/investing

A Virtual Oil Spill and a Real Oil Spill

Arguments can be made that there are 2 fronts on the war to combat the Gulf oil spill. BP obviously taking the responsibility for the clean-up, but what about cleaning up the public’s perception of the oil powerhouse?

All things considered, BP really is not doing that bad of a job. They’ve managed to produce some very quick attempts to stop the spill, pumped millions of dollars into the local economies, and overall been fairly transparent about the progress.

The fact of the matter is that this is just a bad situation that they ultimately caused, and they ultimately will pay the price for.

As the lawsuits pile up, the spill gets worse and big investors start to worry, the stock price falls, further compounding the problem.

With the launch of a recent positive media campaign, BP is obviously trying to counter some of the growing frustration.

How can any company reverse negative sentiment?

But just how bad is the buzz, where is it coming from and, like the lurking oil plume, how can it be countered?

The crisis being managed is one fought both on land and sea – and in the hearts and minds of the Internet community.

After President Obama addressed the nation, and estimates came out that the spill may be up to 100 times the original estimate the number and negative tone of BP’s media skyrocketed.

Research provided by Yovia, Fisheye Analytics and RVI Network Connections.

The U.S. Securities and Exchange Commission has hit Goldman Sachs with some serious charges, and this leaves the company in a precarious situation. It is not clear how the company’s investors and account holders will react. Analysis shows that it is highly unlikely that Goldman Sachs will meet a similar fate as Bear Stearns and Lehman Brothers. The questions on everyone’s minds are whether the company will weather this storm and if the stock price will find itself in a downward spiral. It is safe to state that Goldman Sachs will not reach its old highs in the near future.

The first day the news broke, shares of Goldman Sachs closed down 12.79% at $160.70, posting the largest-ever single-day dollar drop. The stock was off as much as 15.5% in earlier trading. In the options market, investors flocked to buy put options, and in credit markets, the cost of insuring against a default by the bank jumped. The news led to the stock bouncing briefly at the 50, 100, and 200 day Moving Averages, which was very negative for the company and proved the stock selling was very aggressive. The shorters and sellers had a firm grip on the stock and will continue to be problematic for any significant recovery of the company’s stock in the near term. Wall Street analysts are predicting a stiff fine, a weaker price share and a tougher financial overhaul for Goldman Sachs. The stock will face an uphill battle to reach its original highs and there is the possibility of more charges being brought against the company by the SEC.

Goldman Sachs said the allegations against it were completely unfounded and that it will “defend the firm and its reputation.” It will be interesting to see if the company can eke out a win, but for now, unless more charges are filed or the stock market takes a nosedive, it’s unlikely that the stock price will fall below $100.

Janet Shan

Good morning Dr. FeelGood…please meet my financial advisor, Mary Jane!

A few savvy investors, rogues in the field, may be wondering how to invest in the new green economy, Medical Marijuana. Expect low returns and uncertain futures for investments of the few Pink Sheet stocks available, most notably Medical Marijuana Inc (OTC: CVIV). Rising out of the dreams of half-baked stock seekers, the companies are not representing well at this point in the public market.

Medical Marijuana, Inc. was the first to enter the US market as a penny stock (opening at .04) in April, 2009. It’s a year later, so how are they now? Well, the annual revenues have reportedly fallen from $818.9K to $13.0K – so are you still interested? They were followed into the public market by a few others: Cannabis Science, Inc. (OTCBB: GFON), Cannabis Medical Solutions, Inc. (OTCQB: CMSI), International Merchant Advisors, Inc. (Pink Sheets: IMAI). All are listed as penny stocks, closing no higher than 0.15, but Medical Marijuana Inc. was the only one to also note an unsolicited quote warning against the information about its reported market values.
None of these stocks are for the faint of heart; the medical marijuana market just doesn’t allow for that type of surety at this point.

According to Rob Reuteman’s recent article in USA Today, Medical Marijuana Business Is On Fire, Jack Cary, a partner in Greenwerkz, a Denver dispensary, agrees. “There is a lot of investment money waiting on the sidelines, investors waiting to see what the rules are, waiting until an investment is not so high-risk,” he said. “Like any gold rush, any boom, there’ll be a bust. There will be a shakeout.”

So, if you would like to invest with your heart, feel free. But, do keep in mind that much of the medical marijuana business could shift to established pharmaceutical companies, if the foreshadowing of government regulations rings true. Investing in the future of this arena may not end up in the pockets of California and Colorado’s current streetwise vendors; it may be in the accounts of the corporations that buy them.

If you can’t escape the thrill of investing in weed, visit http://marijuanastocks.com/ for a little joy ride.

Jennifer Cipollini

China has made great strides in the race for the most powerful country in the world and it has begun to rival America on a number of fronts. While investing in China carries some risks, it is still proving to be an attractive investment alternative for many aggressive investors. The Peoples Republic of China is still beset by some serious problems, including massive pollution issues and the enormous wealth disparities within its population, but it is still worth a second look for investment opportunities. The GDP of China grew by 10.7% in the fourth quarter of 2009, leading to the fastest gain since 2007. Shanghai’s SSE Composite Index finished last week up 3.2% to close at 3,157.96.

Energy stocks were paramount in the country’s stock market recovery last year. These stocks helped to lead the market to recover from its bottom and are still good plays for 2010. Clean energy and natural gas companies also look very promising. The government’s support on both sectors will create a booming cycle for clean energy and gas operators. The government is looking to increase natural gas to nine percent of China’s energy mix by 2016 from 3.5% today, according to Forbes Magazine. Beneficiaries of this goal include city gas distribution companies, which will undertake an enormous expansion scheme. Hong Kong listed CNOOC, which is one of China’s largest oil producers is a good investment play. The company has a lot of momentum because of the demand for oil products in China.

The Internet is another sector with a great deal of momentum in China and users have increased astronomically. According to CNN, the number of Internet users in China has tripled over the past three years. China now has the most Internet users of any country in the world. There are more than 384 million users online in China. That should bode well for Baidu Inc., (BIDU) which provides Chinese and Japanese language Internet search services. Ctrip.com International Ltd., (CTRP) together with its subsidiaries, provides travel services for hotel accommodations, airline tickets, and packaged tours in the Peoples Republic of China, is also another good Internet stock to purchase.

China has achieved a phenomenal pace of growth over the last three decades and considering the scale of its building efforts, which include companies such as JA Solar Holdings (JASO), which had an 18.1% gain last week, and Yanzhou Coal Mining (YZC), which has a 12.3% percentage gain last week, China is on the path to becoming a full-fledged superpower.

Janet Shan

We have had a pretty nice run in the markets but appear to be back to chop mode. So where do you look for some opportunity for return, while not worrying as you spend more time outside enjoying the good weather? One place is utility stocks. The idea is that, regardless of how the economy is doing, we still need heat and water. Utility stocks can be a nice addition to any portfolio. A good place to begin looking for ideas for potential stocks in this sector is outlined in this post at TradeKing.

Many utility stocks offer nice dividends. While interest rates are expected to rise, rates in the range of 4% or more, are certainly more attractive than the rates being offered by other options such as savings accounts. The key is to find companies that have a history of consistently paying and growing their dividends over time. Some names to consider include PGN or DUK. However, the need for heat, light, and water is global, so you do not just have to look at US companies. Some of the Canadian names, such as ENB or TRP, have resulted in excellent returns for investors. You can also take advantage of the hot markets of China by investing in utility ADRs of China and other nations in Asia and South America as well.

There are about 160 different utility stocks trading on American exchanges. The performance chart tool at stockcharts.com can be used to help you narrow down the choices by helping you identify which companies are showing the most momentum. In the electric utility space, the Brazilian company EBR has been outperforming many US companies on a relative basis. However, depending on your risk tolerance and investment objectives, you may not choose this stock, as it is also more volatile and pays a lower dividend than many of the other choices.

Shalini Gupta

As the controversy and debate heats up over who is going to pay for the massive delays incurred by airlines due to the recent European volcanic-ash event, there is little doubt some of these airline stocks will be adversely impacted. To get some ideas on how to possibly trade this sector check out this thread at TradeKing.

Not only were the big European carriers like British Airways (BAIRY) and Lufthansa (DLAKY) badly hurt, but so too were many of the big American airlines. These include the parent of United Airlines UAL (UAUA), American Airlines (AMR), Continental Airlines (CAL), and Delta Airlines (DAL).

The related cancellations cost the airline industry over $300 million in revenues per day. These kind of losses have the airlines fuming, which has sparked a debate on whether they should have to incur all the costs or whether the related governments should help.

The economic impact goes beyond just the airline industry. It also affects all the direct and indirect employment it creates. In addition, you have the adverse impacts of business dislocation, tourism and trade.

The bottom line is that shutting down air travel cuts off a huge and important supply line for the European economy and its global linkages, with global implications, as airlines all over the world have been forced to cancel their European flights. We will have to wait and see going forward what the long-term impact to airline stocks (and stocks as a whole) will be, but you can be fairly certain that the fallout won’t be good.

Jeff Neal

Rho, the Greek that tracks interest changes, could impact the price of your option. Insight into this Greek variable is discussed at TradeKing.

Given that Rho represents the change in the price of an option with respect to a change in interest rates then you can infer it relates to opportunity costs of allocating your funds in a long-term option versus other investment alternatives. This is why things like dividends have a distinct impact on Rho.

To be honest, of the 5 Greeks, the least important is Rho. This is because interest rates tend to stay pretty constant and even when they do change, it does not have that big of an effect on the options price. Keep in mind interest rate changes (Rho in the Greeks), significantly impact the value of various stocks including banks, utilities and others with large debt loads.

Finally, since Rho is a measure of how the price of the option will change if interest rates change. This is generally a very small factor, especially for shorter-term options, but may become critical if you expect some large movements in interest rates over the term that you expect to be invested in the options.

The bottom line is that you want to have a low Rho on options that you have purchased and a higher Rho on options that you are selling, especially if they are short-term. To see how this Greek can be automated and effectively managed for portfolios, click here.

Jeff Neal

To see some of the basics of how options are re-evaluated when stock splits take place, see the following discussion at TradeKing. However, I like to focus on what brings on a stock split and what kind of opportunities that presents for option traders.

When a company announces a stock split, it typically acts as a tremendous catalyst that causes the underlying asset to garner momentum. With this in mind, it is important to understand the stock split process. In this article we”ll explore the requirements for a stock split as well as the general profile of a company that may decide to announce a split of their stock.

A stock split involves the division of corporate stock by the issuance to existing shareholders of a specified number of new shares, with a corresponding lowering of the market value of each outstanding share. This, of course, is opposed to an actual stock dividend, which is usually a payment by a corporation of its own stock without a change in the market value of the underlying asset.

Before a corporation and its board of directors decide to split, they must have their stock to be in a strong uptrend and also have a comfortable anticipation that the stock will continue the trend. Naturally, the company must have enough unissued authorized shares to split the stock, and then the board of directors must then meet and declare a stock split.

If authorized shares need to be added, then the corporation must seek approval from shareholders, which requires a shareholder meeting for a vote to support additional shares being issued. At that point the company can announce the stock split and both the split and recording dates are set. When the split date does indeed arrive, additional shares are issued and the stock price per share is adjusted accordingly.

In addition, a stock split announcement is typically accompanied by another major event. This could be anything like a dividend being paid, expansion plans, a stock buyback program or even changes to management. Usually when a company declares a stock split it means that particular firm is experiencing success.

The average profile of a company that declares a stock split is that they are currently operating with increasing revenue, cash flow and net earnings. Typically, the stock price is close to or higher than the price of the last split, is in a general uptrend and of course is expected to continue to climb. In addition, business is forecast to be very good going forward, shareholder confidence is high and basically no major legal issues are pending reconciliation.

Stock splits are certainly worth monitoring and when correctly identified provide excellent candidates for low risk and high reward options strategies. In fact, if the trader can visualize a stock split coming when implied volatility is currently very low then these particular situations have a tremendous chance of being highly profitable when coupled with the appropriate options strategy. To see how stock splits can be automated and effectively managed for stock option portfolios please click here.

Jeff Neal

As discussed at TradeKing, staying mentally tough in a trading environment can be challenging at times. Here are some tips and advice on being able to effectively handle this side of the trading business, especially in volatile times.

First, as a trader you have to have a trading plan. The plan should specifically spell out your entry price, where you will exit with a profit as well as where you will exit with a loss if the trade goes against you. This will provide the discipline which is needed when trading in the markets and will give you the mentally tough edge that is so needed to trade successfully over the long-term.

Once the plan is defined it is key that you execute it flawlessly and without deviating. By virtue of having a trading plan in place will help you immensely in being able to remain mentally tough and effectively manage anything that the market throws at you.

Finally, keep a detailed trade journal on how the trade worked out. Not just profit and losses but detail the trading environment as well as why the trade worked as anticipated or did not perform as expected. This will add to your mental edge and contribute to your long-term trading success.

Jeff Neal

With the tough economic conditions, President Barack Obama and members of the Congress have agreed that the country needs some financial reform to prevent some of the reckless actions that led to a financial meltdown. Regulating the areas of financial services that contributed to the financial woes is paramount and reform is sorely needed. Mortgage brokers and their related markets, as well as the little understood instruments such as credit-defaults caused the economy a lot of pain and should be regulated with a sense of urgency. The factors that led to the collapse of the housing market and almost brought the United States to its knees should be reformed to prevent another occurrence in the future.

Many people are wary of government reform, particularly the implementation of a trader tax, which was proposed by Sen. Tom Harkin (D-IA) and Rep. Peter DeFazio (D-OR) and now known as H.R. 4191, would impose a 0.25% transaction tax on the “sale and purchase of financial instruments such as stocks, options and futures.” The bill also calls for a tax on credit default swaps of 0.02% of the value of the instruments involved in such transactions. The trader tax would not be levied on retirement accounts, with respect to any stock contract, futures contracts and swaps held in the plan, for example. It should be noted that the trader tax isn’t currently part of Sen. Chris Dodd’s financial services reform bill, but it has reared its head in many discussions and it is a real possibility that the topic will re-emerge in the near future. Proponents believe the legislation could raise $150 billion per year.

The trader tax has been called a misguided tax by many because of the inability to separate Wall Street from Main Street. The tax seeks to penalize the “fat cat” Wall Street firms whose risky speculative transactions have jeopardized the economy, but the reality is that the cost will simply be passed on America’s Main Street investors. The trader tax would render most current high-frequency trades unprofitable since they rely on the thinnest of profit margins. Further, trading volume could collapse, leading to a shortfall in the tax dollars actually collected by the government, according to the Wall Street Journal. This tax could have an adverse effect on market liquidity, possibly leading to wider bid-offer spreads and would the costs would land in the laps of investors in the form of higher costs on their trades. This tax would also be difficult to impose internationally because it would be very difficult to achieve a broad consensus regarding the details of such a tax. In short, the transaction tax or trader tax would not benefit the average investor and the “fat cat” firms on Wall Street would find another way to recoup the costs.

According to a recent Bloomberg poll, most Americans are fed-up with Wall Street and are unhappy with the compensation of executives and the way the government has dealt with the bailout. This should bode well for the reform process.

Janet Shan