Is Wall Street Trading Illegal?

A recent article the Financial Times (http://www.ft.com/cms/s/0/2924dd32-9c2e-11e0-acbc-00144feabdc0.html#axzz1Px5XUpW8) is about JP Morgan being sued for misleading investors. The SEC claims that that JP Morgan along with other financial institutions sold CDOs (Collateralized Debt Obligations) to clients but were misleading their clients. Also mentioned in the article was the case where Goldman Sachs was sued by the SEC for basically the same thing but Goldman’s case was based on mortgaged backed securities. Goldman Sachs won the lawsuit but had to pay a bunch of money in the end (http://www.marketwatch.com/story/goldman-sachs-beats-the-sec-2010-07-15 ).

Now the real question is whether or not financial institutions were wrong. CDOs and CMOs (Collateral Mortgage Obligations) are basically large pools of either debt or mortgages that are broken into tranches. The first tranche will receive payments first and once the first tranche is paid off then the second tranche will receive payments until they are paid off. As you can see the first tranche has the least risk and therefore is more expensive than the last tranches which are the riskiest but are also cheaper. With expensive versus cheap realize that the more risk you take (more risk equals cheaper) the higher the expected returns. Regardless of what information was given you can see that CDOs and CMOs are risky assets compared to standard stocks and bonds. Whether the information was accurate comes down to valuation methods which I think are irrelevant because the types of investors that bought these CDOs and CMOs are other financial institutions who should understand that CDOs and CMOs have higher amounts of risk and therefore have higher returns that other forms of debt such as bonds. Something else to consider is that the institutional investors make up about 95% of the market where individual investors make up the remaining 5%. Do you really think that institutional investors who have bought CDOs and CMOs don’t understand what they are? If they don’t understand the general risk they shouldn’t be purchasing the assets.

At the end of the day companies like JP Morgan and Goldman Sachs are in the right. They are buying and selling assets just like they should be. No financial institution should be sued for taking a bet against risky assets regardless if their clients bought them or someone else’s clients bought them. Many people view Wall Street as a bad place where people make bets and in reality anyone who makes an investment is making a bet. Wall Street is a place for economic growth and any company is subject to risk whether it is a start up or a 100 year old company. The idea that investors who lost money are trying to sue the other investor who sold it is outrageous.

In conclusion new regulations such as the Dodd Frank Bill and frivolous lawsuits are hurting the US economy by restricting free markets because investors are taking on risk, losing money, and then complaining that they didn’t win. For every investment there is a winner and a loser. If people feel that the markets are too risky and not regulated enough I suggest you stick with fixed income assets such as bonds or CDs. Wall Street should be allowed to take on risk and let the free markets determine who survives.

Is Gold an Irrational Exuberance?

Gold prices continue to rise due to bad economic news globally. In May gold reached a record of $1,518.10 an ounce. Is gold going to continue to rise and is it overvalued? Gold is not an investment but a tool for speculation and wealth storage. As investors have been weary of the equity markets and with the expectation that debt market rates will increase investors are moving their money to gold and silver.

            Gold is overvalued due to the global economic crises. To start, Greece is bankrupt and talk of a second bailout package seems very likely but European officials are saying it is not certain that this second package will happen. Even if the second package is granted, it is far from certain that Greece’s economy will recover. Along with the Greece crisis the US economy is growing slow and equity markets have been declining since April 29^th. The slow growth has also been affecting China’s growth since China sells a large amount of the goods they produce to the US.

            Gold might have a high price now but investors are weary that as global markets improve gold prices will drop. One sign that also points to gold being overvalued is that silver’s price has not been increasing as fast as gold. Silver is similar in that it can be used for speculation and wealth storage but it has not been increasing drastically like gold has. Gold has been increasing due to investors looking for a quick gain and the more gold prices have increased the more investors desire to invest as prices continue to increase. Investors that are now buying gold are either taking great risk in speculation or are poor investors since they will be buying high and selling low.

            Gold may continue to rise and as markets worsen but markets will get better as investors start to forget the past credit crisis and as other global crises cool down. From the evidence presented earlier in this post gold is clearly overvalued. Due to such an overvalue gold is clearly an irrational exuberance.

Tesla Motors (TSLA)

Tesla Motors (TSLA) is an auto company that makes electric sports cars. The big appeal is that they are environmentally friendly since they are electric. An article from Reuters (http://www.reuters.com/article/2011/05/25/tesla-idUSN2513639020110525) states that Tesla is doing an IPO for $158.5 million so that it can design the Model X SUV but they could need up to $214 million. Goldman Sachs will be managing the IPO which could be a good sign since Goldman Sachs is an aggressive brokerage firm. This article and official news was announced 5/25/2011 and there was a 8.5% jump in the stock price. Over the next two days the stock price has been drifting upwards indicating that investors under reacted when the news was first announced.

Tesla Stock Overview: Date: 5/27/2011, Sector: Consumer Goods, Industry: Automobiles & Parts, Current Price: $29.52, 52 Wk Price Range: $14.98-$36.42, Beta: 1.08, Market Cap: $2.819 B, EPS (TTM): $33.17, P/E (TTM): 0.89, EBO Valuation: -$17.86, and ROA (TTM): -62.88 which is lower than the industry, sector, and the S&P 500.

Fundamental Valuation: The fundamental value (EBO model) is -$17.86 which indicates that the stock is overvalued. The EPS forecasts for the next two years are negative based on the data from Reuters. The reasoning for negative forecasts are covered below under the recommendation section.

Technical Analysis: The technical analysis on Tesla is bearish. All technical analysis has a three month timeline. The Bollinger Bands have a 50 day moving average and a 2.5 standard deviation. The Bollinger Bands have a neutral/bearish indicator. The stock price has been riding between the upper band of $31 and the moving average 0f $26. The stock price is getting close to the $31 mark but has been above the average ever since the announcement of the IPO for the new SUV model. It can be neutral if there continues to be an upward drift due to the recent news of the IPO. However if the stock price continues to get close to $31 there should be a downward movement in the stock price.

The stochastic is a neutral indicator. The %K is greater than the %D which is a bullish indicator since the gap is increasing between the %K and the %D. The %K is greater than 80% which is a bearish indicating that the stock is overbought due to the excitement of the recent news about the IPO.

The moving averages are bullish because the stock price is significantly higher than both the 25 day and the 50 day moving average. Both averages have a positive slope which is also a bullish indicator since they have been increasing for almost two months.

The MACD is greater than zero meaning that the short term moving average is greater than the long term moving average signaling upward pressure on the stock price. The MACD is also above the 15 day moving average which is another bullish indicator.

The linear regression is a neutral indicator. The linear regression has a positive slope which is a bullish indicator since it shows that the price should continue to increase. The current stock price is above the linear regression which indicates the stock price should come back towards the linear regression line.

The 100 day momentum for Tesla has a slope close to zero which is a neutral indicator. The momentum is above 100 which is a bullish indicator. The past momentum has been over 100 but recently went far below 100 to about 75. The news about the IPO has added some momentum but it is unknown how long this momentum will last.

Overall the technical analysis shows that the stock price is over its average due to the news of the IPO. It seems the stock will continue to rise but is over heated and will have slower growth in the future. The stock price is however drifting upward suggesting that investors have undervalued the IPO.

Recent News: The most recent news was the IPO that was mentioned above. This IPO will add funding that will be used to design an electric SUV which will be the third model for Tesla.

Recommendation: S-Buy / L-Hold / Day Trade-Buy Tesla’s price is volatile but the stock price is overvalued. After researching the company it is obvious that the company needs more research and funding to become sustainable. After watching Top Gear (http://www.youtube.com/watch?v=5ZaP6GseAUQ) and looking at other websites including the official Tesla website it seems the cars are of poor quality and are overpriced which is basically a bad value for consumers. There are two main models of cars and you can get a racer version of the roadster. The cars range from $80k to $130k. The cars are basically a copy cat of the Lotus Elise with the exception of one being electric and one being gas powered and with the Tesla being three times the price of a Lotus Elise. The Top Gear video had two Tesla Roadsters and they both broke during the test drive. Tesla claims the car will go 200 miles and during the test it only went 55 miles. Also note that it takes 16 hours to recharge the car.

I would recommend day trading this stock with the proper information due to the volatility hype behind the company. I agree electric cars that are fast and sporty is a great idea but making them a dependable product that has a positive value for consumers is going to be a challenge. It would also be a good investment for the short term of about a year. I think the company has a long ways to go before it will become socially accepted by US consumers. On the other hand I might be wrong and this might be the next great company and investors might want to get in before it takes off. I personally would not recommend buying this stock at this time for a long term investor. I gave it a hold recommendation for the long term instead of a sell because the company is still growing and if new information becomes available about a better consumer value it could become a great buy.

Ford (F)

Ford Stock Overview: Date: 5/26/2011, Sector: Consumer Goods, Industry: Automobiles & Parts, Current Price: $14.57, 52 Wk Price Range: $9.75-$18.97, Beta: 2.38, Market Cap: $55.68 B, EPS(TTM): $1.77, P/E (TTM): 8.23, EBO Valuation: $16.80, and ROA(TTM): 3.91 which is higher than the industry and the sector but lower than the S&P.

Fundamental Valuation: When using the EBO model to calculate the fundamental valuation of Ford, the fundamental value is $16.80 suggesting that Ford is undervalued due to its current price of $14.54. The EBO model that is being used was borrowed from Professor Charles Lee at Stanford University. This model makes the assumption that there will be a seven year growth period using the long term growth of Ford. After seven years the stock will revert back to the industry ROE for the last five years since this model has a timeline of 12 years.

Technical Analysis: The technical analysis on Ford is bearish. All technical analysis has a three month timeline. Bollinger bands with a 50 day moving average and a 2.5 standard deviation have neural indications. The stock price is between the moving average and the lower band but is not close enough to the lower band to indicate a future upward move.

The stochastics are neutral and slightly bullish. The %K and %D are almost the same which is a neutral indicator. However the %K is less than 20% which is a bullish indicator. Two stochastics were ran to make the graphs easier to read. The %K was set to 25 on both graphs while the %D was set at 2 and 3 for better analysis.

The moving averages were bearish because the stock price is significantly lower than both the 25 day and the 50 day moving average. Both averages have a negative slope which is also a bearish indicator.

The MACD (moving average convergence divergence) is less than zero, negative slope, and the MACD is less than the 15 day moving average which are all bearish indicators.

The linear regression is a bullish indicator. The linear regression has a positive slope which is a positive indicator for long term investing (over a year) while the current stock price is below the linear regression which is a bearish indicator it could also be a great time to buy the stock since the stock should revert to the linear regression line. When looking at linear regression for five years or less the slope is positive but when looking at the ten year linear regression the slope is negative. This is a good sign since in the past two years or so with the auto industry crisis the US auto companies are starting to become more profitable which is seen in the linear regression of Ford for the past five years.

The 100 day momentum for ford has a negative slope and is less than the base measure of 100 which are both bearish signs.

Overall the technical analysis shows that the stock has been struggling and at this moment in time is not a good time to buy. Also remember that this is only the technical analysis and that smart investors buy low and sell high.

Recent News: According to an article on Reuters.com (http://www.reuters.com/article/2011/05/26/us-romania-infrastructure-idUSTRE74P0ZK20110526) Ford motor company has invested in Romania to make automobiles due to the country’s flat tax and cheap labor. The company made projections but warns that Romania’s roadways are in poor condition which will make Ford’s projections high unless Romania starts to invest in their transportation infrastructure.

Recommendation: S-Hold / L-Buy For a three month recommendation I would give Ford a hold recommendation but would give it an outperform recommendation for six months or more. The company was the only US automaker who did not need a financial bailout which is a good sign for the company. The company seems to be fixing some internal problems which will help with long term growth for the company. Ford is obviously reinvesting profits into long term growth since the company is not paying a dividend which is good for long term investors (over a year). Morning Star has given a Ford four stars out of five and analysts from Reuters seem to be split between a hold and a buy recommendation. Like I said it is a great buy for a long term investment but is not such a good buy for the short term. The stock has a beta of 2.38 which can be seen by looking at how the stock does compared to the S&P and the Dow. The US and global markets are pretty volatile right now due to conflicts in the Middle East along with the financial troubles in Europe. This volatility could be good for a day trader but not so good for a short term conservative investor.