Is it good news or just bad news in disguise?

The good news.

The Dow was up 122 points or 1.2% and the S&P 500 was up 1.5% on Friday after the Federal Reserve reported consumer borrowing increased by 2.43% although credit card and other kinds of revolving credit declined by 2.3% following a 16 month trend of declines.  Auto loans were up 5.01% in January and made up the lion’s share of the increase in borrowing, up for a second month.

The Department of Labor reported unemployment held steady at 9.7% as the economy only lost 36,000 jobs in January, less than what analysts had been expecting.  This fact plus the increase in consumer borrowing and the decrease in overall revolving credit are leading analysts to believe the economy is stabilizing.

The not-so-good news

The rationale that consumer borrowing is going to save the day is unsustainable.  The fact unemployment is holding steady is encouraging, but I find it hard to get excited over the fact unemployment didn’t go up and we didn’t lose as many jobs as were expected.  9.7% is still way too high considering even if the economy generated 150,000 new jobs every month it still wouldn’t keep up with the increase in population growth.  The number of temporary workers increased for the fifth month in a row in February by 47,500, up 11% from this time last year which means the work is there but employers don’t have enough confidence to hire full-time employees.  The Labor Department reported Thursday productivity increased to an annual rate of 6.9% in the fourth quarter, despite the high number of job losses, but workers can’t be expected to keep up this pace forever.

Don’t buy into the rhetoric. Read the rest of this entry »

Where's the cash going?

We’re down to the last two financial statements, Statement of Cash Flows and the Retained Earnings Statement.

The statement of cash flows shows where the business got its cash during a particular period of time and how that cash was used.

The retained earnings statement shows how much previous income was distributed to shareholders in the form of dividends and how much was kept to allow for future growth.

The statement of cash flows is useful for answers questions like: Read the rest of this entry »

Balance sheets - assets vs. liabilities

Before we delve into the other three financial statements let me stop and add a few caveats about financial ratios and financial statements.  Using either to compare one company with other similar companies can give you a good idea of the businesses’ financial health but differences in accounting methods make it difficult to get a true apples-to-apples comparison.

For example, if one company values its inventory using last-in, first-out (LIFO) and the other uses the average cost method then you can’t accurately compare their inventory valuations and cost of goods sold.  This is just accounting-speak for saying the one company assumes it sells or uses its newest inventory first, and that’s what gets reported, and the other company averages the cost of its entire inventory.  Neither way is wrong, and we don’t need to get bogged down in the details, I’m just making the point that you can’t come to an accurate conclusion about a company’s finances by looking at a few pieces of information. Read the rest of this entry »

Financial Statements

Companies communicate what their assets, liabilities, expenses, and revenues are in four different financial statements:

- The balance sheet shows at a particular point in time what a company owns (its assets) and what it owes (its liabilities).

- The income statement shows how successfully the business performed during a period of time by reporting its revenues and expenses.

- The retained earnings statement shows how much previous income was distributed to shareholders in the form of dividends and how much was kept to allow for future growth.

- The statement of cash flows shows where the business got its cash during a particular period of time and how that cash was used.

For a real world example of a company’s financial statements we’ll use ABM Industries, Inc. (ABM), a buildings maintenance and services company I picked for Financial Samurai’s Samurai Fund.  Read the rest of this entry »

What's the retail value of your stocks?

If you’re shopping around for a new or used car it’s good to know the retail value of the vehicle so you’ll know if you’re getting a good deal or paying too much.  Wouldn’t it be nice to know the retail value of your stocks?  Some people think this number is the market capitalization, or the number of shares outstanding times the stock price, but this doesn’t take into consideration a company’s debt or its available cash.  A better way to gauge the price of a stock is too ignore the hype around a company’s stock price and focus on the company’s underlying value, or the Enterprise Value.

Enterprise Value is what you would pay if you were taking over a company. It’s the equity value of the company + the market value of its debt + minority interest (if applicable) – the market value of associate companies + the market value of preferred equity – cash and cash equivalents. Read the rest of this entry »

Learn how to analyze stocks like a pro

Ever wonder how the stock market gurus come up with their stock picks? Stock analysts don’t use a Magic 8 Ball, consult with psychics, or letter combinations from their Alpha Bits cereal to pick stocks.  Not that what they do isn’t a little arcane, they divine the future price of stocks by rearranging different number combinations related to the performance of companies.  These number combinations are financial ratios and something you’ll fully understand once you’ve read this series of articles.  By using these ratios yourself you’ll be better able to make your own stock purchase decisions and minimize your risk, just like the pros. Read the rest of this entry »

Gold is becoming widely accepted as being a bubble, just like real estate and internet stocks once were.  Some of the criteria for being a bubble are an irrational valuation, lots of hype, and no clearly defined price ceiling. Interest rates are down, money is cheap, and the Fed is not giving any indications of touching interest rates any time soon which is helping to fuel gold’s price run.  Gold broke the $1,000 barrier many people thought it would never see again and there’s talk of gold going to $2,000 – $3,000.  And we’re now enjoying infomercials and commercials hawking the wealth building prowess of gold.

So I would say gold meets the technical definition of a bubble.  That doesn’t mean I don’t think it’s a good short term investment, but I would watch it closely and start taking money off the table when it hits $1,300 to $1,400.  So if gold is currently a bubble this begs the question what’s the next bubble? Read the rest of this entry »

My (virtual) million dollars

If you haven’t tried it yet head on over to UpDown.com and sign up for their free stock market game.  The trading simulation is extremely realistic and they give you $1 mee-lee-un dollars to play with.  It’s like fantasy football for stocks, and if that wasn’t incentive enough they have a monthly contest where the winners get a shot at $3,000 in real money for managing their virtual money well.

The rules are:

- Be on the site on or before the 7th of each month to be automatically entered,

- Perform better than the S&P 500 during the contest period (currently 4.93%), Read the rest of this entry »

Where is the price of gold heading?

In one of the comments on my article How to profit from a weakening dollar I learned what appears to be the best way I’ve seen yet to invest in gold.  John from OnlineInvestingGuru.com told me about BullionVault, a way to invest in the professional gold market in New York, London, and Zurich.  Buying gold bullion directly on a gold exchange means you get better prices because you’re cutting out most of the middlemen, and the gold you purchase is stored in professional vaults in any one of the three market cities.  This way you get all the benefit of physically owning gold without any of the risk associated with storing gold.  I think this is actually a better investment idea than the SPDR Gold Shares gold ETF GLD because you’re actually purchasing a physical amount of gold without the management overhead of an ETF.  And one more big reason to use BullionVault – they give you 1 gram of gold free for signing up to help you learn how to trade.  As of Tuesday this amounted to a $38.15 gift. Read the rest of this entry »

Trade your dollars for gold

Its common knowledge the price of gold is inversely proportional to the value of the dollar – that is, when one goes up, the other goes down.  At least, it has ever since the Nixon Shock in August 1971when President Nixon changed the valuation of the dollar from gold to an open monetary exchange.  And we hear every day more evidence of the growing weakness of the US dollar – the yields on Treasuries go up, the cost of crude oil increases, concerns about inflation from the Fed.  So what do you do about the devaluation of the dollar?  You can’t hoard your cash because of inflation and devaluation, so you have to invest it in something.  Banks and bonds are yielding microscopic returns so that just leaves the stock market.  Here are four stocks to take advantage of: Read the rest of this entry »