Taking advantage of emotions

I made a previous post about how oil stocks were undervalued because of BP's oil disaster, but there is another stock that is substantially undervalued because of an emotional agenda by the public against it. If I told you that there was a stock on the market with consistently high earnings year after year, had a EPS of $24/share, and P/E multiple of 5.5x what would you do? The obvious answer is to buy it. The stock just described is Goldman Sachs. The enemy of all American taxpayers, the SEC, and every other investment bank on the street. Although the company has had its fare share of lawsuits and bad press, the negative public perception of this company has not changed its earnings. In the last quarter alone Goldman traders made money every single day during that time period, something almost unimagineable. There is some risk to buying Goldman stock, but after seeing the stock's recent slide over the past three months the stock is seriously underpriced. The time to but this profiting giant is now because these consistent profits will not go unnoticed for much longer.

Obama our savior!...wait not so fast

This past week has seen the American government make serious actions towards improving the financial system in te United States by proposing reforms to curb risky proprietary trading, to increase capital requirements, and finally to limit the investment in and support of hedge funds and private equity. I will focus particularly on the situation regarding the new limits to hedge fund and private equity investment. The new Bill concerning hedge fund investment, coined the Volcker Rule, limits banks participation in private equity and hedge funds to 3%, which seems like a huge victory for the Obama administration. Finally the banks cannot risk huge amounts of money! On first inspection this rule seems great, but looking at the finer details of the Rule, many banks will not be affected by this change for a decade. According to the Bill, banks would have two years to comply to withdraw from these types of investments, with potential for a three year extension further to those original two years. After this five year period banks could seek another five years from the American government for illiquid assets like real estate and other less frequently traded investments. So before everyone gets excited about the government's ability to lower the risk of bank investments look at some of the finer details of the Bill. Maybe there could be penalties for not dumping these assets by a certain time? Just a thought.

RIM: the end of an era...not quite

RIM, the maker of the imfamous Blackberry, has been under a lot of scrutiny lately for falling behind other phone makers like Google (Android) and Apple (iPhone). Personally, I think investors are being a little tough on RIM. With a P/E ratio of 12x, much below its fellow industry rivals, RIM is the stock set to appreciate. People are far too caught up in the hype of advertising from tech giants like Google and Apple, which have inflated P/E multiples of over 20x earnings. Although there is high competition in the phone software business, I think many people are forgetting the innovation that RIM is capable of and their stock has been hit far harder than it should have been in the past couple months. RIM's launch of its new model phone will put RIM back on the right track, and make of its critics look stupid. Be prepared for a RIM comeback by the end of the year.

Robin Hood is back

With the G20 summit meeting happening this week in Toronto it seems like an appropriate time to talk about the proposal of a bank tax by major countries around the world. Much of the public perceives the bank tax as a great way to penalize banks and ensure that tax payers are not liable for the wrong doings of big banks again. What many people do not realize is that the bank tax has many drawbacks that country's should consider before immediately supporting the idea of constricting the banking industry. The fact that a insurance fund for potential bank problems is being set up might actually promote riskier banking behaviour because banks know they can take excessive risks and still have a fall back plan. Many banks might simply see that if you pay the tax, you are entitled to future bailouts. The bank tax also does nothing to fix the "too big to fail" metality, as smaller financial institutions will face huge taxes if they become bigger, resulting in fewer competitors for the Goldman Sachs, Morgan Stanleys, and Bank of Americas of the world. The bank tax is ultimately a punishment of financial institutions, but really the problem came more from a lack of regulation by government, which is supposed to be the corrective mechanism in the economy to smooth out potential problems. Lastly, banks do a particularly good job of directing costs away from them to the consumer, so be ready for higher banking costs if you are pushing for a bank tax. Do not jump to conclusions to quickly about a global bank tax without properly understanding its implications. This time robbing the rich to feed the poor does not work so well after all.

China in the driver's seat

As the world's markets began to trade again this week, sentiments of an improving economy may be coming to fruition on news that China has stopped pegging its currency to protect the country's large exporting business from price volatility. News of China's move echoed in today's morning results in the world markets, as nearly all markets have seen a rise on growing confidence in the equities from China's switch to a floating currency. Although the switch does not erase the European sovereign debt problem or the growing deficits in the U.S., China is proving how its economy can be the motor of economic recovery that the world so desparately needs. One of the best signs for growing demand and confidence for investors is to see U.S. treasuries fall in price (as they did today) as it shows people are not just moving to the safety of government bonds. If China can continue to generate demand the world might soon be able to smile again.

Chinese Bubble Bath

The time has come for yet another housing collapse of a leading world economy. Just like Japan and the U.S., China is ready to have a real estate collapse of huge proportions. Although there is large underlying demand in the country, housing prices are racing to new heights every day, creating a bubble that not even Chinese demand can keep up with. Many people are saying that the rising prices in China are from urbanization and rising incomes, but with interest rates so low housing prices have more than quadrupled in the last five years! Second-time home buyers now have to put down a minimum down payment of 40%, an inconcievable number in many countries. This begs the question that many investors in the U.S. said during their own housing crisis: when should I short the Chinese housing market? The answer is not clear, but it is easy to see that housing prices likely will not drop until interest rates in China begin to rise or demand begins to fall. There is no specific time frame for such activity, but keep your eye on housing prices in China because there is massive potential for this looming crash.

If only the world's economy could be like Apple

Apple, led by CEO Steve Jobs, is on the verge of releasing the iPhone 4 just weeks after its ingenious iPad debut just months before. What makes Apple so amazing is how the company manages to be on the cutting edge of technology year after year after year. The company has annually produced some of the most innovatives products in the world and buyers globally follow Apple products religiously, as carriers of the new iPhone just recently took 600000 preorders. What makes Apple more impressive is that they have done this without any debt! Apple effectively has a debt to equity ratio of 0. Hey Europe, jealous yet? Many people should look to Apple to see how they have enjoyed success by growing at a rate only from the reinvestment of their own earnings. Apple has a great business model that minimizes risk by having little debt and having some of the best innovations of any company in the world. Apple is even more attractive now than it was to Adam.

BP: Oil's last stand?...Not quite

BP has caused everyone in the world to be nervous about oil companies for many years to come. Rightfully so, BP's stock has lost over 30% of its market capitalization and their debt has been downgraded in just weeks, as everybody wants to disassociate themselves from BP's ravaging of the Gulf of Mexico. While BP has been in free fall, BP's problems have caused other oil companies' stock to fall on less confidence in the oil industry. Companies like Exxon and Shell have taken a hit most likely because of a sell off of the oil industry in general after BP's catastrophe. What people do not realize is oil is still the worldest most demanded commidity and until a reliable alternative is found it will be for years to come. As well, the oil giants of the world are earnings machines with each company generating billions in profits each year. Therefore, now is the time to buy oil companies cheaper...with the obvious exception of BP, mother nature's worst enemy.

The Great White North: Not all banks are bad

In the past three years it would be tough to tell anyone to buy a bank stock given the turmoil in U.S. mortgages, European sovereign debt, and various different scandals. If you look to Canada it is a different story. Canadian banks not only weathered the financial storm, but have better capital structures to counteract the balance sheet problems many other banks are facing and most Canadian banks are trading a reasonable P/E ratio from 12-15x. When the global banking industry finally turns itself around, Canadian banks will be a safe bet for capital gains. The best part about Canadian banks for investors is their highly attractive dividend yield. Currently the big 6 Canadian banks are all yielding 3.5-5%, which is great for any buy and hold investor. The continually good earnings and stability of the Canadian banking sector make these picks great for a conservative investor worried about the recent global financial turmoil. Canada may be cold in the winter, but its banks stocks are sure warm to investors.

Austalia: More than just Kangaroos

Many people have not paid enough attention to Australia, but there time to turn the corner economically is now. Along with Canada, Australia is an extremely resource rich country that is located just below China, the world's largest growing economy. As China continues to grow it will demand huge amounts of commodities that Australia will be ready to provide. Within the last year the Australian stock market, driven by commodities, has increased 12.5%, giving evidence to Autralia becoming a powerful economy. Now might be the time to invest in Australia, not just by planning a vacation.

The End of Mutual Funds

For the past 50 years many different types of investors who do not have much investing experience or just want to gain diversification in their portfolios have turned to choosing mutual funds. Although mutual funds are not a bad place to put your money, there are a few misconceptions that should be broken surrounding mutual funds. Many investors turn to mutual funds because of an experienced asset manager leading a fund or because they commonly advertise that they "will beat the market". If you look into these claims very seldom do even the best asset managers beat the market and over the long term, 10 years or more, index and stock averages do better than mutual funds. In addition to false advertising that mutual funds can actually "beat the market", they have high annual costs of up to 1-2% of assets held. So even before your money is working for you, the mutual fund manager must make up 1-2% gains just to be even with the market. So what does this add up to? The much better option to mutual funds are ETFs or exchange traded funds. Although they are not a very exciting investment, investing in an index that have historically outperformed mutual funds, and costs only 0.25-0.5% a year, ETFs are by far the more sounds choice. Be a smart investor, choose ETFs.