Sunday, April 19, 2015

The Short Selling Argument

           Whenever there was a market place, there was a short seller. The nature of short selling in American stock markets is simple; you are investing against the nature of the market. Many in the investment field have strong opinions on short sellers; they’re either beneficial or detrimental to the market system. This topic is controversial because short selling can be dangerous, yet it is still important in a stock market. Short selling bans have existed in the United States during financial crises, and temporary short bans exist on individual stocks after earnings reports or unusually high volume on an individual stock. Short selling bans do not constitute a negative or positive correlation in security pricing and therefore lifting short selling bans increases price efficiency and promotes ethical investigations into corporations.
            First, short selling promotes price efficiency. Price efficiency is crucial to a stock market, because it allows equilibrium in the market place. Price discovery is promoted with short selling because there is an increase in efficient sellers in the marketplace. Research using econometric analysis of 17,000 stocks from over 30 countries during short selling bans from January 2008 to June 2009 found a significant increase in bid-ask spreads, according to the Center for Economic and Policy Research (CEPR) (Beber and Pagano 1). These increases in bid-ask spreads slowed down price discovery in certain securities. Specifically small capitalization stocks, high-risk securities as well as low volume securities felt the negative consequences of short bans due to a decrease in price efficiency. This is because the short selling bans created an increased discrepancy between the bid-ask prices. This inefficiency decreases price discovery and promotes equilibrium in the market place because of the difficulty of finding the right price to trade at. According to Capco Institute’s Journal of Financial Transformation, “[s]hort selling improves the dissemination of information about stocks, it enhances the price discovery process, and as consequence markets are more liquid and less volatile” (Pais and Stork 35). While there is a correlation between increased bid-ask spreads and short bans, when short bans are lifted, bid-ask spreads decrease and a closer equilibrium in the market is met. This is an important concept that short selling promotes and without short sellers would not be achieved.
            Another point is that short selling bans do not work. According to the CEPR research, “results do indicate that the bans have not been associated with better stock performance” (Beber and Pagano 1). The research compared the median aggregate post ban performances of securities to stocks without a ban in place, using market indices as benchmarks. The extensive CEPR research explains how performances are not related to short bans, which is the main purpose of short bans, to effect stock performance. An Oxford Journal study by Dr. Saffi at Cambridge Judge Business School gathered a dataset of over 12,600 stocks from stocks internationally between 2005 and 2008 and concluded that relaxing short-sale constraints is not associated with price instability or extreme negative returns (Saffi 1). Short selling bans are in place because the U.S. Security and Exchange Commission (SEC) fears that short selling is what causes sharp declines in a stock’s price and put bans in place to return stability. This is not the case according to Dr. Saffi at Cambridge and his study that demonstrated how extreme negative returns and price instability are not correlated with short-sale constraints. Even a publication by the Federal Reserve Bank of New York shows stock prices stabilize once bans are lifted from the stock. Intriguingly, stocks subjected to short-selling constraints perform worse than stocks free of such constraints (Battalio, Mehran, and Schultz 5). This publication reaffirms the CEPR research and Oxford Journal study by stating the short-selling bans do not affect performances in the way that were intended to by the ban, therefore concluding the bans do not work. The research done by CEPR, the Federal Reserve Bank of New York, and the Oxford study show relaxing short sale bans do not drastically affect a stock’s price or influences a stock’s instability, and stocks with short-selling constraints perform worse than stocks free of such constraints. Those studies help conclude the fact that short selling bans do not work.
            Finally, short selling promotes investigative journalism and business ethics. The ability to short a company is the ability to check a company, a check that anybody in the outside world could perform. According to American Journalism Review, Christopher Carey, a writer for an investigative journalism website, wrote an article about the questionable technology Xethanol Corp was using (Spivak 39). The stock ended up falling 20% after the article. This isn’t the only case of investigative journalism profiting from short selling. Xuhua Zhou, who dropped out of UCLA’s doctoral program in finance, learned Lumber Liquidators sourced products in his home country of China. He dug into the safety concerns and learned the distributors were curbing key safety regulations, which were highlighted on CBS News’ 60 Minutes (Townsend 1). There have been many stories about investors who investigate companies and can benefit on promoting the correct business ethics and standards. Investors who could find enough evidence to show that a company’s ethics are questionable have a financial incentive to research the company and find ethical flaws. This is a favorable advantage to short selling and shows how through research of companies operations, can find flaws and invest on them.

In conclusion, there is a persuasive argument into why short selling bans do not work. The studies that have been cited are not definite but there is major evidence in supporting the idea of keeping short selling constraints out of the market place. Short selling can be dangerous but carries many benefits like increase price efficiency and promotes investigative journalism. Invest with care. 
For work citation email wwsjmorris@gmail.com 

Saturday, March 21, 2015

Jim Yong Kim and The World Bank

Back in 2012, when Jim Yong Kim was the president of Dartmouth College, he got a phone call from Dartmouth alum and U.S. Secretary of the Treasury Tim Geithner. Geithner told him the government wanted to hire him away. Where did this unusual request come from? The President of the United States. Barack Obama wished to nominate Dr. Kim to become the next president of the World Bank. The World Bank is a part of the World Bank Group that implements loans to developing countries in the attempt to end poverty and illness while promoting economic development. Jim Young Kim in a matter of only a week went from the president of Dartmouth College to the president of the World Bank Group.

Jim Yong Kim was an unlikely candidate; he is the first president that doesn’t have private sector background. He’s not a banker, he’s not a lawyer, and he isn’t a government official. He doesn’t even carry an economic degree. How is he running the World Bank? Well, Dr. Kim is a physician, anthropologist, and academic, and he carries a personal understanding of the World Bank’s goals. Dr. Kim carries first hand experiences in treating patients in Haiti with significantly cheaper, more effective medicine. Dr. Kim was the first to venture into large-scale treatment programs and attempt to treat diseases in poor countries. He has played a major role in promoting a treatment campaign for Aids in Africa and has lead programs that have treated more than 7 million Africans with HIV and counting. He carries a different perspective than any other World Bank leader, he knows the realistic, first-hand experiences in attempting to end poverty and cure illnesses.

Born in Korea, Jim Yong Kim moved to a small town in Iowa, was the starting quarterback for his high school, the starting point guard for his high school basketball team, and president of his high school class. Oh yeah, he also has a mean golf game. There really isn’t much this guy can’t do. After going into non-profits and delivering primary healthcare to poor countries, he was the chairman of the Department of Global Health and Social Medicine at Harvard University. He then became the 17th president of Dartmouth College, making him the fist Asian American to become a president of an Ivy League institution.


Although, there has been controversy surrounding the World Bank. The World Bank has to make decisions of what countries get these loans and grants. The loans and grants must come with an agreement of a payback time period and at what interest rate. There are also more detailed policies that come along with getting this loan. Even Dr. Kim himself was at one point against the World Bank and participated in the movement 50 Years is Enough, a campaign against the International Monetary Fund and the World Bank. Since taking the presidency he has reformed the bank’s famous bureaucratic system, and while they will always be criticism on where the World Bank’s funds go, it continues to fight poverty and illnesses and promote economic development wherever possible, and Dr. Kim deserves the credit for the direction he is moving the World Bank in. 

Info by:http://freakonomics.com/2015/02/19/hacking-the-world-bank-full-transcript/

Tuesday, January 20, 2015

2014 In Review

2015 has already been well on its way and major headlines have already given investors some head scratches, here is the late 2014 stock list in review.

2014 was filled with steady growth along with some downward spikes caused by foreign markets, investors overreaction to oil prices, and central bank's QE reports. The Dow Jones was up 10% YTD, S&P up 13%, and NASDAQ up 17% YTD. This years stocks were mixed for my watch list and as some were good choices, others were not, here is how I stacked up with my forecasts:

Apple 

I gave Apple a C short term and B- long term citing its large cash flow, dominant market share, but slightly old (in tech terms) product line. Apple certainly beat my mere B- long term rating and was up over 40% YTD. This could be because of Apple's strong earning reports. Also could be because of the release of the Iphone 6 and 6 plus, some hype from their Iwatch intro along with an updated IOS system. Apple was strongly undervalued according to Carl Icahn, and he seemed to be right. 

Ford

I gave Ford a very generous A long term and was proven wrong by its weak numbers shown from its heavy investments made in foreign markets. The mistake I made in judging Ford was underestimating its risk oversees. I did not take into account Ford's enormous investments it made in the European market, which took away from their better sales data they had domestically. The updated product line of the Ford F-150 still needed to show more profit in order to lift the company last year. It was down a little less than 1% YTD. 

Cliff Natural Resources

I have never really liked Cliff Natural Resources but have always written about them since their slide has definitely intrigued me. 2014 showed no mercy to the stock and it slid over 76% YTD. This stock is one of the most shorted stocks on the NYSE and can be explained by the companies negative balance sheets and simply lower demand in iron ore, especially in China. I gave CLF a C- long term.

RPC Inc.

RPC was the better way to play oil, or so I thought. Oil has been absolutely drilled over the last few months and has been tumbling caused by over production and O.P.E.C. This could have been an interesting play if oil didn't get hit, and might still be if or when oil is on the bounce back. I gave RPC an A- long term, the stock fell 23% last year. 


American Water Works

American Water Works was one of the better stocks on the list last year and was up over 23% last year. The company made smart acquisitions and has a healthy balance sheet. It also has a nice dividend and treated investors nicely last year. I gave American Water Works a B+ long term.


Urban Outfitters 

Urban outfitters was a risky stock to watch last year and my grade of a C- long term justified that. I cited urban outfitters as a stock that didn't have a good 2013, it was off its 52 week high and that didn't justify purchasing it, the stock was down a little more than 7% last year. 


Nordstrom 

Nordstrom was another retail company I put on the list that outperformed my ranking of a C long term and was up over 27% in 2014. Nordstrom has consistently outperformed the S&P over the last 5 years and shares were slightly undervalued at the beginning of 2014, Nordstrom continued earnings growth as well.


Nike Inc

Nike was a solid stock last year and was up above 23% YTD. I gave Nike a B rating long term and grew based on its solid earning reports, and resiliency despite global economic tension. 


Emerson Electric Co.

There were better plays to be made in 2014 in the industrial industry since Emerson Electric was down over 9% last year. Although it increased dividend its largely exposed to the price of oil and since the sell off of oil, Emerson Electric has fallen, these type of industrial companies tend to follow the outlook of the global economy, which was slightly stagnant last year. I gave Emerson Electric a B- long term.


The TJX Companies 

The 3rd consumer retail I put on the list, did better than Urban Outfitters, but worse than Nordstrom, TJX was up 7% last year. It did a lot worse than my B+ short term and over the first course of last year was down as much as 13%. It pulled a great upswing at the end of last year and moving over 27% from July to December. It also increased its dividend, slightly. I gave TJX a B rating long term. 


Chesapeake Energy Corp

Chesapeake was another play effected by the oil slide and fell off over 27% last year, I did not foresee nor did a majority of investors see oil's slide coming. Again if oil were to come back Chesapeake might be an interesting play. I gave Chesapeake Energy an A- long term. 


Gold

 I didn't give gold a great rating last year (D long term) and it didn't really produce well, the commodity was down 2% last year, although it has been making some upward movements so far in early 2015. 


Facebook

Facebook blew past my expectation of a mere C+ long term, it was up over 47% YTD, apparently its traffic continued to grow and advertisements continued to bring in large sums of money, Facebook has continued to stay relevant and for that not only survived 2014, but thrived.


I may not be making a stock Watchlist 2015 but may throw in my opinion on certain stocks in the weeks to come.

Invest with Care. Not Responsible for Loses. Opinionated Investment Advice. NY Times Credit. Google Finance for percentage statistics. YTD = Year To Date. While the markets are closed on New Years Day, YTD numbers are usually to January 3rd.

Friday, November 14, 2014

It's Like a Game of Chess

Chess seems to be a game you learn as a kid and then tend to only play when the grandparents are in town. Although like some, I never learned chess. Now attending San Diego State University, I learned how to play with my roommate, and now I play a game once a day.

What Chess Can Do For You 

The reason why chess is so interesting is because of the psychology behind it. Such a small simple game becomes a complex strategic game with certain theories, openings, closings, and sacrifices. Doesn't investing sound eerily similar? Isn't investing a complex strategic game with theories, openings, closings, and sacrifices? You can play chess defensively, you can invest defensively. You can play chess aggressively, you can invest aggressively. You can have a big ego during chess, and you can have a big ego investing as well. Chess can do multiple things for you. It can first give you a break from the real world and can get in a trance and yet its just a chess game. Like basketball for me, chess can give you a break from a stressful environment or a bad day. You may think opening a chess game is easy, simply move a pawn or a minor piece forward, but its like investing that way. It seems easy to click a button and buy a stock, but just as one simple opening effects the rest of the game for you, so does buying a stock. 

Navigating your way through a game of chess can be similar to navigating your way through an investment

Now realize this, lets compare chess strategies to investing. Chess positioning is critical, so is it to investing, valuing all pieces on a chess board is key as well as it is to investing, all assets are valuable, now when risking these assets for a greater profit, chess can be compared to this as well. Chess you may have to sacrifice a piece to gain a greater piece down the road. And as in chess you make a move now for a future move down the road. When investing, if you are skimming off your gains at the end of the year for example, you are doing so for future moves down the road. When you make a move in chess, it has to be in reasoning an argument of why this move is made and you must think from the opponents side what move he would do. This can be seen in investing as well. Every trade that is made or investment must have reasoning behind, an argument of why you made this trade or this investment, what will it do for you in the future? How will you close out this trade or investment?  

Conclusion

By thinking your way through a chess game you raise questions that may even apply to investing. As the questions and similarities in the article stated could be used in investing, understand the why to what you do. And even if you think chess and investing are dissimilar, it takes your mind off of the stresses in life and makes you think about your decisions in the game of chess, and the game of life. 

Monday, October 6, 2014

Tesla: The Be All End All of Automobiles

     Tesla has been a crazed stock on the market for the last 2 years on it's amazing run it's been having. Tesla motors has been labeled the future of the automotive industry and could have the potential to be bigger than GM and Ford combined. While the stock has enjoyed better success than GM or Ford, it still has a heap of opposition against it. For one thing that investors have is the evaluation of Tesla. Tesla has been growing not only on earnings but mostly, on pure hype. Tesla has drawn many oohs and ahhs, but it's high prices on it's models and costs could scare investors away. Here's my take on Tesla:

        The Potential
Tesla's concept is revolutionary. Musk's genius way to power a car finally made electric cars a legitimate success. Plus to even start a car company at this day and age is a feat. Now the concept moves away from a gas engine and instead uses the actual frame of the car as the battery. Install it with other high tech features, take away gears, the shifts and constant buffer time most cars have from shifting to gear 2, 3, or 4, and you have the concept of Tesla's car. To move away from the combustion engine and go towards a complete battery, and to start a car company with success (the first to do so in the last 50 years) is breathtaking and deserves the recognition its been having. The potential for Tesla is enormous.

        The Downside
As genius of an idea this is, there is actually a lot of downsides toward Tesla that many would not expect. In fact, an argument could be made that there is more of a downside to Tesla than an upside. Here I'll take a look at a few downsides of the company:

1. Fans of Tesla don't really do anything for the company from an investors stand point
Tesla has an enormous following coming from investors and consumers. The investors have contributed to the success that Tesla's stock has enjoyed the past two years. The consumers might be in curiosity and bring Tesla up in conversation because of how revolutionary and just flat out cool the car is. But the average consumer doesn't do much for the company. Obviously word of mouth is crucial to get the word out for a company, but Tesla does not need that anymore, they need people to buy there car. Sadly the pricing for a Tesla has been pricy and is grouped in the luxury car category. A model S can go for over a $1,000 a month. Until Tesla produces a cheaper car, many consumers won't be able to get their hands on it. Therefore the target consumer would stay the wealthy individuals.

2. Its Giga factory
It has been in talks with Panasonic, one of Japan's largest electronic producers, to build an estimated $5 billion factory in Nevada. This factory would produce lithium-ion batteries for its cars and in hope would lower the cost of making the batteries and lower the key cost of the car. Thus, making the car more affordable for the consumer. Now there is plenty of upside to this giga factory it is set to build, but this is also a downside for Tesla. $5 billion dollar project is a hefty price for one factory, and the risk reward could be costly. Plus, although Tesla's are more environmentally friendly than any other car on the road (look on Tesla's site for the comparison of energy costs compared to fuel costs of an average car) lithium-ion batteries have raised slight concern for how energy efficient they actually are to produce. The metals that the batteries require are said to be incredibly harmful for the atmosphere. Plus the change of owning an electric car to an average car is a huge. Many consumers could even be skeptical about the change.

3. Some States Don't Like It
Perhaps one of the biggest hurtles for Tesla to overcome is its negative impact on lobbyists. Some states have banned the sales of Tesla (Texas, Virginia, Maryland, and now New Jersey). This is because Tesla doesn't use a car dealership to sell its cars. Instead Tesla sells through itself, and the auto industry lobbyists aren't too happy.

4. The Hype
From the investors stand point buying Tesla is an investment for the future. Well, that price that Tesla is trading at is already counting the future in it. The hype seems to be what is driving Tesla stocks higher instead of its actual earnings. People believe that the earnings will rise in the stock in the future, therefore they go and buy it now. Well those future earnings are already built into the stock price, that is how Tesla has been such a successful stock. The real value of the company still needs to be proven by its earnings, and its cut down on costs to produce the car.

Conclusion
Do not get me wrong, Tesla is an amazing company and in fact has tremendous upside. For instance, Elon Musk is one of the best entrepreneurs of my time. With him at the helm Tesla and the rest of Elon Musk's adventurous projects could be huge successes. I am only giving concerns of why Tesla could be an over-speculated company. Maybe not now, but down the road earnings and the growth its been promising has to live up to its expectations. These expectations have been set incredibly high, and Elon Musk definitely knows what he's doing. October 9th Tesla is set to make announcements regarding an updated product line and more. Like the Apple events, this may be eye candy for consumers, enthusiasts, and investors alike. But, understand when investing in it, measurements for actual sustained growth is needed. And other car companies are following in Tesla's footsteps for electronic cars. Invest with Care.


Sunday, June 8, 2014

Trimming and Adjusting in a Slow, Slow Economy

2014 has so far been a weird trading cycle at least for me so far. I've realized as time goes on that the growth stocks that were so successful in 2013, are not so successful in 2014. Some may have  been lucky and have avoided a rough 2014 so far, but it seems like high cap stocks have had a great run so far, and after the slight dip in the end of January, the markets have gotten to steady up pace. It may have been slow but it seems in the recent weeks its been picking up and now breaking through record highs once again to start June off. The whole "sell in May and go away" saying may not have been the best idea. But with the transition from small cap stocks to high cap stocks complete, and other adjustments taking place, did you feel like you missed out? Or can't quite get the trends?

The Trimming Technique
          One of the key decisions in investing is not only when to buy, but also when to sell. The trickiest might be the latter. Lets say you gain a huge return on an investment, but hold on to it because you are afraid its not at the top, and so you think it can keep climbing, instead it falls and you lose much more of the profit you were hoping for. Or other way around, the stock takes a turn for the worst, and so you aren't quite sure if you should sell your loses and move on or stick with the same roller coaster. Its a tricky decision that has investors in a predicament. And so the biggest tip I can give is the trimming technique. Take a look at your portfolio and if you are pleased with the returns, and truly believe the stock has had a great run and believe its in your best interest to take the earnings and run, then so do it. If the stock keeps going while you sold it, you might kick yourself, but I'd rather kick myself with a profit then with a loss. And with the trimming technique, you can just trim some of your gains and keep the stock, therefore, if the stock keeps rising you still get some gains while holding onto a percentage you already made. It works with stocks in the red too. Trimming is used when you believe your investment is at a higher risk then originally perceived; a certain percentage of your gains or losses are cut off to lower the risk of an investment.

The Advanced Reconstitution Phases
          This technique deals with funds rather than individual stocks in a portfolio, although it can still be used. Certain investment websites have a create your own "ETF" where you get to customize a portfolio based on percentages you want to invest in with certain individual stocks. Basically, in the instance of Motif Investing, you can trade 30 stocks for the same fee as one stock, the 30 stocks can be any of your liking and you can customize the percentage of your money goes to each stock. Neat right? Well this type of investing has its disadvantages and advantages and make sure you read up on these customizable "ETF's" first. Reconstituting is typically done quarterly or yearly. Reconstituting is done when a fund looks at its stocks and either add/remove its existing stocks or change the existing ranking of stocks in the fund. This is done to keep the portfolio or fund in tact with market trends. Reconstituting is critical to the success of a fund. Now, this can also be done with certain portfolios. Obviously for individual investors, trimming is an easier way adjust their portfolio, but with those customizable "ETF's"  this reconstituting technique could be possible. Invest with Care.

Monday, June 2, 2014

The Worldwide Developer's Conference: The Ecosystem of Apple

        I know I know, I have already talked about Apple last time but this time isn't about some deal. This time its about there Worldwide Developers Conference they host every year in San Francisco. Now the conference is used to showcase new software technologies and programs for developers. So the first matter we have to get out of the way is that this conference is intended for developers not consumers. So if you watched the keynote Monday and at the end said, "so what did they announce other than software updates" then you are like me. But lets try to look at the picture from Apple's perspective.

Apple's Positioning 
        The conference this year certainly didn't set off any fireworks, but from Apple's perspective they are trying to feed programmers with the tools they need to make their own fireworks. The conference was not about updating their product line, (which I desperately wish they did)  but was about connecting their products and updating their software with new features and easier ways for developers to write code. These announcements were certainly a positive for coders and developers but for consumers and investors, we were not very impressed. Early media coverage has mixed thoughts. Some media outlets focus on the positive of what they said, the new apps including a health and home app, the new finger recognition software and how it can be used through 3rd party apps, and more. Some media outlets focused on the negative what they said, what they didn't say. No new flashy watches or Apple Beat head phones has consumers disappointed. So in reality Apple addressed the glass half full instead of half empty.

My take on WWDC 2014
      I watched most of the key note speech presented by CEO Tim Cook as well as other developers and Apple assistants who presented various presentations and demos of the new software updates a preview of IOS 8 and other new apps. I am not a developer nor am I a enthusiast of coding. But I can understand the positives of the new software they released. The beginning Mr. Cook took shots at Google, then went on to explain its developing software and how it is now much easier to use as well as a new health app that can put charts of your health onto one screen. (I guess that's why they hired some renowned doctors) They also have a new home app that synchronizes all of your home security needs in one app. Tim Cook introduced updates to the Icloud, which connected their applications and devices together. They touched on how they have given more customization and speed into their developing software by using their new software which makes it more easier for developers to use. Apple also emphasized how this new update will not compromise on their well known safety features. 

What To Take From The Conference
      I might of missed a couple of points from the keynote but I got the highlights and there is some conclusions I would take from the conference that are important. Apple made strides to connect all of their devices, update their interface, add some more apps, and make it easier for developers to develop. As an investor and from the big picture, this isn't much and is why Apple fell on Monday. The small picture though has some pretty big implications. Obviously the absence of new products is a red flag for investors, but the strides it made with its developing software is a sign new developers can now be able to make big money apps easier and faster. Also its home and health apps shows how its incorporating its brand into more markets. From an investing stand point that's a good sign. Mr. Cook shared powerful data showing how they have 130 million new customers buying there first Apple product and probably switched from an Android device. (taking a shot at Google) This figure is important because it shows how Apple is still growing and it can retain these customers as well. I didn't like how Tim Cook talked up the update at the end and shared how the new coding software is the biggest thing since the app store. I still wan't to know what the wickedly smart Angela Ahrendts, the former CEO of Burberry who transformed the British company into a money machine with style is going to do at Apple as retail chief. Plus what they plan to do with Dr. Dre's beats. In the end it was a software heavy conference that might of bored consumers, excited developers, and concerned investors. 

In conclusion
       So I end by saying what I've always said about Apple, it  won't be an exciting stock like it was when Steve Jobs was at the helm. But, the anticipation and expectations for something new to come out of Apple is growing and growing. And instead of addressing it, they have made strides to get into new markets, knowing it has lost ground in other markets. "Apple put itself into a great position for the future of their products" but when will those products come out is what everyone is dying to know. Apple has been on a run for the most part because of its fundamentals. It still has a heaping amount of cash, a great dividend yield, and shows great sales from its Iphone's and Ipads, which lets face it, we'll keep buying their new Iphones for as long as they keep updating them. The stock has made a rebound on Tim Cook's reinvestments back into the company, but will not reach new heights until they come out with a new product that consumers will crawl to. Which i'm sure Apple fans will definitely crawl to whatever they have next. Invest with care.