Monday, November 20, 2006

Still Room for the Bull?

According to a blog entry from The Big Picture, the author talks about the role that skepticism can have in creating a bull market. Basically, when there is skepticism, many of the analysts and large investors will pull money out of the stock market in anticipation of declining stock prices. However, this creates a large amount of cash and assets in places other than stocks. As a result, with such a large reserve, these investors have a large amount of cash to put back into stocks when they rally. At the moment, there has been a lot of skepticism about the bull market and the strength of the economy considering the housing market, interest rates, and poor economic data. However, the market continues to hit new highs each day and with all the excess cash at the moment, it is highly possible that it will continue to hit new highs for the next quarter as these investors move their cash back into stocks. So, for the time being, we will most likely see a continuing bull market until next year if we continue to see strong earnings and business activity.

That's good news for Chase and his highly diversified portfolio.

If you want to read the blog, click here.

Thursday, November 16, 2006

Booming Financials

Here are my reasons why the Financial sector, and particularly investment banks, will continue to push forward in the coming year.
  1. They are going to benefit from all the mergers and acquisition activity in the recent month and coming quarters. With the airline industry all hyped up for mergers, this just means more business, and airlines are big business, for the investment banks. Expect the large investment banks, such as Citigroup, Merrill Lynch, Goldman Sachs, and Morgan Stanley to benefit from this.
  2. The IPO market is big right now. In the past month, numerous IPO's have debuted and many of them have done well. As the IPO market continues its push, this also means more business for underwriters and the investment banks. Not only will the investment banks benefit from the added business though, they will get capital gains from IPO's that outperform. For example, KBW opened at 26 but shares were offered at 21. Merrill Lynch, the underwriter for KBW will benefit from the capital appreciation of their shares from 21 to 26 in just one day.
  3. Inflation concern is decreasing. With good PPI and CPI numbers coming out signaling a decline in prices, inflation becomes less of a concern in the economy. This helps banks retain more on the investments but it also creates rate cut hype. Given that inflation will become less of a worry and deflation might become possible, you can expect to see interest rate cuts in the coming year by the Fed. Even if rates are not cut though, there is little chance for a rate increase.
  4. The stock market continues to rally. Financials stock prices will benefit from an overall market rally as the overall market moves up, but they will also benefit from increased interest in the market. As more investors look to get in to the stock market, expect to see revenues increase for wealth management stocks and banks.

Just look at how I am dominating you guys with my stock picks for Trading Night, it's just ridiculous.

Wednesday, November 15, 2006

Home Depot

One way to make money in the stock market is to buy companies that are undervalued and out of favor. One of these companies is Home Depot (HD). Recently, the housing market has been collapsing and industries related to the housing market have been falling out of favor with investors. For example, the Home Improvement Stores industry has not been doing so well with the recent downturn in housing. However, if we compare this industry with the Services sector, which it is a part of, we get a P/E Ratio of the industry of 12 times earnings compared to the sector of 23.25. Currently, the price of Home Depot is hovering around 37, down from its 52 week high of 43.95 and trading at 12.89 times earnings. If we look at Lowes, it is trading at around 30 at 15.72 times earnings and down from its 52-week high of 34.85. Now, if we consider HD's growth for the coming year, analysts predit that Home Depot's earnings will grow 7.8% in the coming year, but the forward P/E Ratio does not reflect any price growth compared to earnings. The current price is trading with negative growth for the current quarter and next quarter factored in and a negative outlook on housing. As housing begins to show signs of strength, we can expect Home Depot's earnings growth and price to increase as well as its P/E ratio. I think that as housing begins to improve, HD's price could reach 45 in the coming year and at that point, it still won't be trading at a P/E Ratio more than Lowes or even close to the sector average.

Monday, November 13, 2006

Quick Look at the Financial Sector

After briefly looking at some statistics between the Financial sector and other sectors of the economy, I believe that the Financial sector will continue to be strong in the coming quarter and year.
  1. At the moment, the sector has one of the lowest P/E ratios of all the sectors at 14.53 with the Basic Materials sector being the only one lower. This means that the current average price of stocks in the Financial sector is trading low compared to earnings and prices of stocks in other sectors.
  2. If we look at ROE between the sectors, the Financial sector again has one of the highest at 17.19%. Essentially, the stocks have stimulated good return on equity but continue to trade at a low price to earnings.
  3. The Dividend Yield of Financial stocks is the second highest of all sectors at 2.63%. This means that Financial companies continue to deliver strong dividends compared to their price, giving stockholders a stable source of income.
  4. Financial stocks have a high long-term debt to equity ratio. While this means that they will take home less profits, it also means that they are highly responsive to interest rates. Given the fact that interest rates are on the high side currently and the economy has been showing signs of weakness in housing and other areas, it is not far-fetched that we will see a drop in interest rates in the coming year.
  5. However, even though these stocks generally will have high interest expense, they have a healthy profit margin to make up for it. At 14.85% net profit margin, they have considerably more margin to cover those higher interest expenses than other sectors do.
  6. The stock market has been strong in recent years. With this, we would expect this sector's stock prices to be overvalued. However, they are still trading at lower prices compared to earnings than almost any other sector.
  7. Many industries in this sector are characterized by growth. Over the past few quarters, growth stocks have not been doing as well as other stocks. As value stocks become harder to find in the current market, growth stocks will begin to outperform. Financial stocks can only benefit from a bull growth stock market.
Considering all this, you can most likely expect the financial sector to remain healthy and continue growth into the coming quarters.

Thursday, November 09, 2006

Thank God for Christmas

Wal-Mart is now my hero. They are bringing back "Merry Christmas". Finally, someone isn't sucking up to liberal "I hate the world" attitude that says you can't wish someone a Merry Christmas. Who cares if they aren't religious or christian, it isn't offensive to say Merry Christmas. People aren't saying "You should love Jesus" when they say Merry Christmas. We are just being friendly. It has nothing to do with politics or the government, so I'm glad someone is saying it again. As for Wal-Mart, I'm going to shop there even more because they are wishing me a Merry Christmas, not a Happy Holidays. Maybe Wal-Mart can bring back Santa Claus.

By the way, here is an interesting cartoon about Democrats and Republicans.

Wednesday, November 08, 2006

Stock Prices and Investor Sentiment

I just read a great blog about investor sentiment and its relationship to stock prices in what he says is the "intermediate period" following. You can read the blog here.
Basically, the guy analyzes a graph showing the relationship between investor sentiment with respect to stock returns over the previous period and compares them to the stock returns over the following period. It is very interesting because it concludes that the more bullish investors are, the less return the market will generate over the next 20 weeks. This research basically states the psyche of investors in the market. Many investors, including myself, prefer to buy stocks on value and when the market is low (and investor sentiment is bullish), it creates value in a lot of stocks. Therefore, the more bearish the market is will predict higher returns in the following period. Basically, if you buy stocks on value when the market is down, you will most likely do well in the following period. Zecco for life.

Tuesday, November 07, 2006

Welcome

I would like to take this entry to give a warm wide welcome to everyone. Thanks for reading and I hope you enjoy future blogs.
Chase doesn't like men.
Rick likes women.