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Archive for January, 2009

January Barometer

Friday, January 30th, 2009

S&P 500 index is down by 8.57% this month. That’s very bad news for the people like me that believe in January barometer theory. The theory goes like this — if stock market goes down in January, it will likely go down for the entire year. It’s not a superstition. It’s a documented fact. This theory was wrong only in few years like 2003 where the stock market was down 2.7% in January but still ended the year with 26.4% gain.

I hope that this year may prove the theory wrong. But, I don’t want to bet on it. There are so many unknowns at this point. Everyone is expecting some kind of miracle from the fed. However, with the speed our politicians are moving to solve the current crisis, I am not sure whether we can see the light at the end of the tunnel. State governments don’t have enough funds to give it to unemployed. Even rental car companies are asking for bailout. I don’t know where all these would end. January barometer would be proved wrong only if the government is able to get the $700 billion bailout (and $819 billion bailout) quickly and generate lot of jobs as Obama promised.

Related Link: January drop is not a welcome sign for 2009

GDP drops 3.8% in 4th quarter of 2008, worst still to come

Friday, January 30th, 2009

This morning the government released their first estimate for the Gross Domestic Product, or GDP, from the fourth quarter of 2008. At first glance the report doesn’t appear quite as bad as some first thought it would be, but one should be cautious to read too much into it. The initial advance 4th quarter GDP figure shows GDP falling by 3.8%. That is certainly a very poor number, in fact is the worst since 1982, but analysts had been projecting a drop of 5.5%. Having said that, the government is likely to revise the numbers in the future and that 3.8% may end up turning into 4% or more on the downside.

The worst news is that it is very likely that the first quarter GDP number for 2009 will be much worse than the fourth quarter in 2008. Inventory which helped hold the number up a little in late 2008 has had to be gotten rid of and companies are laying off workers at a faster pace now than they have at any other point in this recession. The writing is certainly on the wall for things to get worse instead of better with the next couple of GDP reports from the government.

Another thing for individuals and investors to remember is that these GDP figures are more backwards looking than most economic reports, so they mean less to the stock market and the current economic state. The monthly employment data as well as consumer confidence readings and retail sales numbers all do a better job of capturing a more recent snapshot of how things are in the American economy. In my opinion none of the numbers are as important as the employment report, because as long as companies are increasing the amount of layoffs the consumer won’t be in a good position to help the economy turnaround. The bottom line; watch the GDP number, but remember it is not a forward indicator at all.

Rental Car Companies also Seek Bailout

Thursday, January 29th, 2009

Forget the banks, now even rental car companies seek bailout from Fed. Bizarre, isn’t it? As usual, these companies have their own weird logic to seek the taxpayers’ money.

Last month, the chief executives of Enterprise, Avis, Hertz and Dollar Thrifty sent a letter to House leaders pressing them to help the industry. “The impact of the declining economy on our business has already resulted in significant cost reductions, staff cutbacks and facility closures,” they wrote. “In addition, our industry faces significant near term financing challenges…We therefore believe that government action is necessary to help restore access to capital.”

Ok, here is my letter to the congress. “”The impact of the declining economy on my job has already resulted in job loss, declining stock portfolio value and foreclosures. In addition, the banking industry I specialized in faces significant near term financing challenges… It appears that I would not get another job for next 12 months. I therefore believe that government action is necessary to help me to have access to capital.”

These guys have no shame at all. There is no difference between these executives and the street beggar in San Francisco downtown.

Related Link: Rental car firms seek bailout

Man protesting outside New York stock exchange. Where is my bailout?

Man protesting outside New York stock exchange. Where is my bailout?

Unemployment funds running low across the country

Thursday, January 29th, 2009

As if there wasn’t enough bad news to go around before this, the biggest news right now to many people may well be the fact that unemployment funds are running extremely low in most states in the country. In fact some states such as Ohio, New York, South Carolina, and Michigan have already completely run out and they were forced to get large loans from the federal government just to continue paying the unemployment benefits to those who have been approved. For example, two weeks ago Ohio borrowed $500 million from the federal government and expected to burn $50 million of that in one week alone! Clearly the surge in layoffs and unemployment has hit some states harder than others, but more than half of the states in the country are said to be at risk to deplete all of their funds within six months time.

This is definitely not the kind of economic news we need, but it’s just the truth of how bad things are right now. These state governments have been running low on resources for quite some time and the surge in recessionary layoffs has pushed them over the top to where they are unable to pay. The unfortunate thing about this is, the federal government is forced to loan them this money even though the federal government itself is in a terrible monetary deficit itself.

The recession is deepening, state unemployment funds are running out, and the federal government has a massive deficit that is growing larger by the hour. Does this sound like some pretty bad news to you? Yeah it’s sounds awfully bad to me as well. It is a vicious cycle which continues to feed on itself with higher and higher unemployment rates and the worst news of all is that there is no real end in sight. Be prepared for the worst and do everything possible to strengthen your family’s financial position.

25 cent fraud

Wednesday, January 28th, 2009

“It’s easier to steal $1 from a million people than $1 million from one person” — Some crooks drafted a scheme to check out this concept. These guys started stealing 25 cents from each credit card customer. If you see strange credit charge of $0.25 or anything less than $1, it’s better to investigate where those charges are coming from.

When you sign up for online banking money transfer or paypal, they normally deposit a small amount to verify your account ownership. Because of that, it may be easy for anyone to ignore the small charges or deposits. Some crooks got creative and started stealing few cents from hundreds of thousands of people. These charges are shown up in credit card statements with the merchant name “Adele Services”. If you see anything like this, call your bank and alert them.

Source: Mysterious Credit Card Charges

Related Link: Complaints Board

Nigerian Scam

Wednesday, January 28th, 2009

I have been receiving emails from Nigeria since 1998. Every email claim that I am supposed to inherit few million dollars. These emails keep popping up even though I mark each and every one of them as spam in my yahoo account. Nigerian scammers keep sending these emails because people fall for them. The scammers are optimistic that even if they get 0.0005% response, they would easily make hundreds of thousands of dollars.

I am sure that most of you have received the nigerian scam email. Have you ever wondered what would happen if you say “I am interested” to these scammers?

John Rempel, Leamington, Canada did just that. He quit his truck driving job and searched for $12.8 million bounty that never existed. He lost the total of $150,000 to the Nigerian scammers. You can read the complete story here.

Scammers play mind game. If you read the story of John Rempel, you will know how easily he was manipulated. Once the prey is caught in the net thrown by scammers, the prey conditions its mind to believe the hunters. All scammers succeed by sweet talk. John Rempel was naive and strongly believed that some stranger really left $12.8 million for him. I am surprised that even his family played along and lost all the money.

Great Depression – II

Wednesday, January 28th, 2009

Are we in another great depression in terms of unemployment? If unemployment rate is calculated in the way it was done in 1930s, the current unemployment rate is closer to 16.5% rather than 10% forecasted by economists. During the great depression of 1930s, the unemployment rate was hovering around 25%.

Reuters article says that comparing today’s situation with that of 1930s is not far fetched. There is another twist to the calculation of unemployment rate. Unemployment stats don’t take discouraged workers, the workers that lost the hope of getting job and stopped looking for a job, into account while calculating unemployment rate. Thus, the real unemployment rate may be more than 16.5%.

Unemployed take any job they can get

Wednesday, January 28th, 2009

Losing the job is horrible, especially in this economic environment. Some of the unemployed are taking any job they can get. That’s the smart thing to do in the recession.

Michael Antidormi worked as VP in Goldman Sachs making $160,000 a year. He was laid off in February 2008. Now, he is working as representative for disabled veterans’ outreach program making $36,000 a year.

Jason Eldridge worked as personal banker for Chase bank making $40,000 a year. Now, he is a cook making $8 per hour.

Jarrod Posner worked as mortgage lender making $110,000. Now he is the enrollment counselor in University of phoenix making $33,000 per year.

There are lot more similar stories like this in CNN Money. Life is difficult at this point of time even when you are employed. You don’t know when the pink slips are going to show up in your division. Being unemployed makes things lot more complicated ruining the career and family. It’s better to get some job.

There is one downside to accepting any job. If your new job is completely unrelated to your old job, you will face some challenges to get the job similar to your old job when the economy turns around. If a terminated research analyst in Merrill Lynch starts working for Target at $8 an hour for 6+ months, it’s very difficult for him to get back to investment banking. Although every employer in 2010 would understand the difficulties of 2008-2009 job market, they would prefer someone who is always in touch with his specialty.

Related Link: Recession racks up more layoffs | Five legal ways to work from home

Do we need the banks to perform well for a stock market turnaround?

Wednesday, January 28th, 2009

A debate has been raging over the last several months on Wall Street as to whether the financials and the banking sector really needs to do well in order for the overall market to do well. In the past the financials have always been seen as sort of a market barometer and the market is unable to have any kind of sustained advance without the banks and major financials taking part. Some people now believe that this is a modern economy where the stock market will be able to sustain a healthy rally despite the fact that the banking sector will not have things sorted out for quite some time.

This is certainly a question where there is no clear answer as only time will tell, but I would suggest to readers that any long-term sustainable bull market must include the major banks and the financial stocks. These financials are absolutely vital to the health of our overall economy. Sure there can be other sectors doing well while the banks are struggling, but every other sector is going to need to deal with the banking sector at some point. If the banking industry is in the mess that it is in currently, that will hinder other areas that might otherwise be profiting in a much bigger way. For example, while demand for certain products may be strong a company might not be profiting in the way they could be because the credit markets are frozen up and individuals and small businesses are having trouble obtaining loans.

I don’t know that financials and the banking sector have to lead a sustained bull market, but I certainly think they have to be part of that rally. I believe that until we see a more clear picture of what the banking sector is going to do to get its act together, market rallies will be quite short lived. Unfortunately, with no end in sight for the banking system’s problems I am not particularly optimistic that a bull market will be starting anytime soon.

Is options trading right for you?

Tuesday, January 27th, 2009

Trading in the stock options market can be a very lucrative way to make a living, but it is also a place where many people lose their hard earned money very quickly. What exactly is an option? An option is defined as a contract that gives the buyer the right to buy an underlying asset at a specific price or before a certain date. The buyer has the right, but has no obligation. There are two types of options, calls and puts. Calls give the holder the option to buy a stock at a certain price within a specific period of time. Puts give the holder the right to sell an asset at a certain price within a specific period of time. Put more simply, if someone buys a call they are hoping the stock price will increase substantially before the option expires. If someone buys a put they are betting that the stock price will go down substantially before expiration. Options are derivatives because they derive their value from an underlying asset, the main company stock.

What kind of benefits does options trading have? Trading derivatives and options gives you a great amount of flexibility and the ability to hedge your bets more than just a common stock does. What downfalls do options have? Options are extremely speculative and are far more risky than a normal common stock. In many cases if the common stock moves in the opposite direction you are hoping for it to move, your option may be worth virtually nothing when the expiration date comes.

The bottom line is that the everyday consumer has no business being in options trading. Options trading is only for those professionals who have mastered the market to a point that they can feel comfortable taking on so much risk. For everyday individuals such as you and I, options involve far too much risk and are not a good way to invest your hard earned money.

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