Stocks and Trading Thread - Channeling your inner Mono

[Malthus]

Way I was looking at it is this: fit I invest in stocks, can I earn enough to pay for my shelter, same as if I invest in real estate? That is, can I earn enough to pay the rent, on-going? Presumably the value of the stocks would increase over time, but then, so will the rent. Will the increase on stocks be sufficient to cover this, ongoing?

You can't buy as many stocks on the margin as you can a house, so that can be the advantage.  You won't be able to buy $500,000 in stocks on a $100,000 downpayment, and in any case it would be a highly dangerous thing to do.

I guess my point is this: I agree that they are very different sorts of investments, but this difference is IMO an advantage in some ways. Houses are as you say illiquid, but they are very "safe" if you do not want to sell; you can always just live in them. Once you have bought a house, if you don't want to sell of move you really could not care less if the real estate market tanks tomorrow; you will still have your house. If your stocks tank, you have only bits of paper fit to wipe your bum with. 

You're making a crucial, and potentially dangerous assumption, and that is that you will continue to have the income to service your debt.  Since houses are sold on a margin, you do indeed have a very real risk that at some point in the future you'll become unable to make payments.  Many people forget that they're going hugely in debt when buying a house, and leverage can always work both ways.

Yeah, but that risk is from a totally different source. For example, the stock market tanked significantly in the last recession (call that risk A) yet I didn't lose my job (risk B) and the market for real estate did not fall significantly in my city (risk C). Owning real estate rather than stocks proved to have an advantage there, even though it was somewhat leveraged (thank goodness, not much any more - I've been making extra mortgage payments and I'm almost done!  ); risk A materialized but not risk B.

My point is not that reals estate is a better investment, merely that it has its advantages: owning your house diversifies your exposure to various risks. It can be a sensible part of an overall investment scheme, or at least, that's been my experience.

[Tamas]

What the fuck is wrong with people?!!
Citigroup is a huge fucking mess, with the government to unload 27% of the shares in the coming months, and they just keep buying and buying the stock, especially after the CEO sez "we will be grand".
This is the same bullshit I saw in the news prior to the crash: economic data was pure horrible, then came Bernanke, said "all will be good" and the stock market soared.

Yes, of course I went short on Citigroup. Yes, I got MAJORLY pwned by the CEO speech.

[citizen k]

Citigroup's Stock Likely to Keep Climbing: Bove

Citigroup has turned itself around and investors in the stock, which has risen around 12 percent in the last 5 days, are likely to make important gains in the long term, Richard Bove, financial strategist at Rochdale Securities, told CNBC Wednesday.

The most important factor in the stock's rise over the past days was Citi CEO Vikram Pandit's testimony to Congress, where "he was just ebullient," Bove said.

Citigroup will be pricing a $2 billion preferred shares offering at $25 par value with a yield of 8.875 percent, traders told CNBC on Tuesday.

One trader said the offering was "multiple times oversubscribed."

Citigroup's balance sheet shows that the bank exceeds all the government's capital requirements, Bove said, adding that the bank has $192 billion in cash, more than 10 percent of its assets.

Pandit has separated businesses to keep and businesses to sell in the bank and this will increase the value of Citigroup, Bove explained.

"If one was able to separate out the business that they're going to sell at the moment ... the part that's going to survive has got a 65 cents to 70 cents earnings power, which I think is a $7 stock," he said.

"But you have to go through the sale of the government stock before, I think, it starts to move up even more seriously," Bove added.

The bank is likely to lose money in the first and probably the second quarter, he said, so it is a longer-term investment.

"If we go out two-three years... my view is that the dividend payout ratios in banks are going to go back up to 40 percent and if people were to buy these banks at the present time, they're looking at extraordinarily high yields based on where dividends could be, say, in 2013," Bove said.

Citicorp May Earn $20 Billion by End-2012: Report


Citigroup Chief Executive Vikram Pandit is set to forecast returns of 1.25 percent a year or more on the bank's main assets within a few years, the Financial Times reported on Wednesday.

Pandit, set to speak at a conference on Thursday, will not give a specific profit target for Citicorp, the FT reported.

Pandit is expected to focus the market's attention on the performance of the Citicorp unit, which had more than $1 billion of assets at the end of December, out of Citigroup's total $1.86 billion.

If Citicorp's assets grow by about 5 percent a year, as some executives expect, the unit could earn roughly $20 billion by the end of 2012, a big increase from current levels, the FT reported.

Citigroup's performance depends not only on Citicorp, where it houses its main assets, but also on Citi Holdings, which has businesses and assets it is looking to shed.

Analysts have struggled to predict Citi Holdings' performance, which depends on the quality of its assets and the global economy.

But in recent days, investors have become much more hopeful about Citigroup's prospects — the company's shares have risen 11 percent since Monday's close.

Shares of other hard-hit U.S. financial companies, including insurer American International Group , have also rallied.

The U.S. government, which owns more than a quarter of Citigroup's outstanding shares, is eligible to start selling portions of its stake in the middle of next week.

The government will sell its shares only if it can do so at a profit. Citigroup's shares closed at $3.96 on Wednesday. Taxpayers bought shares of the third-largest U.S. bank at $3.25 each. Citigroup spokesman Jon Diat was not immediately available for comment.

[Tamas]

The second one's important part: CitiCORP. The rest of the company is in a much much worse state and will keep bogging the banking part down.

As for the first article, I could cite some which say "OMG sell!"

[MadImmortalMan]

I'm not going anywhere near C. They haven't paid back TARP yet, right? Even so, you never know what regulatory atom bombs could fall from the sky without warning.

[Barrister]

What about the pros? 

I want to invest in real estate (and will someday), and think there are a lot of pros.

It's a tangible asset that will never hit zero value.  A company can go bankrupt and the stock becomes worthless.  A company can default on its bonds and the bond becomes worthless.  A mutual fund or investment company can go under, etc.  But real estate will always be worth something.

You can take a hand in increasing it's value.  You are managing your investment.  If I don't like how a stock is doing, there's nothing I can do about it.

You're not at the whim of the market and it's daily fluctuations.

It's an investment that generates a fairly stable revenue stream.

It's a necessity.  Even in a recession people need homes, businesses need facilities, etc. 

And they're not making any more of it.

[Ed Anger]

What about the pros? 

I want to invest in real estate (and will someday), and think there are a lot of pros.

It's a tangible asset that will never hit zero value.  A company can go bankrupt and the stock becomes worthless.  A company can default on its bonds and the bond becomes worthless.  A mutual fund or investment company can go under, etc.  But real estate will always be worth something.

You can take a hand in increasing it's value.  You are managing your investment.  If I don't like how a stock is doing, there's nothing I can do about it.

You're not at the whim of the market and it's daily fluctuations.

It's an investment that generates a fairly stable revenue stream.

It's a necessity.  Even in a recession people need homes, businesses need facilities, etc. 

And they're not making any more of it.

[MadImmortalMan]

You can take a hand in increasing it's value.  You are managing your investment.  If I don't like how a stock is doing, there's nothing I can do about it.

This means it's more work than just about any other investment too, and has a way of consuming your time. I'm thinking along the same lines you are, but I want to look into some of those property management companies that will handle the day to day stuff for you in exchange for, well, some kind of fee I guess. It could be a ripoff, but the idea sounds appealing.

[DGuller]

It's a tangible asset that will never hit zero value.  A company can go bankrupt and the stock becomes worthless.  A company can default on its bonds and the bond becomes worthless.  A mutual fund or investment company can go under, etc.  But real estate will always be worth something.

The value of the asset may never hit zero without a major collapse of governance (e.g. Detroit), but your equity in it may get to zero, and much further down than that, since you usually buy real estate with a loan.  If you buy it with cash, then you're fine, but then your returns are going to be very crappy.  In the long run, the value of the real estate appreciates very little in real terms.

It's a necessity.  Even in a recession people need homes, businesses need facilities, etc. 

Maybe, but not in the same quantities.  If the recession gets bad, people pack themselves more densely, such as with children staying longer with the parents instead of branching off on their own.

And they're not making any more of it.

They're not making any more of water either, but it doesn't mean that investing in water is a good idea.

[Barrister]

The value of the asset may never hit zero without a major collapse of governance (e.g. Detroit), but your equity in it may get to zero, and much further down than that, since you usually buy real estate with a loan.  If you buy it with cash, then you're fine, but then your returns are going to be very crappy.  In the long run, the value of the real estate appreciates very little in real terms.

I'm not saying you should invest in any real estate.  Obviously you need to judge that the RE you are purchasing is at a fair value, and unlikely to fall.  You also want to keep your leverage to a reasonable amount.  UP here for a non-principle residence you'll need to put down 25% which seems quite fair amount of leverage to assume.

It's a necessity.  Even in a recession people need homes, businesses need facilities, etc. 

Maybe, but not in the same quantities.  If the recession gets bad, people pack themselves more densely, such as with children staying longer with the parents instead of branching off on their own.

Not sure what you're saying here.  Every investment can be sensitive to a downturn.  But RE is impacted less than almost any other sector.  Not that it is immune, but it is impacted less.

And they're not making any more of it.

They're not making any more of water either, but it doesn't mean that investing in water is a good idea.

On the contrary - water falls from the sky every day.  As far as humans are concerned, it is being created.  Land is very different in that way.

[DGuller]

I'm not saying you should invest in any real estate.  Obviously you need to judge that the RE you are purchasing is at a fair value, and unlikely to fall.  You also want to keep your leverage to a reasonable amount.  UP here for a non-principle residence you'll need to put down 25% which seems quite fair amount of leverage to assume.

It's not unusual for real estate, but it's still a fairly high leverage ratio of 4.  It's far from impossible for real estate to fall that low, no matter where.

Not sure what you're saying here.  Every investment can be sensitive to a downturn.  But RE is impacted less than almost any other sector.  Not that it is immune, but it is impacted less.

I'm saying that just because people need shelter doesn't mean that demand for real estate won't go down.  I also find it a dubious proposition that real estate is less sensitive to economic downturns.  In locally depressed areas from which people are moving out in search of jobs elsewhere, it can be quite sensitive.

On the contrary - water falls from the sky every day.  As far as humans are concerned, it is being created.  Land is very different in that way.

[citizen k]

What Commodity ETF Investors Should Know
Michael Johnston, Senior Contributor
03/11/10 - 09:35 AM EST
By Michael Johnston, founder of ETF Database

It's difficult to put a finger on the exact cause of the recent surge in popularity of commodity investing. More than likely, the boom is attributable to a number of different factors. Correlation between international equity markets (and even between stocks and bonds) has surged in recent years, increasing both the importance and difficulty of adding noncorrelated assets to investor portfolios. Given the relatively weak correlation with other asset classes, commodities have found a home in many investors' portfolios.

Moreover, unprecedented injections of liquidity into the financial system have created anxiety over a coming uptick in inflation that could erode returns to stocks and fixed-income instruments. Commodities have historically served as an effective inflation hedge, and many are once again turning to natural resources to protect assets from a surge in the CPI.

Regardless of the cause, commodity investing is hot, and many investors have turned to ETFs as a way to gain commodity exposure. There are three primary ways to gain exposure to commodity prices (as well as two spinoffs) through exchange-traded products, and each can potentially offer a very unique risk and return profile:

1. Physically-Backed ETFsThe most efficient way to gain exposure to changes prices of natural resources is to actually buy and hold the underlying commodity. Portfolios utilizing this strategy will ensure a near perfect correlation with the spot price of the commodity, because the value of the underlying holdings will move in unison with market prices.

Unfortunately, the physical properties of many commodities make physical storage impractical or prohibitively expensive. The physically backed exposure approach only makes sense for commodities that 1) are nonperishable, 2) are easily stored, and 3) maintain high value-to-weight ratios.

As such, the universe of physically backed ETFs is essentially limited to precious metals funds that store bullion in secure vaults. Commodities available through physically backed ETFs include gold, silver, platinum and palladium.


2. Futures-Based Funds

While the physically backed ETF structure works well for precious metals, a similar approach obviously wouldn't work with the majority of commodities. A physically backed livestock ETF would be a potential disaster for obvious reasons, while the storage costs and logistical headaches associated with a fund storing barrels of oil or bushels of wheat would likely necessitate a double-digit expense ratio.

In order to provide exposure to prices of resources that don't lend themselves to physical storage, many ETFs invest in futures contracts written on the related asset. A futures contract is an agreement to buy or sell a commodity at a certain date for a predetermined price, so its value generally moves along with spot prices.

In order to avoid taking physical possession of the underlying commodities, these funds conduct a regular "roll" process, selling contracts nearing expiration and using the proceeds to purchase longer-dated futures contracts. As such, futures-based products are impacted by three factors: 1) changes in the spot price of the underlying commodity, 2) interest earned on uninvested cash, and 3) the "roll yield" incurred when near-month contracts are exchanged for longer-dated futures. If prices for future delivery are significantly higher or lower than the current price level, the third of these factors can contribute significantly to overall returns.

While the returns to futures-based commodity funds will generally exhibit a strong correlation with spot prices, the movements are often far from perfect. Perhaps the most extreme example is the United States Natural Gas Fund(UNG). In 2009, natural gas prices remained stable, but UNG (which implements a futures-based strategy) lost more than half of its value as a result of consistent contango in futures markets (see What's Wrong With UNG).

Funds utilizing a futures-based approach include UNG, the United States Oil Fund (USO) and PowerShares DB Commodity Fund(DBC).

2b. Futures-Based Commodity ETNs

Among exchange-traded commodity products relying on a futures-based strategy, there are some subtle yet extremely important nuances. A number of commodity funds are actually structured as exchange-traded notes (ETNs) that are linked to futures-based commodity benchmarks.

The UBS E-TRACS CMCI Food Total Return(FUD) is a good example. FUD is linked to the UBS Bloomberg CMCI Food Index, which measures the collateralized returns from a basket of 11 futures contracts from the agricultural and livestock sectors. FUD doesn't actually invest in these contracts directly, but is rather a debt security that pays returns based on the movement of a related benchmark.

Commodity ETNs have both potential advantages and drawbacks. Because they don't actually invest in futures contracts, ETNs will generally exhibit lower tracking error, and the management process may be more cost-efficient. But because ETNs are senior unsecured debt securities, they expose investors to the credit risk of the issuer. In the case of a bankruptcy, there are no underlying assets to be distributed to investors. Most ETN issuers maintain very high credit ratings, but the risk of default should never be completely written off.

Many of the commodity products offered by iPath and UBS are structured as ETNs.


3. Commodity-Intensive Equities

Frustrated with the impact of contango on certain exchange-traded commodity products, some investors have turned to equities of commodity-intensive companies as an alternative means of establishing exposure to natural resource prices. Because the profitability of hard-asset producers is often impacted significantly by the prevailing level of prices for the related commodities, a strong correlation generally exists between these assets.

However, investors should remember that the holdings of these ETFs are not commodities, but stocks, and as such will generally exhibit a higher correlation with equity markets than spot commodity prices (thereby potentially diminishing one of the primary advantages of investing in commodities).

There are a handful of ETFs offering both broad-based exposure to asset producers (e.g., HAP) as well as more targeted exposure to gold miners (GDX, PSAU), agribusiness companies (PAGG, MOO), timber stocks (CUT, WOOD), and steelmakers (SLX, PSTL). A complete list of the ETFs included in the Commodity Producers Equities ETFdb Category is available here.

3b. IndexIQ ARB Global Resources ETF(GRES)

This ETF employs a unique investment strategy to offer exposure to commodity products, and as such is worthy of its own subset of the commodity-intensive equities heading. GRES invests in global companies that operate in commodity-specific market segments, but also includes short exposure to the S&P 500 and MSCI EAFE Index, essentially isolating the return component generated through movements in commodity prices.

At the time of publication, Johnston had no positions in ETFs mentioned.

[Malthus]

What about the pros? 

I want to invest in real estate (and will someday), and think there are a lot of pros.

It's a tangible asset that will never hit zero value.  A company can go bankrupt and the stock becomes worthless.  A company can default on its bonds and the bond becomes worthless.  A mutual fund or investment company can go under, etc.  But real estate will always be worth something.

You can take a hand in increasing it's value.  You are managing your investment.  If I don't like how a stock is doing, there's nothing I can do about it.

You're not at the whim of the market and it's daily fluctuations.

It's an investment that generates a fairly stable revenue stream.

It's a necessity.  Even in a recession people need homes, businesses need facilities, etc. 

And they're not making any more of it.

One downside I should mention is that, if you live in that real estate, there are lots of expenses associated with it that have to be paid all the time - upkeep can be a literal money pit.

[citizen k]

                                                               
Examining ETFs: China Watch

http://www.thestreet.com/video/10701002/examining-etfs-china-watch.html?puc=_etf_html_pla1&cm_ven=EMAIL_etf_html&s=1#71525136001

[Tamas]

Has any of you folks checked out VMware recently? I mean as far as financial figures and such goes.

Because I am trying to find a reason to NOT choose this as my second non-margin stock purchase. Due to my work I am in a good position to see just how virtualization will overwhelm the way IT infrastructures are handled. Yes, a lot of it has already happened but it is just a start.
And I think it is not that dependend on economic growth, I mean, whatever your company is doing, after a certain (not too big size) you will have quite a dependancy on IT and either things go well and you will need more IT infrastructure, or they will go bad in which case you need to cut costs on the existing one and virtualization is the ready-made answer for it. And it looks like VMware is by far the best choice for that.