Warning Signs 01 (Oct 08 - Feb 15)

[sidney]

I met 2 friends with no knowledge, within span of 2 days. One wanted to open a/c and ask me to accompany them. One wanted to play stock market. This is warning to me.

But i encourage them to open a/c and dun play margins + cfd until they koe the mechanics. Because i believe in starting right.

[kennynah]

tell them...dont do nonsense like T+3... ie; no money...dont buy stocks...

[Poles]

you will only know pain when you felt it.

[millionairemind]

you will only know pain when you felt it.

One of my friend who loves to trade said he learnt the lesson the hard way. He maxed out on his credit cards and overdraft.... just because he did not cut losses short during the burst of the dot.com bubble.

He finally learnt it when he had to work out with his creditor on paying back his loans in installments. He has since cleared it.

Now he is a superb trader, cutting losses at the first sign of trouble.

[sidney]

I hope i can learn from ppl's pain, not true experience

[kennynah]

unfortunately.... one can never truly feel the pain of a razor blade slicing through one's hand, through watching others do it on themselves... one needs to be cut at least once, to serve as a vivid reminder...

[winston]

Buy First, Investigate Later

I've a friend who has been buying first and then investigating later. He would latched on to a rumor eg. HK listing for S-Chips, Chinese money coming to Spore, General Election boost etc. and buy first.

Everyone is so afraid of missing the boat now ...

Personally, I have been taking bigger bets with lesser research as well

Need to remind myself that when the fire starts, the emergency exit may be locked, no matter how close I'm to the emergency exit ...

[winston]

Find America's Next Big Bankruptcy Here By Tom Dyson

Last week, I was in the mountains of Argentina for the inauguration of Doug Casey's real estate development, the Estancia de Cafayate. It was a week full of cocktail parties, golf tournaments... and unconventional ideas.

In between all the fun, I attended a small, private investment conference. The only speakers were Rick Rule, Doug Casey, Bill Bonner, and Porter Stansberry.

Porter gave the best speech. He presented a compelling argument that one of the largest companies in America is bankrupt and its stock must go to zero by 2011.

Before I present Porter's case, first consider Porter's track record for unearthing these bankruptcies. For three years, Porter told his readers over and over again that General Motors was bankrupt. He thumped the table a hundred times about it. Then he gave the same warnings about Fannie Mae, Freddie Mac, and the Wall Street banks months before they folded.

No other analyst I know of has a better track record for predicting the major corporate collapses of the past two years.

Porter says these major corporate bankruptcies are easy to find. Here's how he does it:

First, he looks for companies that increase their short-term debts. This subtle act of desperation always indicates a company that's having trouble with its finances...

Short-term debts are debts you have to pay back within one year. These debts have lower interest rates than long-term debts because they carry less uncertainty. The downside is, you have to pay them back sooner.

Then Porter tries to imagine what would happen if creditors charged the company higher interest rates. Could the business handle it? GM was perfect example. Even when it carried an investment-grade credit, it still couldn't make enough money selling cars to cover their interest costs. When the ratings agencies downgraded GM's debt, the ship sank.

Fannie Mae had the same problem. It financed mortgages with short-term debts. When interest rates rose, it blew up.

Finally, Porter looks for a jettison of assets. Companies struggling with debts will sell their best assets to raise money. GM was forced to sell GMAC, Suzuki, Isuzu, and Hummer, for example. These asset sales always speed up the decline. The moment the market forces you to sell something, it loses half its value. But the debt secured against it keeps its value.

You can figure out if a company is headed for bankruptcy just by looking at its annual report. First, search for the word "maturity." It'll bring up the company's debt-repayment schedule. Compare this result to prior years to see if short-term debt has increased.

While you have the annual report open, look up interest expense in the income statement. Compare this to free cash flow in the cash flow statement. This tells you how comfortably a company can afford its debt.

For asset sales, you could search the annual report for "divestitures," but the CEO will probably mention the big ones in his letter to shareholders at the beginning of the report. (He'll remind shareholders what a good decision it was to sell those assets.)

In Cafayate, Porter told us which iconic American company goes bankrupt next...

This company fell into the classic short-term borrowing trap. It has a $100-plus billion block of debt to repay over 2011 and 2012.

This company is currently paying around $17 billion a year to service its $500 billion of debt. That's an interest rate of around 3.3%. But it only banked $12 billion in earnings after expenses last year. So there's a huge hole in the finances... even with its funding costs at 3.3%. When funding costs rise, the ship will fall apart.

Finally, Management has been running a yard sale. In the past five years, this company has sold off its best businesses. "The common stock – every single share," concludes Porter, "is not worth one penny."

Finding the next big bankruptcy is easy. Look for companies that pay more in interest than they receive in income from their businesses, shortening debt maturities, and corporate fire sales. Find these patterns, and you've got a looming bankruptcy...

Source: Daily Wealth

[winston]

How to Profit From the “Next” Dubai By Martin Hutchinson, Money Morning

The first sign of a bubble – and the most important thing to consider – is the existence of a major mismatch between the local interest rate and the local inflation rate. If the local long-term interest rate is substantially below the local inflation rate – other than in a really deep depression like one we experienced in the 1930s – then speculation is being subsidized by the financial system.

Take Dubai. Back in July 2008, inflation was 20% and rising. But you could get a home mortgage for 7% per annum. That’s a “real interest rate” of minus 13% per annum.

( As in HK now ! )

A second sign of a bubble is when an economy doesn’t really have much of an underpinning – save for speculation.; The dot-com bubble of 1999 was like that.

Let’s consider a couple of examples.

India, for one, continues to grow very rapidly – it advanced at an 8.9% clip in the latest quarter. But India has a budget deficit of more than 10% of gross domestic product (GDP) and when money stops being cheap, it will have a tough time.

Commodities and gold are currently in a bubble. Gold – which set yet another record yesterday (Tuesday) – is the classic item for which nothing tangible supports the price. But while money is as cheap as it is, gold will continue its advance.

That means real estate is a lousy bubble investment, because you can’t be sure of selling it when you need to. Stocks and gold, on the other hand, are pretty good profit plays, provided the companies you’re investing in are not too small, so there’s ample liquidity.

But remember, what goes up must come down, and it may do so with a bump. So invest only a modest amount in the next bubble you spot. Otherwise you’ll lose precious capital during the day – and lots of sleep at night.

http://www.moneymorning.com/2009/12/02/ ... d-default/

[kennynah]

Commodities and gold are currently in a bubble. Gold – which set yet another record yesterday (Tuesday)

duno whether soap or dishwashing bubble...but hor....Wed saw another high for gold...i think...