Investing: January 2010 Archives

Last week, the markets shrugged off good news on GDP growth.  Over the past year, the markets had seized on news that things were getting less bad as a reason to rally.  Now, while the news actually is good -- GDP increased by a lot more than analyst projections -- the markets are reacting by shrugging off the good news and dropping because banks may face additional regulation.

Did anyone actually think that after the financial crisis and the extraordinary steps that were taken to prevent the financial system from collapsing that there wouldn't be more regulation?  If so, they need to have their heads examined!

In any case, the latest sell off, while killing some of our positions like our call options in Intel, has created buying opportunities.

The first trade that we will make is to take advantage of a company that's going to go ex-dividend on Tuesday.  The company is Pioneer Southwest Energy Partners (PSE).  The stock closed at $23.14 on Friday, and the dividend will be $0.50.  That works out to a yield of 2.2 percent.  We will hold the stock until after the ex-dividend date, and then we'll sell it.  That will give us an annualized return of 394 percent if everything works out right.  If we have to hold the stock for longer in order to make sure that we sell it for the same price as we paid for it, that will obviously drop the return down.  However, even if we have to hold the stock for a full month, we'll get an annualized return of 24.4 percent, which we can live with.

The next trade we will make involves selling one of our winning positions, Biovail Pharma, and using the proceeds to buy Intel.  We'll also close out our calls in Intel to buy the stock itself.

Why?  Well, Intel just reported better than expected earnings, revenues, and margins.  And the stock has dropped by about five percent since then, despite a big surge in the GDP numbers for software and computer systems.  It's trading at around 12 times this years projected earnings, versus the S&P 500's 14.3.  On top of that, Intel is an innovator.  It also goes ex-dividend this week, but investors don't buy Intel for its dividends.  They buy it because it is the undisputed leader in its sector and it works very hard to maintain that position.

We will likely turn around and sell covered calls on Intel to both boost the income we get on the stock and to make the trade even less expensive.  But Intel is going to go into our portfolio as a core position.

Many assume that when the markets are down, things are bad.  That's not necessarily true.  When the markets go down, savvy investors can find buying opportunities.

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• Three Stocks Going Ex-Dividend Second Week of February (seekingalpha.com)
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When it comes to economic news today, we could call it a GG day.  And no, we're not talking about Bloomberg's Gigi Stone, although she may be reporting on some of this news.

There has been a lot of concern lately over the sovereign debt of Greece.  Greece's debt has been pounded recently, as speculation over whether or not its deficit reduction measures will allow it to avoid defaulting on its loans.  Greece's finance minister said that the country would "draw blood" with its plan to cut spending and to increase revenue over the next three years.  The country is not contemplating outside help to shore up its financial condition, George Papandreou added.

A big part of this, Papandreou added, would be addressing corruption in Greece.  "I have said let us clean the slate and put in rules and regulations so we move away from this negative legacy. It is not part of our DNA. It may draw blood from us all, but it will create a more credible political system."

And Greece will have to clean up its mess by itself, as the European Union says that it will rely on the country to fix its problems and that there is no alternative plan.  Christine Legarde, France's finance minister, said "Any single member state, France, Germany, Greece, is not alone. We're jointly accountable to each other. [The eurozone] is a monetary zone which holds us together. There's no way out. There's no bail-out system and we have to deliver on the commitments that we made."

The bad news on Greece will be countered by good news on American GDP.  The Commerce Department reported today that GDP rose by 5.7 percent in the fourth quarter.  One indicator beyond the top line number was that spending on equipment and software purchased surged by 13.3 percent.  This, along with Intel's blowout earnings, revenue, and profit margins, seems to indicate that the much anticipated boom in technology is occurring.

The consensus estimate for GDP growth was for an increase of 4.7 percent, with estimates ranging from three percent to 7.5 percent.  The actual increase in GDP was the largest since the third quarter of 2003.

Part of the reason for the increase in GDP was the increase in disposable personal income.  This jumped by 4.8 percent in the fourth quarter, four times the 1.2 percent increase in the third quarter.  Since consumer spending accounts for two thirds of the economy, a growth in disposable personal income is sure to help bolster the economy.

And consumers weren't spending all of their bigger paychecks, as the savings rate ticked up a notch, going to 4.6 percent from the third quarters 4.5 percent.  Keep in mind that for a time during the housing bubble, the savings rate actually dropped below zero for a time.

The GDP news is a positive development.  This seems to give credibility to the Fed's decision to end its quantitative easing as well as its conclusion that the economy is recovering.

Traders may want to establish positions in stocks they've been looking at since they've sold off over the past few weeks.  With the economy showing signs of picking up, the dip may be a good buying opportunity.

The government released two economic reports this morning, and both of them came in below expectations.  The Labor Department released its weekly initial jobless claims data, which showed that initial unemployment claims dropped by 8,000 to 470,000 from last week's revised 478,000.  The moving average, which smooths out the volatility of weekly data, rose by 9,500 from a revised 446,750 to this week's 456,250.

Continuing claims dropped by 57,000 from last week's revised 4,659,000, coming in at 4,602,000.  The four week moving average here dropped as well, falling by 94,250 from last week's revised 4,763,500 to 4,669,250.

On a state level, the news was mostly good, as 30 states reported a drop in claims of more than 1,000.  The leader here was the state of Pennsylvania, which reported a drop of 25,819.  There were three states reporting increases of more than 1,000, lead by California's 43,748.  However, California's increase was due in part to a backlog of claims that the state cleared.

Analysts had expected claims to come in at 450,000, a drop of 32,000 from last week's 482,000 claims.  Projections were for claims to total 400,000 to 480,000, so the actual data was towards the pessimistic side of projections.

An economist at Barclays Capital said that the company expected the labor market "to continue to improve going forward.  The trend in claims has been on a consistent downtrend and we do expect that to continue."  Companies are starting to end layoffs, and some are starting to bring workers back.  That is consistent with a slow improvement in the labor market, which has seen 7.2 million jobs cut since the beginning of the recession in December 2007.

Separately, the Commerce Department reported that orders for durable goods increased by 0.3 percent in December, ending a two month streak of declines.  Excluding the volatile transportation sector, durable goods were up by 0.9 percent.  Analysts had expected durable goods orders to increase by 2.0 percent excluding transportation.

The biggest drop in orders was seen in the non-defense aircraft sector, which nosedived by 38.2 percent.  The largest gain in orders was seen in the defense aircraft and primary metals sectors, which were up by 14.7 and 8.1 percent repspectively.

The increase in durable goods orders is good news, as it means that factories will have to hire more workers if there is more demand for these items.  One potential bright spot here was shown by Ford, which recently announced that it would hire around 1,000 workers for a factory in Chicago.

Without jobs growth, there can be no robust recovery.  Thus, the durable goods number is critical to watch, as that directly relates to factory employment.  All in all, the data is positive, but it is still far from the time to pop the cork on the champagne bottle.

As expected, the Federal Reserve announced that it would keep its target interest rate at zero to 0.25 percent.  What traders seized on was the statement by the Fed that rates would remain low for "an extended period" because "inflation is likely to be subdued for some time."  The Fed also added "economic activity has continued to strengthen and that the deterioration in the labor market is abating."

In addition to its interest rate announcement, the Fed said that it would end several programs that purchased securities on the open market.  Many had wondered when the Fed would end its quantitative easing programs, and it's clear that the answer is soon.  Four of the programs will end on February 1, and another one will be wound down with a final auction taking place on March 8.  In a cautionary note, however, the Fed noted that it "is prepared to modify these plans if necessary to support financial stability and economic growth."

There was one dissent among the votes.  The head of the Kansas City Fed, Thomas Hoenig, said that "economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

An executive at Nationwide Insurance in Columbus, Ohio said the actions and comments by the Fed show that it believes the economy "is on the mend."  He added that the dissent by Hoenig was due to Hoenig's view that the economy is entering "a recovery that's picking up speed" and that the Fed will have to act to increase interest rates "faster than the board in Washington thinks."

Another change in the Fed's statement showed that it there is increasing optimism about the economy among its members.  Previously, the Fed had said that the economy is "likely to remain weak for a time."  The language, which had been in place since April 2009, was changed to a statement that "the pace of economic recovery is likely to moderate for some time."

Stocks, which had been down for most of the day, rallied on the Fed's more optimistic assessment of the economy.  The Dow rose by 0.4 percent to 10,236.  The S&P 500 was up by 0.5 percent to 1,098.  And the Nasdaq climbed by 0.8 percent to 2,221.  All of these indices were down before the Fed's announcement, with the Dow off by 0.4 percent before the annoucement.

The more upbeat assessment of the economy by the Fed is good news.  Wells Fargo Advisors in St. Louis said that "the market will like this."  They added that while the Fed is "comfortable with how the economy is progressing, even though they didn't come right out and say that."

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The New York Fed's actions in the bailout of AIG will have already come under scrutiny by the TARP's inspector general, with Neil Barofsky reporting that its actions "severely limited" potential savings.

Now the actions of the New York Fed, which was led by treasury secretary Timothy Geithner at the time of the AIG bailout, are coming under fire again.  Under question is whether or not the New York Fed improperly prevented AIG from disclosing who received payments and how much they received.

Emails have been released that show the New York Fed asked management at AIG to not disclose to the public information on payments made to its trading partners.  The release of this information instantly provoked criticism from various politicians, among them Darrell Issa.  Since then, additional information has been released that shows the New York Fed attempted to get approval from the Securities and Exchange Commission to withold the names of those receiving payments and the amounts disbursed.

Issa said "there has been a widespread effort by officials at the New York Fed to thwart transparency and we will continue to pursue this investigation for as long as it takes."

Perhaps Issa, instead of grandstanding about a topic where it is clear he is clueless -- nothing new there -- should instead work on "transparency" for his own financial matters.

When asked about his campaign contributors, Issa clearly needed some work on his transparency and disclosure.

Darrell Issa Can't Answer Question on Campaign Contributors

Issa clearly needs to learn that those who live in glass houses should not throw stones.  But since he is a politician who sees the chance to score points by ranting about AIG, he won't.  Perhaps the media should look into what Issa's contributors have bought instead of letting him rant nonsenically about AIG and the New York Fed.

If Issa wants to point to a lack of transparency and non-disclosure, he need look no further than the mirror.

As you know, over the past few days, the markets have plunged on concerns that the Obama administrations proposed restrictions on banks owning hedge funds and private equity firms and proprietary trading.  Adding to the downward pressure was China announcing that it was tightening lending to prevent a bubble from forming.  Bad news about Greek debt and concerns over the ability for other countries in Europe to meet their obligations made things worse.

All this added up to a week where stocks sold off, with the Dow, S&P 500, and Nasdaq all off by around four percent.

There is a lot of nervousness among traders these days.  How else could you explain a sell off in Intel's stock despite their beat on earnings, revenue, and margins?  Bans on proprietary trading have nothing to do with Intel, which is clearly on a roll and is a market leader, but the stock slumped anyway.

And there is a lot of economic data for traders to react to this week.  The week opens with a report on existing home sales for December.  These are expected to drop sharply, as many acted to take advantage of the original expiration date of the $8,000 tax credit on November 30.  On Tuesday, reports on consumer confidence, as well as the Case-Shiller home price index will be released.  Wednesday brings the release of the Fed's decision on interest rates as well as new home sales data.  Then on Thursday, we'll get the initial jobless claims report from the Labor Department, as well as data on durable goods orders.  The week closes out with data on GDP, the employment cost index, and consumer sentiment.

Quite a bit in there that can move markets.  However, as they say in informercials, but wait, there's more.  And while the more in informercials is often something that's just a throw in, the more here is far from it.

Ben Bernanke's term expires in a week.  The Senate has to determine whether or not to appoint him to a second term.  This appeared to be a done deal until very recently, with only fringe players like Jim Bunning from Kentucky, who appears to have been beaned by too many baseballs during his playing career, opposing the appointment of Bernanke to a second term.

However, Barbara Boxer and Russ Feingold have added their names to the list of those who will oppose Bernanke's appointment.  While the most likely outcome is still for Bernanke to get a second term, the announcement from these two democrats added to the nervousness of traders.

If you think last week was bad for the markets, just watch and see what happens if the Senate doesn't cure its case of rectal cranial inversion and vote to give Bernanke a second term.  Look out below.

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As anyone who is paying attention to financial news knows, the Obama administration proposed new regulations that would prevent banks from trading for their own accounts and that would restrict their ownership of hedge funds and private equity companies.  These ideas came from former Fed chairman Paul Volcker.  The reaction from the markets was swift and negative.

For the third day in a row, all of the major indices were off.  The Dow dropped by 2.1 percent to 10,173.  Just three trading days earlier, on Tuesday of this week, it reached a 15 month high of 10,725.  The S&P 500 was off by 2.2 percent to 1,092, and the Nasdaq slumped by 2.7 percent to 2,205.  For the week, the Dow was off by 4.1 percent; the S&P 500 lost 3.9 percent; and the Nasdaq dropped by 3.6 percent.

Financials were particularly hard hit.  On Friday, Morgan Stanley lost 5.3 percent.  Bank of America was down by 3.7 percent.  And Goldman Sachs dropped by 4.2 percent.  In the two days since Obama announced his proposed regulations, the S&P 500 financials index is down by 6.1 percent, which is the largest drop since September.

However, it seems likely the fears leading to this selloff are overblown.  As an executive at Institutional Risk Analytics in Torrance, California said, "prop trading at all of these banks makes money.  But is it the biggest part of their business?  No."

So we are talking about a relatively small portion of a financial firm's profits.  A percentage that has been quoted in the financial press is ten percent, and many have said it's difficult to separate out the actual figures from financial statements filed by the companies.

Second, many have said that putting these regulations on banks is going to force them to make a choice between owning hedge funds and private equity firms and engaging in prop trading or accepting a federal charter and getting government guarantees for their deposits.  They say that this will eat into the profits of the companies and make it impossible for them to function.

This, of course, ignores history.  From the 1930s until Glass Steagall was repealed in 1999, there was a prohibition on commercial banks entering the investment banking field.  And nobody can say that these institutions weren't profitable, sometimes wildly so.

Thus, it's our view that the panic selling of financials presents a buying opportunity for investors.  If you liked Goldman Sachs or Morgan Stanley -- both of which can go back to being investment banks instead of federall chartered banks if they want to -- when it was five to ten percent more expensive, you should like them even more when they're on sale.

As many may know, Baron Rothschild was reported to have said the time to buy is when there is blood in the streets.  The guilotine may not be taking any heads right now, at least not literally.

But with the prices of financials taking a pounding on news that they may be required to give up something that accounts for a relatively small part of their earnings, it may be time to buy.  If you don't want to buy right now, what you can do is sell a cash covered put.  Sell a put, which you cover with cash, at a price where you'd be happy to own a stock for.  If the stock drops to that price, you buy it.  If not, then you collect the income and then buy the stock later.

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President Barack Obama's announcement that he will seek to implement regulations on banks that prohibit them from trading for their own profit sent financial shares plunging.  This dragged down the market as a whole, causing the Dow to drop into negative territory for the year.

Obama adopted the ideas of former Fed chairman Paul Volcker and sought to ban commercial banks from trading for their own accounts.  He also wants regulations to prevent banks from owning hedge funds and private equity firms.  This would, according to some officials, force banks to choose between operating as a federally chartered and insured depository organization and running proprietary trading divisions or owning hedge funds and private equity firms.  Banks would be allowed to continue running proprietary trading divisions on behalf of their clients.

The move, while not quite the reinstitution of Glass Steagall, does look like the administration's attempt to separate the insured depository units of banks from their trading divisions.  The rationale behind the move is to prevent banks from using their federally insured funds in order to engage in potentially risky trading.

If the proposals pass, newly formed banks like Goldman Sachs and Morgan Stanley will be forced to choose between retaining their federal charter and guarantees on the deposits they accept or to abandon their federal charters and return to being investment banks with no federal guarantee of deposits they accept.

In introducing his proposal, Obama said "while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse."  Obama went on to warn those who are likely to oppose the regulations that he's ready for a fight.  "If these folks want a fight, it's a fight I'm ready to have," he said.

"When banks benefit from the safety net that taxpayers provide, it is not appropriate for them to turn around and use that cheap money to trade for profit," Obama added.

Obama's proposal caused shares of financials to plunge.  The stocks of JP Morgan Chase, Citigroup, and Bank of America were all off by about six percent.  Shares of Goldman Sachs also plunged, dropping by four percent despite reporting profits that exceeded expectations.

Some analysts said that the selloff in financials was overdone.  A director at International Risk Analytics in Torrance, California said "prop trading at all of these banks makes money.  But is it the biggest part of their businesses? No."

The market also got a dose of bad news from China.  "China was the global engine for growth during the downturn and now they're saying they're going to slow down," an analyst at Point View Financial Services in Summit, New Jersey said.  This is causing traders to wonder if "the punch bowl is being taken away" and if "the end of the good times" is approaching.

The combination of both of these factors caused the market to drop sharply.  The Dow was off by two percent and closed at 10,390.  It is now off by 0.4 percent for the year.  The Nasdaq dropped by 1.1 percent to 2,266, and is off by 0.2 percent for the year.  The S&P 500 fell by 1.9 percent to 1,116, and is clinging to a gain for the year by the skin of its teeth.  It is up by 0.1 percent in 2010.

We believe that those crying gloom and doom for the financials seem to forget exactly how much money was made by those companies during the time between the passage of Glass Steagall and the repeal of that law in 1999.  There cannot be a serious argument made that these organizations were not profitable, and very much so.  And it does seem very unfair that the very organizations whose unfettered risk taking caused a crisis that required a big bailout can turn around and benefit from the response to the crisis.

If financials continue to plunge in response to the Obama proposal, we believe that this would be a good buying opportunity.

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Investors sold off stocks today, as disappointing earnings from companies ranging from International Business Machines (IBM)  to Morgan Stanley (MS) to Coach (COH) as well as lending curbs in China caused a drop in all of the major indices.

The bad news started after the close of markets yesterday, with IBM reporting results that trailed expectations.  The stock was off 2.9 percent today, as revenue for the company's business sales unit dropped by 2.8 percent to $4.58 billion.  On a positive note, the company guided its earnings towards the higher end of its projections, saying its 2010 earnings will be at least $11 a share.

Morgan Stanley showed that financial companies were not out of the woods yet, reporting earnings of $413 million, or $0.14 a share.  The consensus estimate for the company was for earnings of $0.42 a share, with estimates ranging from $0.14 to $0.72 a share, so the company equaled the worst projection by analysts.

Even a company like Coach, which increased both revenues and earnings in a tough market for luxury goods, fell.  Their results trailed projections from some analysts, and the stock was punished.  Its shares were off by 5.6 percent.

With companies like these taking poundings, it should come as no surprise that all of the major indices fell.  The Dow dropped by 1.1 percent to 10,603.  The S&P 500 was off by 1.1 percent to 1,138.  And the Nasdaq sold off by 1.3 percent to 2,291.

An analyst at IG Markets in Chicago warned investors that "we might see profitability out of companies this season but we're not really seeing revenue growth."  An analyst from Sanford C. Bernstein concurred, saying that IBM's results showed that it is still an open question as to whether or not there will be "a material improvement" in corporate technology spending.  There is a good chance that any improvements in profits will be from increasing profit margins, not revenue growth.

China's tightening of credit also weighed on markets.  A trader at Capital Spreads in London said that "it looks like the Chinese are starting to place some constraints on liquidity, which may put a cap on their expanding economy but also have a larger effect on global growth."  A top regulator in China said that it will monitor lending in order to prevent bubbles from forming.  Given China's history of hamhanded efforts to cut off capital in the past, traders are concerned this could happen again.

Two Warren Buffett owned companies announced mergers.  Kraft was able to come to terms with Cadbury, ending a four month old drama which saw the merger left for dead, then back alive, and now agreed to.  The reason the deal got done?

Good old fashioned cash.  Kraft raised additional money by selling off one of its divisions and then used much of the money to increase its offer to Cadbury.  The initial offer by Kraft was ripped by Cadbury as "derisory" and the company started talks with Hershey in order to repel Kraft.  Cadbury also ripped its eventual partner as an "unfocused conglomerate" and said that it had businesses in "unappealing categories."

But in the end, a sweetened stock and cash deal of $19.7 billion was enough to get Cabury's management to eat its words and agree to the merger.

Analysts said that the deal was "a modest win" for Cadbury shareholders and that "it's hard to believe anyone can come in and break up" the merger."

Kraft wasn't the only Buffett owned company to do some shopping.  His Berkshire Hathaway purchased a block of life reinsurance properties from Swiss Reinsurance for $293 million.  Swiss Reinsurance said that it will use the money to improve its capital position and that the deal with Buffett was "clearly not a game changing transaction for us."

Still the transaction is a solid move by Swiss Re to improve its capital position and to shed some risky assets.

Finally, Tyco agreed to buy Brink's Home Security in order to boost its position in the home security market.  Tyco is the largest player in the field, with 22 percent of the market.  Brinks will add another four percent to that total.  The deal, which will provide Brinks shareholders with $42.50 in stock and cash for a total purchase price of $2 billion, isn't expected to face regulatory problems due to the fragmented market in home security.

Tyco is adding Brinks to its assets because the home security business features relatively stable earnings and cash flows.  Its ADT division, which focuses on security, accounted for about $7 billion of Tyco's $17 billion in revenue during the last year.

What these mergers show is that cash rich companies are taking advantage of current market conditions to add assets to their porfolios.  Investors may want to do this as well.

With the new week arriving, we've got a couple of trades we've done some research on.  Here, we take advantage of a dividend which will be paid soon or a company that's being taken private.

The company that we'll purchase which is going to be taken private is Sinoenergy Corporation (SNEN).  This company is being taken private, and the deal is expected to close on January 31.  Shareholders will receive $1.90 per share, and the stock is trading at $1.84.  So, there's a slight spread on the stock, which works out to 3.3 percent.  But, since we'll only hold the stock for about two weeks before we get paid the $1.90, we'll earn an annualized return of 85 percent.

We believe that this deal will close because the company's main shareholder is the entity that will be buying it.  They already control 39 percent of the company, so it's highly unlikely that anything's going to happen to derail the purchase.  We believe that the risk of the deal falling apart is small, so we're going to purchase the shares and collect the spread on January 31.

The company which we will be purchasing to collect the dividend is Hospitality Property Trust (HPT).  The shares, which were trading at $23.84 at the close on Friday, will pay a dividend of $0.45 on February 23 and the ex-dividend date is January 21.  That works out to an effective yield of 1.9 percent in a month's time.  We'll further increase that yield by selling covered calls on the stock.  The February $25 call is trading for $0.55, so we will get $1.00 in income in a month's time.  That works out to income of 4.2 percent in a month, or 50.3 percent on an annualized basis.

As you know, the markets will be closed on Monday for Martin Luther King's birthday.  That means we'll have to make our trades on Tuesday, but we know what we're looking to do here.

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Yesterday's action in the markets showed that while the proponents of the efficient market hypothesis claim that the markets are rational, reality is otherwise.

How else could you explain this?  Intel (INTC) hit the trifecta for companies.  Their profits for the fourth quarter increased to $2.3 billion, or $0.40 a share from $234 million, or $0.04 a share in the fourth quarter of 2008.  Revenues also climbed, from $8.2 billion in the fourth quarter of 2008 to $10.6 billion in the fourth quarter of 2009.  And their gross margins surged to a record 65 percent.

That is very positive news for a company, and management's outlook added to the plus side of the ledger.  For the upcoming year, Intel expects to see a gross margin of 61 percent.  While that's off from the 65 percent that they saw in the just ended fourth quarter, that's a historically high number for the company.

These numbers blew away analyst expectations.  Expectations for profits were for $0.30 a share and revenue was expected to come in at $10.2 billion.  So Intel exceeded expectations on profits, revenues, and margins.

Naturally, Intel shares dropped on the news, falling by about three percent to $20,80.  Efficient market my butt.

JP Morgan Chase (JPM) also reported earnings that exceeded analyst expectations.  For the fourth quarter, the company reported earnings of $3.3 billion, or $0.74 a share, on revenue of $25.2 billion.  In the fourth quarter of 2008, the company earned $702 million, or $0.06 a share.

Analysts had expected JPM to come in with earnings of $0.61 a share, which the company beat.  However, revenue came in lower than expected, with analysts expecting revenues to total $26.8 billion.

On the news, shares of JPM sold off, dropping by 2.3 percent.  With this stock, however, traders had a reason to sell off.  The topline number was less than expected, and management cautioned that consumer defaults could continue to be a problem for its retail banking and credit card divisions.  The results, said Sanford Bernstein, were "on revenues and the cautious tone around the credit outlook."

The news from JPM was a catalyst for a drop in all of the major indices.  The Dow was off by 0.9 percent to 10,610.  The S&P 500 fell by 1.1 percent to 1,136, and the Nasdaq dropped by 1.2 percent to 2,288.

For the week, the Dow lost 0.1 percent, the S&P 500 fell by 0.8 percent and the Nasdaq dropped by 1.3 percent.

Investors should take advantage of days when the market sells high quality companies like Intel that just beat earnings, revenue, and margin expectations.  This selloff in Intel provides investors with a chance to get in at a lower price than they could have BEFORE earnings were announced.  If it was worth three percent more before a blowout quarter, it's time to step in and buy the stock, not sell it.

The government gave investors a wake up call this morning, with two negative economic reports.  The Labor Department reported that initial jobless claims increased last week by a more than expected 11,000, to 444,000 from last week's revised figure of 433,000.  The four week moving average, which smooths out the volatility of the weekly figures, dropped by 9,000 from last week's revised number to 440,750.  That number is the lowest the four week moving average has been since August 2008, which predated the bankruptcy filing of Lehman Brothers.  Initial claims have dropped by 34 percent since their high in March of 674,000.

Continuing claims also fell during the week, down by 211,000 to 4.596 million.  The four week moving average here dropped to 4.855 million, a decrease of 151,500.

There were six states with a decrease of more than 1,000 claims, led by Illinois which reported that 6.928 fewer people filed initial claims due to fewer layoffs in the construction, trade, and manufacturing industries.  On the down side, there were 18 states which reported an increase of more than 1,000 claims.  New York topped this list, reporting that 22,810 more people filed initial claims.  Layoffs in the construction, service, and transportation industries pushed claims higher in New York.

The consensus forecast for initial claims was for a rise of 3,000, with estimates for claims ranging from 400,000 to 450,000, so the actual number came in at slightly higher than the midpoint for claims.

Analysts at MF Global in New York said that "the trend in jobless claims has been down," which "implies the labor market is improving."  Starwood Hotels said that "companies are driving their top line again" and getting on the road.  This "not only benefits their business, but spurs job creation."

Another report from the Commerce Department showed that retail sales dropped by 0.3 percent from November's revised figure.  However, December's sales were 5.4 percent higher than last year's figures, which came on the heels of the near implosion of the financial system.  And the November figures were revised upwards from a gain of 1.3 percent to a gain of 1.8 percent.

Gains were seen in the sporting goods, hobby, book, and music stores sector as well as non-store retailers, gasoline stations, furniture and home furnishing, and health and personal care stoes.  The gain was 1.6 percent in the sporting goods sector.  Decreases were led by the electronics and appliance store sector, which fell 2.6 percent.  Other sectors seeing decreases were motor vehicles and parts dealers, building material and garden supplies, food and beverage, clothing and clothing accessories, general merchandise, miscellaneous, and food and drinking establishments.

Moody's Economy.com said that the latest figures show that "we'll see weak gains in spending over the next six months" because "people are still anxious."  Another contributing factor to the drop in sales may have been the blizzard that hit much of the east coast on the weekend before Christmas, which is normally the busiest shopping period for retailers.

All told, the data shows that the economy, while definitely doing better than it has in the recent past, is not out of the woods yet.  It's recovering, but it's got a long way to go before it returns to strong growth.

Does this sound familiar?  A 27 year old steel trader spends all his free time looking for a two bedroom in his city's historic district, which he hopes to buy immediately.  Developers are snapping up land for luxury high rises and villas, and banks are happily showering them with money.  New towns are being built in the desert, with developers confident that demand for housing won't lag.  And families who can afford it are buying multiple houses, living in one and hoping to flip the other one for big gains.

In some cities, the price per square foot for high end real estate has shot up by 54 percent in the year through September.  In the month of November alone, housing prices in major cities jumped by 5.7 percent, and housing starts skyrocketed by 194 percent.

Brokers say that some buyers are falsifying their income so they can buy more home than they can afford, hoping to sell the property later at a profit.

Individuals are borrowing as much money as they can from family and friends, with one speculator borrowing from friends and family to make mortgage payments on multiple apartments that totaled more than twice his take home pay.  He sold this apartments for a big gain, and now is plowing that profit into four more apartments.

The government is keeping interest rates low and encouraging banks to make loans to home buyers.  And they've injected lots of capital into the system.  Companies in different fields are starting up real estate arms.  According to Morgan Stanley, "when you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land.  No one talks about their factories making money these days."

And most importantly, analysts are saying those dreaded words:  this time, it's different.  They say that the growing economy, rising family incomes, migration to major cities, and pent up demand for housing will keep the bubble from popping.

Las Vegas in the latter part of the opening decade in the 21st century?  Japan in the 1980s?

Nope.  China in 2010.

Even those who are involved in the real estate market say it's a bubble.  "It's definitely a bubble," said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier.  "But it won't break because there is lots of support beneath the bubble because buying power is really strong."

China's government doesn't want to stop the party, because the construction of housing is creating demand for steel, cement, furniture, and construction workers.  And many other sectors of the economy are dependent on housing and increasing prices.

But if the government doesn't take action before the bubble inflates too much, they will be forced to take drastic actions.  If the government does what it has done in the past, when it hiked interest rates sharply and cut off capital flows to developer to deflate a bubble in Shanghai, the fallout could be severe.

Developers then won't be able to get the capital needed to complete their projects.  Consumers won't be able to access cheap loans in order to refinance the properties they can no longer afford.  Banks will have to eat significant losses as the property portfolios they own sour.  And those industrial companies that are now talking about how they're profiting from the bubble will lose money in the resulting plunge.

One of the things that I've said will keep China from becoming a true rival to the United States is if they get fat, dumb, and lazy, much like the United States has.

By not learning from the multiple housing bubbles we've seen since the 1980s, it's clear they might do just that.

Investors looking to put money to work in China may want to take a long hard look at putting their money into a country where such a huge bubble is inflating.  When even those involved say one is forming, that is a big warning sign.

The current earnings season started off on a sour note, as the first Dow component to report, Alcoa, disappointed.  After the close of markets on January 11, Alcoa reported earnings of a penny per share in the fourth quarter.  Analysts had expected the company to earn six cents a share.  The company said that rising energy costs hurt its earnings, but traders weren't willing to listen.  On the day after Alcoa reported, its stock suffered the worst pounding since March of last year, when the markets were hitting their multi-year lows.  The stock dropped 11 percent.

Also adding to the downward pressure on stocks was a report that China was requiring its banks to hold more capital, thus reducing the amount of money available for loans.  China's actions came in response to concerns that a bubble was inflating due to a very aggressive stimulus program put in place by its government.  Concerns over slowing growth in China hurt companies like Caterpillar, which saw its stock drop by about three percent.

All of the major indices ended up in the red, with the Dow falling by 0.3 percent to 10,627.  The S&P 500 was off by 0.9 percent to 1,136.  The Nasdaq slumped by 1.3 percent to 2,282.  The drop ended a six day winning streak for stocks.

Analysts said that those who were fearful that stocks had come too far too fast had their concerns heightened by Alcoa's earnings.  In addition, the actions of China put "pressure on raw materials stocks as people look at it as a real engine for global growth," Security Global Investors in New York said.  The company added that China's actions also raised the question "about when central banks will start to tighten."

Harris Private Bank in Chicago added that "any hint of [China] looking to restrain their economy is going to infect real nervousness into our markets."

Alcoa's disappointing earnings show the problems that are still facing the economy as it recovers from the worst recession since the Great Depression.  Companies are using cost cutting as a way to boost their earnings, but they can only cut expenses so much.  Last week's payroll numbers show that employers are still reluctant to hire.  Given this, it is hard to envision how companies will meet the earnings projections analysts have assigned to them.

Even if companies met those projections, the S&P 500 is close to fair value.  With Alcoa's earnings serving as a warning shot across the bow of investors, how stocks will react to the potential torrent of disappointing earnings is something that needs to be on the mind of investors.

If the January effect more than just theory, then 2010 may be a good year for equities.  As you know, the January effect holds that if the market is up for the month of January, it's likely to show gains for the year as a whole.  And, some investors take it further, saying that the first five trading days are a good indicator for the year.

Last year, the major indices were up for the month of January.  Although nobody would have believed it when they hit their lows in March, the January effect held and the major indices were up significantly for the year.

Stocks kicked off the year with a rally, with the Dow climbing by 1.5 percent to 10,584, its highest close since October of 2008.  Other major indices joined in, with the S&P 500 gaining 1.6 percent to 1,133 and the Nasdaq, which surged more than 40 percent last year, climbing 1.7 percent to 2,308.

According to Stock Trader's Almanac, in 86 percent of the 37 years where stocks showed gains over the first five days, they showed gains for the year.  And, if you extend it out to the month of January, over the past four decades, when stocks gain for the month of January, they gain for the year 72 percent of the time.

We will have a lot of economic news that determines whether the rally continues or not, with the Fed releasing its minutes of its meeting to set interest rates and the government releasing jobs data on Thursday and Friday.

It's going to be an interesting week for investors, and with the week possibly setting the tone for the year, investors need to keep informed.

Now that 2009 is in our rear view mirror, investors need to evaluate how their trades performed.  Our goal, as you know, is to beat the S&P 500 and to shoot for positive returns every year.  We use options and other trading techniques in order to see if we can accomplish this.

There is only really one account that we can use to track our returns.  One of our accounts is one that we put money into and thus, our returns are goosed by the influx of new money.  On the other hand, we have an account where we do not put any money into, so we can use this to see how we performed.

How did we do in 2009?  We started the year with $29,867 in our account with TD Ameritrade.  We closed the year with $35,904 in that account.  That's a gain of $6,037, or 20.2 percent.

That compares favorably to the Dow, but not to the S&P 500 and not to the Nasdaq.  These indices were up by 19 percent, 23 percent, and 44 percent respectively according to Barron's.

What went wrong?  Well, as seen by the lag in the Dow, high quality stocks of large companies lagged the market as a whole.  Our core holdings are naturally going to be large, high quality companies that we can count on year after year.  And when we select dividend paying stocks, we lose out on a lot of small cap companies, which fueled the rally.

Still, we'll stick with our strategy for our core holdings.  While we will dabble in small cap companies, we'll have a core set of holdings consisting of high quality large cap companies.  We'll see if we can goose our returns by selling covered calls on them, but we won't ditch these companies because they're companies we can count on for the long term.