Finance

We are entering another phase of earning seasons, we have seen a tremendous rally in the stock market, but will it be sustainable? There are arguments by experts that this recent rally is just a sucker rally unless it backed up by some earning reports.

Although stock prices have rally fairly strong over the past few months, this rally needs to be supported by real positive earnings reports of the companies. If companies are not increasing profits or show sign of improvement than we are very likely to see another big drop in the stock market. But the focus will not be the bottom line of the companies it will be the top line, the question that needs to be answered is “have revenues increased?” this indicates if companies are actually selling more goods and services. Increasing the bottom line can come from many different areas such as cost cutting, layoffs and even accounting changes.

This is the first time in a long time that so much focus is placed on top line over bottom line, the street is looking for more sales and revenue.

Earlier this month IBM (IBM ), Intel (INTC ) and Google (GOOG) impressed investors with their results, even in the troubled finance sector JPMorgan (JPM), Goldman Sachs (GS ) and Citigroup (C) beat analysts expectations.

It is important for investors to keep a close eye on corporate earnings, as this is a good indicator of weather we are out of the recession or not. If the top line is improve this indicates that people are purchasing more and consumer sentiment is improving, however a negative top line can indicate the opposite and we could see stocks tank again.

So far corporations have come out with good earnings reports and strong profits, most recently Apple (APPL) released their results which gave the markets a little boost, but will these strong profits drive stocks higher or not is to be seen.

So everyone is excited that the Dow Jones is about to it 10,000 pts, I see everyone on twitter being excited about this milestone, the media keeps talking about this “big” milestone. Is it really a big deal? I wonder if people still care much about the Dow, I for one find the Dow a fairly useless index.

Dow Jones 10,000
Many believe that the Dow reaching and breaking the 10,000 milestone marks the end of the recession or at least confirms we are in a recovery. The assumption is based on the premise that the stock market is often a leading indicator for the economy, as the Dow surpasses a big milestone the economy should be in the recovery phase. Although I do not have an issue with this premise, I think that the Dow Jones is not a very accurate and useful index to base this conclusion on. The 10,000 is more of a psychological barrier than anything else.

Dow Jones Useless
Why do I think that the Dow is useless index? Many reasons, first of all the Dow is consists of only 30 companies, I highly doubt that these thirty companies are an accurate representation of the stock market or the economy. Second the Dow is not consistent, it includes and excludes companies as it sees fit. For example it recently dropped American Insurance Group (AIG) from it’s list and added Kraft Foods (KFT) instead, although this maybe somewhat justified since AIG stock tumbled, past switches are not very justified. Other recent additions to the Dow Jones, since the Dow passed 10,000 for the first time, are Microsoft (MFST) and Home Depot (HD).

What do Experts Think?
As always the “experts” all disagree with each other, however we can draw some inferences from new companies being added to the Dow. In theory if a new company is added to the Dow Jones it’s price should jump up because of more visibility and because some fund managers need to hold Dow components. Not so much, BusinessWeek points out that there is little impact on stocks moving in our out of the Dow, so it is becoming irrelevant to investors as well.

I think looking at other economical data such as unemployment numbers and looking closer at earning reports are better indicators of the economy.

Additions To Dow in last 48 Months:
Cisco Systems (CSCO)
Bank Of America (BAC)
Chevron Corp. (CVX)
Travelers (TRV)

Companies Dropped Recently:
General Motors now Motors Liquidation Company (MTLQQ)
Citigroup (C)
Altria Group (MO)
Honeywell (HON)

Often when the market is just range bound, investors can make a profit through options. However there are some common mistakes investors make that can cost them their profits, this is a quick premier on options and how to avoid some common mistakes.

What are options?

Options are contracts of either buying or selling the underlying security. You can buy or sell a call option or a put option.

Buying Options
When you buy an options you have the right to purchase or sell the underlying security anytime throughout the life of the contract. Important to note that you do not have to do anything and can just let the option expire. You as the buyer have to pay the seller a fee for the option contract. It can act as an insurance policy if you believe the stock price may change over the next month, but still want to hold on to your securities for now. For example you may currently be holding a position in Apple (AAPL), but think the stock may fall in the next six months so you buy a put option for the next six months, if APPL falls below the strike price you sell your stocks and repurchase at market price.

Selling Options
When you sell an options contract you have the obligation to either buy or sell the underlying securities if the buyer exercises their right. If you sold a put contract that you’ll have to obligation of purchasing the securities and if you sold a call option than you’ll have the obligation to sell the security. For this you will be collected a premium from the buyer who purchased the contract.

Covered Call Option- If you own the underlying security and sell a call option on that security than it is a covered call option, because you have enough security to cover the call. You currently own 100 Exxon Mobil Corporation, XOM, shares and decide to sell a call option, since you own enough XOM to cover the potential call, this is said to be a covered call option. See Writing Covered Calls for more info.

Naked Call Option- If you sell a call option and you do not own the underlying security it is known as a naked call option, because you’ll have to buy the security at the market price when it is exercised. For example you sell call options for Intel Corporation, INTC but currently you do not own any INTC, if the call option is exercised you will have to purchase the INTC at the current market price.

Common Option Mistakes

MISTAKE 1: No Enough Research
The most common mistake option investors make is they either don’t understand option trading or do not know enough about the underlying security price movement.
How to Avoid it? Learn about options first, Option Tips, and make sure you do your research before getting into options. Options can be very risky if not understood.

MISTAKE 2: Selling too quickly or hanging on too long.
This too happens often, investors either get out too quickly to cash a small profit and miss the large chunks or they stay in too long and lose out.
How to Avoid it? Simple set a strict and clear stop loss point and profit exit point, this will ensure you stay within your limits.

MISTAKE 3: Too Much Money in One Trade
This probably is the most dangerous mistake you can make. Sometimes investors see a good opportunity and put in 70-100% of their trading portfolio, BIG MISTAKE! You should never put any more than 15% of your trading portfolio in a single trade!

For more option mistakes and how to become a better option trader see “Top 10 Mistakes New Option Traders make”

The recession is over; well that is what Federal Reserve Chairman Ben Bernanke and economists believed up until last week. Last week president Obama set a new 35% tire tariff on Chinese imports which could not only prolong the recession but according to some it could cause a trade war between The United States and China and take us straight into a full blown depression. President Obama enacted a new 35% tariff on Chinese imported tyres after being pressured by the union, many experts believe this newest protectionist measure will escalate the trade issues between the two economic powerhouses causing a major trade war.

China’s minister of commerce, Chen Deming, condemned the decision, saying that it “sends the wrong signal to the world” at a time when Washington and Beijing should be co-operating to deal with the worst economic and financial crisis in decades. According to Mr. Chen this is a serious act of trade protectionism and it violates WTO rules.

In response China is taking a serious look at the imports of US poultry and vehicles and should they enact similar protectionism measures things can go from bad to worse very quickly.

Although the aim of President Obama’s new measures is to protect the domestic economy and jobs, I highly doubt this will benefit either one in the long run. By enacting this new tariff Obama is hurting the already cash strapped consumers; reducing supply of cheaper imported tires will result in price increases and hence disadvantage consumers. Consumers had determined that the Chinese products are not only acceptable, but also provide better value for the spent.

I have to question if this move by the Obama administration was truly to help protect jobs and help Americans or was it done as a political favour? Clearly this decision will hurt the fragile American economy as well as the already cash impoverished consume.  It should also be noted that this decision was not supported by the US tire companies such as Goodyear and Cooper Tire as they understood that this new tariff will only hurt American product sales in China, I am not sure why President Obama did not understand this simple concept.

At one point in time the United States was China’s most vital trade partner, however the US has lost its status and now Europe is China’s largest trading partner. Should a trade war erupt US will have the short end of the stick, and the American economy could see a much steeper economic decline.

I do not necessarily agree with China’s labour laws or believe the Chinese have the best products, but government intervention in the free market is almost never a good idea.  It’s simply a matter of survival of the fittest, let the free market and consumers decide who provides the best value. Intervening in this process will have dangerous consequences. Obama’s protectionism measures will eventually isolate the US, potentially causing trade wars and lead the US economy to a potential depression.

Is there a potential trade war between the US and China? After last week’s move by the Obama administration I would not be surprised if the Chinese react with their own protectionism measures. In my humble opinion we still have a long while to go before this recession has ended.

Tires, chicken, and US-China trade