Commentary: 2011 The Year Ahead

Vacation time is over and the markets have returned to the business of pricing capital and determining through supply and demand what the value of companies are to the 'market'. Various valuation methods can be used to identify a company's 'value' and as market participants work out whether the company is undervalued or overvalued, we will see this 'difference of opinion' reflected in the share prices of these companies.

So what's your point?

As we come into 2011, we continue to be faced with the economic unknown of whether we have truly emerged from the Global Financial Crisis with blue skies ahead, as austerity measures start to bite causing social unrest, asset prices remain deflated stagnating the U.S. property market verses too much money inflating property prices in Asia beyond the reach of home buyers, rising commodity prices fuel inflation and public concern on food security, and with a market that has the ability to easily take us to extreme index highs or lows in an instance. 2011 is fraught with dangers at every corner.

QE2 in the U.S., multiple European sovereign debt issuance's, and money that has been kept on the sidelines by institutional investors is leading to a flood of money into emerging markets, property and other assets, exposing the rest of the globe to the risks faced by these countries if they fail to reposition their economies to be economically sustainable. Remember, we live in a fait money world where money is backed by the legal word of the issuer as a form of exchange that will be honored.

What do you 'value'? If you do not know what you value, then you better find out fast. A flood of water is flowing and you need to know where you are anchored, what you are anchored to and where the high ground is for refuge from these waters.

Firstly, make sure you value the people and relationships around you. Look after yourself mentally, emotionally and physically. You can't fight a battle if you are not fit and generally in a good frame of mind.

Secondly, value what you have. Be content with the car, house and stuff you presently have. Have goals, share it with others and spend up big if you make a lot of money, but this market is going to require you to focus and be on point. Don't let stuff distract you or make you do stupid things.

Thirdly, value and respect your financial boundaries and be financially sound yourself. Use leverage wisely and reduce all forms of debt especially consumer debt and student loans. Put a sound plan in place to reduce debt and work at it. Combine debt to lower affordable rates and take advantage of refinancing clauses whenever you can.

Fourthly, value and practice financial planning. You don't have to go down to the minute detail in your plan or in tracking your performance. I ditched Quicken/MS Money and related software because it took too much time in tracking what really was unnecessary detail for me. I use a simple spreadsheet to keep track of cash balances and broad categories of expenses only, and a simple balance sheet to track net worth. I work towards keeping a diversified portfolio of stocks, bonds, income earning investments and property which I update monthly. Then I have my trading portfolio.

Lastly, don't value money more than it is worth. It is only as good as the word of the government that backs it, and do you really trust the government? :) Ask the poor people of Zimbabwe who are suffering hyperinflation and whose government even had to issue a $1 trillion dollar note in 2008 to keep up but had to finally abandon its currency.

We spend hours evaluating companies, economic data, and trading the markets and 2011 will provide plenty of opportunities to do just that in the days ahead. Today's opportunity is to take stock, check the foundation and the fence line, and if all checks out, to go into battle.

The only easy day was yesterday...

Stock Update: AAPL Where to Now? A Long Term View Part 3

Right. We now come to the daily chart and again we take note of where the support lines were in the medium term and then set line for where we want to watch for short term support which I have defined as $292. We observe that volume has dropped off dramatically in the last 4 trading sessions and the MACD has turned south. There was a shooting star at the $318 level (Mon Oct 18) followed by a plunge down the next day (Tue Oct 19) undoubtedly due to profit taking and since then indecision to the negative side with all the red candles.

To me this says to go short for a while until participants decide what direction they want to go in. This will mean that you need to keep your finger on the trigger ready to close your short position at any time to prevent losses from growing.

Disclaimers
1. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.

Stock Update: AAPL Where to Now? A Long Term View Part 2

In my last post, we started to see that the long term view of AAPL looks bearish and raised the question whether we are due for a fall in AAPL.

With this weekly chart over a 2 year period, I have identified 3 support levels - $191 (long term support), $270 (medium term support #1) and $240 (medium term support #2). Since the end of August, AAPL has moved up nicely in price and in volume. This is a good sign that participants are there to support the price in increasing numbers.

You will however note that the candles are getting a little extended beyond the Bollinger Bands the last 2 weeks and we shall see whether this week ends up strong or weak to turn the MACD down where we may see some downward action, consolidation before resuming the uptrend, or sidewards action like we saw between April - September. Anything is possible.

Should we go short at this time? Take some profits off the table?

Disclaimers
1. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.

Stock Update: AAPL Where to Now? A Long Term View Part 1

What an amazing ride it has been for Apple since my last entry the end of June where we were at around $260 and looking at a pull back which is what we saw happen ~$240 early July and even lower in August to ~$236 and not breaking out beyond $263 until September. During this time, iPads were being released around the world driving up earnings and giving positive momentum to the stock sending it above $300. What is next in store as we head into the end of the year with U.S. mid-term elections taking some of the focus and then onto the holiday season?



It may be a good time to take a breather and look at the bigger picture in terms of a monthly 5 year chart and look at what has been going on.

Firstly let's look at volumes since 2007. Interesting that the monthly volumes have been very light in 2009 and 2010 compared to prior years with the highest number traded in May 2010 of just under 675 million shares. Nevertheless, the stock has climbed higher. This is a comment often heard in the media and the concern here is that fewer investors are chasing the stock higher and is an issue around a lower diversification the investor base which may lead to an increase in risk for those participating as there are fewer opinions out there than there were before. However, it could be that we are getting a better quality of participants and fewer 'speculators' in the markets by way of hedge and/or quant funds which exited the markets due to the financial crisis. What we therefore are seeing in the lower volumes are more "normal" trading volumes which we say pre-2005.

Still on volume, what we are also seeing is a bearish divergence with volume falling while prices rise. Is it possible that AAPL is ready for a fall?

Disclaimers
1. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.

Stock Update: AAPL

AAPL is about to pull back. The overall market is needing a breather and we are about to get it. AAPL has held on well and the two bearish engulfing patters is an indicator that the bears are getting stronger. The MACD is topping out and heading down. We'll get a dip here to under $260, possibly to $250 or $240. I would be buying at these levels.

Disclosure
I am LONG AAPL Puts.

Stock Update: AAPL. Is Apple Having Butterflies?

While reading an article on Butterfly patterns on forex today, I noticed the bearish butterfly pattern under discussion looked vaguely similar to how AAPL was looking especially after the run up over the past two weeks on positive news about iPad sales topping 2 million in the two months following its release and with the announcement of iPhone 4. All "ka-ching" type of news to me justifying a move up and with second quarter coming to a close, add in window dressing to your list of reasons for AAPL to trend higher. Who would not want to tell their investors that they are holding great company like AAPL?

This leads me to one of the primary reasons why I take this bearish pattern seriously, because more than likely after June 30 will we see some profit taking and a pull back in the price.

Looking at the chart with another pattern - Cup With Handle, we could argue that profit taking will lead to the formation of the Handle at which point it will attract buyers to come in again and pushing AAPL above $270 and break out.



With the pre-markets reacting positively to China's announcement on the revaluation of its currency, we are seeing AAPL push higher along with it. I was Long AAPL puts already and will be watching this trade for the pull back or for the bulls to continue at which point I will cut bait.

References
The Butterfly Pattern
Stock Charts - Cup With Handle

Disclaimers
1. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.



Disclosure: Long AAPL Puts

Commentary: Best Money - Building A Quality Dividend Portfolio

There comes a time when you realize that Fast Money is not always the Best Money especially if you survived the carnage of 2008/2009. With all the volatility presently in the markets - 200 points up, 200 points down on the DJIA and then 200 points up again - when do you buy and when do you sell? For a trader it is challenging enough, but for an investor what can you do?

I asked myself these questions:
1. Which companies survived relatively well in the last 3 years with good profit margins, reasonable levels of debt, ROA, ROE, and pay dividends?
2. What volatility did these companies experience in their share price over the last 52 weeks?
3. What sort of returns could I potentially gain holding these companies medium to long term?

It takes a bit of work and key punching to get all the data you need using the stock screeners from Yahoo and CNBC as well as reading articles on dividends from Fool.com and Investors Place, and after much effort I came up with these Top 5 companies that I am considering or have included in my income earning dividend portfolio using the following screening criteria:
- Mid to Large cap;
- Dividend yield above 3%;
- Profit margin above 10%;
- ROA above 10%;
- ROE above 20% and
- Total Debt to Total Capital ratio below 50% (Total Capital = Total LT Debt + Shareholders Equity).

Note: While I used this criteria to screen, my final selection also considered companies mentioned in the articles and elements for diversification.

1. Johnson & Johnson (JNJ) gives a 3.65% dividend yield paying $2.16 per share annually and is well diversified into consumer heath care products (remember the baby powder?), medical devices and pharmaceuticals.

Johnson & Johnson has profit margins over 20% and low debt ratio under 20% meaning that they are able to generate good cash flows, not having to devote a lot to paying interest expense because they are not highly leveraged which in turn reduces their risk to bankruptcy due to liquidity concerns.

Their share price is 12% and 8% from the 52-week high and low respectively and if you take a 12 month period, assume that it reaches either of these extremes again and include dividends in your calculation, the impact to your portfolio will be a 15.5% total gain (capital gain + dividend) or 4.2% total loss (capital loss + dividend). Converting this into a ratio for comparison purposes you get 3.72.

2. Coca-cola (KO) is everyones favorite dividend earning company yielding 3.36%. Again it has nice profit margins and a good use of assets and capital with responsible use of debt. Similar to Johnson & Johnson, Coca-cola's share price is between the 52-week high 14% and low 10%. Including dividends, a move to the 52-week extremes will provide a 16.9% gain or 6.5% loss, a ratio of 2.59.

3. Southern Copper Corp. (SCCO) yields a whopping 5.93% yield. Nice margins and use of debt. Southern is not as large as Johnson & Johnson or Coca-cola, but are in a position to benefit from the growth in China with its demand for copper. It is more volatile as you look at the extremes it has hit over the past 52-weeks with a high 22% away and a low 39% away. This risk is reflected in the returns and the ratio 0.83 based on potential gains of 27.7% and loss of 33.3%.

4. Altria Group (MO) is not a 'people' friendly company dealing in 'smokes', but it pays a good dividend of $1.40 per share yielding 7%. It is highly leveraged at 74% total debt/total capital, but is able to service the debt through decent margins of around 20%. Potential 52-week gains here are 16.6% and losses 12.5%. Ratio is 1.33. If you want alternatives, try ExxonMobil (XOM) or American Eagle Outfitters (AEO).

5. Abbott Labs (ABT) is a 'people' friendly company, working to make people's health better, yields 3.62%. As a pharmaceutical company, it needs to make decent margins 16% to fund further R&D which it does and also has to make use of more debt as well 45%. Overall, it has to move 17% to get to its 52-week high or 11% low for a potential gain 20.4% or loss 7.0% with a ratio of 2.90.

Table: Top 5 Quality Dividend Paying Companies


Use this article as a starting point to investigate these companies further before making any decisions which has been my approach. The criteria I use has helped me to make an informed decision and serve as reference points. Share prices or the company's performance may or may not reach the same levels as in the past.


Disclaimers
1. I hold shares in JNJ, MO and ABT and none in the other stocks mentioned as of Jun 18, 2010.
2. Tax considerations have not been included in this analysis. You should consult with your tax professional or financial advisor before investing.
3. This article is not intended to provide investment advice and is an expression of my own opinion. Readers act upon this information at their own risk.

References
8 Dividend Stocks Boosting Yields
5 Dividend Monsters To Buy After the Crash
The Best Dividend Stock. Period.


Disclosure: JNJ, MO, ABT

Stock Update: GS

R2 - $184
R1 - $176
S1 - $166
S2 - $147
Big bad Goldman Sachs. The investment bank who has a ducks back and has somehow managed to avoid getting implicated in anything despite all the rumors around their involvement in helping Greece to mask its deficit, its derivative activities with AIG, using its insider knowledge from transactions it was handling with clients to take opposite positions on those clients to name a few.

The fact is that they are alive and kicking. At the end of January this year, their stock hit a low of $147. Friday Mar 12 it closed at just under $175. The first hurdle point is $176 which it did touch briefly on Friday, and if GS can maintain its momentum above that, I'd like to believe it will be a short walk to $184 beyond which we can possibly see $190 again.

Expect a pull back in the next couple of weeks. Take profit if you are in and wait for opportunities if you are not.

Source:E*Trade

Stock Update: AAPL

What is not to love about Apple Inc these days? $22million bonus for Tim Cook? Sure! Go ahead!

As we get closer to the launch of the iPad, the talking heads like Cramer have been pushing up the stock. After wavering in early March around $210, we saw a gap up on Fri Mar 5 to close at $218.95. A week later we are at $226.60. All that I can say is if you are long AAPL take profits. Don't worry if you have missed this move to get in as there will be more opportunities to come.

For now, go short or buy AAPL puts. Be ready as always to close out your positions if it goes against you.

Source:E*Trade

Stock Update: DOW

In my Feb 20 entry, I questioned whether Dow could stay at $29. It managed to do so for a few days before breaking down back to $28. It made a higher low on Feb 25 ($28.32 vs $26.18 on Feb 8) and then a higher high Mar 5 ($30 vs $29.54 on Feb 18). Next we have another higher low Mar 11 ($29.40 vs $28.32 on Feb 25) and we will want to see a close above $30 and then reach $31.40 for a convincing uptrend. To seal the deal however, Dow will have to get to $34. This is not entirely impossible, but as you can see, Dow is very much tied to the gyrations of the DJIA.

If the DJIA can get above 10,800 we will see Dow move towards $34.

Source:E*Trade

Market Update : DJIA & NASDAQ

Dow Jones Industrial Average DJIA
R - 10,800
S - 10,270
The mighty Dow is losing some steam. The early part of the week didn't see much happen and the last two sessions while getting a boost finished weak. Unless we see some good volumes these next two weeks to the end of the quarter, we may finish lower than the Jan 20, 2010 high. This is not a major issue as long as DJIA finishes higher than the Dec 31, 2009 close of around 10,600 where by the fund managers can at least say that quarter on quarter they are above last quarters close even while marginal.

NASDAQ Composite Index COMP
R - 2,450
S1 - 2,340
S2 - 2,120
We have new resistance at 2,450. The last time the NASDAQ was there was mid-Aug 2008 before the collapse of the markets. Expect some pull back in NASDAQ listed stocks, so take profits over the next couple of weeks or at least protect the gains you have for when the market does pull back.

Market Update : DJIA & NASDAQ

Dow Jones Industrial Average DJIA
R - 10,800
S - 10,270

A very strong finish to the week! The bulls are on a roll! The question is whether there is enough money out there to really push volume forward and keep moving the markets up. There appears to be some stability forming in the U.S. economy, but the big issues still remain - jobs and housing loans. Unless people feel more secure about their jobs, they will not buy consumer goods. Neither will they buy big ticket items like cars and white goods let alone homes. Interest rates are low, but for how long? Consumers are more likely to pay down as much debt as they can with any additional money. Further the stimulus money is going to have to come to an end as will low interest rates. What will need to be kept in place is retaining people in their homes and reduce the need for foreclosures. If you kick people out of their homes, you take away a significant psychological form of security. Buy people more time responsibly to keep their homes until they get a job or gain enough equity back in their homes to 'comfort' the banks and support asset values will do more to get the economy back on track.

Next is jobs. If you have a job, are able to keep your costs down, reduce debt, and stay healthy, you will survive. If you at least had some saving, you can survive for a while, but you gotta get cash in the door eventually.


NASDAQ Composite Index COMP
R - 2,340
S - 2,120

Technology is king! Some big moves this week and we are getting closer to Resistance at 2,340. Look for topping out in the coming weeks and a pull back. Take profits as you go through the coming week.