Saturday, September 4, 2010

I have $10,000 and four months. Where do I invest?

(MONEY Magazine) -- Question: I have a budget of $10,000 for a stock simulation I'm doing for a business and personal-finance class. What stocks should I invest in to make the most money in four months? -- Matt

Answer: I hope for the sake of you and your fellow students that this simulation represents some sort of academic exercise as opposed to your instructor's views on the right way to invest in the stock market.

As I've noted before, investing is more like a marathon than a sprint. So I don't believe that performance over a few months -- or even a few years -- is a very good gauge of one's prowess as an investor or stock picker.

I also think that focusing on such a short time period could make it more difficult to cultivate the patience you need to succeed as an investor.

But with those caveats in mind -- and assuming the $10,000 you're investing is theoretical money as opposed to real bucks -- I'm going to tell you what you should do to give yourself the best shot at making the most money within four months and beating your classmates in this exercise. (more)

World Financial Report

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The Economist – 04 September 2010

The Economist is a global weekly magazine written for those who share an uncommon interest in being well and broadly informed. Each issue explores the close links between domestic and international issues, business, politics, finance, current affairs, science, technology and the arts.

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How To Trade The Gold/Silver Spread

What Makes A Trade A Spread?

A spread consists of two or more related futures positions. Note the word "related" here. In order for a spread to be recognized for margin purposes—more on that in a moment—there has to be an economic connection between its constituents. Plainly, gold and silver are fellow-traveling precious metals, but formal recognition of the spread by the exchange clearinghouse is required to derive the spread's benefits.

What benefits? Well, in most cases, reduced margin requirements.

Let's look at how this facilitates a gold/silver ratio trade.

COMEX gold is traded in 100-ounce contracts, which require a minimum performance bond (or margin deposit) of $5,739 each. COMEX silver's $6,750 margin requirement is based upon a 5,000-ounce contract.

If you think the gold/silver ratio will move in the white metal's favor, then you might be inclined to buy silver. By purchasing silver outright, however, you're only going to make money if prices advance above your buy point. In contrast, selling gold against a silver purchase wagers on an improvement in silver's buying power, whether it derives from a rise in silver's price or a decline in gold's. A spread, therefore, gives you greater flexibility. (more)

Goldman Sachs Said to Shut Principal Strategies Unit

Goldman Sachs Group Inc. is shutting its principal-strategies business, a group that makes bets with the firm’s own capital, to comply with new U.S. rules aimed at curbing risk, two people with knowledge of the decision said.

Wall Street’s most profitable investment bank plans to hold off on announcing the wind-down while the 65 to 70 members of the global unit seek new jobs, the people said, speaking anonymously because the internal discussions about the process are confidential. Some traders and support staff may get roles within the New York-based firm, while a team in Asia may raise money for a new hedge fund, the people said.

“What’s motivating people is that they need to know where they are going, and no one wants to be the last group out the door,” Gary Townsend, president of Hill-Townsend Capital LLC, said on Bloomberg Television. “It’s really the personnel decisions that are driving this to happen sooner rather than later.” Townsend’s Chevy Chase, Maryland-based investment firm specializes in financial companies. (more)

Should US government debt be rated junk?

FORTUNE -- A few weeks ago, Hedgeye, the investment research firm where I'm a managing director, hosted a conference call for our subscribers that posed the question, "Should U.S. Government Debt Be Rated Junk Status?" Given that debt issued by the U.S. government continues to trade at almost all-time lows in yield, this is a contrarian call to say the least.

But while investors are willing to accept little in the way of return to own U.S. government debt and the U.S. has retained its AAA credit rating, the metrics by which we use to evaluate the balance sheet of the United States continue to deteriorate.

Typically, a bond receives junk status due to its increased risk of default, and therefore pays higher yields to the owners of the bonds to make up for the risk. In general, the owner of a bond is subject to many risks: interest rate risk, inflationary risks, currency risk, duration risk, and so forth. In this instance, as it relates to the United States, we are actually most concerned with the risk related to future repayment. Specifically, with projected deficits for at least the next fifty years, will the United States be able to repay its debt and, if so, on what terms? (more)

Moving into Bonds: From Frying Pan to Fire

By Kevin Brekke
With the great bond stampede that began in 2009 continuing, giving rise to the very real possibility of a bond bubble, we decided to check the relationship between bond returns and bond fund inflows to see if there might be a correlation. Take a look at this chart:

    (1) Measured as the year-over-year change in the Citigroup Broad Investment Grade Bond Index.

    (2) Plotted as the three-month moving average of net new cash flow as a percentage of previous month-end assets. The data exclude flows to high-yield bond funds.

As suspected, the rise and fall in total return from bond funds is accompanied by an influx or exodus of bond investors. Data to construct the chart were taken from the Investment Company Institute’s (ICI) 2010 Fact Book where they state,

In 2009, investors added a record $376 billion to their bond fund holdings, up substantially from the $28 billion pace of net investment in the previous year. Traditionally, cash flow into bond funds is highly correlated with the performance of bonds. The U.S. interest rate environment typically has played a prominent role in the demand for bond funds. Movements in short- and long-term interest rates can significantly impact the returns offered by these types of funds and, in turn, influence retail and institutional investor demand for bond funds.” (more)

Industrial metals - price hiatus ahead,

According to the Royal Bank of Scotland, September and October could well be poor months for non-precious metals miners.

in a report titled, "Diversified Metals & Mining: Q4 2010 Commodity Price Revisions & Outlook," the bank writes, year-to-date share price movements point to the fact that the world has moved into what it terms the "second phase" of the mining cycle, which is characterized by volatile but largely sideways movement for mining equities.

It notes that while phase one of the cycle, which they posit began in December of 2008, sees mining stocks rally on the back of improvements in "liquidity and the resulting balance sheet relief, the turn in global economic leading indicators, weakness in the U.S. dollar, commodity purchases by China, the resulting drawdown in exchange inventories and the increase in commodity prices", it is not a sustainable uptick.

" The optimism toward mining asset prices generated by the turn in leading indicators and the resumption in economic and commodity demand growth eventually gives way to the reality of lagging fundamentals as economic growth slows. The shares give up some or all of their gains and move into a broad sideways trading range until industry fundamentals catch up," RBS analysts write. (more)

Sorry, Gold Isn't Verging On A Massive Rally

With Gold once again near all time highs in recent sessions, we are hearing much chatter from the Gold Bugs who are preparing for an explosive rally. The long-term charts (see below) suggests that caution is warranted. This is not the kind of price action that we have historically seen in bull markets that have lifted resistance and traded far above the highs.

Rather, we see a market that is showing several signs of weakening conviction; all of these boil down to bulls losing conviction as momentum wanes on each successive rally.

Strategically we continue to see concerns over the USD and the EUR, combined with consensus expectations for softer growth levels going forward for several years, as the primary narrative driver for bulls in the absence of inflation. The fact that economic growth, while anemic, is real creates an offset to this argument as other asset classes such as equities may take short term favor (note that the near-term correlation between gold and equities is volatile). (more)

Bloomberg Businessweek - September, 06 2010

* Property of China. China is buying
Australia's resources as fast as it can,
making Australians rich - and nervous.

* Companies. Michael O'Leary's
plan to make you miserable.

* Investigation. A ponzi scheme at the FBI.

* Etc. The end of Wall Street sell night.

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Stocks close higher on jobs optimism

(MarketWatch) -- Investors pushed stocks up for the fourth day in a row, sailing into the long weekend on a high note as an encouraging jobs report sent stocks to their best pre-Labor Day week in two decades.

The Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,448, +127.83, +1.24%) finished up 127.98 points, or 1.24%, to 10447.93, putting the Dow up 2.9% on the week -- its first positive weekly showing since the beginning of August. The Dow also edged back into positive territory for the year.

The market leaped after nonfarm payrolls data showed jobs slowing at half the rate predicted by economists. The Labor Department said the U.S. lost 54,000 jobs last month, about half of what economists had expected and matching the level of revised losses recorded the previous month.

The unemployment rate, calculated using a separate household survey, edged up to 9.6%, as expected, from 9.5% for the previous two months. (more)

Chart of the Day