Let Greece Fail Already

To promote and encourage the default of a nation is very uncommon and a bold statement about your opinion on such matters. The consequences of such drastic actions would cause a violent macroeconomic catastrophe. But history has shown that a sovereign default is often a revitalizing last resort and for Greece, a country whose fiscal problems are worse than many other nations, it may be in its best interest and for the world to implement an orderly and properly controlled default on its debt. Let's take a look at some reasons to support such extreme proposals.

For the last two years, Greece has taken austerity measures to help reduce its debt and revive a current four-year recession. When Greek's debt crisis became relevant, the nation cut and froze salaries of public and private workers and cut holiday bonuses on government employees. It is also reported that many have not been paid for nearly two years. Most recently, the country increased taxes on incomes, created new taxes on purchases (like GST in Canada), and sold national property and assets to raise revenues. These austerity measures forced a heavy burden on its citizens that made significant sacrifices to save their nation. The final result: an August 2011 report revealed the nation's revenue fell 1.9 billion euro and spending rose 2.7 billion - laughable.

Good money is being thrown at bad money. The European Central Bank (ECB) and the International Monetary Fund (IMF) has aided Greece so long as Greece took necessary financial steps to prove they were working towards fiscal balance, but as mentioned above, these austerity packages have proven unsuccessful. The risk of a default is high and credit default swaps on Greek debt are at record prices. Two-year notes are yielding more than 70 per cent and investors are pricing in a 98 per cent chance of a default. But with worldwide sentiment so bearish, the IMF and ECB continue to fuel a dying fire. Continued talks for loan packages are still in the works. They might believe that current debt restructuring plans will save Greece, but it will only stave the inevitable.

The country has had a long standing history of high debt. Since 2000, the country has never had debt as a percentage of GDP under 97 per cent, with most of those years well above 100 per cent. The nation defaulted four times in the 19th century, so it would not be an unusual circumstance, although in fairness, a different time and setting. There are many possible reasons to blame for the continuous spending problems, but the current mood of world investors is manifested in the phrase, "German taxpayers are funding Greeks to retire at 50."

Greek citizens can retire at 50 with a near-full pension. That is wonderful, but therein lies the problem. The average lifespan in Greece is 80.2 (as of 2009 data), which means that the government is providing an income for about 30 years after retirement. Greece has taken massive steps, but should they consider raising the pension payout to 60 or 65 like most nations? Other nations are already proposing retirement at 71 to keep their government pension programs afloat as the baby boomers start retiring.

There are many around the world who are proponents of a Greek orderly default as well, including a former Argentinian leader who was at the helm of their debt restructuring plan in 2001. Unlike a company default, a sovereign default holds no legal consequences because a country controls its own affairs. A "haircut," as is called, allows a nation to pay back a portion of its debt, with many experts expecting it should be around 35 to 50 per cent, but Greece continues to deny this will happen. Some claim that those who purchased Greek bonds will lose all of their money regardless. By avoiding an orderly default, it is only hurting its neighbours who are forced to fund Greece, regardless of their stance on the issue. It would also remove massive uncertainty in financial markets which have once again become volatile.

A default would also allow Athens to leave the Eurozone and the euro currency and coin a new currency, which gives the country the ability to create money to repay debt obligations, as is similar with most nations, like America. However, this would assure that the euro was a failed experiment and likely why many don't want Greece to fail.

It is a common theme to hear that Greek is nearly insolvent. When I started writing this blog, two-year notes were yielding 26 per cent. That was two days ago! It has nearly tripled, and regardless of what the IMF and ECB decide to do with the debt restructuring plan, one thing is certain: Greek is on the brink of default and things are about to get ugly.

2011 Market Preview

The first trading day of 2011 has come and gone for the most part (some still closed in lieu of New Year's Day, including Canada, U.K., and Japan) and positive returns kicked off 2011 with most major world markets gaining well above one per cent. This bodes well for those with strong convictions in the January almanac.

Since 1928, when the S&P 500 ends the month of January with gains, the market has finished positive from the previous year 73 per cent of the time. More impressive: since 1950, when the first week of January finishes positive, 86 per cent of the time the market finishes positive as well, with an average of 14 per cent gains.

It's a little premature to be making predictions one day into the year and foolish to predict today's price action is a fair indicator for the rest of the week, but with more and more bullish news coming out of America, the fundamentals do support another positive year, even after a huge 50 per cent rally from the summer lows.

If you're still a non-believer in 2011, consider that since 1940, the end of World War II, the third year in a president's term have been positive averaging a 19 per cent rise. Although there have been years where gains have been limited to 2-6 per cent, it does indicate that 2011, historically speaking, would be a low risk year with potentially great returns. Not only that, the last two years of a president's terms have outperformed the major stock markets.

Of course, all these almanacs, historical data, and predictions won't matter if America decides to dip back into a recession-like state and corporate earnings fall off the tracks. We'll have to wait 365 days to see what analysts were right.

Commodities

Don't think the commodity story ends in 2010. Gold, silver, oil, and copper have all had huge rallies leading into the new year and expect that trend to continue, at least for the first half of the year. Asia's continued economic rise, America's slow but surely recovery along with a falling US dollar bodes well for commodities. Gold and copper continue to reach all-time highs, as well as silver, notwithstanding the Hunt brothers and oil has reached multi-year highs.

Trading Ideas

If you're animate that this year will finish positive but don't know by how much, the best trade would have to be writing barely in-the-money puts. In-the-money puts would expire worthless if the market surges above strike prices, especially in an extremely bullish year. They would also lose significant value if the market's gains are tepid allowing traders to capture as much time value as possible.

Some January 2012 put options have huge premiums, allowing people to earn ten per cent for at-the-money options. Apple, trading at just under $330 today, have 330 puts worth $42 or more. If Apple fell to $289, you would still make money!

Personally, I've always believed writing puts are more efficient than buying stocks, especially if the stock does not pay a dividend. It requires zero dollars and equal or less margin too. Just remember that if you are assigned, you'll need to forfeit the cash or margin to cover the purchase.

With that said, I would like to wish all my readers a Happy New Year and good luck trading and investing.

Fed Buying Bonds Again...

Before I start this post, I just wanted to write a big thank you to HongT, a recent follower who wrote a wonderful compliment about my blog. If you ever have personal requests or even questions I don't normally discuss on this blog, please comment or find me on Facebook (please include a message who you are so I don't ignore your request) and I'd be glad to talk to you.

The Federal Reserve will be meeting Tuesday and Wednesday this month and economists expect the Fed to announce another round of bond purchases as a way to stimulate economic activity by keeping borrowing costs low. A majority of economists polled predict purchases will exceed $500 billion, adding to their never-ending debt. But continued reckless spending by the government will be in focus today, as millions of unemployed, angry, and hopeless Americans cast their votes for or against change in levels of federal government.

Bond purchases by the Fed is nothing new and it's recently been occurring at an outrageous pace. The plan, more famously termed as Quantitative Easing (QE), is to ignite the economy through lowered borrowing costs. Sound familiar? That's because it's the same description used to explain low interest rates. But because rates are so low, QE has been a strategy continued to be played out by this administration that continues to fail 300 million people.

Very little positives have resulted through QE measures, but the Fed insists on maintaining their course of action. Meanwhile, 17 million Americans are still out of work and jobs are being shipped out of the country because major corporations are hesitant on hiring with no clear signs that economic growth is sustainable. Don't be surprised if drastic changes occur in Congress, the House, and the Senate later today.

Many investors and even non-investors ignore these headlines, thinking that it does not affect them, but this is simply not the case. So why does the Fed keep trying it if so many believe it's not working? Their decision is based on the fundamental theory of a loose monetary policy.

It all starts with the Federal Reserve. The Fed, which by the way is a not a government agency, but a private cartel of its member banks overseen by the US government, buys bonds in the Federal Reserve Market, not the bond market. This is done by printing money, which creates inflation. The purchases of the bonds are done to work with the member banks in keeping rates low. This allows consumers the ability to borrow from banks at low rates or increase investment spending by businesses, also known as capital goods. If the business is successful, it expands and hires more workers, expanding spending, and expanding the overall economy... well that's the theory.

QE has done none of the sorts, at least not yet, and probably won't do anything in the near future. All it has done is decrease the US currency, in turn, increasing the value of nearly every asset in the financial market, except housing.

Low interest rates and an appetite for risk has pushed the stock market higher over the last six months because the yields in the bond market have been just plain ugly. Even corporate bonds are trading extremely high because their prices are in direct correlation with government bond prices.

You may have noticed that many companies, like Microsoft and IBM, recently announced major bond offerings. With rates in the bond market so low, they are selling debt and using that cash to buy back shares or pay for dividends. When a company buys back shares, it reduces the outstanding shares or the supply of shares, which results in a small increase in its price. This is important because public companies are valued by the EPS, not always the actual net income. Instead of trying to create more profit during poor economic times, they can sell debt for cheap and maintain their dividend payments, pleasing shareholders.

Hewlett-Packard mentioned that it plans to buy back up to 25 per cent of their shares. That's a significant amount! HP's market capitalization is roughly 97 billion (at the time of this posting). If 25 per cent of their shares are bought back, and the value of the company does not change for the worse, then the shares, which are $43 right now, would be valued at $57 in the future, an increase of 33 per cent. I bring this point up because more and more companies are issuing bonds, and it is very important that you review your investments and see how this will impact your portfolio.

A devalued US currency has also sent gold and many commodities to record prices. It has been a joyride for those enjoying the second gold rush, without having to set foot in California or the Yukon, but the rally in gold is a sign of inflation. Gold is often used as a hedge against currency devaluation and inflation. And with America printing more and more money to buy bonds, it is only a matter of time before the inflation bomb really affects America and the rest of the world. 17 million Americans are still out of work and another estimated 18 million are not making enough today... how in the world are they going to be able to afford food after inflation ripples through the economy?

The Death Cross Will Happen

"The charts don't lie" is a common phrase that exists amongst traders. It is an accurate, but not guarantee, barometer of investor sentiment and long-term concerns or beliefs. The charts on the S&P 500 and the Dow Jones have continued to show bearish signals since the start of May.

In the middle of May, I noted that the 200-day moving average was breached by all the major North American exchanges (see link) and discussed in a technical analysis blog about the functions of the moving average (see link). Since that date, the Dow Jones has fallen about 1,000 points. And now, we have two big signals the market may fall a little more.

Yesterday, the S&P 500, the Dow Jones, and the NASDAQ all hit 2010 lows, with more lows reached today. The S&P 500 had a key support level at 1,040 which was breached to the downside, indicating further drops to follow. And today, the market is now watching an upcoming death cross.

The death cross, which occurs when the 50-day moving average drops below the 200-day moving average, is a sign that stocks or asset classes will fall further, hence the name. Although the event has not yet occurred, it is fair to say this will happen in the next few days. Mathematically, the Dow Jones must move up 2,000 points in the next day to reverse the falling 50-day average. If you check the charts, the 2-week upward run in June of 800 points did not deflect the 50-day average.



I am anticipating the death cross to occur next week. We may see traders or firms try to delay the event by pushing the market up, even if tomorrow's job reports is positive, but the negative sentiment will take over.

It would be a wise decision to purchase some insurance or write in-the-money calls until a real turn around in the fundamentals is evident.

200-Day Moving Averages Passed

On May 20th, we saw the American markets drop below the 200-Day Moving Average (see previous post) followed by continued drops and extreme volatility. And now almost one month later, the American markets have surged well above this technical level. Not only that, the markets are back close to positive territory for the year. For many, this is a good sign that the bear market has ended, something I had recognized, but I don't think this is the restart of the bull market.

The market tends to be extremely volatile during options expiry week (the third Friday of every month), where daily swings of over 100-points is typical. Traders may try to move stocks into more favourable positions against their options for maximized profit or minimized losses. Therefore, we could see markets continue huge swings before this week ends.

Today's huge rally was highly unexpected with very little significant news impacting stocks. Commodities, especially energy, have surged in the last week as signs of a recovering economy took focus away from the European crisis. The continued upward move on the day could be a result of a short squeeze, a situation where shorts are forced to close out positions for a variety of reasons.

Just eight trading days ago, the Dow Jones closed below 10,000 on bad jobs news. Today, it closed above 10,400 for the first time in almost a month. Although I think June will finish higher than the end of May, I do not see this rally sustained until the fall. Volume was average, suggesting few traders believe in this rally. Strong volume is required for technicians to feel confident in a technical break out.

I'm going out on a limb here, but I can see the Dow finishing below 10,200 by Friday, barring major news.

The Fate of British Petroleum and the Oil Industry

On April 20, 2010, British Petroleum [BP:NYSE] informed the world that it had a small oil leak from an oil rig settled in the Gulf of Mexico. BP stated that 1,000 barrels per day was lost due to the explosion, but later admitted that the government's estimate of 5,000 barrels per day was much more accurate. Unfortunately, both BP and the US Federal Government was wrong, as recent studies show that over 100,000 barrels of oil are lost in a single day.

Many now accept that this oil spill has usurped the Exxon Valdez disaster as the biggest man-made natural disaster in human history. As well, estimates now put this oil leak as the largest oil spill in the world, passing the Iraq oil spill during the Iraq War in 1991 [1]. It's reign as number one will continue to live on if BP can not stop the leak. Attempts to halt the leak has failed on numerous occasions and may continue through the entire summer, prompting many to question what will happen if hurricane season hits early or harder than usual.

Shares in BP plummeted in the month of May; the first day of June has not been any better. Yesterday, BP announced that clean-up costs is nearing $1 billion US, sending shock waves across the globe. The company's market value decreased 15 per cent just today as investor's consider how much damage the company has inflicted on itself and the environment.

And now, speculations are swirling that British Petroleum's existence is in peril as its low share price is attractive as a takeover target. It also doesn't help that its reputation has been tainted for a few decades, and it has lost million, if not billions, in future oil revenue literally being washed away.

Bankruptcy is a tad absurd, but recent estimates by a Raymond James analysts see costs to spiral to $5.2 billion in 2010, up from a previous estimate of just $1.6 [2]. To put that into perspective, the company netted over $18 billion in 2010.

What this disaster has done has put drilling in the spot light. The realization that we need safe drilling has come to the forefront and expect many countries to implement new operating procedures and how we clean up oil spills.

A recent video has also been popularized on YouTube courtesy of this disaster, and I hope to make it viral. A non-profit organization named Matter of Trust has come up with an ingenious solution to oil spills: hair. View the video and ask your local salons to make a donation by simply mailing in boxes of hair they would normally throw out.

Canadian Banks Set to Report

Bank of Montreal [BMO:TSE] will start the second quarter earnings season for banks in Canada, providing a tone for the rest of the industry. Expectations for the sturdy six have been set extremely high as the Canadian banks have continued to report huge profits quarter after quarter during a financial crisis. Earnings estimates are expected to be up around 40 per cent from last year; revenue streams from trading and lower loan losses are continuing to improve the bottom line.

However, great expectations can lead to disappointment, especially with a rising Loonie decreasing foreign income and European loan problems yet to be factored into the estimates.

"Expectations have just gotten very, very high for the banks and that's probably the biggest headwind to stocks in the near term," Edward Jones analyst Craig Fehr said [1].

On the other hand, a small drop in the value of the shares after earnings could be a buying opportunity. Being rated the best banking system in the world, many investors may be tempted to invest money into the strong fundamentals.

"Investors should absolutely be investing in Canadian banks," said Barclays Capital bank analyst John Aiken. "With significantly less exposure to Europe and the additional weakness in the U.S. economy ... you've got very strong downside support [1]."

The market saw extreme volatility on Tuesday May 25 as traders prepared themselves for a slew of reports, and many are buying up bank stocks that have been beaten up during this market correction. Shares of CIBC [CM:TSE] rose 1.5 per cent today and is one of few stocks that have not seen their stock's value decrease during the month of May.

Canadian Imperial Bank of Commerce, Toronto-Dominion Bank [TD:TSE], Royal Bank of Canada [RY:TSE], and National Bank [NA:TSE] all report earnings on Thursday, which will definitely create a mixed bag of winners and losers. Bank of Nova Scotia [BNS:TSE] report June 1.

How to Protect Your Gains
Those that are pessimistic on earnings should consider writing calls for additional income. Option premiums for the month of June are paying nearly 3 per cent. By the end of this week, the risk premium will have disappeared which could provide a cheap way to close the options and hedge your investments.

The big five banks have been given a rating of 9 on the Minh-dex Maple Leaf Fund and have beaten the TSX over the past two weeks.

[1] Quotes obtained from a Reuters article.

200-Day Moving Averages Breached

All four major North American markets have just dropped below the 200-day moving average today. Toronto, the Dow Jones, NASDAQ, and the S&P 500 are down between 1.7 and 3.5 per cent on more terrible news in Europe.

A drop below the 200-day moving average is not a good sign. Long-term investors should consider protecting their assets through a variety of hedging strategies, preferably writing deep in-the-money calls. Consider selling June strike prices 5 per cent below your stock's current value, or even higher if you think there is a 20 per cent correction on the horizon. Just be cautious as this is an automatic exercise if the market turns around sharply or decides to stop falling.

For example, Bank of Montreal [BMO:TSE] is trading at $59.90 (at 12:50 PM EST) and the June 58 call, which is $1.90 in-the-money or 4 per cent, is bidding $3.30. Time value is $1.40. So, if your stock falls below $58 by June 18, you earn $3.30 to offset any loss on your stock. It also allows you to be a little wrong. If BMO finishes at the same value that it is today, you still make $1.40 and if it goes up, you earn the difference of $1.40 and how much the stock is up.

This strategy replicates a sell today without creating a down tick on the market itself and allows you to capture any time value on the option. As well, most widely held stocks are going ex-dividend by June expiration and I sense many investors are not in the mood to trade.

The other levels we should keep an eye on is the Dow Jones at 10,000. Although this level is not a real technical level, it is a psychological level that many amateur traders might use to sell or try and push the market lower.

A Bubble Waiting to Burst

China's exponential growth has been envied by countries all over the world. Consistent GDP growth in the double-digit territory practically every quarter allowed millions to leave the poverty line. This new-found wealth and capital flowed into the world of investments, as millions of Yuans entered the Shanghai Stock Exchange (SSE) and real-estate market.

From 2006 to 2007, the SSE tripled in value. Investors were hungry for wealth and continued to push the value of the exchange for another nine months before it bubbled and popped, wiping out 2/3 of the gains, coinciding with the financial crisis. It was a hard lesson for millions of Chinese investors - Easy come, easy go.

However, unlike the stock market, the real-estate market in China continues to shine. About thirty minutes ago, the Chinese government released data showing consumer prices rose 2.8 per cent in April from last year and property prices rose 12.8 per cent [1].

Concerns in China's real-estate market have been a hot topic for quite some time now. Chinese officials are trying to prevent a property bubble and have implemented many mandates to slow down the market without raising interest rates. China recently banned individuals from having more than two mortgages and second mortgages are charged an interest rate well above the going rate. And yet, prices continue to soar.

But with such strong economic data, what indicators are suggesting the end may be near? Recent remarks by wealthy investors and hedge funds claim that signals of a bubble ready to burst are hiding in plain sight, and we could see the fall of China occur within 9 months. Their reasons point to falling commodity prices and a skewed GDP.

Commodity prices soared in the summer of 2008 during the boom, but lowered demand from China and the rest of the globe have cut the price of oil in half, and prices of metals down 10 to 20 per cent in the last four weeks. They believe this is a clear indication that construction is slowing down in China, which is important because of the skewed GDP.

Recent data showed that approximately 60 per cent of their GDP is based directly to construction. With the Chinese government considering raising interest rates, it could put a serious halt to construction and lead to another Dubai, a country whose property bubble had burst last year. Imagine what a slow down on 60 per cent of their GDP composition would do.

A third argument that I have is that the stock market has always been a leading indicator of an economy. It is a representation of investors expected values of companies in the near future based on forecasted earnings. Investors are showing a lack of confidence in their public companies. As a result, the SSE is down over 12 per cent this year, where as North America and Europe are nearly unchanged (was up 6 per cent before that huge crash last week).

Interpreting the numbers and predicting the fate of an entire nation is a tough task. Professionals have been wrong before, and they will continue to be wrong in the future. However, it is also these same professionals who are the most qualified to paint us this gloomy picture of China's economy and one can not discount the signs as random. Nine months ago, they all said the US economy was recovering, and they were right. Can these same people be right about China as well?

[1] Bloomberg report

Dead Cat Bounce in the Making

Last night, the European Union unveiled a massive €750 Billion ($962 Billion US) bailout plan to save Greece. As a result, financial markets surged on May 10. European markets shot up between 6 to 10 per cent, with North American markets surging 3 to 4 per cent after a week of severe losses. Asia rose between 1 and 2 per cent as well.

What doesn't make sense to me is that for the past few weeks, it has been known that the EU would bail out Greece, yet the market continued to drop on the contagion concerns. I even hinted it last week in my blog titled "World Markets Tumble that the EU would do all they could to prevent the fall of Greece. Then, earlier today, the bailout was announced; markets rallied as if this information was new to the market. Everyone seemed so delighted today to see an up market, that the end was over, but it seemed like a sucker's rally to me.

One look at the move today and it might be a dead cat bounce, that is, a short-term rally in the value of a declining stock or stock market. The rumours that Greece would get a bailout became official, but concerns and fears still linger. Asian markets rose on Monday, but in Tuesday morning trading, early gains are already wiped out by the lunch break (Yes, Asian markets get lunch! I wish that was implemented in North America).

With exception to the predicted bailout now reality, the working fundamentals have not changed. Concerns in China's growth are still a plenty (a future posting, possibly tomorrow), the bailout makes no guarantees and additional funding may be needed, and although US economic indicators are improving, the rate is not to the world's liking.

Technical indicators have not yet turned around either. The upward momentum of today's market stalled in the first thirty minutes of trading and gradually dropped until the last half hour, a sign of hesitant buyers perhaps. The Dow broke below the 50-day moving average on Thursday, and The Dow did not break above the 50-day moving average today. Technicians consider a sell or buy signal confirmed if the security in question does not go back to the level of support or resistance. Tomorrow is the third day, and if it does not trade and close above that level, expect another bad month of May.

My friend Christian also pointed out that the Volatility or VIX Index, which measures the values of short-term options on a given index and creates a calculated "volatility value," is entering a golden-cross signal, a charting pattern that occurs when a short-term (50 days) moving average crosses above a longer-term (200 days) moving average, indicates an upward move. In this situation, an upward move in the VIX typically means a downward move in the market.

A friendly reminder should be issued here as well - Trade cautiously. The US Bailout of 2008 had very positive first reactions, but was followed by a 20 per cent drop over six months. We could see a repeat of continued selling pressure as Greece concerns remains.

The Anatomy of a 1,000 Point Drop [Update 3]

May 6, 2010 is a day that will not be soon forgotten. The intra-day drop of almost 1,000 points (998.50) on the Dow Jones was the largest in its history. [Previous errors have been corrected] Shortly after the market drop, stocks quickly recovered, but now the industry is investigating what caused such a large drop. Rumours in the market are pointing fingers at a Citigroup trader who made an error on a trade. But for those of you who were working or had no idea what happened today, this is how it all unfolded.

2:30 PM - Dow Jones falls below 10,600.
At around 2:30 PM EST, the Dow fell below 10,600, triggering a wave of selling. The market at this time, was already down over 300 points. VIX (volatility index) spiked up to 35 and would continue to rise. The market would continue to fall and the Dow reached 9,869.62 (-9.18%).

Index options orders disappeared in the market. I personally had puts before this large drop and it got filled on the way down. Minutes after, all orders seemed to have left the market because nobody was comfortable trading. The bid was 0.00 and the ask was 7.40 for a Diamonds May106 put. It seemed as if traders were seeing what was going to transpire as the Dow reached a circuit breaker.

The stock market introduced circuit breakers in the 1980's. The circuit breakers have never been triggered, but today's drop was the closest seen in our history. 2010 Q2 circuit breakers are 1050, 2100, and 3150. Note, the time of the drop would have not created a halt, as a 10 per cent drop after 2:30 PM would not constitute a halt.

2:45 PM - Dow Jones reaches low of the day.
The market's obvious over selling reached its pinnacle and buyers would start coming back into the market. Many financial websites and their servers crashed during this time, and information was not being fed. BigCharts.com stopped streaming the charts of the US markets and Yahoo! website was down for almost two hours. The market would pare 600 points and was only down approximately 400 points.

Many believe the market rebounded only to prevent the exchange from halting. Although one can also argue the market was over sold, since it has fallen 12 per cent in three days.

2:47 PM - Accenture shares trade at 1 cent
Suspect trades start hitting the market. Accenture shares valued over $41 as of today, traded at one penny, Bloomberg reports. Apple shares also hit $100,000 a share today. Expect these trades to be cancelled.

3:10 PM - Dow Jones sudden rise flattens.
20 minutes after the sharp drop, then subsequent rise, the market started to flatten out. Reports started flowing into the market of computer trading or hedge funds selling.

Computer trading has been blamed for sudden drops in the past, when in 2008, 500-point drop days was a regular occurrence. Computer trading is used by large firms to sell when stocks reach a certain price below the current market price. These orders are called stop-loss orders.

3:45 PM - Reports of Human Error and Trades Questioned
After the market started to flatten out, news published that a trader at Citigroup made an error on a trade. Instead of selling one million shares, he put "B" for one billion shares. People speculated and are unsure if his order would cause a market-wide reaction.

4:00 PM - Proctor & Gamble shares in question.
At the end of the trading day, PG shares were being questioned as the stock plummeted over 35 per cent in a day. PG management does not know what happened, but technical glitches are being blamed.

[Section updated at 1:21 AM EST] A rumour has been swirling in the market claiming a Citigroup trader placed a trade for $16 billion instead of $16 million on stock index futures at the Chicago Mercantile Exchange. The CME has responded saying "[there] does not appear to be irregular or unusual in light of market activity today."

PG trades are only being questioned on the NASDAQ. And the Dow Jones finished lower 347.80 after the roller coaster ride. [Additional information added to this section at 1:21 AM EST] The exchange has said that PG shares, as well as Accenture, Apple, and many others, are being cancelled if they did not appear on the NYSE ticker. It is believed the erroneous trades occurred on the NASDAQ electronic platform.

[Additional information added] The NASDAQ and NYSE have announced they are cancelling orders many securities that deviated 60 per cent away from a trade at 2:40 PM. Here is the official list. You may have received this from your brokerage as well. Click here for list.

This blog may be updated as more information is revealed through out the day. This blog was last updated at 1:36 PM EST (May 7, 2010).

World Markets Tumble

The market continued to free fall in the last hour of trading today. Too bad I made very little money on it, doubting the bearish signals that occurred throughout the day.

The Dow Jones Composite has fallen below the 50-day moving average, a technical indication that these drops may not be over. The VIX, which measures volatility, surged to over $22 at the close. This is an indication that uncertainty is back in the market.

World markets dropped heavily over night on news that Greece and Portugal bonds have been downgraded by Standard & Poors. The S&P believe that the two countries have a higher probability of defaulting now and noted that bondholders should expect to get about 30 per cent back on their original investment if the small nation goes bankrupt. Greek bonds are now below investment grade.

The market's recent wave of negative news coming out of Europe has dampened the market's rally. As we head into the summer months (historically not as profitable), many may have started the selling early. The world's markets have shifted its focus back on Europe and what will transpire.

Personally, I would like to think that Greece and Portugal will not go bankruptcy, as we have already seen the EU attempt to bail out Greece in the past few weeks. Once the ordeal boils over, I believe many will see this as yet another buying opportunity. But let's just hope I'm right.

Economic Indicators Rise Again

For months now, I have written that the US economy continues to strengthen, and more news in the last two days adds to my conviction. On Tuesday (April 13), chipmaker Intel [INTC:NSAQ] posted a record quarter, quadrupling profits. The company has risen 60 per cent in the last 12 months, keeping pace with the general markets. Intel commented that demand for their chips are rising, boosted by rising demand in computers and netbooks. Wall Street has been making a lot of money, but for the first time, Intel has given great news to Main Street. The company announced in their first quarter results that they will be hiring 1,000 to 2,000 employees in 2010. Many analysts were waiting to see large corporations start hiring, which would really indicate the end of the recession. Unemployment data, which is a lagging indicator, has remained flat at 9.7 per cent for the last quarter. If the unemployment rate can decrease in dramatic fashion, we could really see confidence in the consumer again. Just last week, US retail data showed that consumers have already started to open their wallets. The Beige Book also showed signs of good news. 11 of 12 regions showed improving economic conditions. Global recovery has also been signified in OPEC estimations, Asian GDP growth, and interest rate hikes. Glad to see hard working Americans, Canadians, and everyone else will finally catch a break.

Primerica Shares Surge

It has been quite a while since an IPO garnered such attention, but Primerica [PRI:NYSE] shares lived up to its hype, at least for the first day. By mid-day trading, the stock was trading above $20, reaching as high as $20.20, more than $5 above its $15 initial offering price with 15 million shares trading hands. The company is a spin-off from Citigroup [C:NYSE] who raised $320 million from the sale. Many believed that the IPO would sell well because the shares were undervalued at $12-14. According to Reuters, the company is trading at 0.7 times book value, when most insurers trade near 1.0 times. This would mean the company's shares fair value compared to its peers is $20. Primerica has a unique marketing and employment strategy that has been controversial, which has prompted lawsuits against the company. Despite this, the company has over 100,000 employees across North America working as independent agents.

How to Play RIM Earnings Today

Technology earnings kick into gear tonight, with Research in Motion [RIM:TSE][RIMM:NSDQ], makers of Blackberry smart phones, reporting results after the bell. According to analyst estimates, RIM is expected to earn $1.28 US in their 2010 Q4(RIM reports in US dollars although is a CDN corporation). Last year, they blew out estimates. Christmas season seems to be a very profitable one, but has the stock's recent gains and upgrades already priced in a predicted beat? In the US, the stock has risen from $60 to almost $75. Now, to be fair, about $10 of that move was foreign exchange related, as the Canadian dollar strengthened against the US dollar. But where do I think RIM will go after-hours? I do not see it moving up more than the $80 calls are worth. Apple and Google have taken market share, and reports shown in the last week indicate that Blackberry users are willing to give up their "BB" in exchange for the iPhone or Android. It looks like we could see a sell on news kind of day for RIM. The options are pricing in a move of about 4 per cent. Normally, I would short both the call and the put the day before earnings to capture the volatility of earnings. The 75 calls and puts are about $3.50 each. A short straddle could pay you $7.00 ($700 each). All the stock has to do is move less than 8 per cent this afternoon and you will be raking in the dough. If you don't want to waste commissions on closing one side of the leg, consider writing the 80 call and 70 put, which I think is a better trade anyways. They are both about $1.65 ($330). You are covered more on this trade and you are only sacrificing half the potential profits. So as long as the stock remains between $70-$80 by April 16, you can buy me a nice steak dinner.

Economic Recovery Imminent

March 9,2009: The world's financial barometer, known as the stock market, would reach multi-year lows and all signs pointed to the Apocalypse. Major financial companies, such as Bear Sterns, Lehman Brothers, and Merril Lynch were all wiped off the face of the earth, and many other firms were close to bankruptcy as well. It took a huge bailout to save the rest back in the fall of 2008. Signs of a second Depression were here. Fast forward to March 9, 2010; there is emerging hope that an economic recovery is on the horizon, with many indicators already showing improved figures, such as retail sales and GDP growth. The markets in Asia, Europe, and Americas are now up at least 60 per cent since the fallout and investors who sold a year ago are grieving at the missed opportunities everyone knew existed. It is hard for the average person, especially in America, to see that a recovery has been in the works for nearly three quarters, with jobs still unattainable, income being slashed, and so much negativity all around, but the signs are here. When Obama took the reigns as President, he inherited a mess of an economy, and give him credit, he has made many controversial decisions which seem to be helping. Many people denied the economy would ever recover and that it would take years. However, those people discounted one major difference today compared to the Great Depression: The world is much more global and China and India are now major players in the world. I've written a few times since I started my blog that things are looking good. Rising commodities alongside a rising US dollar is a very strong indicator. GDP is up, manufacturing data positive, retail sales up, job cuts down, and just about anything else looking a little better. Although jobs have not yet been created to substantially reduce the unemployment rate, we have seen signs that employers are ready to invest in human and technological resources. To my readers who are in a bit of a rut, be patient. I may not have been alive for the Great Depression nor old enough to remember the Asian crisis, but I know that humanity never changes and history always repeats. Keep a positive outlook and have confidence in who you are. Retail sales will jump start hiring and I predict this will happen in the summer. Yes, it is a while away, but this is a slow recovery that requires human endurance. The strong will stick through it and have something proud to talk about. Monitor major leading indicators to stay informed. Pay attention to the stock market trends, consumer expectation reports, and housing permits. Remind yourself that employment is a lagging indicator and generally lags the economy's state about two or three quarters. The recession was considered over, by definition, at the end of 2009, so hopefully we are halfway through the lag.

Drivers and Investors Buy Ford

February U.S. auto sales were released today with major surprises. The most predictable surprise was Toyota's drop in sales, the only automaker to have a drop. This comes on the heels of a massive recall and halt in sales of many of its most popular vehicles. But, this was not the major story that headlined. Ford [F:NYSE], for the first time in 12 years, outsold General Motors and sales gained 43 per cent. For the record, they outsold GM by only about 300 vehicles. Ford's dramatic increase in sales stems from an increase in fleet sales (rental car companies). They represented 40 per cent of the sales for Ford this month, 10 per cent higher than Ford's 2009 average. The company was hit hard during the automaker crisis, with the stock dropping below $2 a share, but when the American car maker told the government it did not need a bailout, the stock rebounded and has continued to climb to over $12. Ford has released many new popular vehicles that are better on gas mileage and are eye-appealing. With the car-buying season approaching, Toyota, GM, and Chrysler offered 0% financing for 60 to 72 months to entice buyers, but Ford did not follow suit, indicating Ford's confidence in their product. CNBC analysts said that Ford's turn around presents a good investment, with guidance of $1.00 a share, and even as high as $1.35 by some analysts. If these figures can be sustained, the company's stock price should be near $20 in the next year. Profit-taking is expected this week, but buying opportunities for long-term holders is now.

Greek Tragedy, Euro Falls

Sadly, I've been a little negligent with my blog the last week, but my friend Di insisted on more market blogs (and future non-market blogs to come). I'm currently working on a re-formatted options lesson, as requested by my other friend Wilson, and an article on RSP and TFSA's. Later or early next week, I will start to add investment basics for the beginner, along with my current daily market blog. It has been a few days since my last blog about Toyota, and so far, fears about the Japanese automaker seems to have disappeared with renewed concerns about European governments and their inability to finance their deficits, most notably Greece. According to a Bloomberg article posted on February 8, 2010, the Greek government has the largest budget shortfall in the European Union, and may need outsider aide. Concerns are also being extended to Portugal and Spain, resulting in rising credit default swap spreads. For those that do not know, a credit default swap is like an insurance policy against a government's debt. At last check, Portuguese swaps cost $244,060 to insure $10 million of debt for five years, up $20,000 over the weekend, reaching a new record for the country. Bank of America-Merrill Lynch analyst, Steve Pearsons, said that the Euro will continue to decline over the coming few years until the issues are resolved. Major currencies, especially the US Dollar, have advanced significantly against the Euro in the last ten days alone. He also claims the mounting problems will undermine commodity prices. Falling commodity prices are good for consumers, as costs of good will decrease, but could cause more economic problems for countries heavily invested in mining and drilling, such as Canada, Russia, Brazil, and many parts of Africa, which could offset any benefits for the average citizen, already being seen just days after the turmoil. Stressed countries have recently lowered wages, which has triggered massive strikes in Greece. The world is listening to these three countries with their ears to the door and worldwide stock markets have declined between five to ten per cent in the last two weeks. The theme of 2009 was "buy on dips (down days)", but 2010 seems to have reversed course quickly, with many to "sell on rallies (up days)." I've seen mixed reviews from analysts: Many believe this is a short-term correction that was anticipated in the early winter, others believe the 2009 rally was uncalled for and sees lows retested. Only time will tell. For anybody already invested in the market, I would suggest protecting your account. The costs of puts are a little high, but could be well worth it if the market falls for another few more weeks. Gains incurred on your puts would offset some of the drops in the value of your stocks. Consider writing calls for income as well.

Feb 3, 2010: Toyota's Misery, US Economy

When my family received a letter regarding our Toyota Camry two weeks ago, I should have realized this would be a great trading opportunity, but alas I did not. Toyota Motor's [7203:TYO, TM:NYSE] recall will forever change their reputation as a safe, reliable vehicle. The worldwide recall which occurred in the last week of January has put a damper on Toyota's sales. The company actually halted vehicle sales in December when a lesser-known recall was reported in late November. Earlier today US Transportation Secretary Ray Lahood told owners to stop driving their Toyota and immediately take it to their dealership, as a fix has been found. Later in the day, Lahood retracted his statement, as it turned out this was false. For anyone who has a recalled make, Toyota suggests a simple test. "If you experience any issues with your accelerator pedal, please contact your dealer without delay. If you are not experiencing any issues with your pedal, we are confident that your vehicle is safe to drive." But that's not all. In the last 48 hours, more problems have appeared in Toyota vehicles. There have been 140 complaints with respect to the 2009 Prius. The vehicles are not responding to braking, as well as sudden acceleration. This problem has already caused at least two injuries and two crashes to date. I am not here to spread propaganda or speculation, but if you own a recalled vehicle, please be cautious and pay attention to the news. These vehicles are the 2009-2010 RAV4, 2009-2010 Corolla, 2009-2010 Matrix, 2005-2010 Avalon, 2007-2010 Camry models (excluding hybrids), 2010 Highlander (excluding hybrids), 2007-2010 Tundra, and 2008-2010 Sequoia. The 2009 Prius is not yet on the recall list, as investigations are under way. Meanwhile, competitor's are thriving in sales in the wake of the news. All but Chrysler reported an increase in January sales year over year, and net US auto sales rose to 10.8 million from 9.6 million last year. Yesterday, US home sales also showed positive growth, another sign US economic conditions are improving, and this morning, services industries also showed improvement, but less than expected. The figures were limited due to high unemployment. The recent plethora of news has allowed markets to rise strongly in February, albeit three days old, after a steep sell-off to finish January. For many of my friends and family, the struggles will continue, but signs show there is light at the end of the tunnel. A recovery is in the works, although many see it as slow-paced. On average, Bloomberg analysts believe the S&P500 will finish the year up 10 per cent.

Jan 25, 2010: Apple, TI

I do want to apologize to my friends and any readers who were expecting a Friday post, especially after a very tough week in the markets. I had a family emergency and was unable to write or even go on line as often. Apple [AAPL:NASD] and Texas Instruments [TXN:NYSE] kicked off the week with quarterly earnings and both stocks beat expectations. Apple beat the estimates easily, netting $3.38B or $3.67 a share against estimates of only $2.07. Texas Instruments, well-known for its TI-83 Graphing Calculators we all endured in high school, posted positive numbers as well. TI made a profit of $655M or 52 cents a share. Both companies saw revenues climb during the holiday season, but both stocks remained tame after hours. According to many writers, new accounting rules allowed Apple to recognize all sales of iPhones and Apple TVs into their revenue at the time they are sold. The news should come as a relief to investors with housing data released earlier in the day showing negative signs. 2009 proved to be the first year in four where sales of houses previously owned were up, but prices were down 12 per cent, the largest year-over-year drop since The Great Depression. Home sales were boosted by low prices and government tax credits, pulling buyers to purchase homes earlier in the year. Expectations for housing sales for the remainder of 2010 look sour. For traders, this week could prove critical. Last week, there was a steep sell-off in the last few days, with the Dow Jones losing over 500 points and the TSX losing just as much. The earnings of key consumer staples and discretionary will be released. Following Apple and TI today, Yahoo! [YHOO:NASD] and Microsoft [MSFT:NASD] will post earnings Tuesday and Thursday respectively. Tomorrow, Johnson & Johnson [JNJ:NYSE], famous for Band-Aid, Neutrogena, and Listerine, will post earnings, as well as Pfizer [PFE:NYSE]. The reason I find this week so critical is because we have some of the largest companies from the needs and the wants posting earnings. If both the needs, like toilet paper, soap, and medication, and the wants, like laptops, music players, and smart phones both show rises, we could see signs that consumers are spending again, which accounts for two-thirds of most economies. Rising consumer spending equates to a rising economy.