Friday, June 19, 2009

The 5 Best Financial Stocks Of 2009

By Billy Fisher

2008 is a year that the financial service sector would rather forget. The Financial Select Sector SPDR (NYSE: XLF) crumbled 55.2% over the course of the year. So far in 2009, the sector has begun to regain its footing. After a rocky start, financials are now approaching break-even. Year-to-date, here are the top five financial stocks with a market cap of at least $10 billion.

Shunning a Bailout

The top performer in this class of stocks has been Barclays (NYSE: BCS) with a year-to-date return of 80%. In an effort to shore up its balance sheet, the company recently agreed to sell its Barclays Global Investors (BGI) business unit to BlackRock (NYSE: BLK) for $13.5 billion. BGI includes Barclays' much sought after iShares asset management business. Earlier in the year, Barclays exhibited a sign of strength when it declined to receive government bailout funds in the wake of the global credit crunch. The bank was able to overcome steep write-offs during its Q1 thanks to incremental revenue that was generated as the result of its purchase of Lehman Brothers' U.S. assets.

Repaying Uncle Sam

The second-best performing financial stock with a market cap above $10 billion as we approach the midway point of 2009 is Morgan Stanley (NYSE: MS). After losing two-thirds of its market value in 2008, the bank holding company has been able to steady its ship in 2009. Shares of Morgan Stanley are up 75% so far this year. The horizon looks even more promising for shareholders as the company was recently approved to repay its TARP money which has come to be viewed as a scarlet letter in the industry. Another bank that was also approved to repay its bailout money along with Morgan Stanley is Goldman Sachs (NYSE: GS). Common shares of Goldman Sachs have risen 70% year-to-date. In mid-April, the firm checked in with a strong Q1 and was able to take advantage of its rising stock price by making a $5 billion common equity offering.

Hitting Their Stride

Denmark-based Danske Bank (OTC: DNSKY.PK) turned in a mixed bag of results in its most recent quarter. The firm reported record Q1 income as it benefitted from strong banking activities. The gains were partially offset by a large amount of loan impairment charges. Nevertheless, the company has seen its stock appreciate 67% so far this year, making it the fourth-best performing stock in this group.

Switching focus to the other side of the pond, CME Group (NYSE: CME) has surged 58% up the charts in 2009. The futures and options products company is bouncing back from a tough Q1 in which pro forma diluted EPS was down 30% on a 21% drop in total revenue when compared to its year-ago quarter. On the plus side, the company has been able to maintain relative strong margins while operating in a brutal macro environment.

The Bottom Line

Coming off of a horrendous 2008, the financial sector has been starting to work its way back towards a state of normality. Some of last year's biggest losers have been among the biggest winners in the space as we approach half-time. We will revisit this race at the end of 2009 to see which companies were able to pull through and which companies ultimately could not keep pace.

Tuesday, June 9, 2009

Top 4 Things Successful Forex Traders Do

by Selwyn Gishen

Trading in the financial markets is surrounded by a certain amount of mystique because there is no
single formula for trading successfully. Think of the markets as being like the ocean and the trader as a
surfer. Surfing requires talent, balance, patience, proper equipment and astute discrimination. Would
you go into the water if there were sharks swimming all around you or dangerous rip tides? Hopefully
not. (Benjamin Graham pioneered cutting edge concepts that propelled other top investors to fame.

The attitude to trading in the markets is no different to that required for surfing. By blending good
analysis with effective implementation, your success rate will improve dramatically and, like many skill
sets, good trading comes from a combination of talent and hard work. Here are the four legs of the stool
that you can build into a strategy to serve you well in all markets.

Leg No.1 - Approach
Before you start to trade, recognize the value of proper preparation. The first step is to align your
personal goals and temperament with the instruments and markets that you can comfortably relate to.
For example, if you know something about retailing, then look to trade retail stocks rather than oil
futures, about which you may know nothing. Begin by assessing the following three components.

Time Frame
The time frame indicates the type of trading that is appropriate for your temperament. Trading off of a
five-minute chart suggests that you are more comfortable being in a position without the exposure to
overnight risk. On the other hand, choosing weekly charts indicates a comfort with overnight risk and a
willingness to see some days go contrary to your position.

In addition, decide if you have the willingness and time to sit in front of a screen all day or if you would
prefer to do your research quietly over the weekend and then make a trading decision for the coming
week based on your analysis. Remember that the opportunity to make substantial money in the markets
requires time. Short-term scalping, by definition, means small profits or losses. In this case you will have
to trade more frequently.

MethodologyOnce you choose a time frame, find a consistent methodology. For example, some traders like to buy
support and sell resistance. Others prefer buying or selling breakouts. Yet others like to trade using
indicators such as MACD, crossovers etc.

Once you choose a system or methodology, test it to see if it works on a consistent basis and provides
you with an edge. If your system is reliable more than 50% of the time, you will have an edge, even if it's
a small one. If you backtest your system and discover that had you traded every time you were given a
signal and your profits were more than your losses, chances are very good that you have a winning
strategy. Test a few strategies and when you find one that delivers a consistently positive outcome,
stay with it and test it with a variety of instruments and various time frames.

Market (Instrument)
You will find that certain instruments trade much more orderly than others. Erratic trading instruments
make it difficult to produce a winning system. Therefore, it is necessary to test your system on multiple
instruments to determine that your system's "personality" matches with the instrument being traded. For
example, if you were trading the USD/JPY currency pair in the forex market, you may find that Fibonacci
support and resistance levels are more reliable in this instrument than in some others. You should also
test multiple time frames to find those that match your trading system best. (Uncover the history and
logic behind this popular trading tool in Taking The Magic Out Of Fibonacci Numbers, and Advanced
Fibonacci Applications.)

Leg No.2 - Attitude
Attitude in trading means ensuring that you develop your mindset to reflect the following four

Once you know what to expect from your system, then have the patience to wait for the price to reach
the levels that your system indicates for either the point of entry or exit. If your system indicates an
entry at a certain level but the market never reaches it, then move on to the next opportunity. There
will always be another trade. In other words, don't chase the bus after it has left the terminal; wait for the
next bus.

Discipline is the ability to be patient – to sit on your hands until your system triggers an action point.
Sometimes the price action won't reach your anticipated price point. At this time you must have the
discipline to believe in your system and not to second-guess it. Discipline is also the ability to pull the
trigger when your system indicates to do so. This is especially true for stop losses.

Objectivity or "emotional detachment" also depends on the reliability of your system or methodology. If
you have a system that provides entry and exit levels that you know have a high reliability factor, then
you don’t need to become emotional or allow yourself to be influenced by the opinion of pundits who
are watching their levels and not yours. Your system should be reliable enough so that you can be
confident in acting on its signals. (Find out how your mindset can play a larger role in your success than
market influences Trading Psychology And Discipline.)

Realistic Expectations
Even though the market can sometimes make a much bigger move than you anticipate, being realistic
means that you cannot expect to invest $250 in your trading account and expect to make $1,000 each
trade. Short-term time frames provide less profit opportunities than longer term, but the risk with
longer-term time frames is higher. It's a question of risk versus reward.

Leg No.3 - Discrimination
Different instruments trade differently depending on who the major players are and why they are
trading that particular instrument. Hedge funds are motivated differently than mutual funds. Large banks
that are trading the spot currency market in specific currencies usually have a different objective than
currency traders buying or selling futures contracts. If you can determine what motivates the large
players then you can often piggy-back them and profit accordingly.

Pick a few currencies, stocks or commodities and chart them all in a variety of time frames. Then apply
your particular methodology to all of them and see which time frame and which instrument is most
responsive to your system. This is how you discover a "personality" match for your system. Repeat this
exercise regularly to adapt to changing market conditions.

Leg No.4 - Management (Implementation)
Since there is no such thing as only profitable trades, no system will trigger a 100% sure thing. Even a
profitable system, say with a 65% profit to loss ratio, still has 35% losing trades. Therefore, the art of
profitability is in the management and execution of the trade. (Learn more in The Myth Of Profit/Loss

Risk Control
In the end, successful trading is all about risk control. Take losses quickly and often if necessary. Try to
get your trade in the correct direction right out of the gate. If it backs off, cut out and try again. Often it
is on the second or third attempt that your trade will move immediately in the right direction. This
practice requires patience and discipline but when you get the direction right you can trail your stops
and almost always be profitable at best, or break even at worst.

The Bottom Line
There are as many nuanced methods of trading as there are traders. There is no right or wrong way to
trade. There is only a profit-making trade or a loss-making trade. Warren Buffet says there are two rules in
trading: Rule 1: Never lose money. Rule 2: Remember Rule 1. Stick a note on your computer that will
remind you to take small losses often and quickly - don't wait for the big losses. (Start your own
investing adventure with the help of some simple guidelines: Tailoring Your Investment Plan.)

Good investing, Kingsley.

Tuesday, June 2, 2009

7 Types Of People Who Fail In Finance

by Marv Dumon

To earn a career (or even a job offer) in finance, you needed to have sufficiently impressed your interviewers. The finance setting in the real world is competitive. Occasionally, HR will let in finance professionals with uber personalities. They have spark, personality and commendable accomplishments. Unfortunately, as their peer group begins to work with them, these peers come to a realization that there are certain dysfunctional behaviors that serve as roadblocks to teamwork, realizing team objectives and smooth execution. Here are seven personality types that you find that injects poison into finance's unique corporate culture.

1. The Pontificator

Pontificators tend to lurk around and blow their own horn at inopportune times, usually when you have a report due in two hours, right before the meeting starts or when you are rushing to the bathroom. Pontificators are focused on themselves, and spend less time thinking about organization or team goals. They also tend to tear down colleagues with biting remarks, and suck up to the boss, but when they meet someone with significantly higher standardized test scores, or well-regarded position within the firm, they worship that person.

Why they fail:

Pontificators waste people's time and irritate everyone. They sap the group's energy through de-motivating and aggravating remarks, and teamwork suffers as a result. A well-functioning organization can boot these people out after input from members of the team. Unfortunately, pontificators can be high performers and some managers are reluctant to let them go.

2. The Selfish Jerk

"Selfish jerks" can occasionally profess to care about organization and team goals – if this opportunistically helps with their image within the company. These people are really only aligned with their personal desires. When the company experiences some kind of adversity – when it becomes critical for each worker to rise to the occasion - the selfish jerk takes off for a new organization in a heartbeat or works at protecting his or her job. The selfish jerk is typically well-versed in financial subjects and industry benchmarks, is obsessed with researching industry statistics on salary and bonus, and runs a covert operation trying to figure out what co-workers are making in terms of salary and bonus.

Why they fail:

These types of personalities repel managers. Finance professionals who show promise as potential leaders possess managerial and leadership characteristics. The underpinning of leadership is service in the interest of the company and the team. Selfish behaviors lead to a nasty corporate culture that nobody wants, that includes "one-upmanship," territorialism, back stabbing, sabotage and lack of teamwork.

3. The Nerd/Doormat

The nerd/doormats have succeeded in a plethora of academic subjects in high school and college. They are widely read, but unfortunately, doormats have completely ignored their communication skills and have difficulty conveying even simple issues in a succinct and understandable manner. Because doormats are usually bright individuals, they can reject receiving training or courses that will help improve communication or management skills.

Why they fail:

The doormat's desire to be left alone – and avoid co-workers when the need for teamwork arises – produces costly miscommunication and disconnects. Often, if there is conflict within the group, the doormat cannot muster the necessary backbone to stand up for what is right. They are passed over for promotions for more assertive colleagues.

4. The Procrastinator

Procrastinators have succeeded in school and in prior work experiences. This track record of success leads them to believe that their successes were more of a function of individual personality rather than hard work, insights and sheer execution. The procrastinator has become complacent, and waits for quasi-emergencies before stepping up.

Why they fail:

Being late with monthly, quarterly and annual financial reports is unacceptable in finance. Alternatively, when procrastinators turn work in on time, the quality suffers significantly. In finance, bottlenecks produce missed deadlines or poor work product. In an effort to make the team more efficient and effective, managers fire the procrastinator. (If you're interested in improving your time management skills, take a look at Time Management Tips For Financial Professionals.)

5. The Excel Lightweight

The Excel lightweight excelled in college accounting and finance classes. The lightweight's prowess in understanding the theoretical concepts, however, is no longer sufficient in the real world. In a finance setting, practical skills such as advanced Excel knowledge are a driver for garnering increased responsibilities, higher productivity and spreadsheet formula accuracy. How can you succeed in finance without excelling in its major form of communication, spreadsheets? The Excel lightweight doesn't understand much about keyboard shortcuts, macros, advanced formulas and add-ins.

Why they fail:

The Excel lightweight causes blow ups from time to time in the form of inaccurate Excel numbers and formulas. Those with little or no prior real world experience think that their superior knowledge of finance theory translates into practical application on the job. The Excel lightweight can cause tremendous amounts of re-work as well as investigation of the root cause of spreadsheet or database problems, especially with large projects. They can also torpedo careers. Embarrassment and anger run amok and are directed towards the Excel lightweight's managers by higher-up executives or clients.

6. The Error-Prone Dummy

The error-prone dummy is typically a junior analyst or junior associate that had connections and got into the firm through the back door. He or she went to the same college as the interviewer, or has a dad who is an investor in the company. You won't find senior people that are error-prone dummies because they've already been ushered out, even with their connections. Accuracy, dependability and reliability are critical success factors in finance. Unfortunately, the error-prone dummy spends time daydreaming about prospective nighttime activities or is more interested in college football scores than work. His or her work product suffers, and the team is stuck wasting time doing re-work or researching what went wrong.

Why they fail:

They get fired because doing so is an effective cost-saving correction action. Error-prone dummies are not able to catch redundant adjustments, incorrect industry assumptions, overly optimistic forecasts and missed calculations. If finance is viewed as a game of football, then the error-prone dummy is equivalent to a player who never catches a pass or fumbles the ball when he or she does catch it.

7. The Apathetic Cyborg

Apathetic cyborgs do not care; they will work only as much as needed to prevent being fired - nothing more. In a setting where people are rushing to meet deadlines, the apathetic cyborg never displays passion. Don't bother telling him or her anything of importance, as it's going out the other ear.

Why they fail:

The apathetic cyborg is perpetually uninformed. It doesn't matter if the CFO repeatedly blasts emails about the importance of complying with Sarbanes-Oxley, or that 12% is the new cost of equity for the company. The apathetic cyborg risks non-compliance with critical regulatory statutes, or provides field operators with the wrong cost of equity percentages to use to evaluate new projects. Because the apathetic cyborg is out of the loop, pretty soon he or she be out of the company.

Parting Thoughts

If you want to succeed in finance and within your organization, constantly gather feedback from your peers and managers. There are unique issues and objectives that are critical within finance: teamwork, meeting deadlines on reports, alignment with organizational objectives, excel prowess and clear understanding of initiatives (Sarbanes-Oxley compliance). If you know where you stand, you will be in a position to take concrete action to improve certain areas. Finance is a competitive field and there are not that many chances given to those who are on the radar for getting the boot.

Monday, June 1, 2009

The Biofuels Debate Heats Up

by Zoe Van Schyndel,CFA

Concern over pollution, air quality and the availability of gasoline has elevated biofuels as a key solution to environmental and energy problems. However, a closer look at the issue reveals that these fuels are unlikely to be a magic potion for energy needs. There are a host of problems associated with biofuel production ranging from water, air and land pollution to the distortion of agricultural commodity prices and the destruction of sensitive ecosystems. In addition, these fuels make up a very small percentage of the energy marketplace, which would require difficult and expensive measures to change. In this article, we'll take a look at biofuels, examine their benefits and drawbacks and examine what these new energy products might mean for the environment and for investors.

What are biofuels?
Biofuels originate from some type of biomass, or biological matter that can be used for fuel. The two most common types of biofuels are bioethanol and biodiesel. Bioethanol is created by fermenting sugar or starch; corn and sugar are most often used. Biodiesel, on the other hand, is made by combining alcohol, usually methanol, with vegetable oil, such as that found in soybeans, palm oil, animal fat or recycled cooking grease. Once biomass is converted into liquid fuel, it can be used for a variety of energy needs. Ethanol and biodiesel are often blended with gasoline and diesel as additives to reduce vehicle emissions or may be used in their pure forms as renewable alternative fuels.

Corn Crazy
In corn-belt states like Illinois, ethanol additives appear in close to 50% of the gas sold in the state, according to the Illinois Corn Growers Association. Ethanol is a home-grown fuel, but it is also an attractive additive for several other reasons. Adding ethanol to gasoline reduces the amount of hydrocarbons and carbon monoxide in vehicle exhaust, and in its pure form, ethanol has a very high octane rating, which generally means it will provide more power.

However, although ethanol is considered a cleaner burning fuel with less carbon monoxide and other toxic emissions, the troubling thing about using corn for energy is that the fossil fuel energy used to create ethanol is very high. According to a 2002 report by the U.S. Department of Agriculture, ethanol yields only 34% more energy than is used in its production; however, other studies, such as one by David Pimentel and Tad W. Patzek published in Natural Resources Research in 2005, suggest that corn and other ethanol crops require more fossil fuel energy that the fuel they produce. In addition, corn production also requires herbicides and fertilizers, which can contribute to soil and groundwater pollution.

Despite these issues, the U.S. has vastly expanded the amount of acreages devoted to corn, a move that has been driven in part by subsidies and tariffs that restrict imports. According to a 2004 report by the California Energy Commission, the U.S. government has also maintained national tax incentives to encourage ethanol production since 1978.

The Sweet and Sour of Sugar
Brazil is the current poster child for biofuels usage. Unlike the U.S.'s dependence on corn, Brazil relies on sugarcane as its primary ethanol feedstock. After OPEC crippled the Brazilian economy with its oil embargo in the 1970s, Brazil's government made a concerted effort to wean itself from oil. After years of heavy subsidies and tax incentives, by 2005, 73% (according to a January 2006 article in Fortune magazine) of cars sold in Brazil came with "flex fuel" engines, which are capable of running on any mixture of alcohol or gasoline.

Sugarcane has also proved more efficient than corn; sugarcane provides 570 - 700 gallons of ethanol per acre, while corn yields 330 - 420 gallons (Nature, December 2006).

Sugarcane does have its negative side as well, in both human and ecological terms. Most Brazilian cane is cut by hand, which can be a dirty and deadly business for workers in the heat as some sugarcane growers host terrible working conditions. In addition, the cane fields are often burned before harvesting to make it easier to harvest and to flush out pests like snakes. Unfortunately, this burning process contributes to the release of green house gases. Furthermore, each additional acre allocated to sugarcane means that natural vegetation is displaced somewhere to make the crop land available, further exacerbating the negative impact of this fuel.

Palm Oil
Palm oil is relatively inexpensive to produce and that can make it attractive as a feedstock for producing biodiesel. Biodiesel is biodegradable and nontoxic, and can be used alone or blended with petroleum diesel. In addition to being used as motor vehicle fuel, biodiesel can be used as heating fuel in both domestic and commercial applications.

Southeast Asia, Indonesia and Malaysia in particular account for the majority of palm oil production, most of which goes for human consumption or other uses besides energy. Unfortunately, oil palm trees are often grown on newly cleared rain forest or peat swamp, thereby destroying habitat and opening up the remaining forest to poaching. While the oil itself may be a more environmentally friendly alternative compared to fossil fuels, the processes that are used in growing palm may contribute to significant damage to the environment.

Biofuels Reduce Food Supply
Corn kernels and sugarcane juice are common feedstock for creating ethanol, while palm oil has a central role in biodiesel. What these commodities all have in common is that they have a competing purpose of being a source of food and fuel.

The conundrum of food versus fuel and the increased demand for these products as a feedstock for biofuels can cause increases in commodity prices. Such an increase generally translates into higher food prices for consumers. Furthermore, even if price isn't a concern, the supply available is also a hotly debated issue, and some critics contend that these competing interests could lead to food shortages. In November 2007, Oxfam, a leading humanitarian aid agency, cautioned the European Union to ensure that its plans to switch to biofuels won't hit farmers in poor countries. The agency warned that increases in biofuel production could trigger a "land grab" that could force poor farmers off their land and reduce the land available for food production.

Specific Stocks
Investment opportunities to participate in the biofuels boom range from newly listed companies like, Biofuel Energy Corp. (Nasdaq: BIOF), which is a development-stage company that builds and operates ethanol production facilities in the midwestern U.S., to long-established giants like Archer Daniels Midland (NYSE: ADM) and ConAgra Foods (NYSE: CAG). Furthermore, as venture capital flows into startup biofuel companies, this will provide additional opportunities for investors to participate in the boom as these companies become public traded.

The Way Forward
Biofuels may be one of the keys to weaning ourselves off the petroleum merry-go-round, but several issues must be addressed to make them a true competitor with petroleum. Until the holy grail of biofuel feedstocks is found, it is likely that there will be continued pressure on agricultural products as the dual interests of food and fuel fight for the same raw commodities. Opportunities for investors are growing in this niche and, as more companies go public, there are likely to be additional options to choose from.

Good investing, Kingsley.