown below). It’s broken its red downtrend line on the chart below. So “any way you slice it”, the trend is now upward, not downward. Why is that important? It’s always important to trade with the trend and not against it, in order to have an “edge”. Also, many big hedge funds and money managers use “trend following” systems. As these manual and automaetd systems detect a new trend, you get another fresh wave of huge buying as this happens. 3.       With our broker, you can earn some interest on each mini lot each day, as you await even more appreciation in the EUR/CHF pair.  You can readily see from the chart above that the pair has continued to put in “higher lows” ever since last October (even before the interventions started). However, the SNB has continued to “put a floor in” this pair at higher levels periodically as they go into the market and sell francs, sooner & sooner all the time! Ever since June, the trend has been upward and makes the trade far more appealing, because you’re not having to fight a downtrend now, and neither is the Swiss central bank (finally). We can zoom in a bit on the 4 hour chart below and  see that ever since the massive, heart stopping, intervention started, they’ve kept the upward momentum going overall as shown by the green arrow below. So if your analysis agrees with mine, then “hop on board this train” before its totally “left the station”.   

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 When Warren Buffett speaks, people listen! Buffett not only has a real effect on the stocks when he buys and sells large positions in companies, but he has an effect on the overall psychology of the market.  

 He really influences the influencers, but sometimes his messages are very misinterpreted and these misinterpreted messages can lead to stock market bubbles.   

A lot of people can really go wrong when listening to Warren Buffett too passively and perhaps even too literally as well.   Don’t get me wrong it is through no fault of his own, but when he is misinterpreted or taken out of context his words carry so much weight that they can have a large negative effect.   

If you listen to him today, you might think that he is eternally optimistic about the economy and the stock market.  

 Buffett is optimistic now about the long term outlook of the economy, but who really isn’t? When someone spends a lot of time talking about how the economy and the market will be better in 10 -20 years from now, you know things are on the surface are not that good.  

Investors should always be cautiously optimistic (like Buffett) about the long term and nothing should ever be taken for granted.  

This long term optimism leads to short and medium term euphoria which leads to bubbles, and we have seen this in the real estate market and twice in the stock market in the last 10-15 years. 

Investors should never be locked into long term optimism, because it leads to too many passive decisions about their money, such as the belief that the long time horizon will take care of everything. I will not deny a certain degree of truth to this, but our investments deserve more attention.  

We should be cautiously optimistic about the long term, and only when everything has gone to hell in a hand basket should we be completely optimistic about the long term (like Buffett).  When there is nothing else to be optimistic about! 

 Just so I am not taking Buffett out of context, when you hear Buffet speak now, he is about 75% optimism and 25% pessimism. A couple of years ago when things seemed OK he was at least 75% pessimism and 25% optimism.  

He was very bearish on real estate and who can forget his calls on the weapons of mass destruction.  This ties right into his philosophy to get fearful when everyone is greedy and greedy when everyone is fearful!  

At the very least even the most basic 401k investor should be concerned about the medium term trends and perhaps even short term trends in markets.   

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 In the midst of earnings season, the market is responding in typical fashion.   In one of my previous articles from earlier this month, I talked about some of the things the market needed to see from earnings season in order to stabilize and move higher.   Well, we’re seeing them. Now what?  As a result of the earnings “surprises”, the S&P 500 index (SPY) is at 8-month highs. But is anyone really surprised by these earnings announcements? The bar has been set so low in terms of analyst estimates that even the most inept of CEOs could guide his company over it. Is anyone else concerned about this?  Apparently, Morgan Stanley’s equity strategist is. He says that investors should be selling into this rally as it has no legs.  And one of the reasons that this rally “has no legs” is because companies are beating estimates even though they are experiencing declining revenues. The other reason that they are beating is directly related to unemployment. Let’s take a look at what that means. Companies are becoming leaner due to mass lay-offs. By reducing their labor costs, companies are able to increase their profitability even though they are not bringing in as much revenue. These companies include:  Starbucks (SBUX), Ford (F), Caterpillar (CAT) to name a few.  So is this a good thing for the economy and the stock market going forward? Absolutely Not! All this is showing us is that companies are good at cutting the fat so to speak, and not growing their business. This could be a sign that we are not out of the recessionary woods just yet. But what this is also doing is decreasing the amount of consumption out there as more and more people become unemployed and slash their spending. Also, it causes those who are employed to also cut their spending as well, as they are now fearful that they may be next in line to lose their job. So they start saving instead of spending. So let the downward spiral resume. As decreased spending increases, companies will experience even smaller revenues, which will cause them to lay off more employees to remain profitable. Then Wall St. analysts will lower their estimates, which will allow even the weakest of companies to seem strong. While the unemployment figures are declining more slowly from month to month, we are still experiencing huge jobless claim numbers and the employment picture does not appear to be improving. I would have much rather seen companies not beat their earnings but retain employees, rather than slashing their workforce to gain a few bucks in their stock price. For the near-term pop in price they are experiencing will be short-lived, if there is no one left who can afford to purchase their goods because they are unemployed.  Unless that company makes government cheese. So, if the equity markets can ride out this wave AND unemployment starts to improve significantly, then we can justify these current levels. If not, then I expect the equity markets to sell off (QQQQ, DIA, and SPY) and I will be looking at the US dollar ETF (UUP) to rise as the flight to safety trade will return. I’m just hoping right now that the rest of the market doesn’t catch on, or that they’re too blind to see that these earnings are really forecasting bleak times, not prosperous ones.  

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Well Bernanke may be voted (as Beaver Cleaver would have said) a “swell guy”, but not in my mind. Oh sure, he’s done what every other “head of the Fed” would do: print money and lower rates exorbitantly!Remember how everyone raked Greenspan over the coals for taking interest rates down to the absurdly low level of 1% and how they said it was a mistake to take rates down that low and hold them low for so long? They blamed those actions as being one of the biggest contributors to the latest bubble!Greenspan’s Excesses x 2 = BernankeWell what do we have today? We have rates that got lowered quickly and they have hit bottom at a “range between 0% and 0.25%”, essentially zero percent. Bernanke says that rates make stay unusually low for an extended period of time. Think this is going to end any differently than producing another painful bubble that will pop? Of course not. Anytime interest rates are taken artificially low and held that way for any “extended period of time”, it causes rampant inflation and enormous speculation in all markets: stocks, commodities, real estate, etc. So don’t blame the speculators for taking advantage of something that the Fed caused. Speculators don’t cause the bubbles, but they do ride them. Those who have the power to “print money” and take rates down unusually low are the ones responsible for the bubbles. Don’t be fooled. There aren’t enough speculators in the world to overrule the long term effects of what the Fed can (and does) put into place. So where is all of this headed? Well, it’s killing the dollar once again. See the chart below. The dollar has been in a downtrend now since March and it’s not likely to end anytime soon.Also, many on “Main Street” don’t think they care if the dollar falls. They are just concerned about their 401ks, IRAs, etc. So they are worried exclusively about their stocks and it seems that the Fed is only worried about the same. The Dow has bottomed in the same month that the dollar turned downward. So the Fed is more than willing to sacrifice the U.S. dollar in order to help to artificially prop up stocks. That makes everyone feel “warm and fuzzy again”. However, what they don’t realize is that in doing it this way, it drives up the cost of every day goods as unusually high inflation hits the market, robbing their “ever-shrinking” dollars of purchasing power. So it becomes “tougher to live” day to day, but hey, your stocks are going up, right? Maybe not. Maybe it’s just “smoke and mirrors”.   Look at a chart of the Dow Jones Industrial Average (DJIA) as measured in gold (aka real money). You see, gold holds value despite inflation. So when you look at the Dow in “gold terms”, the Dow is actually still down trending. Why? Because the only way that the Fed can get the Dow, S&P 500, etc. to rise, is to cause the dollar to tank.Well if the Dow goes up in dollar value, but those dollars are worth less all the time, have you really made any “real” head way? I think not! And there’s no better way for this to be seen than viewing the Dow in “gold terms”. In other words, when you take into account the inflationary pressures over time, the Dow is actually LOSING GROUND!How you can Protect Yourself and Your Accounts from the Ruthless Fed!So since the Fed will not stop their actions what is one to do in order to protect themselves? Sell short the dollar, buy gold, buy foreign currencies, buy commodities and buy foreign stocks. These are the ways to preserve your purchasing power AND your retirement accounts at the same time. 

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 As someone who spent a lot of time as a Financial Planner after the Tech Bubble in the late 90’s, it is not easy to say you have to love Tech stocks. Why? Because, the Tech market of the late 90’s became the poster child of what not to do when investing. It became a cliché for anyone who taught people how to diversify and be a balanced investor.  Regardless though, I hope people are taking another look at this market, with the past behind them and with a much wiser risk management approach leading their decision making.  The fact of the matter is, the NASDAQ market (QQQQ) is on its best run since 1998 and up approximately 23% on the year.   NASDAQ is only down 20% since the Economic Crisis    Up 16% in the last 3 Months   You should love this market right now because the risk/reward is not as bad it is in the other stock market indices like the Dow and S&P.  There may be some bumps in the road, but for the long term investor this is an area that cannot be overlooked.   Here are 5 reasons why Techs should once again be part of every portfolio:  Most Tech companies have strong balance sheets with no debt and a lot of cash. Wecan’t say that about Financials and many other industries.  Newer technologies have become like utilities, and people are literally afraid of falling behind the technology curve.  Emerging markets like China and India love their high tech gadgets just as much as everyone else and these markets are huge and growing fast.  Technology promotes efficiency, and with companies looking to cut costs they do not mind upgrading their technology.  They’re profitable and should continue to be profitable. It’s all about earnings and most of the tech companies are good at making money and knowing what consumers want.      This is not your late 20th century Tech Market, and in fact the NASDAQ is still about 60% off its all time highs from March of 2000. Investing in this market intelligently may prove to be quite lucrative over the coming years.   

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Today, I want to share with you, four crucial reasons why I believe that the British pound is about to soar once again vs. the U.S. dollar.

Even though the pound (GBP) has been stuck in a range bound pattern for a month and a half now, things are about to change.

Here’s why:

1.      The U.K. “unemployment claims” figures have been headed down ever since the huge spike up in March. In fact, the latest numbers came out this morning. What did it show? There was a positive revision (improvement) in the previous month’s unemployment numbers to 30.8K. The latest numbers were expected to come in at 41.4K but ended up coming in at a much lower 23.8K. Lower unemployment claims is a bullish sign for their economy and therefore, for their currency as well.

2.      The U.S. Dollar Index continues to fall. While the dollar index has been in a downtrend ever since early March…it’s been consolidating sideways for about a month and a half now. Some speculated that it would turn back upward. However, I felt that due to the poor fundamentals, excessive money printing, Obama’s policies and higher unemployment than much of the world, that the technical trend would therefore continue. Yesterday and today, the index has decisively broken lower yet again, helping the GBP/USD to bolt higher.

3.      The inflation in the U.K. is still at 1.8% on a year over year basis, while many countries out there have “negative inflation” aka “deflation”. So with the U.S. having -1.3% inflation and the U.K. having +1.8% inflation, my bets are for the pound to appreciate over that of the U.S. dollar, since inflation spurs eventual rate hikes, which spurs investment in a currency with a growing interest rate yield.

4.      Stocks have gotten a recent boost in the last few days as a notable improvement in corporate earnings has fueled a better sentiment and higher stock prices. When investors are willing to take upon the risk to buy stocks, they also load up on more aggressive currencies too, such as the GBP.  

So it’s no wonder that the pound hit bottom in the February/March area on the charts and has headed up overall since as unemployment improved and stocks stabilized while the dollar broadly turned lower and U.K. inflation remained notably much higher than most other currencies, particularly the dollar!This is why we have an uptrend on the GBP/USD daily, one year chart.

The four reasons that I give above cannot be ignored and are not “fleeting” points but are points that will continue to impact the pound for months to come. So if your analysis agrees with mine, then buy the GBP/USD! 

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• Currency Investing

  Let’s face it: gold is very pretty. It makes for great eye-candy when dangling from some starlet’s neck, usually holding some other equally beautiful gem or precious stone. But what’s it really worth?  Well that’s pretty easy, just take a look at the current quote for gold or a gold chart, recently trading around $909/oz. But what does that really mean?  Well I’m not going to rehash the basic laws of supply and demand, but: An asset it only worth what someone is willing to pay for it! There are many other uses for gold besides just making pretty jewelry.  There are many industrial and engineering uses for gold as it is very malleable, it’s resistant to corrosion, and it conducts electricity. So what? What does that mean to me? Absolutely nothing! Why? Because I have choices. I can choose not to buy it and it doesn’t affect my life one way or the other. But oil? Now that’s a different story.   Now I realize that here in the US we’re making a push toward renewable energy and trying to wean ourselves off of foreign oil, but right now we are still years away and it is also cost-prohibitive. Back when oil was $147/barrel and gasoline cost $4.00/gallon, I chose to amend the way that I consumed oil, namely by driving less, and turning down my heat in the winter. But this is something that affects my life directly. So why all the love for gold?   Well, throughout history gold has been symbolic of wealth and power and in modern times has been known as a hedge against inflation. When Nixon took the US off of the gold standard in 1971, he was merely decoupling one symbol for another! (gold vs. paper) And in 1971, what was the biggest source of wealth and power? That would be the United States. (Whether or not this was true at the time is up for debate, but it seemed to work.) Fast forward to present day. The US doesn’t seem as wealthy and powerful in comparison to other nations and the disparity between that wealth and power gap has narrowed considerably since 1971. As a result, much has been made recently about the consternation regarding the use of the US dollar as the world’s reserve currency, and nations such as China and Russia have recently been calling for changes.  Which brings me back to gold and oil. It appears now that our economy has “stabilized” for the time being and that we might be in the early stages of recovery, yet it seems like deflation is rearing its ugly head. It looks like BOTH gold and oil has been selling off recently.   Is this a minor blip or a trend reversal?  Unfortunately, the fall in the price of oil means that demand may be falling which could be indicative of the world economy not recovering quickly enough. This is actually good news for the US dollar as it will gain strength from the “flight to safety” trade, but deflation will bring down both gold and oil. As far as the intrinsic value of gold is concerned, to me it’s worth as much as a piece of paper with a president’s picture on it. And it’s not as easy to carry. Give me oil any day of the week.  All of the gold bugs who are hording gold coins in safety deposit boxes are living a fantasy.   If they were sane or smart, they’d starting hording oil. At least they’ll be able to heat their homes and cook warm food, rather than just sitting around with their gold hoping to look pretty enough to be asked out on a dinner date!   Because once everyone figures out that gold holds no more value than a piece of paper, it too will lose value. Now if I can just find away to carry around some oil. 

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