April 2012 Archives - 3/13 - Money Morning - Only the News You Can Profit From
Investment Advice: 5 Ways to Conquer Gambler's Ruin
The relationship between investing and profits seems simple enough. You buy low, sell high and your portfolio grows — or so goes the story.
In reality though, success comes down to something called "Gambler's Ruin."
Most investors have never heard the term but understanding its implications can mean the difference between heartache and success, especially now.
Gambler's Ruin is a mathematical principle that deals with the preservation of assets – or, more accurately, the probability that you'll lose them over time.
Here's how it works:
Imagine that Player One and Player Two each have a finite number of pennies, which they flip one at a time, calling "heads" or "tails." The player who calls the flip correctly gets to keep the penny.
Since a penny has only two sides, it would seem on the surface that each player has a 50% probability of winning – and that's indeed the case for each individual flip.
But, if the process is repeated indefinitely, the probability that one of the two players will eventually lose all his or her pennies is 100%.
In mathematical terms, the chance that Player One and Player Two (P1 and P2, respectively) will be rendered penniless is expressed as:
- P1 = n2 / (n1 + n2)
- P2 = n1 / (n1 + n2)
In plain English, what this says is that if you are one of the players, your chance of going bankrupt is equal to the ratio of pennies your opponent starts out with to the total number of pennies.
While there are wrinkles in the theory, the basic concept is that the player starting out with the smallest number of pennies has the greatest chance of going bankrupt.
In the stock market the player with the smallest number of pennies is you… and me…and any other individual investor, for that matter, who is up against the big boys.
Investment Advice: Playing to Win
If you've ever been to Las Vegas or Monte Carlo, chances are you understand this at some level, if for no other reason than that the longer you stay at the tables, the greater the probability that you will lose.
Investing is much the same.
How to Profit from High Crude Oil Prices
Despite a recent price pullback, my "oil constriction" approach for how to profit from high crude oil prices has not gone away.
In fact, it is right on track.
But we need to remember that the constriction in oil availability will not hit all oil sector shares the same way.
There are four overriding elements in what is coming.
1) Crude Oil and Gas Prices on the Rise
The markets have witnessed a rise in both crude oil and gasoline prices – West Texas Intermediate (WTI) prices are up 37% since Oct. 4, while RBOB (the gasoline futures contract traded on NYMEX) is up 29% since Nov. 25.
The constriction, however, is not simply reflected in the price.
We have a very different dynamic underway than the one experienced in 2008. Three years ago, it was a speculatively driven rise in oil prices that came crashing down when an outside crisis hit (the subprime mortgage mess and the corresponding credit freeze).
This time around, the constriction results from the rapid decline in prices from the third quarter of 2008 through a sluggish leveling-off through the fourth quarter in 2009. This period produced a significant cutback in new drilling.
Consider this: The top 15 oil producers in the world have replaced barely 70% of the extractable reserves they extracted over the past three years.
With conventional production, therefore, the constriction is already in place.
However, we have moved quickly into accelerating unconventional oil production.
That is element number two.
Netflix (Nasdaq: NFLX) Stock Falls Out of Favor as Members Slip Away
The tumultuous tale of Netflix Inc. (NASDAQ: NFLX) got another twist this week when the company reported disappointing earnings and guidance after the close Monday.
Netflix posted its first quarterly loss in seven years for the first three months of 2012.
The disheartening numbers and guarded sentiment prompted words of warning from analysts and caused investors to flee the DVD rental-by-mail and streaming video company. investors tuned out in Tuesday trading, sending shares down more than 13%.
While the earnings loss was substantially smaller than analysts' forecast, the focus remained on second-quarter estimates that warn of a slowdown in subscriber growth through early summer.
The time between April and June is historically a lethargic period for Netflix as longer days and warmer temperatures lure people outdoors and away from viewing movies and old TV shows at home.
But the picture for Netflix, once a media darling with Hollywood starlet-like status, looks fuzzy at best.
It is losing the one thing that made it a hot hit: its members.
Netflix (Nasdaq: NFLX) Falls Short
Netflix anticipated adding 190,000 to 790,000 subscribers to its video-streaming service in the current quarter. That was well below analyst estimates of more than 1 million.
"They are giving a signal to the Street their growth story is over," Wedbush Securities analyst Michael Pachter, who rates Netflix a "Sell," told Reuters.
The projection startled already-jittery investors who were watching for clues the company would revisit its once-impressive growth after suffering a chain of gaffes over the last year.
Today's FOMC Meeting To Bring Little Change
While the U.S. Federal Reserve will have an abundance to say about the economy today (Wednesday) when it concludes its two-day FOMC meeting, little is expected in the way of change.
The Federal Open Market Committee meeting will conclude Wednesday afternoon with a statement, revised forecasts and Chairman Ben Bernanke's news conference. The Fed will most likely reiterate that it will keep short-term interest rates at record-low levels through 2014. The Fed is not expected to commence any new program to lower longer-term rates unless the economy weakens.
That would diverge from the Fed's stance just three months ago when the January FOMC meeting ended with indications that Team Bernanke was leaning toward a third round of bond buying (QE3) to pump more cash into the troubled economy. More Fed bond purchases have been proposed as a means to drive down long-term rates to encourage borrowing and spending.
Since then, data on the U.S. economy has indicated a gradual strengthening, and the ongoing European sovereign debt crisis appears less ominous than it looked at the start of the year. Those developments argue against additional Fed bond buying.
"This will be a wait-and-watch meeting," David Jones, chief economist at DMJ Advisors, told the Associated Press. "Despite all the theatrics with a Bernanke press conference and new economic forecast, I think we will get a very predictable outcome-no change in policy."
That portends the Fed will retain its plans to keep its benchmark interest rate, the federal fund rate, at record lows until at least late 2014. The Fed planted that expectation at its January meeting and said nothing to change that hope when it met in March.
The Secret System that Blew Another Hole in the Euro
This may sound arcane and boring, but I promise you it's not.
What I've learned will blow yet another hole in the already shaky euro.
It begins with Bernd Schunemann, a law professor at the Ludwig-Maximilian University in Munich. He has sued the German Bundesbank over its participation in the Eurozone "Target-2" settlements system.
Now I'll be the first to admit that yes, my eyes do glaze over when thinking about settlements systems-and I used to be a merchant banker.
But looking at the details of the case I had something of a banker's moment of clarity.
I realized that Schunemann was claiming that the settlements system had saddled German taxpayers with a potential liability of 615 billion euros, over $800 billion, in exposure to Greece, Italy, Spain and Portugal.
After all, who would have to bail out the Bundesbank if it became insolvent?
What's more, when you un-glaze your eyes and look closely, the risk is entirely unnecessary. It is yet another huge botch-up job by the EU bureaucrats.
Here's what I mean…
The Euro and the Target-2 Settlement System
The Target-2 settlement system was introduced in 2007, as a replacement for Target (Trans-European Automated Real-time Gross Settlement Express Transfer System).
The first Target was the large-scale payments system between central banks that had been introduced with the euro in 1999.
Under the system, when a Greek makes a large euro payment to a German, his Greek bank makes a payment to the Greek central bank, which in turn makes a payment to the Bundesbank. Once it reaches the German central bank, it pays the German bank, which pays the German.
For ordinary trade transactions, that's all fine and good. Greek exports to Germany are balanced with German exports to Greece.
If, however, there's a big trade imbalance between the two countries, then gradually an imbalance grows up between the central banks. As it develops, the Bank of Greece ends up owing the Bundesbank more and more money.
Even more serious is when Greek citizens rush to get their money out of Greek banks and put it in German banks. Every million euros Greek citizens remove from their banks is a million euros by which the Bundesbank increases its exposure to the Bank of Greece.
You can see how this could be big problem-especially since that's the arrangement all around the Eurozone.
Five Cheap Stocks Under $15: BAC, NAK, SD, RIMM, ELN
A certain group of equities have been out of favor lately. Beaten down, they have landed into the cheap stocks barrel.
Yet some of the richest rewards come from these battered and overlooked stocks. So don't let a low share price deter you.
While it is not recommended that you fill up an entire, or even a major, portion of your portfolio with stocks under $15, the addition of a few carefully selected "cheap stocks" could be worthwhile.
Admittedly the odds of picking the next Apple Inc. (NASDAQ: AAPL) are long, but the right low-priced stocks can be worthy as a trade with the prospect of a huge upside – if timing is right.
The following are five stocks under $15 that have taken a beating and offer the kind of potential that make them worthy of a closer look.
Here's the breakdown…
Apple Inc. (NASDAQ: AAPL) Q2 Earnings: iPhone Carries the Day
Thanks to booming sales of the iPhone, Apple Inc. (NASDAQ: AAPL) Q2 earnings far outpaced Wall Street expectations.
Apple earned $12.30 a share on revenue of $39.2 billion, compared to analyst expectations of $9.99 a share on $36.6 billion. In the year-ago quarter Apple earned $6.40 a share on revenue of $26.67 billion.
Apple sold 35.1 million iPhones in the quarter, well beyond the 30.5 million analysts had projected.
AAPL stock had fallen in recent days when U.S. carriers AT&T Inc. (NYSE: T) and Verizon Communications (NYSE: VZ) both reported significant declines in their quarterly iPhone sales. The reports raised concerns, unfounded as it turned out, that iPhone sales would miss.
That's one reason why the news was greeted enthusiastically in after-hours trading. AAPL was up $41, or 7.29%, within 30 minutes of the earnings announcement.
Case-Shiller Home Price Index and Home Sales: What the Latest U.S. Housing Market Data Show
The latest U.S. housing market data released Tuesday underscore the persisting trend of uneven performance in the industry.
The S&P/Case-Shiller Home Price Index showed prices hit post-bubble lows in February, and U.S. home sales data show that while not all housing news is dismal, a strong and stable recovery is a long way off.
The U.S. housing sector has been a drag on the economy since a home price bubble burst and helped cause the 2007-2009 recession. While many economists maintain that a budding recovery is blooming in the troubled sector, recent housing market data are simply another wake-up call.
Here's a look at the numbers.
Case-Shiller Home Price Index Falls
The Case-Shiller Home Price Index of 20 cities revealed a price drop from January to February of 0.8% (on a non-seasonally adjusted basis). The 10-city index also fell 0.8%.
The 20-city index declined 3.5% from a year ago, while the 10-city composite slipped 3.6%.
"Nine housing markets and both composites hit post crisis lows," David Blitzer, a spokesman for S&P, told CNN Money. Included in the nine markets are Atlanta, Charlotte, Chicago, Las Vegas and New York.
Blitzer went on to note, "While there might be pieces of good news in this report, such as some improvements in many annual rates of return, February 2012 data confirm that, broadly speaking, home prices continued to decline in the early months of the year."
Foreclosures and other distressed property sales continue to be the main challenge for home prices, Pat Newport, an analyst for IHS Global Insight relayed to CNN.
"We still have 6 million homeowners who are late on their payments," said Newport. "We'll still have lots of foreclosures, which will depress prices."
In fact, with January's mammoth $26 billion mortgage settlement between five major banks and a group of state attorneys general, foreclosures that had been held up for a year or more are now moving forward.
"Enough homes are in the foreclosure pipeline to keep house prices falling through much of this year," Celia Chen, a housing economist at Moody's Analytics, told the Los Angeles Times.