skip to main |
skip to sidebar
The Oilers have not played a playoff game since they lost game seven to the Carolina Hurricanes in the Stanley Cup Finals on June 19, 2006. Had the Oilers won the Cup, well, I probably would not have to feel like an ashamed fan, but alas, here we are. So, since that day, seven and a half years ago, here are ten things that have happened or could have happened in the same time span.
1. Snow White will have had the opportunity to be impregnated by and give birth to the children of all seven dwarfs.
2. Most of Europe, including the United Kingdom and infamously Italy, has gone through two recessions. One occurring from 2008 to 2009 and a "double dip recession" from 2011 to 2012.
3. If you found a nickel every day since the last playoff appearance to the date of this post, you would have $134.50, still not enough to buy one Oilers ticket closer than row 35.
4. The average American married couple would be filing papers for divorce.
5. Michael Bay has some how been allowed to produce three Transformers movie with one more coming at the end of this hockey campaign.
6. Every cell that comprised you seven years ago has been replaced by daughter cells through mitosis (urban myth).
7. An entire company started from scratch, took over the world, and then collapsed into nothingness with these devices.
8. "New Horizons," a space probe sent to study objects beyond Pluto, has flown from Earth to the middle of Uranus and Neptune's ring of orbit.
9. Your child will have learned what are birds and bees and are now learning about the "birds and the bees."
10. A high school graduate has traveled the world for a year and earned his or her masters in university.
I feel so sad...
Without a doubt, Netflix (NFLX) is one of, if not, the most volatile stocks on the S&P 500 sometimes moving as much as 5 per cent in a single day on zero news. In a good week, a blind and lucky trader can easily beat the average annual return of a mutual fund or broader index. Traders gravitate towards volatile stocks like Netflix for good reason. In the last 365 days, the stock rose from $57.40 to $389.16 - a 578 per cent increase. The stock hit that $389.16 the morning after it posted fourth quarter earnings on October 21, 2013, that beat the estimates. An hour later, the stock crashed and was trading below the previous close of $354.99. And many, many lessons were taught that day.
1. Valuations Matter, Eventually
Along the way up, naysayers claimed the stock would crash. At $100, it was an expensive speculation. At $200, it was overpriced. At $300, it was exponentially absurd. It was $400 that finally raised all eyebrows and got people thinking about valuations. Don't expect shares to fall back to $50 again. It can't be that easy, but the stock has a P/E of 266 compared to an industry average of about 16.4. Value traders would have avoided Netflix entirely with fundamentals and expectations that would never be met, knowing it would one day fall, but while all that happened, the irrational traders booked huge gains.
It is probably a little unfair that those who invested against all logic ended up with the profits. The reality of the market is that a stock price might not make sense based on its fundamentals, but there are so many other factors involved. Back in 2011, the stock also charged to $300 and fell to $50 on, yes, fundamentals. The company's prospects of huge growth became an issue when it decided to split up its DVD-rental and streaming businesses, jacking up prices, and creating turmoil with both traders and customers. What we now understand is that Netflix won't ever be able to raise prices without backlash or the potential for customer cancellations, and that proves bad for Netflix shares in the long-run.
Over the course of a company's public history, share prices will be buoyed or deflated by news and expectations to irrational levels, but over the long haul, valuations and fundamentals will eventually take over. You may argue that an investor missed out on as much as 500 per cent gain, but if you believe in valuations, you won't need to rely on luck and the demand of others to make money.
2. 95% Institutionally Owned
So, how did the shares continue to rise with fundamentals so out of whack? It could have been an issue of supply. At the moment, almost 95 per cent of Netflix shares are owned by some institution held in some fund, not by individual investors. Apple (AAPL), the largest technology company in the world, has just 62 per cent of its shared held by institutions. Based on the latest filing prior to this week, it was known that billionaire Carl Icahn held 9.4 per cent of Netflix shares in one of his funds. So why is this important?
When a stock has just 5 per cent of its shares being traded by retail investors like you and me, it means that there can be a liquidity problem. If supply is limited and demand is hot, then we see rises like Netflix that become irrational and alluring to trade. So, when news came out on October 22 that Icahn sold half his holdings or about 3 million shares over the last week, it meant that there was a sudden explosion of supply. And when 3 million shares hit the market at once, the price goes down. Of course, no fund manager would allow a price shock like this, so he could either purchase put options or sell them in chunks to allow the share price to withstand massive volatility. The news of the sale triggered more selling after hours. It told people that big money is leaving the proverbial table, and rich people do not like to lose money, so follow suit.
An investor should be diversified in their stocks, but stocks also need a diversified number of investors as well. Warren Buffet, considered the most successful investor ever, has his own general rule of thumb and invests in companies where institutions own under 30 per cent of the float.
3. Chasing Momentum is a Gamble
The rise that we saw, that conflicted with valuations and defied logic, is known as momentum and can be chased in either direction. Traders chase momentum hoping to catch any energy that is left in the direction of the stock's movement. When you chase momentum, you are always late to the party. But like a real party, you hope that there's some dancing, drinking, and socializing left. Of course, the club eventually closes and the window of opportunity shrinks every second. Momentum trading is a calculated risk - a gamble not on the prospects of the company's profitability, but on the belief that there are enough people out there that still want to buy. And unless your school replaced history with mind-reading, your speculations might be a shot in the dark.
Nobody buying after a rise of 450 per cent justifies their decision with "This stock is so undervalued." They are what we call the envious trader, trying to make a fraction of what the others made before the move. But timing is so important. There is a saying that the stock market "rises like an escalator, but falls like an elevator" so being wrong is a very distinct, painful event that unfolds in a short period of time. So for the trader that was the last to enter the club or forgot to leave altogether, they should learn the fourth lesson of trading.
4. Always Take Your Profits
If Icahn perfected his trade, he would have sold after hours on the day of the earnings report. The stock had traded above $394 in the after-hours market. Of course, nobody is perfect, and when he learned that he quintupled his money in a year, it was probably time to get out. In a situation like Netflix, where prices rise exponentially, become irrationally valued, and look unstoppable, then it's time to take your profits even if it is just 5 per cent of the 578. The point is that prices fall faster than you can make the order to sell when things finally turn. In this example, Netflix actually fell hard, but was still worth more than it was at any time prior to last week, but that is not the point. The issue here is that there were millions of people that also bought it at $390 after hours and the open, then saw their investment fall by 15 per cent the next day. Can you afford to lose that?
On October 21 at 1 PM, stock at $348, I "knew" the stock would fall so I did a debit put spread costing me just over $1000. At 4:05 PM, stock at $385, I "knew" my $1000 was gone. I wrote it off as a gamble worth taking. The profit was $1,500 if it fell 8 per cent or more. But I chose the wrong direction. Then I woke up and saw the stock at $345 and by day's end, $322. My friend asked me if I sold, to which I answered no but I realized that if I wait to try and make the full $1,500, I risk losing my original investment. So, on Wednesday, after seeing the shares were revived and up to $328, I closed both legs and made $330. That worked out to a 30 per cent gain in two days. Yes, if the stock stays at $328, I would have made more money by Friday, but that was not the point. The biggest lesson I learned from years of trading is always take profits. You can not predict the price of a stock so easily and with it being so volatile, there's a chance that for a brief moment which can occur on a Friday afternoon, the stock could be at a price unsuitable for profitability, and I will tell you that too many times I have become greedy and tried to make an extra dime or nickle and it has backfired.
5. Forget The Stock, Don't Be An Envy Trader
I was taught the moment you sell a stock, delete it off your screen. Nobody ever buys at the low or sells at the high. So when you remove it from your watch list, you extinguish the potential for the "I knew I should have waited" and "Why did I sell so soon?" statements. I heard it all the time working at the investment firm when my clients or colleagues traded and I would remind them they made more than a day's pay. Whether you are a trader finding opportunities or just a regular investor, get those names off your list when you are done.
When Netflix posted earnings, the uncertainty of the financials were no more, then it fell hard an hour after the open the next day. So what happened? Prior to the earnings, an institution knew it was time to sell as valuations became the correct rationale. He booked his profits and announced, required by law, that he sold a large chunk of his holdings in the first 12 days of October. Those that bought after the earnings in the after-hours market were clearly gambling the momentum. In fact, if you had tracked the trades, you would have seen it go from $380 to $394 rising ever so steadily. But who were those people? Nobody in their right mind would buy their first share of Netflix near $400, so it was definitely former Netflix traders still clinging to the stock envious of the gains others had made. In less than 24 hours, these five huge lessons were learned by anyone that lost any money on Netflix this week. And I'm sure there will be more lessons learned tomorrow.
If you fell into a coma in August of 2011 and woke up last night just before midnight in the East Coast, you would have seen the same images on television. That's because the debt ceiling was a major topic as America reached its borrowing limits again twice in the last two years and 18 times in the last two decades. And unless all Americans become billionaires over night and fork over half their income via taxes to the government, the debt ceiling will once again be a topic of discussion in January or February 2014 - just a few months away.
Just think about the resolution for a moment. A government was shut down for over two weeks, putting 800,000 government employees temporarily out of work, created massive uncertainty in the financial markets, triggered potential downgrades which would have raised interests for all, delayed discussions of potentially more important issues, decreased their GDP by an estimated one per cent, and put the nation on the brink of default just so they could fund the operations of its nation for an estimated twelve weeks. It is a joke of efficiency and policy that hampers America and the rest of the world.
Aside from Denmark, America is the only nation with a debt ceiling. It was created in 1917 to help fund efforts in World War One, and was set at double the national debt. Conversely, Denmark's debt limit policy started in the 1990's and was set at triple the national debt. It was reached in 2008. After a short, quick discussion, the country's politicians doubled the limit. Why? Because the limit was a stagnant line that did not take into account for inflation and raised it incredibly higher to make sure it was not an issue for decades.
A survey done by the University of Chicago back in January 2013 showed 84 per cent of economists agree or strongly agree that "a separate debt ceiling that has to be increased periodically creates unneeded uncertainty and can potentially lead to worse financial outcomes." Only three per cent expressed disagreement.
In fact, the debt ceiling is often considered the laughing stock of America, aside from all its other follies we love to poke fun. What's unusual about the debt ceiling is that the limit has a few loopholes, it should never become an issue. America actually borrowed $16.669 trillion back in May and has tapped into its safety valve using extreme measures to fund its country. But that sink is about to run out of cash. The quick and easiest way was to simply print money, literally, and some asked the government to print a $1 trillion coin, kind of like the Simpsons fictional trillion dollar bill.
However, such a maneuver would in theory devalue the dollar and raise inflation so high that it would cause more harm than good, but then again, it seems every economic theory in the book has been throw out the window over the last decade. Obama has said he is completely against the idea of printing money. You may argue that during his reign as the Chief, the Fed has always printed money, but this is inaccurate. The Federal Reserve purchases U.S. Treasury Bills, a debt-instrument, from its member banks using credit, not printed money, it created out of thin air. This helps spark demand for U.S. debt keeping interest rates in the nation low. As a result, the Federal Reserve, a part of America, owns $1.794 T of U.S. debt, and this leads us into the next topic.
There is a common saying that China owns America. Now, of course, nobody actually thinks China literally owns the country and all its land, but it stems from the notion that China has a lot of U.S. bonds on its books. But if we're using the logic of some radical political satire, then the real owner of America is Americans. Mind-blowing.
American government branches own about 25 per cent of U.S. bonds, Social Security owns $2.764 of that. China, just 7 per cent or $1.3T, less than the $1.794 owned by America's central bank. And Japan holds $1.1T of U.S. bonds and it is expected with the selling by the Chinese government, Japan will reclaim its spot as the number own foreign debt holder.
With America and SS holding so much of the bonds, this is why Obama nor any Republican would allow the nation to default, as it would hurt millions of Americans retired or ready to retire, and of course, those in office looking for re-election. So of course we all knew the bill would pass at the 11th hour. But why did it take so long? And why did 144 politicians publicly vote against a bill that would save the nation from default potentially creating a catastrophic economic collapse? Are they "mad like a hatter?" Maybe they know something we don't and are the most honourable warriors on Capitol Hill...
The political games brought on by the debt ceiling actually become popular when in 1995, Newt Gingrich, then the Republican leader of the House, repealed the Gephardt Rule, which granted the ceiling to be raised any time a bill was passed based on the spending that was authorized. But Gingrich realized it could be used as a "whip" to persuade politicians to make deals. And with Clinton at the helm of America, it could be used by a Republican House leader to bully a Democrat President. Enter the twilight zone.
Imagine this for a moment. From the dry plains of Africa to the urban neighbourhood across the proverbial train track, not a single child is hungry. The abundance of food used to feed our agricultural needs are sent in boat loads to the poorest of the poor. The pain of war and genocide exist in the virtual world of video games where injuries are healed by a floating health pack. Disease is part of a fable that exists as an invisible foe alongside witches and vampires. And children, once illiterate and devoid of the simplest calculator, are now capable of communicating their thoughts through Tweets and possess in their palm access to the collective information of human history.
This is the goal of humanity - a perfect world where human rights and needs are fulfilled; individuals can pursue dreams without the distraction of poverty or sickness. It sounds lovely, but perfection is a deceiving concept. Without the hardships that entertain us everyday, we lack character, integrity, and wisdom. The essential tools for moving forward become suppressed. For a child that grew up in the ghetto having to face drugs, violence, and poverty daily, he earns a badge of honour by surviving the ordeal. And every so often, one of these children makes wishes and finds strength to explore and overcome the world, discovering it is much easier for him than his wealthier peers.
So, how does this relate to my usual business-like posts? We are now living in one of the greatest recessions in the past two generations, worse than the 1980's crisis as described by many. For those of us living in the first world, we have been blessed with economic recoveries recession after recession. But because of such prosperity, we have forgotten how to save and our children are never taught the value of a dollar. And good-paying jobs once a dime a dozen are now a needle in a haystack. It is an adversity many have never encountered and it is visible through their ill-actions towards others and themselves. We are witnessing people strategically file for bankruptcy to avoid paying their mortgages - lack of integrity. Other well-educated souls unwilling to take on a simple job such as a cashier or custodian to pay their piling debts - hubris. And some blaming the government for its ineptitude when the real problem and solution rests in their hands - lack of accountability and responsibility.
Okay, well we are not technically in a recession, but whatever we shall call it, this session of tepid growth is just what the doctor ordered. For most of us, the economy's slow-witted pace feels much like a recession. Ideas are crushed, finances require frugality, goals are harder to reach, and promotions more than a stone's throw away. However, the greatest amount of millionaires were made after the end of The Great Depression. Whether it was from asset investments or identifying demands and needs, those that succeeded were tenacious risk-takers willing to be positive and creative when worldwide sentiment was melancholy.
Think of it like a stock market correction. Sentiment is fairly bearish; fear and uncertainty outweigh the greedy. Those that panic sell when the market is falling are less likely to be profitable. Market corrections are important as it is an opportune time for big traders and big money to re-enter the market. Corrections execute the weak and provide lessons too. Historically, stock markets bounce strongly after a correction yielding big profits to those that bought on the quick down-turn. When sentiment was weak, they made an opportunity in a bad situation. In a perfect world, we say the market will always go up, but in such a scenario, the market would lack liquidity. Those wanting to buy would find no sellers and there would actually be less prosperity. Prices would be artificially high and its value essentially meaningless.
We do need recessions. We need people to learn how to endure adversity and allow the emergence of leaders, create entrepreneurs, and eliminate weakness. We need people to educate themselves on the value of a hard-earned dollar and be grateful for what they own. Harsh times, yeah, it builds character, integrity, and honour, something this society has lacked for quite some time. This is when you need strength and courage to take risks and build your businesses when costs for assets and expenses are relatively cheap. Or perhaps make investments with money sidelined for years. Maybe fulfill some travel goals as prices are dirt cheap. There is less to lose when things are at the bottom. And for those that are skilled, motivated, charismatic, and creative, you easily stand out as an asset to a company or against your competition.
Would I rather see every starving child fed, disease wiped out, and education for all? Absolutely! But to never face life-altering adversities, our society would never have an underdog story nor would we learn to fight for what we believed in nor become stronger. We ask for perfection in so many aspects of our lives that we are blind in seeing our chaotic, sometimes unjust world is as good as it gets.
In Canada, a discount brokerage is a type of investment firm that can not provide advice and must take all instructions given by the client regardless of how poor it may seem. General information may be communicated but what to buy, why to buy, and when to buy can never be answered. Essentially, these accounts are self-directed by investors with the knowledge and capabilities of taking control of the investments and finances. At least, that's what I thought.
Throughout my tenure at the firm, I encountered a vast amount of Canadians so ill-informed about the market that their stories still stick with me today. I would try to refer them to an advisor but often times that could be taken offensively. It was a fine line to walk on. The stories I share today are not meant to ridicule any one in particular or the firm, but to put into perspective your financial ability's and whether or not you are ready to manage your own investments.
The Dentist
I received a phone call from a brand new client. His profile said he was a dentist and had been with us for less than a week. He asked me to sell his mutual funds which were just transferred in. I made the trade as discussed and noticed that the transfer came from our company's full brokerage side. I made the assumption that either he felt confident in running his own portfolio or he wanted a cheaper commission on the sale of his account. Either way, I went ahead and made the trade. After confirming the order, this is a paraphrase of how our conversation went from there on.
"How much money did I receive?"
"Well, we don't know the actual value of the sale as it is not determined until the end of the day."
"What? I don't understand."
"Unlike stocks, mutual funds are priced at the end of the day. So the price you see on the Internet is yesterday's close."
"But my old broker told me that they would be sold immediately."
"Yes, the mutual fund has been given instructions to be sold, but again, the price is not determined until the end of the day. That is how mutual funds work."
The conversation would loop for a few more minutes before the dentist finally absorbed the information. What was interesting to me was that he mentioned he was with the full broker for years, but did not learn a thing. It was this moment that made me decide that if I took the full-advice channel, I would build a relationship that was built on education and information to form strong, trusting bonds.
The lesson to take away here is not just that mutual funds are priced once a day, but that you should be taking ownership of your investments when you feel educated and confident. And although your level of knowledge on financial products may never be equal to those in the industry, it is beneficial to familiarize yourself with the basics and invest within your comfort level.
To give credit, this client was not stupid by any means, he was simply unaware of the major differences of mutual funds and stocks, which is very frequent as we will see in the next story.
The Research in Motion Lady
I call her the RIM lady because of her holdings. It was well into the six-figures, but a large chunk, like 90 per cent, of her holdings were invested in one company, Research in Motion, now BlackBerry. And then there were two mutual funds which accounted for the rest. This was not well-diversified enough by any means, but she was up like triple on the stock. She called in to sell her mutual funds as well, but had just purchased them within a month.
"Hello there. I would like to sell my mutual funds."
"Absolutely ma'am, but just so you are aware, these funds were purchased two weeks ago and will incur a charge for not holding them at least 30 days."
"What? I thought this was a discount brokerage and these funds don't have charges."
"Yes ma'am, we are a discount brokerage, but mutual funds have a holding period."
"Okay fine, just sell them. I've had them for two weeks and the price has barely moved. They are terrible products."
"Well, that's because these are diversified mutual funds and they're designed to hold a lot of companies. And considering you've had them for only two weeks, you can't say they are bad products. Big returns so shortly don't happen."
"Well, Research in Motion did."
"Yeah, that is an exception."
As you can see, I got emotional and defensive because she was complaining about our brand's mutual funds and in doing so, I potentially may have crossed the fine line between advice and education but I felt that this lady was just not informed enough about her investments. If she still owns her stock, she has seen her shares fall to $8 from as much as $150 just four years ago.
The moral of this story is to diversify if you are starting out and not a great stock picker. Patience will get you through the long-term, especially if the companies you own are very well run and managed and have a steady stream of profits. There will be ups and downs, but what matters is the plan you devised. Although I am against mutual funds myself, they do have their benefits. And before making any purchase in any professionally managed product, always ask questions especially about the fees.
The Crying Lady
The last story I would like to share was actually an event that happened with my co-worker who sat next to me. It was a devastating situation that needed empathy and understanding, but a real lesson can be learned here.
It was days after the financial meltdown and the stock market was plummeting. Margins were being called and people were losing money all over the place. But the story of this one lady struck a cord with me. She was retired and had been very wealthy all her life. Not a millionaire, but saved enough to retire comfortably. Prior to the financial crisis, it was a raging bull market and more people starting borrowing money to better returns. It worked for years until October 2008.
The lady called in and got my colleague. It appeared that she had to sell all her stock to cover her loans but because of the collapse, it was not enough. She had piled up a debt within her trading account that exceed $100,000. To top it off, she was retired. She started to cry because she was lost. She did not know who to turn to or what. I believe in the end Credit made a payment plan of some sorts, but it made me really fearful of borrowing for weeks to come. She went from having a comfortable retirement build up of wealth to massive debt. And this was four days into the crisis.
Again, she was a smart woman and it was not that she was financially naive, no. It was a set of bad luck that tore through the accounts of hundreds, if not thousands of Canadians and millions across the globe. An event like this reminds us that we should invest within our means and if you plan to borrow, which is actually a very good way to make money, you must remember to have a secondary plan when things go wrong. Can you pay back the debt? Can you afford to invest? These are questions you must ask yourself before making your first real investment.
The euphoria that surrounded gold two years ago made gold bugs wealthy as lofty predictions and price targets sent traders in a frenzy trying to play catch-up, but its decline over the last two years has shown us how quickly momentum can shift. And the accelerated drop in prices this year has been triggered by news of Fed tapering coupled with a stronger American dollar.
Last week, an independent author for Marketwatch.com provided technical analysis informing traders that a breakdown on the uptrend line would result in massive selling. Two different continuation patterns were crossing paths giving reason that the breakdown was days away. On Tuesday, that trend-line was breached with many indicators going bearish such as the DMI and RSI, as seen below. Gold is down about 4 per cent since. Based on our calculations, the selling pressure could mount to an additional 3 per cent drop with the SPDR Gold Trust (GLD), a US-priced exchange-traded fund that tracks the spot price of gold, could drop to the $124 price, which is the last level of support
How to read the charts
The price chart's purple trend lines were rising upwards until September 10, when the price dips below it. A general rule of thumb is to allow three days for any signal to be confirmed since signals of change can be false or to find additional evidence. Today is the third day, and gold prices have not mounted any comeback and has pushed down to the Bollinger Bands, a mathematical band creating a range used to determine overbought or oversold conditions. We see that gold is now oversold, suggesting a short-term rise or end to declines, but its breach also means that the bands will start moving downward and create conditions for more falling prices.
In the lower indicators, the MACD (Moving Average Convergence/Divergence) confirmed gold is bearish as well, pointing to a second potential signal. MarketWatch uses simple to use colours and when the "red line" rises above the "blue line," it is basically saying that negative conditions trump positive conditions. This is consistent in all their indicators. The black divergence curve also went negative at the same time as the cross and is another clue that the trend was confirmed.
In the DMI (Directional Movement Index), we see the exact same colours crossing. The lines essentially represent the battle between the bulls vs. the bears. And a declining "blue line" means that bulls have lost strength. A crossover means that sentiment has shifted, in this case bullish to bearish.
So what do I predict? Gold will have declines into October, but for two days, we should not see anything. Wait until next week to create a position, either short, go long a bear-ETF, buy the puts or a credit call spread. Any of these trades should be profitable if executed properly along with a decline in gold prices.
Two weeks ago, I posted an article examining the health of Canadian defined-benefit pension plans in light of the battle between retired workers and the city of Detroit. I wanted to follow up with a basic educational article discussing how they work and why they are failing.
A pension plan is essentially a fund or scheme designed to provide funds at retirement. Contributions made by an employee through out his or her working life at a company eventually gets paid out when that worker retires. A defined-benefit plan determines the benefits to be received in the future, as is indicated in its name, it defines the benefits to the employee. In between that time, the fund will invest its assets in a number of investment vehicles. The problems that arose in Detroit and maybe for many in the future is that DB plans are only obligated to pay the debt if they can afford to. If a fund or employer declares bankruptcy, those obligations could become a part of a bankruptcy litigation.
The single biggest culprit to the failure of so many pension plans are interest rates. It is the backbone of economies because rates give value to assets and currencies, and determine the cost of borrowing. But when interest rates are as low as they have been, it significantly cuts returns. Although the chemical make-up of any pension plan will vary from company to company, most traditionally will invest in bonds, stocks, real estate, and other opportunities.
When interest rates are low, the income earned on bonds are reduced. In the world of lending, low interest rates push debt prices higher. If the government sets rates at 1 per cent, then a bond expiring in one year should yield about 1 per cent. The bond will be priced so that the purchaser of the bond (lender) receives just one per cent yield. So if the bond pays 3 per cent a year, the value of the bond must rise to offset the 3 per cent earned through interest income (known as the coupon). If a pension plan purchased a 10-year bond that matured (expired) today, the value of the bond will have risen and could be sold for a nice profit. But any new investment option purchased to replace it would be in the same asset class and yield less. And if rates do rise, then the value of the newly purchased bond will eventually decline.
Interest rates affect the prices of equities in the exact same manner with minor differences. The issue that money managers are faced with are low dividend yields as a result of low interest rates. Stocks are at all-time highs, yes, but money managers are in the business of creating income, not net worth.
The third common investment choice is real estate. Whether the property is a sky scraper or housing unit, these products are intended to earn income through rent or revenue-sharing. Think about it like this. You just bought a strip mall and rent out floor space to offices and business. A bad economy simply means lower demand for your space or lowered revenue-sharing opportunities. The value of your strip mall is moot because the intention of purchasing the mall was to generate income.
A reduction in the work force also negatively affects pension plans. When baby boomers retire, it pulls from the plan and obligations must be met. But, the supply and demand for workers continues to be low. Advancement in technology results in fewer workers required for the same job. And a struggling economy means companies are not ready to hire and worse, more ready to fire. The impact of employees matters for pension plans.
Pension plans are steady-state programs that use contributions from current members to pay owed retirees. Any difference is made up by withdrawing from the fund itself. Logically, the fund will release any cash first. Then, if a deficit remains, assets are sold. This is why income generation and cash flow is often more important than the net value of any fund. Combined with low interest rates yielding terrible returns and a smaller pool of workers to contribute to funds, we see that it is a recipe for the inevitable failure of many pension plans.
So, here is a long-winded summary of what money managers are faced with. Pension plans need high interest rates to survive. Central banks cut rates to spur economic growth, but it has failed. As a result, asset values rose to record highs creating low-yielding products for an extended period of time. Historically speaking, economic cycles hint that interest rates will rise, but based on tepid economic growth, rates will not rise until the pace of economic growth is comfortable. Rising interest rates are meant to deter growth. Since Central Banks are not yet ready to raise target rates, the only way to increase yields is to reduce the value of assets in some form. Now, with the baby boomers retiring and claiming benefits, pension plans must sell a chunk of assets at highs to offset shortages. This could be the supply side pressure needed to raise yields. However, these major moves hurt the economy and slow growth too, so businesses might cut hours or payroll numbers, mortgages rise, and demand for business space decline. Down the road, lower asset values means deficits are being offset by selling more asset units. And a reduction in contributions from fewer employees could be made up by increasing contribution payments, but reduces short-term money supply for the worker. A continued cycle exists all because the reduction in interest rates failed to spur growth.
The plight of Detroit is a somber reminder that the tragic falls of empires can still exist even in the modern-day era. Municipal bankruptcies have become all too common in America and a chapter 9 of this magnitude sent shock waves across the globe. Many questions can be asked how a former vibrant, manufacturing city with a population exceeding 1.8 million crashed to a city of ruins with just 700,000 citizens. Devoid of life and street lights, the city is terrorized by black and white jump suits instead of the traditional blue collars. It might sound like the plot to "Robocop," but the events that led to the financial collapse of a large American city resonates with so many working people all over the world because it exposed that public pension plans are not promises.
Government jobs are known to be lower-paid salaries relative to an equal private-sector job. But the trade-off in salary is off-set by better benefits and pensions. At least, that was the belief until Detroit unraveled and claimed its pension plan obligations as a liability to be considered in its bankruptcy decision. It is expected that all creditors will receive at most 20 cents to the dollar after proceedings are finalized: yes, that includes pension plan beneficiaries. With a world in turmoil and interest rates so low, are your pension plans safe?
DBRS evaluated the health of 461 defined-benefit (DB) pension plans world wide and is "mightily concerned." For the first time in a decade, the aggregate fund status was 78.6%, below the 80% minimum threshold they deem safe. More concerning was that 45% of funds world wide are in the "danger zone." For Canadians, news could not be worse. Not a single private DB pension plan had a surplus. Surprisingly, the government-run CPP had a surplus last year and is estimated to have enough funds for 75 years, although this is a defined-contribution fund.
Among the worst funds were three financial firms and two telecommunications companies. Check the list below to see if your DB pension plan is on the list, courtesy of DBRS.
Stay tuned for a second post explaining how a pension plan works and why they are failing.
If you're an investor looking to make some purchases, you may want to wait out the summer. There has been a huge shift in the market's sentiment over the last few weeks and traders are showing signs of fatigue. Many traders and professionals are predicting that this summer won't be so hot for stocks.
Last year, traders following the adage “Sell in May, stay away” lost out on a decent summer run up. But this year, the market is entering summer with a little less optimism. May 22 was a critical juncture as charts went bearish. For traders using candlestick charts, there were signals that bullish sentiment was fading. Ben Bernanke’s remarks about cutting back on monetary stimulus has introduced much needed volatility back into the market. For the first time this year, the Dow Jones Industrial Average lost value for three consecutive days this week.
Sentiment has shifted from a “buy on the lows” to “sell on the rallies.” The indices have been unable to break new highs and many large cap leaders have seen their shares revisit support levels instead of testing resistance. The charts do not look very favourable in the near to short term. Many stock charts look nearly identical to that of the indices, which does not bode well for traders looking to find leaders. Although the uptrend is still intact, the double retracement to the support trend line in a matter of days could be seen as a sign of sellers taking over.
Here are some big-name NASDAQ components that have showed some decay in bullishness.
Google (GOOG), a market leader, has not seen its shares climb back above $900. It was touted as being the next stock to hit $1,000, but those predictions will have to be delayed.
Shares of Netflix (NFLX) are developing a head and shoulders top. And if the stock trades below $200, shorts may come in.
Other leaders like Apple (AAPL) tried to reverse upwards but has seen its shares fall.
Facebook (FB) moved higher earlier in the spring courtesy earnings but have fallen to the lowest levels of 2013. Optimism has worn out as the company introduces insignificant updates to enhance shareholder value.
Volatility and uncertainty have taken focus no doubt. It appears big traders are placing bets that the market will make a big move in one way or another. Check out these option trades from Monday.
Staples (SPLS) reached new highs but saw one trader buy to open 10,000 September 15 put options for just $0.15 and then another 5,000 contracts for $0.85. The shares closed at $15.51 on Monday. Total volume on the day was 15,084. The trader makes profit if the stock falls below $14.62 by September or if the option values rise above $0.38.
Pfizer (PFE) options also pointed to a big move. A trader implemented a long straddle buying 65,000 $35 calls and puts for July - prices not available. A long straddle combines two different predictions that the stock will be above $35 and below $35 on the third Friday of July. Because this is not possible, the goal of the trade is that the winning option’s gain is larger than the losing option’s loss. The further the stock trades from $35 in any direction, the more the trader earns. This is a strange trade as the stock is $28 today.
On the other hand, Dupont (DD) was on alert on Monday when 15,000 October 57.50 calls were bought to open and 15,000 October 50 puts were sold to open. Some are saying a trader or firm is making a bet that it will break out above its resistance. However, taking the options route is a cheaper alternative than buying the shares out right, as it cost this trader just $0.30 a share versus $55 to control the 1.5 million shares.
Prior to the three-day loss, put options to open on Monday outgrew call options. On Monday, traders ready to capture on the decline bought to open 2.08 million put contracts versus 1.67 million calls. It appears that short-term traders were anticipating this decline. Get ready for an exciting summer, traders.
There I was, a young man from the Canadian Prairies situated in unfamiliar territory. With the inability to swim, I was submerged under millions of gallons of water trapped in a vessel with seal doors and no way out. Was I scared? Absolutely not. It was a riveting, eye-opening moment that changed me forever.
It was my 25th birthday, and my best friend at the time and I went down to Hawaii. For my birthday, we went on an excursion on a submarine ride off the coast of Kona. We had to take a small passenger boat from the dock to the submarine located a few miles off the coast. The weather was perfect and not a cloud was in sight. The sun beamed down on us and reflected off the surface of the ocean so I was unable to see what was below us. The ocean looked like an endless blue field of nothingness stretching eternally into the horizon.
Getting quickly to the point, after boarding the submarine and receiving quick safety updates and pamphlets, we submerged below the ocean's surface, diving slowly into a world I could never experience back home. Just a few meters down and my reality was shaken. The ocean was not the boring blue I thought it was. It was teaming with life. My only glimpse of the ocean world was from the Discovery Channel and it did not do it justice.
Schools of fish surrounded our windows, some drifted by apathetic to the daily submarine dives. While I tried to capture every moment on film, I realized I could not capture how I felt, so I sat back and just looked. This changed my life! I learned that the world I live in had so much to offer and all I had to do was explore it, experience it, and share it. By simply changing my angle of perception a few meters from above the surface to below, I gained knowledge of what never existed before. It was this moment that inspired me to explore the world more and make adventuring on my birthday an annual thing. It is why I went to California for my 28th birthday and why I spontaneously drove down to Mexico to experience the dangers and craziness of the city, but that is another story for another day.
I learned one valuable lesson that Hawaii trip: inspiration comes from within. When we arrived back to our cabin on the cruise, I was enthused, ecstatic, and full of energy. I remarked how much life existed just a few meters below the surface, but my friend, who had a great time as well, did not see it the same way. I remember being shocked by that. He did not view it as a life-changing event. He just saw it as a fun experience. I was glad that he enjoyed it, but to my dismay, it did not bring out what he needed to move forward. At the time, he was stuck in a rut, not really growing as an individual in any facet of life. It was disappointing.
We draw inspiration from outside forces, such as role models, a great book, or perhaps adversity, but ultimately, what we need to push forward comes from inside us. Find something or someone that helps nurture a culture of ambition, of inspiration, of motivation, so that when you have nothing, you look to yourself for inspiration. Find ways to remind yourself how far you've come. And most importantly, be an inspiration to somebody else. It does wonders to you spiritually and is a catalyst for inspiring yourself, almost self-remedying.
A person can have the best motivational speaker in the world, but that does not guarantee a successful individual. Given the same set of variables and external forces and role models to a million people in identical starting conditions with exactly similar situations, we will find that there are a million possible outcomes. A handful will be great successes, the mass will be drones to these kings, and the remaining will be the slums of society. Don't be a drone, and never be the slum.
This year, I have been blessed to have two people in my life that have pushed me so much that I can not thank them enough. I have set new goals last week to catch up to my friend who is in the pursuit of his dream job. He had a glimpse of it very recently and has that goal in his grasp. My other friend has re-entered my life and has been the crutch I needed when I felt unchallenged, unmotivated, uninspired. She has been a huge factor in my growth and she has given me the opportunity to reciprocate, which is a huge compliment to me. I hope everyone can find something or someone that inspires you to be the best you can be. Nobody lacks the essential ingredients. We all lack the oven that let's us rise to the top.
The Boston Marathon: an athletic event that has lost all of its meaning because of terrible events that took place. And in the aftermath, the goons of America jumped online to Tweet and share how it was the "sand niggers" and "Gooks" fault. This is why nobody likes America. These people jumped to wild accusations backed by unsubstantiated evidence stemming from a culture of racism, intolerance, and ignorance. This is the only country that would tell you that one plus one equals two dead Arabs.
A viral tmblr post (click here) revealed a mass of Americans hiding, waiting to pounce on the enemy for whatever reason. Their knee-jerk reaction's re-iterate our views of America.
With every destructive event that takes place in America, the hordes of haters come out, but so do those that stand for civility and represent the good side of America. I hope we can all ignore the few Americans, the hypocritical, racist dogs that have destroyed the reputation of America and focus on what is good. Aside from minor differences, we are all brothers and sisters. And in a time of disaster, we must stand together as one to console our neighbours. We are after all, divided only by borders and oceans.
What if the culprit turns out to be a Caucasian male earning $55,000 a year working as a mechanic, driving his two children to school every morning in the suburbs, while his Christian wife prepares a home-cooked meal? What if? The public shaming should put these trolls on the map and hopefully get rid of them too.
The epitome of America is no longer defined so simply. I don't know what it is, but it was once a place where a man could dream and fulfill it. Where a man could try and save the lives of children without being accused of pedophilia. Where a mother showing strength on-camera all the while mourning quietly in the shadows off-camera is not called an actress. Where people had the strength and courage to stand for morality. Americans, you are letting a minority of hateful people re-define your country. America is still a proud nation, often too proud, fired by passion and a desire to succeed. But it is being ruined by the immoral, ill-valued citizens that call America home.
What I saw and focused on in the wake of the aftermath was a large majority of Americans clinging to the foundations of humanity. Strangers carrying strangers to the nearest ambulance. Restaurants opening their doors to the bewildered and exhausted offering comfort, coffee, and Wifi to contact family for free. Amputees from the west coast providing solace to the east. This is what I wish all of us non-Americans remember when we think of their nation. There is no need for us to vilify an entire nation in the same manner as the Tweeters calling for war.
Why am I standing up for America? Because I am Canadian and they are our biggest allies. Because an attack on its citizens by terrorist bombs or by slander is unfair to all that is good. They are like any other country with a diverse range of opinions, some moral and some hateful. 85 per cent of their firefighters are volunteers. There is still a lot of good that exists within America and if we want to stand tall as a global unit against anything, we can not knock anybody down, whether it be Arabs, Koreans, or Americans.
The history of Groupon [GRPN] is an interesting tale that involved dramatic finishes, betrayal, roller coaster rides, and valuable lessons. It is not a well known history because of its irrelevance in the world beyond its niche of "online coupon clippers." But I believe the history is still worth sharing.
Prior to Groupon’s IPO in November 2011, Google made an offer to buy them for up to $6 billion in the fall of 2010. It was almost a done deal, but Groupon made the ultimate decision to reject the bid last minute. It was quite shocking and Google management was disappointed at the time. To put the bid into perspective, the $6 billion bid was equal to about 75 per cent of Google’s net income for the year ending 2010. Google was confident that Groupon was worth a lot, but Groupon was more confident that they were worth much more. Groupon was a fast-growing business and there were very few competitors like it at the time, so they practically had a monopoly. But with such small barriers to entry, replica businesses starting popping up with better pricing for retail outlets. And the decision to reject the bid was a surprise to many.
The IPO was a success. Early investors got a huge pay day and all of the concerns about their business model took a back seat. The company offered about 5 per cent of its float to the public at $20 a share and raised $700 million to expand. This valued the business at roughly $13 billion, more than twice the final bid by Google. There was still huge demand post-IPO. The shares would debut on the NASDAQ and traded as high as $26 on the opening day, creating a market cap of $17 billion. It seemed that Google definitely missed the boat and should have bid much higher. But that is where Google’s regrets end and Groupon shareholder pain’s begin. Both companies have gone in opposite directions since that day.
Today, Groupon shares are valued at around $5.50 with an estimated market cap of $3.6 billion, just 60 per cent of the final Google bid, and a steep discount to its IPO valuation. That $26 price it reached on the opening day has never been touched again. Right after its earnings report in late 2012, the shares touched $2.60 making the company worth under $2 billion. The stock has recently traded up from its all-time low on rumours that Google will make another round of bids for the company, but trading on rumour is a gamble. Groupon has yet to earn an annual profit, losing $67 million in 2012 and $373 million in 2011. Turmoil and poor performance has led to the firing of their CEO. Even with double-digit revenue growth, its long-term growth prospects seem bleak and fewer and fewer customers are using their services. There are just too many similar online coupon brands out there now.
Meanwhile, Google reached an all-time high this month of $844. The company is now worth about $267 billion, an increase of 33 per cent since Groupon’s IPO debut. The company reported net income over $10 billion in 2012 and has seen extensive growth in its Android business. It has announced more revenue generating strategies, such as the termination of free apps and is sitting on over $8 billion in cash and equivalences. And investors believe that there is room to grow, with the shares expected to hit $1,000 by year-end. It seems lofty, but this blue chip market giant continues to grow at double-digit rates as well, justifying a 25 P/E.
After being denied, Google decided to make its own competing online business called "Daily Deals." The competition did not kill Groupon, but exposed that their business model was flawed. It also may have exposed that Google got extremely lucky that their poor decision to bid Groupon did not come to fruition, but I digress.
In hindsight, Groupon's decision to reject the bid was a poor one it appears. George Santayana said "Those who cannot remember the past are condemned to repeat it." Groupon should have known it was an overvalued brand at $6 billion in 2010. Even if it made all the right steps to be worth $10 bilion today, they should have sold. The market was in the midst of a second technology bubble and the founders lived through 2001. They saw what happened to Yahoo! and Microsoft. Were they that arrogant to believe a company making $50 million in revenue at the time could create $6 billion in present day profits over its entire existence? They certainly thought so and now the CEO has been canned because of it.
July 2012: Apple [AAPL:NSD] is still a well-run machine without Steve Jobs. Shares have recovered from a spring correction and momentum is building. Analysts make the claim that the drop was a buying opportunity. With the release of new products like the iPhone 5 and a new iPad, money flowing into the company from consumers and investors would be endless. It could be the first company worth a trillion dollars. Microsoft of the 1990's was the closest, but its shares collapsed at the turn of the century and never recovered. But Apple is different. It has wider margins, more growth potential, and the largest cash balance in history.
September 2012: Apple is just weeks away from the iPhone 5 release and shares have pushed into all-time high ranges. Every down day is followed by a larger up day. The stock has now doubled in less than two years. The company became the most valuable company ever in history and reaches $705 a share. Analysts predict that Apple will still rise, reach $1,000, and still believe it to be the first ever trillion dollar business in market capitalization. No company can compete with a large company like this. Nearly all analysts make the call to buy the shares and investors did.
February 2013: Apple has released two earnings reports and has shown slowing growth. The engine that could has run out of steam. The company's shares have fallen from $705 to a still respectable $460. Five months after the correction, analysts finally cut their price targets on Apple. The words "trillion dollar" are once again heard only in conversations about the US debt. Analysts admit they were wrong on $1,000 targets and lower it to $800.
The above was an example of why individuals should never listen to an analyst, no matter how good that one may be. It is not because they are liars or cheats or thieves. No, because analysts are human. Therefore, they make judgement calls as a human. Analysts should not be viewed as prophets with a crystal ball. Although their predictions may be well-educated in nature, these predictions are solely on fundamentals and are formed through the same schools of thought as counterparts anywhere.
They fall victim to public sentiment. In 2008, there was widespread belief that the American economy was headed for a double-dip recession, so analysts were pessimistic. They felt the sentiment of consumers and investors. Their targets were low, yet shares outperformed and had one of the strongest showings in years. Today, we see analysts with big buy ratings on every company even though earnings are showing lackluster growth.
Some believe analyst ratings are a trailing indicator. They react too late, as seen in the Apple example above. By providing a sell rating nearly six months after shares fell almost 40 per cent is redundant. Historically, analysts over estimate earnings during times of good and under estimate earnings during times of recovery. Below, we see a chart of EPS estimates by analysts and the real EPS.
Analysts projected big earnings for the market during stable economic times. The chart shows lofty predictions during the 1990's but companies disappointed. Then, the recession hit in 2001 and analysts gave pessimistic views only to be proven wrong year after year. It took 6 years for estimates to be overly optimistic and then the financial crisis hit.
Where are we now? 5 years after the financial crisis hit and approximately 90 to 95 per cent of stocks have a buy rating on them. Have we reached another cycle of extreme optimism? If so, it may be a signal to sell. After all, to say at random your stock will earn you money 9 times out of ten seems a little too easy. And when global markets are trading at or near all-time highs again, it may be time to finally ignore the analysts and figure it out on your own. I certainly have.
The Edmonton Oilers have a young, dynamic team with very few people inking them in the post-season. A playoff game has eluded the city for 6 years, but the development of their prospects has translated into exciting hockey. However, it has not yet translated into wins. Being dead last two of the last three seasons has allowed the team to draft the best player available, and the likes of Hall, Nugent-Hopkins, and Yakupov have given the city and fans hope that things are finally about to turn around.
However, it will be an uphill battle. To become a better team is one thing, but to be better than 7 other teams is a considerably tougher task to follow. This team has many glaring weaknesses and any fan can list them: Poor defense from the forwards, an inability to get shots on net, terrible face offs, poor discipline, and a lack of grit. These are small parts of the game that help build a championship team. However, having visible weaknesses allows management to identify players that can be obtained through acquisitions.
Major deals prior to the trade deadline should put them into the playoffs. The Oilers have received plenty of support from the goaltending position. Facing more than 30 shots a night, Dubnyk has been stellar and it appears that Khabibulin has accepted his back-up role with professionalism and confidence. He is healthy, and although he has had just one appearance because of injuries, he has proven he is back and ready to help the Oilers make the playoffs.
The Oilers possess gifted forwards such as Eberle and Gagner, the latter on a contract year. Their top six forwards may be small, but their speed will allow them to overcome big, strong defensemen on the rush. By sticking to their game, they can control the pace with their youth. A high-tempo game suits the youthful Oilers just fine. And as they continue to develop and focus on their strengths, I believe that their transition game and fore-checking will improve.
Another reason the Oilers have a good shot is the continued weakness of their division. Minnesota made a big splash with huge signings, but it has not been the “It” factor that the Wild thought they needed. Calgary and Colorado are still not contenders. That leaves the perennial Canucks as heavy division leader favourites. However, many analysts predict that the time for the Canucks is passing, which leaves the door wide open for the Edmonton Oilers. Divisional placement is huge in the NHL. Many times we have seen division leaders claim third in the conference simply because their division was weak, and although that is not the best way to make the playoffs, any missteps by the Canucks is an opportunity for the Oilers.
Don't agree? Want a different perspective. Check out Nico's blog at EDMFlavor and see who you agree with!
Passion, enthusiasm, excitement, pride. That is what I see when I re-watch Nail Yakupov's game-tying goal celebration over and over again. But there are people out there criticizing him for his over zealous reaction, for disrespecting the game and making a mockery of hockey. He cheered like a soccer player, so what? They have passion for their careers and teams too. Let's give the kid a break here. If the Kings did not have a problem with it, neither should anyone else.
He is 19 years old and just scored the most exciting Oilers goal since Hemsky against Dallas. Puck mid-air, rebounding off of Quick's blocker with just 4.7 seconds remaining. The drama that was built exploded in passion from a kid. He skated and slid across the ice leaving his fellow team mates behind and collapsed in joy. He looked to the crowd and cheered with them. It is the epitome of hockey. It is what I, along with millions, missed three months for. This is what I live for.
Had this been a game-tying goal at the ten minute mark, then absolutely it was too much but it wasn't. It was at 4.7 seconds against the Stanley Cup champs when the odds were so stacked against the them, when the team just had a disallowed goal a minute prior, when Quick was sensational all game, it was right. It was perfect!
Nothing astounds me more than the fact that all of Canada hated him exactly one month ago for his remarks against team Canada's Junior team. Today, he is a hero, at least in Edmonton, and those remarks? History.
Yakupov is a sensational player who clearly wants to win and has a passion and drive that many of us lack. I for one am glad that he has brought his personality to the league. Hockey is not confined to gentlemen with cuts, scrapes, missing teeth, and bruised fists. It is also for the energetic, immature, naive boys who grew up wanting to be in the NHL and will make every moment of it memorable.
