Hi everyone,

Last month we looked at how the DOW was getting close to the key 9,000 mark and wondered whether it could break through this level and make new highs for 2009. Last time round it failed just short of this level and slowly fell back towards 8,000. Over the last 2 weeks the DOW has surged back up to this level and after almost 7 months the it finally broke back above the 9,000 mark late last week. This recent rally has seen the DOW rise 1,000 points in the last 2 weeks. So today we take a look at what’s behind this recent market rally and ask if it is likely to continue.

Q2 Earnings Catalyst For DOW Rally

To put a bit of context around this 2 week rally, the DOW rose 12% which is it’s best 2 week performance since 2000! And it’s not just the DOW that’s benefited, the S&P and Nasdaq have also surged upwards by similar percentages. This sharp run-up in the major US Indices has been mainly driven by some strong Q2 results from a lot of the blue chips. Of the S&P 500 companies who have reported Q2 earnings so far 77% have beat analysts estimates, albeit these are greatly reduced estimates, by an average of about 15%. The continued stream of earnings beats has given the market the incentive it needed to drive higher after its mini-pullback earlier in July. No earnings pleased the market more than those of bellwether Caterpillar’s whose excellent results, which beat the street by $0.12 per share and reaffirmed it’s full year guidance of 5-10% revenue growth, helped drive it’s share price up over 10% last week. As a company with probably one of the greatest global reaches in terms of the markets it operates in, the construction and heavy moving equipment manufacturer’s results are always closely watched as providing a very good indicator of the current temperature of the global economy.

Tech Still Leading The Way Higher

Not to be outdone by the DOW the Nasdaq has been setting records of it’s own…Prior to it’s small 0.4% pullback last Friday the Nasdaq had just completed a 12 day winning streak, it’s longest winning streak since 1992. I was a bit surprised when I read that the tech index hadn’t gone on such a winning run in so long and that even right throughout the tech bubble of 2000/2001 it never achieved such a feat. It was disappointing results from Microsoft that ultimately lead the Nassy lower on Friday, one of the few big tech companies to miss estimates. Prior to Big Blue’s results it was all bright and rosy in the world of tech with excellent results from Apple, Google, Intel and Amazon to name a few driving the Nasdaq onwards and upwards on a daily basis.

Apple once again did it’s usual party trick of blowing away it’s own very conservative guidance and the Street’s slightly less so conservative expectations. After an almost $20 run-up in it’s share price in the couple of weeks prior to announcing it’s results to $150 a share I wondered could Apple continue higher, well there was no need to fear, it’s added another $10 a share since last Wednesday’s results. The results themselves were very impressive, Apple just can’t ship it’s products quick enough, particularly it’s iPhones where it sold 5.2 million of those bad boys last quarter and is “currently experiencing some supply issues”. While in most cases supply issues would be a cause for concern, like when Boeing can’t get it’s new airbus out in time to meet contracted delivery dates, in Apple’s case it’s a very positive sign. With Apple it’s simply a case that they can’t manufacture enough iPhones quick enough. We shouldn’t really be surprised, with stories of 15 minute delays to just get to talk to an employee in Apple’s stores in the US and if anyone here in Dublin has tried get their hands on a new iPhone 3GS recently I’m sure you too have being met with the response that sorry but they are currently not in stock….

Should We Be Concerned?

But should we be concerned about all this bullish talk, bottoming out became green shoots which  have now become talk of a proper recovery. What would concern me about this recent results driven rally is that the earnings beats have all come from an EPS perspective. In a lot of cases however when we look at the underlying results revenues continued to fall but it was the results of aggressive cost cutting programmes that meant profits held up and EPS looked good when compared side by side with what the Street’s analysts were expecting (analysts who had already slashed earnings expectations drastically in the face of the global economic environment these company’s were now operating in). So while I appreciate it is all about the bottom line, surely part of it must be about how that bottom line is achieved? And if chief executives are delivering that bottom line by cutting back staff numbers, reducing production levels and slashing spending rather than growing revenues, the question has to be, how long can they continue to do that for before they run out of costs to cut??

Certainly there are some positives out there, the global credit markets are at last starting to thaw and the US housing market is starting to pick up also with the number of housing starts announced yesterday up 11% month on month. But with US unemployment figures contining to rise (although at a lower rate) do the US public really have money in their pockets to spend? It will certainly be interesting to see if the US companies can continue to beat the street’s expectations in Q3 and Q4, especially as Wall Street’s analysts are likely to increase their expectations in light of what has happened in Q2.

So Where To Next?

The DOW chart below helps highlight the steepness of this recent run-up. Breaking above the 8850 mark on Thursday was key as this was a level that it failed at last time round. Once that hurdle was cleared it quickly jumped another 200 points.

DOW Breaks 9000 - Click to Enlarge

The market is clearly in overbought condition right now and a pullback, at least short-term, is probably on the cards. If we do get a short term pullback we would hope that this previous resistance level at around 8800 will now act as support. For now though it’s best to stick with the trend rather then trying to call the top of this current rally. Last night, after a  lackluster day when the markets traded mostly down we saw a late end of day rally which lead to the markets closing slightly up once more at 9,100. This end of day rally would be seen by many as a sign that the bulls are still in control of things right now. Keep your stops tight and be ready to go short if this run-up eventually runs out of steam.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

I received a question recently from a friend of mine asking me what was the difference between financial spread betting and CFD (Contracts For Difference) trading. This is a good question and one I wondered about myself for quite a while when I first heard of CFDs. Over the last couple of years I went to a few sessions run by Davys and a few of the other firms who were trying to build up their CFD business. After going to these I realised that there is very little difference between trading CFDs and Financial Spread Betting. There are however a few subtle differences between the two which are worth being aware of, especially for those of you who are trying to make up your mind which route is best to go.

A Look At What They Have In Common

Ok, before I get onto the things that work differently between Financial Spread Betting and CFDs lets do a quick run through all the stuff that’s pretty much the same between the two:

• Both allow you the opportunity to go long or go short so you can take advantage of both rising and falling markets
• Both are free of stamp duty *
• Both are leveraged products which means a low initial outlay, you only need to put up a fraction of the total value of your trade, the IMR (Initial Margin Requirement) which can be as low as 2% on some markets, e.g Currencies.
• Following on from the previous point, because both are leveraged products, they are as a result both a high risk form of trading.
• With both all your trades are in the currency of your trading account, thus removing the risk of currency exposure, regardless of what market you trade.
• With both you never take ownership of the underlying instrument, so there are no share certificates issued and you have no voting rights at AGMs, etc
• With both you can trade a wide range of markets including equities, indices, currencies and commodities.

* Note: Tax Laws in Ireland may change.

There is a Capital Gains Tax Liability on CFD Profits

So from the above I think it is pretty clear that Financial Spread Betting and CFD Trading are very similar, basically the same kind of financial product dressed up with two different names. However, as mentioned above there are a couple of material differences between that two. The big one for me is that with CFDs there is a Capital Gains Tax Liability on any profits made from trading CFDs. I see this as a massive drawback to getting into CFD trading over Financial Spread Betting. Especially given that since last last April’s budget CGT is now 25%….

Now the proponents of CFDs will argue that there is a benefit here too, in that any losses incurred while trading CFDs can be offset against profits made in order to reduce your tax bill. Now I don’t know what you think on this but for me that “advantage” sort of defeats the purpose. None of us get into trading to make a loss, so if you are making losses it’s hard to really be looking at the silver lining in that you can reduce your tax liability as a result of the loss incurred (I’d sort of compare it to paying an extra fee to protect your No Claims Bonus on your car insurance  – it’s just insurance on the insurance). Personally I’d rather take my chances and back myself make a few quid with my spread trading and to that end I’d prefer to be in a position where I had no CGT liability, a 25% gain straight away…

CFD Traders Benefit From Dividends On Long Positions

The other main difference between CFDs and financial spread betting is that with CFDs you do qualify for dividends on long positions on equities, well sort of…Although you are technically not the owner of the shares, if you hold a long position on the ex-dividend date your account / position will be credited with a payment that is the equivalent of the net dividend on the underlying shares.
There is a potential downside here however to be aware of, if you hold a short CFD position on the ex-dividend date, then your account will be debited by the amount of the gross dividend on the underlying shares.

With financial spread betting on the other hand, dividend payments don’t really come into play. If there are any dividends due on a stock then these are generally built into the price of the share you are trading. As a result you can basically trade your position as you see it, you will not get any “bonus” dividend payments for long positions, but likewise you will not see losses applied to short positions to account for dividend payments.

Final Takeaways on CFDs

CFDs became a real buzz word in Ireland over the last 18 months or so as a result of the Anglo Irish Bank debacle, the massive stake Sean Quinn built up in the bank via CFDs, the need to liquidate his position when the contract expiry date came and of course the now infamous Golden Circle of investors. I’ve read a lot on CFDs as a result of all this and as mentioned at the start of the post I have gone to a few sessions explaining CFDs run by the Irish brokers but I’ve never actually held a CFD position and to be honest I can’t see myself opening a CFD account anytime soon. I just don’t see any major benefits over my normal financial spread trading. Given that most of my positions are relatively short-term the dividends just aren’t going to make a material difference, the 25% CGT liability on the other hand, yep that makes a difference alright! But I’m far from an expert on CFDs so would be interested to hear from readers out there who have traded CFDs in the past as to how they have found them, do they think they are a better route to take than normal spread betting and if yes, why?

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

A short post today which takes a look at the three key US Indices – the DOW, S&P 500 and the Nasdaq. In particular I wanted to highlight some key levels that the DOW and S&P are approaching. I’ll also touch on the Nasdaq which has gone off on a bit of a run on it’s own recently.

DOW and S&P Threatening Positive Territory for the Year

First up we have the DOW which is edging ever closer to moving into positive territory for the year. It’s a sign of the times when we are almost half way through the year before we reach the point where one of the World’s leading Indices is about to move into the green for the first time since the first week of January! But that’s where we are at with the DOW, if you look at the chart below you will see that it peaked at just over 9,000 on January 6th and then preceded to plummet steadily week in week out until it hit it’s lows of 6,400 in early March. Since then we have seen a very impressive recovery with the DOW rising over 35% to bring us to it’s current levels at approx 8,750. It will still needs to rise another couple of percent to break through the 9,000 mark again and if we look at the chart we can see how over the last week or so it’s trading range has being tightening. Will it have the legs to continue it’s upward move to 9,000? And more importantly, if it gets there (as is looking likely), will it have the momentum to break through and hold above this key level of resistance?

DOW - Click to Enlarge

Next up if we take a look at the S&P 500 chart for this year we see an almost identical picture. January 6th saw the S&P peak at 943. Lows were hit on March 6th at 667. And so as not to be out done by the DOW it too has risen strongly over the last 3 months, by over 40%, to now stand at 940 and once again within striking distance of positive territory for the year. Interestingly the S&P did go positive last Friday when it hit an intra-day high of 957. However there wasn’t enough momentum behind this move to new highs for the year and ultimately the S&P closed flat at 940.

S&P 500 - Click to Enlarge

The next week or so is going to be key for both these markets. Unless we get some big news to drive the markets onwards (and I’m not aware of any right now) I think the DOW is likely to be met with some selling and profit taking at around the 9,000 mark, so those on the long side should be cautious and keep their stops tight. Longer term the market does appear to want to go higher with the US financials all happy out again and eager to give back their TARP money as fast as they can and “green shoots” appearing all over President Obama’s speeches. If the 9K hurdle can be breached and the market holds steady above if for a few days well then like all things a new target will be found – and there is none better than the DOW back above 10,000… The S&P looks to be a bit stronger right now and the more likely of the these two to get properly into positive territory for the year. It too has a major target in it’s sights with the 1,000 mark not too far off at all now.

And the Gold Star goes to the Nasdaq

Unlike it’s two big brothers, the Nasdaq has decided to go off on a bit of a run of it’s own over the last 2 months. It was first to break into positive territory for the year back on April 2nd and since then has rallied a further 15% and now stands at the 1,500 mark. Clearly the “smart money” believes that tech is good once again. The recent Nasdaq rally has being lead by stunning rises in tech giants such as Apple, Google, Microsoft, IBM, Cisco and Research In Motion to name a few, all of which are up over 30% in recent months.

Nasdaq - Click to Enlarge

Can the Nasdaq sustain a rally that has seen it rise by almost 50% since it’s early March lows? I think it’s likely to slow down a bit to draw breathe before the next set of quarterly results from the major tech companies, at which point the market will decide if the recent rises were justified and if in fact they have further to go.

Until next time,
Happy Trading :-),
SpreadTrader.ie

Hi everyone,

I hope you all had a great bank holiday weekend and enjoyed the great weather. Most of my posts to-date have focused on equities and various fundamental

Oil Rig

and technical indicators that influence share prices of various stocks. Of course one of the nice things about spread trading is that it gives you exposure to a lot of other of other markets without limiting you to just trading equities. You can also trade commodities, currencies, interest rates and bonds. Given that it is starting to make the news again recently today I thought I’d introduce Oil to you. There is way too much involved in trading oil to cover in a single post, in fact there are professional oil traders who trade nothing else but oil all the time and know it inside out. What I wanted to cover today was just a general introduction to the key factors that drive oil price, a sort of list of the basics you should be aware of before you start trading oil.

OPEC – The World’s Most Powerful Cartel?

Arguably the World’s most powerful Cartel, OPEC (the Organisation of the Petroleum Exporting Countries) was setup in 1960 and consists 13 of the world’s largest oil producing nations including Iran, Iraq, Kuwait, Saudi Arabia and Venezuela to name some of the bigger players. It’s remit is effectively to control the supply and price of oil to help oil producers achieve a “reasonable rate of return on their investments”. Their definition of what is a reasonable rate of return and ours may differ slightly but such is life! Today OPEC supplies approximately 40% of the world’s oil. The group meets regularly to have a chat about current oil prices, global demand and to decide on what it is going to keep it’s daily output of oil at which is the key thing that oil traders around the world are waiting to hear from these meetings. At it’s most recent meeting in Vienna last Thursday OPEC decided that in the interest of the overall global recovery it would keep it’s current production levels steady at 25 million barrels of oil per day.

The Strength of the Dollar Plays Its Part

Because oil is priced in dollars per barrel, the strength or weakness of the US Dollar has a significant impact on what happens with the price of oil. As the dollar weakens, unless the dollar price per barrel increases in a similar measure, then the price per barrel achieved actually drops. This was one of the factors in the recent rise in oil from a low of $30 a barrel in February, when the US dollar was trading strongly against the world’s major currencies (at the time it was approx $1.25 to the Euro) to a high of approx $68 a barrel today (the dollar has weakened to approx $1.43 to the Euro today). And as the US government continues to borrow left, right and center and flood the US economy with dollars in an effort to pull itself out of this recession expect to the see the dollar continue to weaken further. A weak dollar is something the gets on the nerves of the OPEC members also and was a topic of much discussion back in late 2007 when the US dollar started to weaken significantly for the first time against the Euro, hitting new lows on an almost weekly basis. It was at this time that Oil hit the $100 dollar a barrel level for the first time and an OPEC summit in November 2007 saw several of the members (particularly those who were not exactly best mates with the US such as Iran and Venezuela) calling for a move away from US Dollar priced oiland to instead use a basket of currencies for pricing oil. The proposal was eventually shot down by the US’s close allies, primarily influenced by the powerful Saudis.

Oil Inventories an Important Factor

Standard supply and demand economics  ensure that global stockpiles of

Oil Storage Tanks

crude oil will play a major role in the price per barrel. In particular US Crude Oil inventories are closely watched by oil traders and can have a significant impact on oil price movements in either direction. Only last week the US Department of Energy announced that US Crude stockpiles had fallen by 5.4 million barrels in the previous week, the markets were expecting a drop of only 500,000 barrels. This was one of the main reasons way the Brent Crude shot up almost $3.00 a barrel last Thursday. It should be noted that while US stockpiles are reducing of late, at the end of last month as part of it’s decision to keep oil production levels steady OPEC was quick to point out that global oil inventories are at a 20 year high. Clearly the oil cartel wanted this piece of information known so that the finger could not be pointed at them should oil prices suddenly rise as a result of their decision not to increase production levels.

Global Equities an Indicator of Future Demand

It’s probably no surprise that global equities and the health of the overall world economy have a direct impact on the price of oil. The perfect example of this is the last 12 months where oil prices plummeted from their highs of $147 a barrel last summer to their lows of $30 a barrel in February, perfectly in line with the full force of the Global Recession kicking in. As talk of an impending recession became a reality last year share prices in markets across the globe came crashing down to earth. As sales dropped, companies cut production levels, car manufacturers stopped making cars, house builders stopped building houses, as people cut back on non-essential travel etc, etc..the demand for plastics and oil itself also fell, bringing the price of a barrel back down to levels not seen since 2004. And in the last couple of months as talk of “green shoots” is all we hear from the US and other major governments around the world what do we see happen to oil prices….they more than double in the space of 3 months.

US Holiday Driving Season

Traditionally every summer American’s across the United States hit the

US Driving Season

 roads for what is often referred to as the Summer Driving Season. This driving season, when US families hit the Highways and head off across vast open States on their holidays, usually kicks off in earnest around the 4th July holiday. Millions upon millions of Americans jump into their 4 ltr gas guzzling SUVs and away they head.  It’s around this time that analysts and traders start to keep a closer eye on petrol(or gasoline as the American’s would say) stockpiles. If these stockpiles start to drop rapidly expect to see this reflected in the price of oil.

Hurricane Season in the Gulf Of Mexico

Probably not as big a factor as some of the previous items discussed but still one baring in mind later in the year is the impact the US Hurricane Season can have on oil prices. The Atlantic Hurricane Season officially runs from 1st June through to 30th November each year and over the last few years massive hurricanes such as Ivan in 2004, Kathrina and Rita in 2005 and Gustav last year have seen both on-shore refineries and off-shore oil rigs close down. Sometimes these closures are just short-term while the storm passes but many of the more severe hurricanes have seen significant damage incurred which have led to production to be stopped for several weeks while repairs take place. Obviously any reduction in the amount of oil produced or refined will lead to inventories dropping and oil prices rising to compensate for the reduced supply.

Some Final Thoughts

I plan to come back and talk about oil again in the future and hopefully take a look at some of the technicals that are at play when it comes to trading black gold. But for now I hope this post will at least highlight some of the factors to bear in mind before you decide to go long or short Oil. Above all I hope the article helps you get a feel for how closely so many different markets are related – interest rates, currencies, equities and oil. As the US pumps out dollars to try get itself out of this recession it increases it’s debt to trillions of dollars, that weakens the US dollar which in turn improves US equity markets as US companies export more now that the dollar is cheap. At home in the US people have more money to spend as a result of the US Government’s stimulus packages and all time low interest rates (another reason why the dollar is falling). And both of these factors (weaker dollar and improved equities) lead to an increase in the price of oil as global demand increases in line with the improved economic outlook. If you can get your head around all these inter-relationships it should avoid you putting on multiple trades which ultimately contradict each either, e.g. Shorting the Dollar and Shorting Oil at the same time or being Short Equities and Long Oil at the same time. While short-term pair trades like these might pay off but when looking at the bigger picture they are typically not how these markets tend to work.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

The Sage of Omaha

So I spend quite a bit of time on this blog talking about technical indicators that we should be aware of as Traders which I believe are very important when it comes to spread trading, particularly for short to medium term traders. But what about the Fundamentals of a company? Certainly they should not be ignored either. I’ve always tried to go down the route of first using the fundamentals of a company to help identify companies I might want to trade and then move onto the technicals to help identify specific entry and exit points. Fundamentals are even more important for longer term investors and there is arguably no greater long term investor than Warren Buffett, the Sage of Omaha.

Like most people interested in investing, stocks, companies, business in general, Buffett has a been a bit of a hero of mine over the years. From his amazing approach to identifying companies to invest in to his excellent Berkshire Hathaway Annual Shareholders Letter to his brilliant quotes, he has certainly made the world of business and investing much more interesting for me. Buffett is a true fundamentals investor, he believes in investing in great companies for the long term. And his investment strategy has certainly paid off with his success unparalled in the modern day business world. The share price of Berkshire Hathaway (the company which effectively manages Buffett’s investments) has risen from just over $20 a share back in 1967 to a high of over $141,000 a share in December 2007. It has dropped back recently like all investments but still sits at over $91,000 a share today. To consistently achieve an annualized return of over 20% a year for over 40 years is pretty incredible! If I can achieve anything like that in my spread trading career I’ll be a happy little spread trader indeed!

But back to the focus of this post, there are are litterally hundreds upon hundreds of Warren Buffett quotes out there, full of great advice, wit and wisdom. Everyone has their favourites and today I thought I’d share my Top 20 Warren Buffett Quotes with you. So starting at No. 20 and working up, here we go:

20.  The only time to buy these is on a day with no “y” in it.
19.  Time is the friend of the wonderful company, the enemy of the mediocre.
18.  The investor of today does not profit from yesterday’s growth.
17.  If past history was all there was to the game, the richest people would be librarians.
16.  You only have to do a few things right in your life so long as you don’t do too many things wrong.
15.  I don’t look to jump over 7-foot bars, I look around for 1-foot bars that I can step over.
14.  Investors making purchases in an overheated market need to recognise that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.
13.  It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
12.  Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simple jerks with a billion dollars.
11.  Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.
10.  Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive then energy devoted to patching leaks.
9.  I’ve reluctantly discarded the notion of my continuing to manage the portfolio after my death – abondonng my hope to give new meaning to the phrase “thinking outside the box”.
8.  There seems to be some perverse human characteristic that likes to make easy things difficult.
7.  Only when the tide goes out do you discover who’s been swimming naked.
6.  Risk comes from not knowing what you are doing.
5.  If a business does well, the stock eventually follows.
4.  A public opinion poll is no substitute for thought.
3.  Price is what you pay. Value is what you get.
2.  It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you will do things differently.
1.  We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

So there you go, that’s my 20 favourite Buffett quotes. If you have any others which you’d like to share use the Comments box below, that’s what it’s there for after all!

Until next week, have a great bank hol weekend!
Happy Trading :-),
SpreadTrader.ie

Hi everyone,

In response to a comment from Redmadra on this week’s Chart of the Week which looked at Morgan Stanley this post covers my own personal thoughts on the current state of the Irish banks. Not sure where to start on this one to be honest, along with our falling property prices, ever increasing dole queues and increasing taxes few things are discussed as much these days as our banks…!

So it’s all the Banks fault then?

On Wednesday we had the excitement caused by one angry shareholder’s

Gary Keogh Egg Throwing

egg throwing at AIB’s AGM which must have been absolute gold for the Irish media covering the event. It has led to Gary Keogh becoming a bit of a cult hero for the average shareholder on the street who has lost money in the banks over the last 18 months. Not a bad aim on the egg throwing front either although I think it would have been hilarious had he decided to take off and throw his shoes at Dermot Gleeson instead like that Iraqi guy who flung his shoes at George W Bush last year! I can understand Mr. Keogh’s anger (and fair play to him he spoke and got his message across to the media very well when interviewed directly after the incident) but you know at the end of the day we should all understand the risks involved when we invest in shares. If we have learned anything over the last 10 yrs or so it’s that no company is too big to fail (or be nationalised in the case where it is too big to fail!). The collapse of Enron in 2001 should be enough for anyone who decides to invest in shares to know that stuff can go wrong, the people in charge of the companies you invest in can make mistakes, bad judgment calls or even commit fraud. Before it filed for bankruptcy in September 2001 Enron employed over 22,000 people, had revenues of over $100 billion a year and had a peak share price of just over $90 in August 2000. A little over 12 months later it’s share price had fallen to pennies. Sort of makes AIB’s share price fall from a peak of €24 in the summer of 2007 to about €1 nowadays look tame!

I was watching some of the highlights of the AIB’s AGM, or more accurately it was probably the EGM the preceded the AGM but you know what I mean…and there was a massive amount of anger, frustration and general disgust in the room. While the leaders of the bank need to take a lot of the responsibility for what has happened to the banks share price I don’t think they can be the only ones to blame on this one:

• We all got caught up in the property boom that swept out little
  

  Buy-to-Let Apartment

  country from 2000 to 2007. Suddenly we were all property investors of some shape or other, from reading the 40+ page property supplements in our newspapers back to front each week to buying a holiday home in Portugal to buying a couple of  “buy to lets” in Carrick-On-Shannon to buying the 5 or 6 apartments in Bratislava! Yep from one end of the extreme to the other we all took part in Ireland’s property boom.

• Our new found wealth and love for property speculation led to us demanding our banks to lend us more money for the next “buy-to-let” as much as it was our banks calling us up to suggest we do a bit more refinancing so that we could consider getting into the Cape Verde Islands before everyone hears about it! We would have being well pissed off if they said we could only have 10 times our salary this time round…
• Regardless of the reckless lending by the banks, we were the ones that decided a 1 bed apartment on the Quays was worth half a mil or whatever…
• And of course our government was only too happy to count all the extra stamp duty it was raking in each year while at the same time trying to figure out how best it could put all this extra money to waste rather than maybe putting some of it away for the next downturn…
• For those who lost 80 or 90% of their life’s savings due to the collapse in the share prices of the banks, the question has to be asked why did you put all your eggs (excuse the pun) in one basket. I doubt it was the bankers who suggested you do this…A few weeks back I wrote about the importance of a diversified portfolio, I’m not going to rehash that now but if your interested click here to have a read.
• And last but not least lets not forget there is an international dimension to all this. While our country certainly dug a massive hole for itself, the last 18 months or so has seen a global financial crisis take place, matched only in scale by the Great Crash of 1929. This crisis is something that would have hit our little open economy very hard regardless of the performance of our banks or even if we never had a property boom in the first place.

So while I certainly feel for those that lost their life’s savings, especially the older members of society who more than likely will not have the opportunity to regain these losses, I don’t think it is right for everyone to now decide that it’s all the bankers fault, and that they should now be all strung up and eggs thrown at them.

So where do our banks stand now?

As for our banks, well it’s taken the guts of 2 yrs for them to start to admit to

Bad Debt

the scale of the bad debts on their books. It’s only in the last few months that main banks have started to put some sort of realistic bad debt provisions in place. On Monday AIB said it now expects it’s bad loans to come in at €4.3 billion (the absolute upper level in March was €4 billion!). To put the most recent revisions into context only last November AIB said it’s bad debts estimate was €950 million, yep that’s right, just 6 months ago the bad debts were going to just under a billion. In February of this year (yep that would be just 3 months ago), AIB said it’s bad debts were actually more likely to come in at around €1.8 billion. And yeah, upon a little further reflection, a little further digging around it’s loan book, they now reckon €4.3 billion might be closer to the mark…

Similar examples are out there the other banks but I’m not going to bother boring you with the figures. All I’ll say on this one is that it may have taken 2 years but at last it looks like they are starting to move in the right direction with these figures, that said I still think it’s going to be much higher before we are done. Oh yeah and whose going to cough up for these bad debts when all is said and done….think that burden falls on the Irish tax payer. Ok one last figure before I more off this particular point, AIB’s bad debt provisions in 2007 anyone?? €106 million!!

Bad debts aside, funny enough it looks as if the rest of the divisions across our main banks are actually doing alright. Current accounts, personal loans, credit cards, insurance, pensions and investments all continue to bring in the millions of euro each year for our banks. For example, bad debt provisions aside, AIB are are still expected to have operating profits of €1.8 billion this year.

Good Banks and Bad Banks

It seems all we’ve heard from the Government, the opposition, the media and every Dublin taxi driver over the last 6 months is talk of setting up a Good Bank or a Bad Banks. The options ranged from setting up a brand new bank which the government would invest capital into so that this new “Good Bank” would start lending to business again and not be burdened with the toxic debt that currently existed in our banks. Another option was to select one of the existing banks and take all the bad loans off it so that we would have one Good Bank that people could look to and have confidence in. Then there was the idea of setting up a “Bad Bank” which would effectively bail out all the existing banks by taking any of the bad loans that were never going to get paid off their hands and letting them carry on making good profits in the other areas of their business. And I’m sure there were lots of other variations of the good bank, bad bank idea out there. It’s easy to be cynical about all this but I suppose at the end of the day something needs to be done to sort out our banks otherwise we run the risk of ending up like Japan when it’s property crash lead to the 90’s turning into what is now referred to as “The Lost Decade”.

And then there was NAMA

So in an effort to sort out all the toxic loans out there, clean up our bank’s

Breaking Open The Piggy Bank

balance sheets so that they might start loaning a few quid to Irish businesses again and to basically get the property market moving again our Government, after looking into all the various Good Bank / Bad Bank options has come up with NAMA, the National Asset Management Agency. NAMA is effectively the Bad Bank option mentioned above -  but I suppose calling it NAMA sounds a bit better than referring to it as The Bad Bank of Ireland or something along those lines, although the BBoI sort of has a familiar ring to it!

NAMA’s remit, to take all the toxic development loans off the the banks books at an agreed marked down value. Coming up with what that marked down value should be fun. Many commentators are predicting this will turn into a legal minefield. I tend to agree, I wouldn’t be surprised if our next big tribunal in a few years time will be NAMA focused and end up costing the taxpayer a few more million. In the meantime we are still all waiting to hear  what the actual terms of reference for NAMA will be and when the legislation for the new entity will be introduced. Brian Lenihan has stated yesterday that he believes their will be “huge practical difficulties in the areas of law, staffing and valuations” and that it was important that the Government took it’s time to make sure it got the setup of NAMA right. My concern in the Government taking it’s time on something is that this time next year we will still be talking about NAMA but not be any closer to it’s actual establishment. Hopefully I’ll be proved wrong on that one.

Recent reports from Davy suggest that based on their current estimates that the post-NAMA world could see the government own  up to 64% of AIB. That leads me to the obvious question, what’s the likelihood of full nationalisation? Brian Lenihen continues to state that nationalisation will only be considered as a last resort. For me it’s becoming an ever increasing prospect. Not just for AIB but for several of our banks. Clearly Anglo was first to go but by the time we are done with all this I would not be surprised to see it followed by Irish Nationwide and AIB. I’m not sure on BoI, I think it’s status as the country’s national bank could see it survive the nationalisation onslaught. Likewise I think IL&P has enough going on the life and pensions side of it’s business to keep it’s staff away from joining the ever increasing band of pubic servants. As an aside, some fighting talk from IL&P’s chairperson Gillian Bowler at the company’s AGM yesterday, one of the more impressive speeches made over recent weeks by any of the bank leaders.

Final thoughts…

Asked for my thoughts on the state of the Irish banks by Redmadra I’m not sure if I have come anywhere close to answering his question….For me they are still a mess. I have deliberately avoided discussing their charts this time round because I just don’t think one could accurately work off them. There is a slight upward trend but this particular SpreadTrader thinks the vast majority of movement in Irish Bank shares these days is emotionally driven rather then being based on any proper fundamentals or technicals. I did trade them a bit on the way down and more recently earlier this year I went long BoI at 14 cent a share. Foolishly I closed that trade out way too early at 46 a share but not before some nice profits where taken off the table so can’t complain too much I guess. Since then I have decided to stand to one side on the Irish banks because l still think the risk of nationalisation is on the horizon and I have no idea how this NAMA stuff is going to work out. Personally I’d rather trade the US financials these days. I think they are easier to read and generally offer better trading opportunities.

As for the hedge funds who rudely shorted the Irish bank stocks on the way down?? Well they were dead right, they saw the madness of the Irish Property boom and decided to play it to their advantage by shorting the companies likely to suffer the most when the bubble inevitably burst – the banks. Great call as far as I am concerned and they are entitled to the profits they made out of bringing Irish bank share prices to their knees. At the end of the day no one can say they were wrong in their ascertains that Irish bank shares were overvalued at the time. And to the rumors that these same hedge funds are now the ones buying into the Irish banks….well perhaps they are positioning themselves to make a move post NAMA. Once the bad loans are gone off their books and capital ratios are back where they need to be don’t be surprised to see any Irish bank still standing on it’s own two feet (i.e. not government owned) suddenly be snapped up by a major hedge fund or a well funded international rival.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

In reply to an email received from Sean last week todays post is a short enough one covering some sites I use regularly and which I found useful for finding different types of market information. I’ll probably stick these on their own page on the site at some stage which I’ll update as I find new sites but for now here’s a few sites that might be worth your while bookmarking for future reference.

Yahoo Finance

I’ll start with the site I probably spend more time on than any other, Yahoo Finance. The site is great for real time quotes, interactive charts and of course general market information, announcments, etc. It may not be the best at any of these but for the ease of having one place you can go to for all this information I think it’s hard to beat Yahoo Finance. Some things I particularly like are:

• You can create your own portfolios of stocks which are saved for you. The information displayed for each stock is fully customisable, so far example I have name, ticker, last traded price, price change, % change, volume, related info listed for my stocks, but you can change this to show whatever info your interested in.
• When you go into the stocks themselves, as well as the last traded price listed, what I find very useful is that they also list the Pre-market prices (from about an hr before the market officially opens) and After Hours prices (handy if are wondering how a stock is trading who has just announced their results after the market closed).
• There is lots of other useful information on specific stocks such as 52 week range, 1 yr Target Price (based on the average of analysts estimates), Market Cap, EPS, P/E and Forward P/E (based on the company’s 1 yr guidance, handy to identify high growth companies).
• And if you have loads of time on your hands there is also lots of extra information such as company filings, competitor info, industry info, analyst opinion and estimates, blogs, message boards and financial info including P&L, balance sheet and cash flow statements.

RTE’s Daily Broker Reports

Next up, if you are looking for good summary information on Irish shares which is up-to-date, accurate and generally easy to read, then a good place to start is the Broker Reports on RTE’s website which are updated every day. The reports generally contain an overview of the latest information on the major Irish shares, from what the market is expecting prior to earnings releases, to analysis after the results are announced and what it is likely to mean for the company’s share price. I’ve certainly found it useful to take 10 or 15 minutes most mornings to scan the latest broker reports for information on shares I’m interested in. One thing I would say however is that the reports are written by the main Irish stock brokers and often give price targets which tend to be on the bullish side, so don’t take these too seriously and do your own research.

Irish Stock Exchange

For a complete source of all things related to Irish shares, then the Irish Stock Exchange is what you need. It contains a lot of information that sometimes is not readily available on a yahoo or a sharewatch such as the number of shares in issue, dividend payment date, ex-dividend date, etc.

XE Currency Converter

I know there are loads of currency converter websites out there but I like these guys:
XE Currency Converter
Simple, easy to use, up-to-date and accurate prices, if you are trading the currencies or shares on foreign stock exchanges and need to do some quick price checks or conversions, it’s as good a site as any.

Earnings Whispers

Here’s a great website if you want to find out when a particular company is due to announce it’s next set of results:
Earnings Whispers
Just type in the ticker and all the info you’ll need is there, including the date results will be announced, whether it will be before the market opens or after it closes, the consensus estimate and much more.

Commodity Prices

I’ve always found it hard to find really good information on commodity prices but probably for a quick overview of how the various commodities prices are doing then CNN Money is not bad. Another options is the Yahoo Finance guys again.

Discussion Forums

There are loads of discussion forums out there which, aside from having lots of pretty poor comments on them, can from time to time have some useful discussions on the go and can also contain the odd link to a very good article. The ones I scan from time to time are:
Askaboutmoney
Boards.ie
Interactive Investor (3i)

Never Ending List…

Obviously the list of financial and investment websites is endless, a few others to consider checking out if your looking for information along the lines of what is available at Yahoo Finance are:
Market Watch
Bloomberg
Financial Times

If there are any other sites you use on a regular basis which you find useful I’d love to hear about them. Leave a comment below or drop me an email on the Contact Us page.

Happy Trading :-),
SpreadTrader.ie

Hi everyone,

Sell in May?

I hope you are all having a great May Bank Holiday weekend. The days are getting longer and at last we seem to be getting some nicer weather, hopefully it will continue! As we move into May it reminded me of the well known investment saying of “Sell in May and Go Away”. For those not familiar with this adage it basically argues that there are good periods (the 6 months from November to April) and bad periods (the 6 months from May to October) periods for investing in the stock market and that historically if you always invested at the start of the “good” period (i.e. start of November) and sold up your investments at the end of this period (i.e. end of April) you’d out-perform the market. I’ve heard a lot about this “investment philosophy” over the years but to be honest never really paid much attention to it. I thought however it might be worth doing some research into it this time round as part of a blog post.

Historical Data Backs Up Claim 

So first things first, is there any historical data to back up or add any weight to the the “Sell in May and Go Away” investment strategy? Well, believe it or not, yes there appears to be some pretty decent historical statistics that back it up. A study by Plexus Asset Management showed that the  S&P 500 Index produced average returns of 7.9% per annum during the “good” periods from January 1950 to March 2009 compared with average returns of 2.5% per annum for the “bad” periods during this time frame. So based on my quick calculations here that would mean that if someone invested €1,000 in the S&P in 1950 and rigidly followed the “Sell in May and Go Away” strategy year in year out their €1,000 investment would now be worth €88,770 (or there abouts). That compares rather impressively against someone who adopted a “bad” period investment strategy, their €1,000 in the S&P in 1950 would now be worth a mere €4,290….taking the increased cost of living over this period into account would mean they effectively lost money…

The above calculations don’t take tax into account or the costs involved each time an investor opened or closed a position, but still they are certainly a bit of an eye-opener as to how the market has tended to fluctuate on a relatively consistent basis year in, year out over such a long period of time (almost 60 yrs). While the above stats are based on the performance of the S&P 500, similar studies have come up with very similar results for the DOW and the MSCI World Index to name a few.

Obviously the above results are based on the average over the period analysed and as with most things in life throughout that time frame there were plenty of exceptions to the rule. Most recently in 2007 when the so called “bad” period May to October 2007 saw the S&P 500 have the cheek to rise 4.3% and was followed by a “good” period that saw the same index fall 8.2% over the following 6 months to the end of April 2008. So I guess this tells us that sayings are just sayings and at the end of the day the market will do whatever it wants!

What Might Cause This To Happen?

But in general we seem to have some pretty good evidence that the markets performs better in the November to April period over the May to October period. So what might the reasons for this be? Well some of the more commonly sited reasons for the better performance during the November to April period include:

• The Christmas Effect (often referred to as the “Santa Claus Rally”) when businesses in general do better because of increased consumer spending in the run-up to the Big Man’s arrival on December 25th
• The impact of year-end bonuses which tend to get paid in late December or January
• The January Effect which is often attributed to small investors deciding what stocks to invest their cash in at the start of the year, leading to a disproportionate rise in share prices during this time compared with the rest of the year. An interesting statistic to back this is up is that average monthly rises in the S&P 500 between 1950 and 2009 are higher in January (1.64%) than any other month in the year.
• April has typically been a very strong month also, often attributed to investors buying into stocks in advance of Q1 results due to be announced around that time.

As for the Summer months typically delivering poorer results, well much of this could be down to people taking their holidays or deciding to do some home / garden improvements around this time as the weather improves, resulting in less money flowing into the stock market.

So Should We All Sell Up Now Then?

So taking all this into account, should you sell up your investments in May then? Well before you start calling your broker it is worth noting that just because the market doesn’t perform aswell during the “bad” period, that doesn’t necessarily mean it always goes down. Since 1929 there have been 31 years where the DOW went up by more than 5% during the May-October “bad” period, just over double the 15 years during this period where the DOW fell by more than 5% during these months.

As for what the market might do this time round, well my crystal ball is still not working so I’m going to continue to watch what the market is telling me and trade that. One thing that will be at the back of my mind as we enter the “Sell in May” period for 2009 is the fact that since it hit it’s closing low of 6,547 on the 9th March, the DOW has rallied a massive 25.4% to it’s close last Friday at 8,212. This is a significant rally by any standards in just over 7 weeks which many commentators are saying is unsustainable and will lead to a sharp pullback soon. Although the last 7 weeks of gains have been impressive, it is worth mentioning that the DOW is still down 9% year to date! Whatever the market decides to do for the May-October period this time round, lets hope it is not a repeat of last years dismal performance which saw the DOW fall 28.5% during the May 1 to Oct 30 period. Whoever first coined the “Sell in May and Go Away” phrase can certainly say they were spot on in 2008, that’s for sure! A repeat performance this time round would see the DOW below the 6,000 mark come the end of October, a scary thought indeed!

Happy Trading :-),
SpreadTrader.ie

P.S. Congrats to the Leinster lads on a great win over Munster yesterday – all the best in the final at the end of the month!

Hi everyone,

I got a mail in recently from one of the readers of the blog asking about market correlations between different stocks, particularly those in the same same sector (e.g. the Irish banks) so I thought I’d do a post touching on some of the things to look out for in this area. In particular in this post I’ve decided to focus on diversification and what it means to the investor. In a later post I’ll discuss some other correlations between different types of markets, such as the relationships between the major stock markets, currencies, interest rates and commodities, but for now lets just look at creating a diversified investment portfolio.

One of the main subjects that many professional investors (those that write books and talk at seminars and the like…) talk about is diversification. Often referred to as the one and only true “free lunch” available to investors, I have no doubt there are many benefits to having a diversified portfolio. For me however the big thing is making sure it is actually diversified. Lets look at a couple of different examples of diversification.

All Your Eggs In One Industry Won’t Work

I’ll start by talking a bit about the share price correlations, in particular stocks in the same sectors or industries. If you have 10 grand to invest and you decide to put 2K each into BoI, AIB, Citibank, Bank of America and HSBC for example, on the basis that you think the financials have taken too much of a battering over the last 12 months and are ripe for a rebound… Well this really isn’t diversification in my book, your call may well be right and most or all five of your picks will rise, but you could just as easily be wrong and the market decides that there are still more write downs, more bailouts, more nationalisations, etc to come from the financials globally, in this case you can bet all five of your investments are going to tank to varying degrees. The above approach might offer some minor benefits in that it would be unlikely for all five stocks to go bust or be nationalised (although anything is possible these days!).

Diversified Stock Portfolio Is Better But Still Not Great

So if you want to avail of diversification then a second approach would be to put 2K into 5 stocks from different sectors, for example 2K into Bank of America (for some financial exposure), 2K into Apple (for some technology exposure), 2K into BP (for some oil / energy exposure), 2K into CRH (for some construction exposure) and 2K into GlaxoSmithKline (for some pharma exposure). This approach will at least reduce the likelihood of all of your five investments getting hit at the same time and to the same extent. But again it’s not a guaranteed approach and would have provided little respite to investors over the last 12 to 18 months when global stock markets tanked and almost no sectors avoided the sell-off the occurred.

True Diversification Looks Beyond Equities

That brings us to approach number three, true diversification, this can only be achieved by looking beyond just equity investments. Lets say our notional investor decided to invest his 10K as follows: 2K in an ETF (Exchange Traded Fund) of their choice to get some equity exposure (diversified equity exposure at that!), 2K into a property portfolio or fund (it would be hard to get any real property exposure for 2K but you could invest in a property focused stock like British Land or Blackrock International), 2K into commodities (lets say gold or oil), 2K into a Government bond (US Government bonds currently pay approx 4% interest) and keep the final 2K in cash (again most Irish banks are offering 4-5% interest at the moment). This approach provides true diversification and makes for the safest way to not completely lost all your investment. In the above example you’d be very unlucky to lose more than 50% of your investment (assuming governments continue to honor their bonds, gold/oil doesn’t go to zero any day soon and cash remains king!).

The downside to this final example of “true diversification” is of course the return you’ll get. The price you pay for the added security your portfolio gains by diversifying is typically a lower rate of return compared to the investor who decides for example to put all their money into high tech stocks. Although the diversified investor probably found it much easier to sleep at night over the last year! This trade-off really depends on your personal circumstances and your appetite for risk. One thing is for sure, any investor who doesn’t deploy some level of diversification (even if it is only the first approach discussed above) to their portfolio is asking for trouble!

Happy Trading :-),
SpreadTrader.ie