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11 Investing Terms You Have to Know
The language of investing used to be fairly simple. A limited vocabulary of investing terms gave you enough understanding to successfully navigate the markets.
Those days are gone.
Things like 24-hour media coverage and analysis, computer-driven trading systems that affect prices within minutes of breaking news, complicated macroeconomic issues, and sophisticated investment products have created an increasingly complex market environment.
This means investors must understand a variety of sometimes strange or seemingly unrelated terms if they hope to prosper – or, at the least, hold their own – in these treacherous economic times.
Failing to become familiar with these investing terms could damage to your portfolio.
Investing Terms You Must Know
The following 11 investing terms have become commonplace in today's market and economy. Study these and you'll have a much better chance of not just surviving, but profiting:
Corporations Are the Real Winners When it Comes to Free Trade Agreements
Whether the free trade agreements with Colombia, Panama and South Korea create jobs or destroy them is debatable, but one thing is sure: U.S. corporations will reap the most benefit from the deals.
After years of delay, the U.S. Congress on Wednesday approved the free trade agreements – the largest since 1994's North American Free Trade Agreement (NAFTA) – in a rare instance of bipartisan cooperation.
The deals will cut tariffs and open up markets between the United States and South Korea, Colombia, and Panama.
And while the political arguments focused on the deals' impact on jobs and the U.S. economy, U.S. corporations will emerge as the real winners.
That's why Caterpillar Inc. (NYSE: CAT), a frequent beneficiary of past free trade agreements, was one of the first to applaud the deals.
"Once these agreements go in effect, Caterpillar products produced in Illinois and Mississippi and the Carolinas will be able to be exported to Colombia, Panama and Korea duty-free," Bill Lane, the Washington directorfor the heavy equipment maker, told NPR. "That's a big deal."
The Boeing Co. (NYSE: BA) was equally pleased.
"When commerce increases, downstream that turns into aircraft orders. More movement of people and certainly of goods opens up more opportunity to sell aircraft," Ted Austell, a vice president at Boeing, told Reuters.
U.S. President Barack Obama, who had strongly urged Congress to approve the free trade agreements, said a government study showed the South Korea deal alone would benefit machinery and equipment makers, pork and beef producers, and the chemical and plastic products industries.
The sector with the most to gain in the Panama and Colombia deals is the agricultural industry, which had complained that the delay in approving the agreements – negotiations begun under the Bush administration – was costly.
"We can't underestimate how much U.S. agriculture has lost out," Devry Boughner, director of international business relations for Cargill Inc., told Reuters. "Corn, soybeans and wheat exports from the U.S. have gone from a 78% market share in the Colombian market to 28%, owing in part to the fact that Canada got to Colombia first."
Dozens of large corporations and business groups have actively lobbied Congress for years to pass the free trade agreements to gain access to new markets or make their products cheaper and more competitive in existing markets.
Some of the other large U.S. companies that lobbied for the South Korea deal include AT&T Inc. (NYSE: T), Chevron Corp. (NYSE: CVX), Johnson & Johnson (NYSE: JNJ), Microsoft Corp. (Nasdaq: MSFT), Pfizer Inc. (NYSE: PFE), Prudential Financial Inc. (NYSE: PRU) and QUALCOMM Inc. (Nasdaq: QCOM).
The Latin American Trade Coalition, which supported both the Colombia and Panama free trade agreements, included Caterpillar, General Electric Co. (NYSE: GE), Wal-Mart Stores Inc. (NYSE: WMT), Citigroup Inc. (NYSE: C), International Business Machines Corp. (NYSE: IBM) and Oracle Corp. (Nasdaq: ORCL).
Why so much corporate interest in free trade agreements?
"Let me just put it this way," explained Caterpillar's Lane. "About eight years ago they passed the Chile free trade agreement. Caterpillar exports to Chile tripled. These agreements have real-life implications and what they've all done is increase U.S. exports."
The European Banking System is Finally on the Verge of Collapse
I hate to sound alarmist, but it looks as though the European banking system – and consequently the global banking system – is edging its way towards another epic collapse.
That means in just a few short months, stocks could be back at their 2009 lows while gold prices travel north of $2,500 an ounce.
This is the worst-case scenario that's been bandied about ever since Europe's debt problems first came to light.
How do we know that this is what's happening?
Because somebody is having trouble obtaining the money they need — and they just borrowed it from the lender of last resort.
The European Central Bank (ECB) last week lent $500 million dollars to an undisclosed Eurozone bank through a credit mechanism that had been dormant for the past 12 months, with the exception of one $70 million draw in February.
This comes as no surprise – the warning signs have always been there.
In fact, I warned Money Morning readers just a few weeks ago that the Eurozone could have its own American International Group Inc. (NYSE: AIG) – or worse, its own Lehman Bros. Holdings Inc. (PINK: LEHMQ) – lurking somewhere in the shadows.
Still, while this may not surprise you, it certainly surprised the heck out of the rose-colored glasses crowd that can't seem to understand the European sovereign debt crisis is finally about to wash up on our shores.
That's why stocks in the United States and around the world have taken such a brutal beating recently. Officially the story is about the renewed worries over Europe's debt crisis and U.S. data that suggests we're once again sliding into a recession.
But what's really happening is that global traders are moving quickly to liquidate holdings and raise cash while they can.
That's why so-called risk assets like stocks, corporate bonds, industrial metals, oil and higher-yielding junk instruments are tanking, as gold, the dollar and the yen are bucking up.
The U.S. Federal Reserve already is engaging in damage control. President of the Federal Reserve Bank of New York William Dudley has said the risks of a double-dip recession are "quite low," despite anemic growth. And it's been rumored that U.S. Federal Reserve Chairman Ben S. Bernanke will telegraph new monetary stimulus measures Friday during his speech in Jackson Hole, WY.
But really, who are they kidding?
This crisis has nothing to do with liquidity (which is how the central bankers are trying to fight it) and everything to do with solvency (which is how they should be fighting it).
Not only are the risks of a global recession mounting by the minute, but I believe the concentration of risks is approaching critical mass.
Widening U.S. Trade Deficit Adds to Fears of Global Economic Slowdown
The widening U.S. trade deficit surprised analysts last week by reaching a level not seen since October 2008, while the decline in exports added to growing evidence of a global economic slowdown.
The U.S. Commerce Department announced last Thursday that the trade gap grew 4.4%, to $53.1 billion from $50.8 billion in May. Economists had expected it to shrink to $48 billion.
Although both exports and imports declined, economists viewed the drop in exports as another sign of trouble for the global economy, which in turn will exert more stress on the struggling U.S. recovery.
The bad news means the government will need to revise second-quarter gross-domestic product (GDP) downward by about half.
"It appears that one of the last fully functioning engines of growth may be faltering," economist Gregory Daco at IHS Global Insight wrote in a note to clients.
A Potential "Big Trade" That Will Put George Soros to Shame
Many investors dream of making the "big trade."
Spurred on by stories of fabled investors who accumulated generations of wealth with just one big trade, they talk incessantly about what they could or should have done.
But actually doing something about it pays better.
Consider George Soros, who reportedly made $1.1 billion in a single trade against the Bank of England by shorting the British pound on September 16, 1992. Or Jessie Livermore, who reportedly made $100 million on October 24, 1929 – Black Thursday. Or how about Jay Gould, who tried to corner the gold market on September 24, 1869. Nobody knows exactly how much Gould made but he left his children $77 million when he died in 1892.
Well, if you have the guts, now is the time to make your move, because I think the next "big short" is already out there. In fact, judging from open interest I'm seeing on gold puts and VIX puts, I'd bet on it.
Right now there are literally tens of thousands of contracts open on both at various strike prices, so the odds are good that somebody – perhaps a group, a hedge fund, or another big money player – is placing highly leveraged bets that things will reverse.
With the proper structure, these trades could dwarf the bets made by Soros, Livermore, and Gould.
Fed Interchange Fee Decision Shocks Retailers, But Consumers Will Pay the Price
A U.S. Federal Reserve decision Wednesday to cap debit card transaction fees at a higher level than expected angered retailers – but it may end up costing consumers much more.
Instead of lowering the "interchange fee" cap from the current $0.44 per transaction to the $0.12 proposed in the Dodd-Frank financial reform legislation, the Fed voted to set the cap at $0.21. Additional fees allowed by the rules would result in a charge of $0.24 for the average debit card transaction of $38.
Although retailers will now pay less, they are peeved the Fed did not stick with the much lower cap, which would have saved them twice as much. Retailers had argued that the high interchange fees have hurt smaller businesses, forcing them to raise prices for customers.
But many, including one of the primary proponents of financial reform, Rep. Barney Frank, D-MA, doubt that retailers will now put any of the near-50% reduction in the cap toward customer savings.
"I think they were fighting to raise their revenue," Frank told The Wall Street Journal.
Indeed, consumers stand to lose as a result of the Fed's decision. Few merchants are likely to lower prices, and banks may well raise customer fees to recoup some of their lost profits on debit transactions.
"I don't think the retailers would have spent millions of dollars lobbying for this law if they intended to pass along every single nickel of savings to consumers," Greg McBride, senior financial analyst for Bankrate Inc. (NYSE: RATE), told the Orlando Sentinel. "This was an issue of where the cash would flow – to the banks or the merchants. Ultimately, I'm afraid, the consumer is going to get stuck footing the bill."
Why Seasonal Trades Are the Solution to Market Volatility
Given all the volatility in the markets of late it might be time to try something with a high probability – though not a guarantee – of paying off.
I'm talking about "seasonal trades."
Seasonal trades are moves you can make in the futures markets, or now via exchange-traded funds (ETFs), that have a history of producing a profit.
Let me explain.
Seasonal trade opportunities arise from patterns that occur at specific times of the year. They are most apparent in the agricultural sector, where changing weather patterns have an impact on prices.
For example, one such seasonal trade – a bullish October sugar play that has posted a perfect record over the past 15 years, producing an average profit of $1,035 per futures contract in seven weeks or less – launched in mid-June.
That particular trade is keyed to the June conclusion of the sugar harvest in Mexico, the last of the year in the Northern Hemisphere. After that, existing stocks of sugar start to decline and prices are subject to weather scares that could disrupt Southern Hemisphere harvests and new-crop growth in the North. As a result, sugar prices typically tend to rise from mid-June through late July.
Capital Waves Investing: How to Profit From the "New Normal"
Buy-and-hold investing is dead.
In the aftermath of the global financial crisis, the fact is that there are far too many strong financial institutions and armies of traders manipulating the financial markets. And that has relegated buy-and-hold investing – a hands-off strategy that for decades was a mainstay for retail investors – to the rubbish heap.
Today's investor has to employ a hands-on approach that uses so-called "capital waves" – the huge swaths of cash that flow from one market to another around the globe – to generate quick profits, says Money Morning Contributing Editor Shah Gilani, a former trader and hedge-fund manager whose trading service, the Capital Wave Forecast, has kicked off 2011 with 17 straight winners.
"Trading is the new normal," Gilani said in an interview. "Capital movement is the benchmark of normalcy."
Gilani recently sat down with Money Morning Executive Editor William Patalon III to discuss the recent successes of his trading service – and to give readers a glimpse of what's to come in the financial markets.
"There were several capital waves that ebbed and flowed in the first quarter that created opportunities for us," said Gilani. "There was money moving in and out of Treasuries, the euro, stocks, and commodities."
Identifying and understanding "capital waves" is the first step to unlocking massive amounts of wealth and not getting beached by Wall Street, according to Gilani. The second step is to avoid trying to fight the tides of investment capital that are swirling from market to market in the modern world. Instead, investors should ride their momentum to big-time gains.
What follows is a full transcript of Gilani's Money Morning interview. In it, he discusses the areas in which he's had success predicting profit-making opportunities this year, as well as his current investment prospects.