The Broke Investor

US Government to AT&T: "No Soup for You" in T-Mobile Acquisition

2011-08-31T18:37:00.000-07:00

The Soup Nazi from Seinfeld never charged $39 billion for a bowl of soup, but the United States Department of Justice is attempting to block the March 2011 deal.

It's painted as a "consumer protection" and anti-trust block, as T-Mobile and AT&T are fierce competitors in 97 of the top 100 mobile phone markets.

Read about the merger here: Can You Hear Me Now? AT&T Buying T-Mobile USA

And the DOJ could very well kill the deal for AT&T, but this seems more likely to become a bump in the road, albeit a big one, as AT&T and T-Mobile plan to restructure the specifics of the deal.

So what's in it for me? A fair question, to be sure.

We all enjoy the competition between major carriers, AT&T, Verizon, T-Mobile and Sprint/Nextel.

Fears that Sprint/Nextel are on their way out the door leads officials to view the AT&T/T-Mobile deal as leading to a two-party system in mobile phone dominance.

That fear is not misguided.

The seemingly exorbitant costs of mobile phones and service, especially smart phones with unlimited data plans, continue to climb. And all of this amongst a four-company competitive landscape.

If that were cut in half, the checks and balances of healthy, free-market competition would put added pressure on a consumer who is struggling to find confidence in a slowly recovering US economy.

Wall Street wasn't kind after learning of the DOJ's action. AT&T (T) gave up 3.85% in Wednesdays session, and although it recovered .25% in after-hours.

Telecom, an industry fraught with mergers and acquisitions, seems to pay competitive dividends.

The Broke Investor used to hold a position in Verizon (VZ), but no longer holds that position.

While the future of the AT&T / T-Mobile marriage remains uncertain. The Broke Investor's opinion is that the deal will go through, with restructuring to satisfy any anti-trust concerns.

Does that make AT&T (T) a buy? You tell me.

brokeinvestor@gmail.com @BrokeInvestor

2011 Gold Rush

2011-08-23T22:00:00.000-07:00

When the financial markets opened on January 3rd this year, Gold opened at $1,429.70. A high price after a steady climb from $769 in November 2008.

It closed on Monday August 22, 2011 at $1,900.40. Up more than 32% in less than 9 months.

But is the gold rush coming to an end?

Some bullish metals investors seem to think so.

George Soros was selling off gold positions in May 2011. Now in August, institutional investors are reducing gold exposure (taking profits) because of the fear of a bubble burst.

Is the gold bubble going to burst like residential mortgage backed securities in 2007 and 2008? Or like the tech stocks in 2000?

Among all the worldwide economic upheaval, it seems unlikely to see a dramatic move down in gold prices.

DISCLOSURE: The Broke Investor does not own any significant precious metals physically or on paper.

In order for gold to come down, wouldn't the US dollar have to strengthen against the metal and against foreign currencies?

For gold to come down, wouldn't world-economic fears have to be abated?

For gold to come down, wouldn't political unrest around the world have to find some resolution?

If none of these things happen in the near future, and the price of gold begins to fall, doesn't that prove that this run-up was yet another bubble?

More questions than answers here, but it seems like the "wait and see" school of thought could prove to be profitable.

brokeinvestor@gmail.com @BrokeInvestor

Got Volatility? Massive Swings and Aberrant Market Behavior

2011-08-10T23:07:00.000-07:00

It's kind of like a see-saw, but in the case of Wall Street, the Bear is much bigger than the Bull.

It's not surprising that the never-ending stream of bad news has caused the stock market to crash, or at least enter a period of extreme volatility, with a clear downward bias.

What is different now than in 2008? The corporations that are turning huge profits are doing so with much less reliance on leverage. These organizations have trimmed the fat, and are operating at efficiencies well beyond what we've known in recent history.

So if the businesses have strong balance sheets, why do their stocks continue to go down?

Fear.

Fear is causing the markets to behave in erratic ways, and keeping 99% of investors guessing as to what will happen next.

Fear of another recession
Fear of losing a job
Fear of currency devaluation (or worse, currency debasement)
Fear of government debt

Feel free to add to the list. It may be an endless list.

Gold prices, on the other hand have shown a fairly steady growth pattern.

But what goes up...must come down? In my opinion, yes. Gold will have to come down at a certain point. What is that point? I have no idea. Probably somewhere in the $1950-$2000 range. But that could happen tomorrow!

From The Broke Investor perspective, which is 100% opinion, its a time for the "wait and see" mentality. The markets could rebound tomorrow, and get back on the growth train. But they could also cascade down to 2008- and early 2009 levels.

Take a look at the stocks you are holding. If they are paying a dividend, you're probably doing alright. Now might even be a good time to enroll them in DRIP, or dividend reinvestment programs. I've discussed these in earlier posts found here:

DRIPs and How to Use Them
Direct Investing and DRIP Investing

If the value of the stock is down, when your dividends are distributed to you in the forms of shares, you will get more shares!

brokeinvestor@gmail.com @BrokeInvestor

Dow Crashes Over 512 Points

2011-08-04T22:35:00.000-07:00

Wall Street's actions today looked like a withdrawing junkie just before the hospital administered methadone kicks in.

The markets convulsed, unable to develop any steady ground, yet hesitant to drop all at once. Finally dropping to the ground (for now), a heap of stimulus-addicted abuse.

Deal Reached on Debt Crisis!

You saw the headlines. You were probably relieved to learn that the Government wouldn't have to shut down. I know I was relieved. But I still felt uneasy about it.

When my credit card nears its limit, and I don't have the money to pay it off, I can't go to the bank and ask for a higher limit (one which they KNOW I can't afford).

Yet, we are relieved when the government takes that exact action. And the credit rating of our country? The debt limit being raised by Congress may not even keep our credit rating at the AAA level that we've enjoyed for likely my entire life.

But we can't blame the government for everything. We put them there, and said, "go do your thing" and that's exactly what they've done.

At any rate, it's not all doom and gloom. Markets do this, they behave this way. Do a quick case study on recessions, and you'll see that in the years immediately following the recession, markets acted in a very schizophrenic way.

Here's a link to a post I wrote back in January 2010. It's about past recessions, and things we should expect.

Lessons Learned from Past Recessions

It's nearly a 6-stage journey. The stages can last for different lengths of time, but it all seems to play out the same way.

I'm actually a little frightened by what I wrote back in January, but it was just an observation of what had taken place during past recession/recovery periods.

Buying time is coming. I don't think it's already here, but it very well could be. Technical Analysts, Chartists, seem to think we're looking at 10,600 on the Dow. I believe a sub-11,000 is realistic. I could be optimistic, or pessimistic. I could be way off, positive or negative. I'm just guessing. But they do this stuff for a living.

brokeinv@gmail.com @BrokeInvestor

The Debt Crisis

2011-07-25T18:23:00.000-07:00

Republicans and Democrats should come to an agreement on the debt issue before the end of the week, or they should all lose their jobs, and the possibility of running for any federal elected position.

They've been elected, by the people, to make decisions, for the people.

What they're doing now is whining and politicking and putting many people at risk.

If the country defaults on the debt, how will banks feel about lending to consumers? Better than they do now or worse? Probably not better.

If the country defaults on the debt, what are the chances that the FDIC will still be able to guarantee all deposits?

But the real question is why?

Why do we have to wait so long for politicians to come to an agreement. They will. And it may just be a band-aid on open wound, but the agreement will happen JUST in time.

When it does happen, though, Wall Street will rally. The rally will likely be short-lived, however, and profit taking could be a good idea.

Financials will no doubt gain the most ground, so I am holding on to my Citi position (which is down about 10% or so) and plan to cut my losses during the rally.

These are just my thoughts.

brokeinvestor@gmail.com @BrokeInvestor

Too Soon, Dude. Too Soon

2011-05-11T20:52:00.000-07:00

Commodities...Down.

Equities...Down.

US Dollar...Down.

Housing Prices...Down.

The good times and easy money of the post-recession recovery may soon be coming to a halt. Actually that halt may have already happened.

The Broke Investor, if you have read previous posts, tends to be fairly optimistic. However, economic news and things to come are raising red flags about growth potential moving forward.

Look at the situation we are faced with.

Automobile companies, many of which posted record profits in Q1 2011, are running low on inventory. This will push prices higher. Higher prices will lower demand. Many electronic parts for cars are or were manufactured in Japan. These parts are in very limited supply, which will drive up the cost of used cars.

What is happening now is reminiscent of a post from August of 2009. Cash for Clunkers - Economic Steroids

Don't focus on the automotive slant to the story, focus on "Economic Steroids", and focus on the government who has been pumping money into the system.

You've heard of quantitative easing. Do you know what it is?

Quantitative easing, for lack of a better explanation, is inflation. It's money from the government, used in this case, to buy back government bonds, therefore giving cash to the financial institutions, with the idea that they will lend the money to Joe Schmoe. (I apologize if there is actually someone named Joe Schmoe, please be assured that this is not directed at you)

The problem with the quantitative easing is that it must come to an end. Right now the US Government plans to end this round of quantitative easing in June 2011.

Too soon? Too soon.

Our economy may be in a "recovery" by definition, but looking around, people are still having trouble finding work. People are struggling to pay their bills.

Will the end of quantitative easing leave the US economy in a position it can dig itself out of? Or will it send us into the dreaded double-dip recession that so many people feared in mid 2009?

The Broke Investor is not an economist, nor a professional trader, banker or anything like that. But the signs all seem to point to something dire on the horizon.

Even so, the idea of making a decent return going long stocks now doesn't seem impossible. But it may be a bumpy ride through the end of the year.

Ending quantitative easing will be like a bodybuilder ending a cycle of steroids. You don't want to be the one left holding the weight.

brokeinvestor@gmail.com @BrokeInvestor

Metals vs. Equities on Short Run Returns

2011-05-09T22:27:00.000-07:00

Looking to turn a quick profit? Want to make $1000 turn into $1100? Doesn't sound like much, but a 10% gain is a 10% gain. Maybe youre not a "broke investor" and you can put $30,000 into something and make a quick 3 G's.

Where do you put your money? Silver was trading at 49.85, the 52 week high, on April 25th. It's currently at 37.66, and trending bullish.

The S & P 500 on the other hand is relatively flat, although the index did balloon to its 52 week high of 1370 and change.

So where to now? The S & P is 2% below its 52 week high set last week. While Silver is nearly 25% below its 52 week high of two weeks ago.

As The Broke Investor has said before, Silver seems like a good investment as far as a hedge against inflation, at $37 an ounce, now might not be a bad time to purchase. With the prices fluctuating in fairly grand fashion, it will be more of a roller-coaster ride than normal for a precious metal purchase.

Physical bullion seems like the best way to go, but silver companies and silver ETF's are also available options.

Investing in silver futures is a game for experienced investors, but if you have that experience, please share it in the comment section, or email me at brokeinvestor@gmail.com

The good thing about the S & P, or equities as an investment vehicle, is that you're able to capture dividends while holding the shares. With an options purchase, as with futures, you're buying rights, rather than shares, so any dividends the underlying company may pay to shareholders will pass right by your outstretched hands.

Some stocks that could have decent growth and/or dividend potential in the short term are:

Pfizer (owned by The Broke Investor) - $20.60, paying a 3.88% dividend, and was recently trading at $21.20.

GM (owned by The Broke Investor) - $31.39, no dividend, but the IPO price was $33, and the stock is trading at less than 6x earnings. GM also announced that April sales were 27% above 2010.

Chimera Investment Corp - $3.91, huge dividend, 14.3%. CIM is a real estate investment trust and must pay 90% of its earnings to shareholders in the forms of dividends. This would be more of a dividend play, but don't expect CIM to trade much above the $4 level.

brokeinvestor@gmail.com @BrokeInvestor

Time to Short Gold and Silver?

2011-05-03T22:05:00.000-07:00

Commodities, especially gold and silver, seem to have taken a breather on their historic run-up. But is now a good time to short precious metals?

Silver, which was nearly $50 an ounce less than one week ago, is fighting to keep it's value above $40. And gold's charge to $1600 appears to be more of an uphill climb at this point, as it has given back $40/oz.

The news out of Pakistan has put pressure on the metals' gains, but it may only be temporary as the US dollar looks to be facing serious inflation, and Federal Reserve actions show no signs of deterring inflationary concerns.

But is now a good time to go anti-establishment? GLD, an ETF that tracks the performance of gold, has pulled back almost 2%, while SLV, a silver tracking ETF, has given up more than 13%.

On the short side of these ETF's are GLL, which is a double leveraged negative ETF tracking gold. As gold goes up in value GLL goes down, and vice versa. For double leverage against silver, ZSL is the ETF that will allow investors to take advantage of a depreciating silver price.

With all of this said, The Broke Investor feels as though Gold and Silver, held in physical bullion, can be good safety nets against inflation.

As of this writing, The Broke Investor does not own any significant physical bullion, aside from the 5 gram silver ingot received as a gift (bribe) from the Rich Dad Stock Success seminar.

The prices of these just seem too high, compared to historical valuations, for a retail investor to take advantage of the "safe haven" of owning bullion. It may prove to be a good time to buy, but one cannot predict the future.

What's encouraging to a metals novice, is that the media is beginning to circulate articles claiming that the "Silver Ride May be Over" and calling for "The End of the Silver Trade".

At $25/ozt and below, The Broke Investor would be more inclined to entertain obtaining physical silver. Again, this is not to be purchased as a growth vehicle, but rather a safe haven, or hedge against inflation.

brokeinvestor@gmail.com @BrokeInvestor

What did the bin Laden News do to Wall Street?

2011-05-02T21:48:00.000-07:00

Most Wall Streeters were asleep as news broke Sunday reporting the FBI's most wanted terrorist had been killed.

Stocks jumped over 40 points on the Dow. Gold and Oil retreated somewhat, and with positive earnings news, investors looked to a cheerful May.

But as the jubilance faded, duly, the markets slowly crept down, and oil regained much of what it had given up early in the session.

Silently, however, the Dow average has crept back to nearly 13,000, and the tens of thousands of retail investors still waiting for "the market to return to normal" have been left behind.

The Broke Investor is not bearish, by any means, but cautiously optimistic. With some gains to lock in after YTD gains (Dow is more than 1,000 points higher since January 3rd.), the value of the trailing stop and limit orders are once again vivid.

General Motors, whose stock bottomed out below $30 recently, has come back strong, up just under 9% since April 19th.

The Broke Investor added GM to the portfolio on the 19th. The thinking was this:

1. Huge sales month in January
2. Huge sales month in February
3. Huge sales month in March

GM announces their quarterly earnings on thursday, May 5th, which analysts expect to be nearly $0.93. Anything higher than $0.95 will send the stock up 1-2%.

GM's current earnings multiple is less than 6x, which is well below the industry average, making it a decent pick for a short term (<1 year) gain.

The thinking for longer term growth is this:

1. The Chevy Volt - especially with gas prices nearing $4 nationally and much higher than that in bigger markets.
2. Buick in China - The Chinese love the large, capitalistic sedans.
3. Supply Capability - With production at 50% (or less) for Japanese cars, domestic US automakers have a distinct advantage from a market share perspective.

Although it doesn't offer a dividend, continued earnings growth and a return to the top of the world's automaker ranking will play an important role in GM's ability to reward shareholders.

brokeinvestor@gmail.com @BrokeInvestor

Options: Exit Strategy is Paramount

2011-04-21T20:59:00.000-07:00

They say man learns from his mistakes, but a wise man learns from the mistakes of others.

So here is your chance to be wise, and learn from the mistakes of others.

You've seen earlier posts about Predetermined Strike and Exit Prices. Well, when you are dealing with derivatives, such as call options and LEAPs, the understanding of where you will get in and where you will get out is of utmost importance.

Here's an example:

Bank of America - LEAP call purchased in october 2010, with a $12.50 strike price, expiring on January 21, 2012.

The stock price, very quickly, approached $15 per share (Mid-late January 2011) and the value of the LEAP doubled.

You know where this is headed, and here is another oft-used cliche: Easy Come, Easy Go.

So true, because that same option, which had appreciated 110% at one point, is now trading at a 34% discount to its original value.

Ouch.

In the case of Bank of America though, the same things hold true that did at the time of purchase, without the time premium behind the option. (Although January 2012 is still quite a long way out)

Bank of America doesn't pay a dividend (worth talking about), and to buy the underlying shares would have tied up nearly $12,500.

And 34% does not take a lot to make up (or double) depending on the stock price and the mood of options investors.

With a solid exit-strategy in mind for this investment, waiting for positive valuations would not be an issue. Even when the derivative play was worth 2x as much as originally paid for it, a trailing stop, or similar plan could have allowed The Broke Investor to earn gains, and lock profits.

Lesson learned. And not a cheap lesson.

Take this understanding of how fast things can happen with options, and be a wise man or woman.

brokeinvestor@gmail.com @BrokeInvestor

Inflation Headlines: A Bunch of Hot Air.

2011-03-31T19:26:00.000-07:00

Inflation is coming! We could see double digit inflation this year! How to position your portfolio for inflation!

Largely, these headlines are crap.

If the value-stealing bastard child of fiat currency, inflation, is "coming," the truth is, it is already upon us.

Just look around at your everyday activities. Gallon of gas in the city of Seattle today? $3.95. While that price may go up and down, we're unlikely to see it drop back to $1 a gallon anytime soon. (Especially considering the 37.5 cent gasoline tax in Washington.)

It goes beyond the pump though: Washington State is known for apples. At my grocery store the cheapest apples I can find are $1.99/lb.

Here's the worst sign of inflation...McDonald's has a dollar menu, but it also has an "almost a dollar" menu, with items for $1.29.

Couple this with the disaster in Japan, which knocked out automotive parts manufacturers, and you won't see a lot of screaming deals on cars. New or used.

Gold is at, or very near, all-time highs, and shows no signs of reversing the uptrend. (PLEASE NOTE: This is not an endorsement to buy gold or gold-related investments)

The argument for the precious metal is that even though paper money (fiat currency) has replaced it as the worlds means of trade, gold is the only thing that adjusts to inflation.

The problem with gold right now is the fear premium. The fear premium, like in oil, pushes the price higher when there is fear or uncertainty.

The global economy, and free flow of information has tremendous effects on all markets, from equities to commodities. Is civil unrest a new thing in the Middle East? Probably not. In fact, most recorded history details wars being fought in the Middle East throughout all of time.

We can just see it now. We can turn on CNN and see people being killed in the streets in seemingly peaceful protests.

Traders on Wall Street are reading tweets from information sources all over the world and trading based on what they hear. It's the way things have always worked, its just instant communication now. Its a blessing and its a curse.

So what is a broke investor to do in the face of all these catastrophes? The same thing you have always done. Homework.

Knowing what you are buying, and having a clear strategy is more important now than ever before.

I am guilty of this as I would imagine you are too, letting a one-day price movement on a stock alter the investment strategy.

Over the long term, equities pay superior returns to investors. Maybe the long term is one year. Maybe the long term is 30 years.

One thing that is true about inflation is that something purchased today for $100, will cost more than $100 a year from today.

A trusted source of information told me recently that if the rate of food inflation is 6-8%, a years supply of food will provide a guaranteed return. Can't argue with that, can you?

My thinking is that equities, during inflationary periods, will trade at higher amounts after the effects of inflation have been realized. But maybe the securities move in a negative correlation to the inflation rate?

brokeinvestor@gmail.com @BrokeInvestor

Mergers, Acquisitions and Rumors...Oh My!!!

2011-03-24T21:34:00.000-07:00

Obviously the AT&T buyout of T-Mobile USA from Deutsche Telekom trumps the news on Wall Street this week, when it comes to M&A activity, but don't think that's the only deal or rumor moving markets.

In a statement from GlaxoSmithKline's CEO Andrew Witty, "we look at all sorts of opportunities that come along." A reference to the rumor that pharmaceutical giant Pfizer is going to sell off everything but its core pharmaceutical assets.

Rumor has it, Pfizer is looking to peddle nutrition, consumer health, animal health and generics businesses.

What is not a rumor is the fact that Pfizer is conducting a review of its overal portfolio.

Coming in at 3rd place in the world of mergers, QWEST and CenturyLink have received their final regulatory approval to move forward.

This comes along with a personal slap in the face to The Broke Investor as Seattle Seahawks home, Qwest field, is to be renamed CenturyLink Field.

Alright, so what does all of the M&A activity mean to investors, and a broke investor? It means that companies are spending money again.

When the economy fell off the cliff, major businesses tightened their belts, and hoarded cash. Now that we are seeing credit becoming available to worthy borrowers, these same organizations are ready to spend their money.

As you've seen with the banks, dividends are being reinstated for shareholders of cash-rich companies, which is yet another leading economic indicator that things are beginning to turn around.

What might be a good thing to do right now, as a broke investor, would be to find a solid company that offers a dividend worth 1.5% or better.

brokeinvestor@gmail.com @BrokeInvestor

Citigroup Announces Reverse Split and Dividend...Kinda

2011-03-21T18:32:00.000-07:00

Vikram Pandit, the CEO of Citigroup, announced that the world's largest bank would begin paying a dividend and will issue a 10-for-1 reverse stock split.

On the surface, rewarding shareholders with a dividend and decreasing the number of shares outstanding looks like a great idea. But take a longer look at the details, and the magic of a dividend reinstatement begins to fade.

The reverse stock split, by itself, doesn't change the overall value of any position in the company. If you have 100 shares of Citigroup, worth $4.43 per share, after the split, you will have 10 shares of Citigroup worth $44.30.

At the end of the day, your position is worth the same amount of money, but in the minds of (especially retail) investors, you're out 90 shares of stock.

And a dividend is nice, especially on a stock that has been beaten down dramatically over the last few years.

But again, if you take a closer look at the dividend structure, you will see that the $.01 dividend is to be paid only after the split has happened.

So this means your 100 shares will yield a quarterly dividend payment of $.10.

I understand that being a broke investor involves limited dollar amounts, but $.40 per year on shares of a stock like Citigroup seems like an inequitable amount of risk.

There are a few other things worth mentioning here about the Citigroup news:

1. The volume, which averages more than 500 million shares per session will likely be cut down tremendously.
2. The volatility, which many traders have used as a tool to generate quick income, will also decrease.

So these two features of the split (or "joining" as it were), are likely a positive for the buy-and-hold investor, and a detriment to the trader.

Fundamentals will begin to play a legitimate part in the valuation of Citigroup. Volatility will subside, and allow earnings reports to play a bigger role in significant price moves.

The hardest part for The Broke Investor to deal with is the fact that Citigroup, which has been traded numerous times, profitably, over the last two years, will be a $44 and above stock.

The previous Citigroup estimate of $7 a share, which would be reflected as $70 a share after May 6th, is unlikely, as the per-share price would have to increase by $26 per share.

brokeinvestor@gmail.com @BrokeInvestor

Can You Hear Me Now? AT&T to Buy T-Mobile USA

2011-03-20T22:47:00.000-07:00

In a move to strengthen its position as a market leader in the cell-phone arena, AT&T has announced plans to buy T-Mobile USA (owned by Deutsche Telekom), in a deal worth $39 billion.

Combining these two companies would move AT&T to #1, with around a 43% share of the market, an 11% increase for the former exclusive seller of Apple's iPhone.

Verizon Wireless, a stock formerly held by The Broke Investor, is the current market leader with a nearly 35% share of market. The merger would clearly put VZ at #2.

A merger like this would require many regulatory approvals, including the SEC, DOJ and FCC.

AT&T's new CEO, Randall Stephenson is hoping that the merger, when completed, will allow AT&T the spectrum (similar to bandwidth) it needs to meet the demand for mobile-based video, gaming and social networking applications.

What does this mean for consumers? Some fear further conglomeration in the telecommunications industry will mean increased pricing. And those fears are substantiatied, as the average mobile phone bill is $77 per month in the US, up $24 dollars in the last 6 years.

What does the merger mean for investors? Let's look at AT&T first, and then Verizon Wireless, and estimate the impact of the news.

AT&T - T - $27.94

AT&T has been on a fairly consistent growth pattern over the last 5 years, with the exception of the 2008 crash, and the March 2009 lows, and pays a dividend of about 6.16%. The iPhone exclusivity, which ended this year, had been a major factor in AT&T's ability to remain among the major players in the mobile business.

Verizon - VZ - $35.84

Verizon Wireless can't claim the same stock price consistency as its rival, but in the dividend game, Verizon holds its own. Currently paying a 5.44% reward, Verizon has issued special stock dividends twice in the last three years, with the latest being a 24% one-time stock offering of spin-off, Frontier Communications.

With the Android platform outpacing both BlackBerry and iPhone sales, it's fair to assume that even if the merger happens, there will continue to be a battle for mobile dominance.

To The Broke Investor, at 6.16% and 5.44% dividends, respectively, AT&T and Verizon seem to be a good place to put some money to work.

The AT&T merger will likely take close to a year to complete, and may put downward pressure on the stock as cash could be leaving the balance sheet in order to complete the acquisition.

Verizon is a stock that The Broke Investor has owned in the past (including the time when the one-time 24% stock dividend was paid). Until the merger is completed, VZ will remain the market leader in mobile phones, and for an investor to continue to collect the dividends, VZ seems like it could be a winner.

PLEASE NOTE: The information included here is not an endorsement for, nor advice to purchase, any company or stock mentioned in the article. Please do your own research prior to making any investment, and understand the risks associated.

brokeinvestor@gmail.com @BrokeInvestor

2011-03-15T21:53:00.000-07:00

The Nikkei, Japan's biggest stock exchange rallied Wednesday gaining more than 4% as of this writing.

Does this mean the US Markets will see a similar increase? Hard to say.

The US markets, while they did experience a Nikkei-crash pull-back, pared most of their losses in Tuesday's session. The Dow gave up a little over 130 points, but the "rally" may have already happened.

Unless the profit-taking and re-valuating from the last 18 month growth period on Wall Street, Wednesday will likely show modest improvement.

There is still a lot of pressure from the unknown in Japan. The nuclear reactor's are anything but stable, the death count is far from final, and the displacement of possibly hundreds of thousands of Japanese citizens will continue to put pressure on all Asian markets.

There is a lot of pressure from the Middle East as well.

Libya's situation has turned in favor of Qaddafi, with military forces taking many rebel strongholds, and Bahrain is in a state of emergency following the shooting of a member of the military.

Until protests and rebellions begin to near solutions, oil will likely creep back up to where it was before the Japan quake.

NOTE: Oil is down nearly $10/bbl as of this writing.

So while the Nikkei rally, which was desperately needed in Japan, will help with the psychological disaster that grips the Japanese, a true bull market is far from certainty.

Tomorrow's session can be a great opportunity to do some bargain hunting. A few stocks that The Broke Investor would look to go long are:

Citigroup - C - $4.44 (Full Disclosure: The Broke Investor owns shares and options on Citi)

General Motors - GM - $32.35 - GM is trading at less than 6 times earnings

Ford - F - $14.67 - Ford was one of the early US equities to move positive Tuesday, and it trades at less than 10 times earnings. (Full Disclosure: The Broke Investor owns options on Ford)

The Broke Investor also owns Merck - MRK - $31.86 - This is an income play. The dividend yield is 4.69%, but beware the P/E ratio of more than 118!

What stocks do you think are bargain priced due to the Middle East worries and the terrible Japanese earthquake and tsunami?

brokeinvestor@gmail.com @BrokeInvestor

Japan's Earthquake Effects on US Equity Markets

2011-03-13T23:03:00.000-07:00

The terrible earthquake and tsunami that struck Japan last week was devastating. It not only claimed thousands of lives and threatens many more, but it marks the beginning of a long journey back to "normal."

With that said, the effects of the destruction in Japan were evident in US equity markets on Friday, as Japanese automakers Honda and Toyota each experienced massive sell-offs.

Whether the destructive tsunami caused significant impact on the automakers' business or not remains to be determined. What is certain though is the perception of traders and retail investors alike, who seem to think the two manufacturers will lose a great deal of market share as a result.

As of this writing, the Nikkei is down more than 6.3% and continues a free-fall.

The declines of the Nikkei are likely having an effect on Hang Seng and the Chinese exchange. The Hang-Seng and Chinese exchanges are down a paltry .37% and .22% respectively.

It would be unusual if an event like this, with the following stock market crash, did not create significant "fear" selling on Wall Street when the markets open Monday morning.

With that said, a US equity sell off could signal a great buying opportunity. Companies that are dragged below their intrinsic values can be great acquisitions when temporary fear-based trading takes hold.

At the same time, as we saw Friday of last week, markets State-Side may not be as adversely affected.

brokeinvestor@gmail.com @BrokeInvestor

Three Blind Mice: Losses in Metals, Oil and Stocks

2011-03-10T21:45:00.000-08:00

Although the markets have been creeping lower, Thursday's 228 point drop still came as a surprise to many retail investors.

One could reasonably call it a fear-based sell-off, due to reports of Libyan unrest spreading to somewhat "stable" nations like Saudi Arabia and Yemen. Both countries are experiencing demonstrations from citizens upset with current governments.

It's not often that any event causes a drop in equities, oil and precious metals in the same trading session, but today's movements accomplished just that.

The Dow's loss of more than 1.8% was a little more than half of silvers percentage loss (3.4%) in the intraday session. Gold performed slightly better, giving back roughly 1.6% before regaining its climb after US equity markets closed.

What is very important to remember is that during a sell off, regardless of what market you are following, there are two sides to the transaction. There are an equal number of shares/contracts/ounces being purchased as there are being sold.

While a 200+ point drop on the Dow would normally strike me as a buying opportunity, this one feels different. We've been on an incredible rally on Wall Street since August of 2010, and it might be time this rally took a break.

It may be an unfair advantage for the oil and metals markets, as they are not subjected to the same trading session hours.

Brent crude is back on the rise, as are gold and silver. Lately, a rise in oil or metals puts pressure on the stock market. It should come as no surprise if US equity markets open lower Friday.

Short term, it may be a good idea to take some profits. Long term, now could be a good time to open a position, or dollar cost average your current positions.

brokeinvestor@gmail.com @BrokeInvestor

Thursdays 191-Point Rally

2011-03-03T21:45:00.000-08:00

The Dow Jones Industrial Average logged the biggest gain of 2011 today, rising more than 191 points.

It could be a few things, but depending on Friday's jobs report the rally will remain strong, or the markets will be back to the doldrums of the Libyan situation and oil-scare.

As a holder of Bank of America call options, The Broke Investor is happy to see what Mike Mayo, banking analyst at Credit Agricole, had to say to CNBC:

http://www.cnbc.com/id/41891291

Basically the expectations for Bank of America are so low, any surprise to the upside will help move the stock price in a positive direction. Mayo also said that without overall revenue growth, BAC is looking at earnings of about $2 per share.

Back to the Wall Street rally though, one thing that jumped out at me during today's session was the thought that this could just be profit taking for metals and oil traders.

If the stock market can take a pause on a rally, and often have a major setback for a session or two, why can't the commodities markets do the same thing?

You often hear about profit-taking in the equity market, but rarely is it talked about in commodities (possibly discussed in the oil trades, but thats about it).

So if the jobs number is a miss on Friday, we could see close to, or all of Thursdays gains given right back.

If the jobs number is a positive surprise, and the commodity rally calms, we could see a major bull-run on the Street.

brokeinvestor@gmail.com @BrokeInvestor

Options Update: Ford May 21 Call $16

2011-03-02T18:37:00.000-08:00

Trading options contracts typically results in big wins or big losses. There is not a lot of "grey area" or "average" performance to be had in this arena.

I wanted to update you, quickly, on an options position that The Broke Investor opened in early February.

From the title of this post, you can tell that I purchased a call option for Ford, at a $16 strike price, that expires on May 21st 2011.

Ford was trading around $15.92 the day the options position was opened.

It closed Wednesday at $14.66.

If Ford stock would have been purchased, The Broke Investor would be looking at a $1.26 loss per share, which is about an 8% loss. Not great, but not terrible.

Because it was an options position, which use leverage (not margin), The Broke Investor's % loss to date is just above 58%. Yikes!

(A very savvy options trader could probably use the above information to determine exactly what was purchased, and how much in raw dollars has been lost.)

All hope is not lost however.

Look at the headlines:
"Ford Motor Co. said Tuesday that its February US auto sales rose 10 percent..."
"Ford to Increase U.S. Production 13 Percent"

Actually, those headlines are in reverse order, but you get the idea...Ford is selling cars.

So the recent price depression is most likely resulting from two things:
1. Libyan unrest causing spikes in oil prices, both events that would normally put pressure on equity prices.
2. A small recall announced in late January. Ford's total recall number is somewhere around 135,000 F-150 trucks.

Compare the Ford recall to Toyota's recent recall of nearly 2 million vehicles, and 135,000 doesn't seem so daunting.

With year-over-year increases in automobile sales for Ford in January and February, things seem to point to a fairly lucrative first quarter.

But how will this help recover a 58% loss?

A lucrative first quarter earnings report near the end of April, should give Ford shares plenty of time to climb up beyond the $16 strike price.

Combine that positive earnings report with, hopefully, a solution to the Libyan situation, and stabilizing oil prices, and $16/share could become $18/share, which would be closer to a 100% gain for the options.

A lot can happen, both positive and negative between now and the expiration date.

The simple fact remains: If you are comfortable with the risks associated with options trading, it can be a very profitable trading mechanism, or a very costly one.

brokeinvestor@gmail.com @BrokeInvestor

It's Not Just the Gas Station

2011-03-01T21:25:00.000-08:00

Gas prices in Seattle spiked $.10 overnight, and there is probably further increases to come. Some wonder if its price gouging, but retailers are backing up their price jumps with an "unknown future" in the Middle East, and rising crude prices.

What's interesting to know is that the often-quoted price of oil in the media, which is $100.03 as of this writing, is the price of a futures contract. The current contract that is most talked about is the April 1 contract.

The price that you are hearing about is not the price that anybody has paid recently for a barrel of oil. It's what the barrel will be worth upon expiration of the futures contract.

Now, gas retailers will often raise their prices when there are impressive spikes in the price of light crude, which is the oil used to produce most gasolines. But why don't the prices go down in correlation with the drops in the same barrel of oil?

The way I see it, there is price gouging happening all the time during a declining or steady oil price. During a "panic" like the one we are seeing the trading on now, the prices are rising quickly, but at a fair pace commensurate with the price of oil.

And its not the gasoline retailers, necessarily, that are gouging consumers on price. It goes all the way up the line.

When you pay $3.69 for a gallon of gas, you have to pay (in most cases in the US) a state tax. Washington State's gas tax is around $.38 per gallon.

The retailer has to buy it from their supplier (sometimes the same company, sometimes not), and profit margins have to be figured in here.

The supplier has to pay for transportation. There must be profit margin built in for the drivers to deliver the gasoline to the various retailers.

The refiners send their fuel through massive pipelines. The pipelines (like The Broke Investor favorite, Kinder Morgan Energy Partners) have to make a profit for use of their pipeline network.

The refiners have to buy the crude oil to refine into gasoline from the producers (like OPEC).

So the refiners produce gasoline to put into the pipeline to sell to the suppliers to truck to the retailers to sell to you, giving your State a cut.

This system blows away the middle-man mark-ups on retail items like clothes and electronics. To get a gallon of gasoline you are paying the salaries of at least five people.

It's not price gouging, but the more you drive, the more you are supporting the families of those five people. Of course the share of profits are not nearly the same on any of these levels, but know that when you fill your car with gas, the $65 it costs you could be feeding more than 20 people.

Wow.

brokeinvestor@gmail.com @BrokeInvestor

Breaking the Rules of an Investor?

2011-02-23T22:06:00.000-08:00

So Libya's dictatorial leader, Moammar Qaddafi and his countrymen are feuding, causing oil prices to rise.

These rising oil prices are doing no favors to strengthen a weak economy in the United States, and are putting huge amounts of pressure on equity markets. Except of course for major oil companies. The surprising fact to learn is that Libya produces less than 2% of global oil.

The oil that Libya produces, and the reserves that it holds, are known as "Light Sweet Crude" commonly traded as "Brent Crude" on mercantile exchanges. This sweet crude is easier to refine into oil, gasoline and other fuels.

So, while this conflict can stymie an already-fragile, rebuilding portfolio and shake the consumer confidence that had been steadily growing of the past few months, it can also provide a great buying opportunity for a broke investor, looking to get into the equity market at a good time.

This is not about market timing, however, its about breaking rules.

While the writing may have been on the proverbial wall, The Broke Investor did not see this market pressure coming from turmoil in a country like Libya.

If these same protests were taking place in Saudi Arabia, it would have been an entirely different story.

As The Broke Investor, a major rule of being an investor, especially a low-capital investor, was broken.

I was not in a position to capitalize on the negative pressure on the equity markets.

This is a valuable lesson, or an expensive lesson from where I am sitting.

Had I kept 10% of my portfolio in cash, the current market pullback would have allowed for two things to happen:

1. Protection of assets: My open positions would have represented a smaller amount of my overall portfolio, and the price depreciation would not have made as significant of an impact.

2. Ability to exploit the pullback: I would have had cash on hand to put to work on an investment or trade I have been researching and waiting for the right situation.

In this case, it's better to have not had at all, than to have loved and lost.

Lesson: Always keep a percentage of my portfolio in cash, or cash-equivalents.
Expensive Lesson: Always keep a percentage of my portfolio in cash, or cash-equivalents.

Important Note: The situation in Libya is a very sad one. It goes far beyond winning and losing in the financial markets, and The Broke Investor hopes for a quick and peaceful resolution to the conflicts in Libya and other Middle Eastern Nations.

brokeinvestor@gmail.com @BrokeInvestor

Stocks or Stock Options?

2011-02-22T21:34:00.000-08:00

Here are two questions that I will pose, and attempt to answer.

1. Does it make more sense to buy shares or call options if the underlying stock doesn't pay a dividend?
2. Are options a good way of investing when you don't have enough to buy a decent position in a stock?

You need to assess the risks, and understand your reasons to buy a stock, or put your money in any type of investment vehicle.

To answer the first question, it depends.

The first thing you need to know is that a call option has an expiration date. If you're long-term bullish on the stock, make sure you're outlook is shorter than the expiration date of the call. If your call option expires in the money, it will automatically execute. If it expires out of the money, you lose 100% of your investment.

You can sell your option contracts similarly to the way you purchased them, to take a certain amount of loss as opposed to riding it all the way to the end.

This brings up the next important thing to pay attention to, risk.

When you buy shares of a stock, you own that portion of the company. You only lose 100% of your investment if the shares become worthless (or less than the cost of liquidation).

Now if the stock doesn't pay a dividend, you're only growth comes from price appreciation. Conversely, a call option's growth comes from price appreciation only as well.

So far, it doesn't make sense to buy the stock or the call option. So what's a broke investor to do?

In some situations, it can make sense to buy the call option, and in others, it makes more sense to buy the stock.

In the case of The Broke Investor, we purchased call option contracts on Citigroup, as the stock doesn't pay a dividend, and it has growth potential beyond the $5 strike price.

Of course, with the Libyan conflict (and probably some profit-taking too), this option is way out of the money. Luckily, there is still enough time left until expiration to weather the effects of this downturn/correction.

By expiration for the Citigroup call, there should be ample time for the shares to increase well beyond the $5 strike price that was purchased.

To answer the second question, probably not.

It can be a way to diversify your portfolio with smaller dollar amounts, but the leverage that options create can be huge risks.

Because of the expiration feature of options, it's a trade, and not an investment.

Take a stock like Disney. It's a huge company (owns ABC/ESPN), that continues to profit from an expanding portfolio of revenue producing assets.

If you wanted to benefit from being a shareholder in Disney, you would not want to buy options on the stock. You would want to buy shares of the stock. If you had only $1,000 to invest, you'd only be able to buy 22 shares.

However, if you're bullish on Disney's prospects for the next 2-10 years, you would want to own the stock itself. You'll collect the dividend, which is $.10 per share, per quarter. Even though its less than 1%, you're in the stock for the growth, so the extra 1% return is a nice bonus.

With two sides to every story, if you think Disney is going to hit $50 by the end of 2011, you can buy a January 21 $45 call option contract, which gives you the right to purchase 100 shares at $45 by or before January 21st, 2012. If the price hits $50 in November 2011, you can sell, or exercise your option.

As a call option holder, you don't collect the dividend, because you're not a shareholder.

It's very important to understand that options are derivatives, and usually require a minimum cash position and occasionally require margin-approved accounts. If you're uncomfortable with purchasing a derivative, stay away from options.

brokeinvestor@gmail.com @BrokeInvestor

Silver Value Relative to Crude Oil Value

2011-02-21T10:00:00.000-08:00

We've seen the comparison of relative valuation between gold and silver, which shows us that silver is overvalued, or that gold is undervalued.

Gold Value Relative to Silver Value

Of course, this information takes into account gold and silver prices as the only variable in determining this comparison.

So what if we compare the prices to another common commodity like oil?

Ask and you shall receive: The price of a barrel of crude oil displayed as a multiple of an ounce of silver.

This chart shows the relative value between silver (oz) and crude oil (bbl) from 1970 to 2009.

PLEASE KEEP IN MIND THE HISTORICAL DATA FOR THIS CHART!

This does not include the unprecedented run-up that silver has had since the beginning of 2010, but it gives an accurate illustration of what is happening between crude oil and silver.

Even though both commodities are based off of the US dollar, this chart shows tremendous growth in the relative value of silver.

The average multiple is 7.1x ounces of silver to a barrel of crude oil. It is interesting to note that the value of oil has not been able to keep up with the average value of silver since early 2005.

What does this information tell us? It tells us that the value of silver, over the last 40 years, has outpaced the value of oil over the same time period.

According to the law of supply and demand, our graph shows us that silver is being used at a faster pace than crude oil.

Will we see a day when the price of an ounce of silver and the price of a barrel of crude oil are on par?

While researching the data required to put together these graphs, I noticed something interesting, which I have yet to uncover the reasons for: 1980 saw the some of the highest values of gold, silver and oil.

1980 Highs:
Gold - $875/oz
Silver - $50.36/oz
Crude - $99.11/bbl

brokeinvestor@gmail.com @BrokeInvestor

Gold Value Relative to Silver Value

2011-02-20T20:17:00.000-08:00

In a post earlier this month, we talked about gold's value as a multiple of silver's value.

Precious Metals: Silver Bullion

I want to expand on the multiple's chart, but also introduce a few new thoughts on relative valuation, and what sense these types of investments make for a broke investor.

This chart shows the value of gold (oz) in multiples of silver (oz), from 1970-2009, based on average prices of gold and silver.

As you can see, in 1970, you would've needed 20.44x ounces of silver to buy an ounce of gold. It reached a high of 89.94, nearly 90 ounces of silver to purchase one ounce of gold, in 1991.

The average multiple in the period graphed above is 54.53x

As of this writing on Sunday, February 20th, the multiple is 42.31x.

Looking at the situation plainly, you could argue two things:

Silver is overvalued, represented by the lower than average multiple.
Gold is undervalued as measured by a multiple of silver.

The relative valuation we see between silver and gold hasn't been this close since 1983-84. At that time, an ounce of gold averaged $423.43, and an ounce of silver averaged $11.44.

Next: Silver Value Relative to Crude Oil Value

brokeinvestor@gmail.com @BrokeInvestor

Facebook IPO and Valuation

2011-02-12T23:24:00.000-08:00

Anyone who has seen the movie, The Social Network, is undoubtedly impressed by the story of Facebook.

A college-kid, having a few beers with some friends, blogging, and writing code, ended up creating, quite possibly the worlds most well-known social networking site.

Now there are talks of Facebook going public, filing an IPO so that everyone can get their hands on their fair share of the success of the company.

But the valuations that have been carelessly tossed around in the media? $50 billion? $60 billion?

According to a report given to potential investors, during the first 9 months of 2010, Facebook revenue came in at $1.2 billion. Annualized, this represents $1.6 billion in annual revenue, and displays a quarterly growth factor of roughly $400 million.

To get to a valuation of $50 billion, at estimated revenue for 2010 of $2 billion, you would be looking at a 25x earnings multiple. This is similar to a price/earnings ratio for valuating a stock price which was discussed in Make Sure You Get What You Pay For.

With $2 billion in estimated revenue for 2010, that would represent $800 million in sales in Q4, which is double the average quarterly sales for the first three quarters of the year.

While it is possible that a company like Facebook could double their average quarterly revenue once in a while, a consistent 100% quarterly growth is unlikely.

Let's say that the revenues double each year. Here is what the total revenues for Facebook would look like:

2011: $4 billion
2012: $8 billion
2013: $16 billion
2014: $32 billion
2015: $64 billion

It is conceivable that Facebook revenues could double in 2011, and 2012, and even in 2013. What is unlikely is to continue that growth trend beyond that time.

This necessary growth multiple calls into question, for a broke investor, what exactly is driving the valuations of Facebook at $60 billion.

Lastly, let's touch on margins. The report that showed the revenue also pointed out an income of $355 million on $1.2 billion in revenue.

That equates to roughly a 30% profit margin. To put this into perspective in a related field, Microsoft's average margins are in the mid-to-high 70% range.

Steve Ballmer Likes This.

Brokeinvestor@gmail.com @BrokeInvestor

Check Your Emotion at the Door

2011-02-10T20:19:00.000-08:00

While The Broke Investor believes in a predetermined purchase and sale price, and the benefits of limit orders to take the emotion out of investing, I am guilty of letting emotion take over.

Typically, I can keep my emotions in check when it comes to making investment decisions. At other times, I choose to invest or not to invest based on a gut feeling about the opportunity.

Predetermined price strategies work very well to limit the amount of emotion involved with your portfolio. Check out this short post, Predetermined Strike and Exit Price for more information on these strategies.

Here are the three emotions that seem to be most prevalent:

1. Greed
2. Fear
3. Excitement

Greed:
This is the most dangerous emotion when it comes a positive return. An trade or investment that has made a great run can create a greed, and a false sense of immortality.

When you open a position in a trade, you should know what you are willing to pay, how much you are willing to lose, and how much gains to take.

Otherwise, greed can cloud your judgement, and a big win can turn in to a major loss.

Fear:
Because of my conservative nature, I tend to be more skeptical than some situations call for.

When I find a great opportunity, perfect for a broke investor like me, the first test is to see how easily I can talk myself out of it. While it is smart to properly research any opportunity, sometimes over analyzing can cost you potential gains.

As a limiter, this fear can prevent me from making a profitable move in my portfolio.

Excitement:
On the flip side of fear as a limiter, excitement can be an enabler. Find an opportunity that looks good from nearly every angle, and pull the trigger.

This is a fairly easy way to get burned, and I've had my fair share of exciting opportunities turn into fiscal disasters. This possibly exacerbates my conservative natured fear.

The important thing to do is properly plan for each investment or trade that you will make. This means doing all the necessary research, pre-planning your purchase price, and your sale price in the black and in the red in the case of a loss.

Now, in the case of limiting gains, a trailing stop or a limit order can allow you to take advantage of upside potential without risking the gain you set out to make.

Taking 100% of the emotion out of being a broke investor is unlikely, but if you can limit the negative side-effects of letting your emotions run away from you, you will enjoy the execution of a strategy, versus a "buy-and-hope" investment style.

brokeinvestor@gmail.com @BrokeInvestor

Trading Options: Like Stocks, More Risk

2011-02-07T22:24:00.000-08:00

Please note: This post is not encouraging anyone to engage in options trading. Options carry risks that are different than many other investments.

Options trading is a fast-paced, volatile, derivatives game.

As a derivative, when you buy options, you don't actually own anything tangible as you do when you buy stocks. The option, whether it is a call or a put can is a purchase of the right, but not obligation, to act in a certain way, at a certain price, by a certain date.

Earlier posts have discussed simple options strategies, mostly covered calls, to generate cash flow from your portfolio. The Broke Investor uses many of these strategies as a way to mitigate the fees associated with trading.

To see how your trading fees and cost basis can be improved, scan these previous articles:

More "Wrong" Strategies on Investing
The Bears Ring in Q4 on the Dow
Sideways Moving Market Strategies
No Bear, No Bull, Dividend Market

But this post is about trading options. Not executing conservative options strategies. This post is about taking advantage of what the markets have to offer, and using non-margin leverage to earn bigger returns.

Thus far, The Broke Investor has sold covered calls, and described how those can effect minor changes on a per-investment basis.

Recently, as discussed in Expansion on the Bank of America Long Trade, you will see that The Broke Investor went long with LEAP options on Bank of America. (you will also see that I called it a long investment. It is more of a trade than an investment, but with longer than a year before expiration, it was, at the time, considered an investment)

At the time of the options purchase, BAC was getting hammered by the Robosigning allegations, illegitimate foreclosures, and a deeper sub-prime debt situation than previously thought. Days after, the WikiLeaks founder commented that he had information that would sink "a major us financial institution," hinting at Bank of America. States were filing lawsuits attempting to force BAC to buyback sub-prime mortgage backed securities.

It seemed that the news was all too negative, and therefore, unjustifiably depressing the price of the stock. So I put in the order to buy Long-Term Equity Anticipation options on Bank of America.

So far, the options have increased in value, considerably. But this post is about trading options, so here is what can happen.

If Bank of America's stock continues its climb, the options will continue to appreciate in value. Obviously as the price of the underlying security rises beyond the strike price, it will always carry value.

What can happen, though, is price stagnation.

If BAC sits at $14.67 for three months, the value of the options decreases. This is because the "time premium" will be losing value. There will not be enough time between May 11 and Jan 12 for as much price appreciation. The call still has value, more so than when it was purchased, but the premium will approach the price differential between the strike and current market value.

The worst case scenario for buying a call option is the price of the stock going down. Yes, purchasing a call is a long strategy, but here is where the risk can be much worse than buying the underlying assest outright.

Using the same BAC example, lets say the stock price falls in Q2, 2011, because of bigger loan losses than anticipated. Follow this up with stagflation, and even slower economic recovery, and you've got a declining stock price. If the stock, on the expiration date, is worth $11.99. The entire investment is worthless.

That's right. $.01 below the strike price can cost you everything you put into the call option.

In the case of owning the underlying stock, you would have lost $.01 per share. No big deal.

So you can see how an investment in a call option contract can have incredible gains, but also terrible losses.

It is important to understand the risks at play in the options trading game. The scenarios discussed here do not cover all of the risks or potential rewards associated with trading options, but they give a general idea for how call options purchasing works.

So far, The Broke Investor has yet to engage in put option buying. This is the case mostly because the rally on Wall Street is showing no signs of stopping.

Brokeinvestor@gmail.com @BrokeInvestor

Peer to Peer Lending: Getting In the Game

2011-02-04T23:03:00.000-08:00

If you've been here before, you've heard about Peer to Peer Lending. And in case you haven't, please view some of my previous posts to familiarize yourself with it.

Peer to Peer Lending
Peer to Peer Lending: Worth the Risk?
Peer to Peer Lending: Pro's and Con's

To follow up on the previous writings, The Broke Investor is engaged in P2P Lending, as an investment.

Although this is a brand new investment vehicle for The Broke Investor, understanding of the process and the probabilities exists.

The program I use gives me a list of borrowers, their reasons for borrowing, and a brief description of their credit history, as well as the ability to ask questions. It shows delinquencies in the past 7 years, as well as current revolving credit balance.

The minimum investment allowed on a "note" as its called, is usually $25. The usual term for the investment is usually 36 months.

Borrower interest rates range from 6.55% to 36.55%, depending on their rating from the program administrators. There is a 1% fee taken by the program administrators as their revenue source.

So here was the theory behind putting $1,000 to work in P2P lending:

$1,000 is a risk that is affordable
With a $25 loan at the minimum 5.55% interest rate (1% taken out by the administrator), each month, the amortization would pay back roughly $.73
Assuming all the loans are at the minimum return of 5.55%, it takes 35 active loans each month to earn $25 in principal and interest each month, or a 2.8% monthly return.
With just $875 invested at $25 per loan, this annualizes to a $300 gain, or a 34% annual return.

Of course, as with any investment comes risk. The risks involved with P2P lending are pretty straightforward.

If a borrower defaults on the loan, you dont get paid back. These loans are unsecured, and therefore you get nothing when the loan is defaulted. In most cases, the program administrator will send the deadbeat to collections, and recover what they can for the investors, less collection fees, of course.

What is a little less straightforward as a risk is the chance that a borrower repays the loan ahead of the amortized schedule of payments.

Your full returns are only realized when the amortization schedule is repaid each month for the full term of the loan. If the loan is repaid early, you realize the gains in interest that were paid, and a refund of your principal investment. So you dont lose money, but your gains are limited.

The ability to double your money in just over three years represents a well calculated risk for a broke investor. Nothing in life is a sure thing, and P2P lending is no exception.

With risks defined as plainly as those associated with P2P lending, it makes The Broke Investor confident in the ability of this investment to pay off.

Investing vs. Trading and Ford Commentary

2011-02-03T21:55:00.000-08:00

Reading through some of the posts from the last 18 months on The Broke Investor, one might challenge the name "investor" and call it The Broke Trader.

That challenge wouldn't be without merit because there are MANY strategies discussed on this site that are definitley short-term trading strategies.

So what is the difference between trading and investing?

First, the Dictionary.com definition of investing:

Invest -- to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.

So this encompasses trading and investing. But the fundamental difference, to The Broke Investor, is the length of time that something is held.

Though the words are used interchangeably throughout The Broke Investor writings, true investing is a long-term position that is held for the purpose of growth or income.

We define trading as "investment" strategies for short term (less than 1 year) gains.

Selling 1000 shares of Merck short is a trade.

Buying 250 shares of Exxon Mobil is an investment.

You invest in your company-sponsored (and hopefully matching) 401k program.

You trade in your Roth IRA, because the gains are tax free.

You might invest and trade in your taxable portfolio because your wins and losses affect your tax bill, and you have access to that money whenever you want it.

Here comes an idea:

Ford is trading at about 9 times its latest earnings per share. If you take the mean average of the last eight quarters EPS, the multiple is 9.5x earnings.

Because GM recently went through its IPO process (for the second time), historical earnings data is unavailable. If we had to guess, GM is likely trading around a 16-18x multiple, given excitement about the IPO and their new all-electric Chevy Volt (which stays on a dealership floor for 7 days).

Toyota trades at about a 19x earnings multiple.

Honda trades at around 11.5 times earnings.

This points to undervaluation for Ford, strictly speaking in terms of earnings multiples.

For a broke investor, it makes Ford look like a good opportunity for a nice gain. Ford maintains a much higher profit margin than GM and a slightly higher revenue report for 2010.

While most analysts are advising against Ford, The Broke Investor is looking for a $1-$2 rise in price by the end of April (after Q1 '11 earnings). This would qualify as a trade by The Broke Investor standards, rather than an investment. The automotive industry is showing signs of life, but seems too risky without the comfort of a dividend for a long-term investment.

Please note: This is by no means a recommendation to purchse, simply a statement of opinion by the author.

Brokeinvestor@gmail.com @BrokeInvestor

Precious Metals: Silver Bullion

2011-02-02T22:47:00.000-08:00

I have written about this before, but the more I learn about precious metals investing, the more I like the idea of it.

Right now, the prices seem to be a little overboard, and here are two reasons why I think that way:

1. When the stock market crashed in 2008, people rushed out of the markets, and into "safer" investments. Silver and gold are natural places for people to store money.

2. Media and Marketing attention has caused gold and silver prices to skyrocket. This causes a mass hysteria of hyperinflation worries, and creates a mad-dash to the local coin and bullion dealer.

An interesting look, though very rough, at Gold versus Silver prices over the last 18 years:

For Example: Looking at 1998 ("4") shows the multiple is 69, this means you would need 69 ounces of silver to buy one ounce of gold.

Please note that this graph is by no means scientific, but it gives you a relative estimate of the price differential. While it would be much more valuable to study the very long term relationship between the two metals, this provides enough of an illustration to see that gold has, over the last two decades, seemed to outpace silver in price appreciation.

More to come later on this, but I wanted to share this illustration. In The Broke Investor opinion, both gold and silver seem to be a little high in price, although they do represent the ultimate hedge against fiat currency inflation.

Fiat currency is paper money and coinage that is minted without a physical product backing its face value. There are limited reserves of gold and silver, but we can print as much paper money as we want (well, we cant, but governments can). The continuation of paper money printing will drive the cost of silver and gold higher.

brokeinvestor@gmail.com @BrokeInvestor

Rich Dad Stock Success

2011-01-29T12:18:00.000-08:00

Earlier this week, the folks from Rich Dad Education (spawned from Robert Kiyosaki's book Rich Dad Poor Dad, a great read I might add!) gave a "Stock Success Seminar."

Knowing that it was likely a sales pitch, I thought it would be good to see how they get you to buy, and what they promise to teach you.

I arrived about 15 minutes prior to the start of the presentation. There were about 30 people milling about the lobby of the hotel where it was being held. After registering (getting a name-tag and a 5-gram .999 silver ingot), I watched as other attendees arrived.

As I took my seat, I noticed that there were about 70 people with diverse backgrounds, ages ranging from early 20's to 75 and older, and about a 50/50 male/female split.

Before the presentation officially began, a disclaimer was displayed, which I will touch on at the end.

The presenter walked to the front of the room and immediately touted his achievements. "I've given 1,500 of these presentations, and I make a LOT of money trading options."

First thought: This guy has been doing this a while.
Second thought: If you did three presentations per week, and worked 50 weeks per year, you would have had to been doing this presentation for the last 10 years, and never missed one.
Third thought: If you are making so much money trading, why bother doing these seminars?

Keep in mind that the purpose of the free seminar, which Rich Dad Education doesn't try to hide, is to sell you an advanced, three-day "training program."

The focus of what the presenter had to offer, besides selling the advanced training program was stock trading, and how much profit can be derived from it.

Crowd interaction is a must for the presenter to be successful,

"This is Kelly here in the front row, and I am going to ask Kelly to hold me accountable to you guys, to make me offer you the best deal I can at the end of this seminar."

Through a series of "raise your hand if..." statements and cheese-ball attempts at humor, the crowd became very involved.

After an hour of showmanship (reminded me a lot of a streetside pitchman), the presenter gets to the ask.

"We offer a 3-day training, and I need the luxury of your time. Forget what it costs, that's not important, I need you to commit to three days for this truly unbelievable training."

Here's what you get:
Here's where it will be held:
I need the luxury of your time
Here's what you will learn:
You will never have to work for anyone else again

Right...

At this point, about 10-15% of the audience walked out the door. I guess they didnt expect to be sold at a "free stock success" seminar.

Then came offers for programs from two partner companies. Two vendors, who are selling services, so you can actually use what you will learn from the 3-day training.

After 30 minutes of trying to push the 3-day program, we finally get the price:

"Most training programs like this are about $3,000, right? (waits for a show of hands) Okay. Well our program has much more to offer than anything else you will get. I think we could sell this for $6,000. Easy."
[Pause for dramatic effect, stare at audience members]
"I told you that Kelly was going to hold me accountable to you guys, for coming to this seminar tonight. And I am going to keep my promise to you, and offer you this amazing training program for $199."

Remember that I said I would touch on the disclaimer that was displayed at the beginning? Well here is what I found in the disclaimer, that didnt quite match up to what was presented.

This is not verbatim, but it read something to the effect of: "These testimonials are from real Rich Dad Education students...Average cost per student was about $4,990."

So the free seminar sells the 3-day training, which is actually a 3-day sales pitch for advanced educational programs, which can cost anywhere from $500 to $15,000.

I am sure that if one had the money, and no knowledge of the process of investing, it would be money well spent. But what it really appeared to offer is demonstrations of trading strategies that are defined on Investopedia, and probably step by step instructions available elsewhere online.

brokeinvestor@gmail.com @BrokeInvestor

Make Sure You Get What You Pay For

2011-01-19T22:45:00.000-08:00

If you have heard people talk about PE's or the multiples, they are all talking about the same thing.

They are talking about the stock price, per share, as a multiple of the annual earnings of the company.

To determine the actual Price/Earnings ratio, you divide the share price by the annual earnings.

P/E ratios have long been used as a relative valuation tool when looking at individual stocks.

Example:
Microsoft - MSFT - closed Wednesday at 28.47.

MSFT's last four quarters worth of earnings totaled $2.32. Divide 28.47/2.32 and you come up with a price/earnings ratio of 12.3x.

That means that the market values Microsoft common stock at 12.3 times the amount of money, per share, the company actually earned (in revenue, not profit).

P/E ratios have been used to give relative valuations to stock prices, which is a good thing. But when you look at a recovering market, like the one we're in, it is important to pick out P/E ratios that are favorable when compared to the market as a whole.

To do this, we look at the S&P 500 P/E ratio, which we can find by looking at the Vanguard S&P 500 Index Fund. (Ticker VFINX). As of this writing the P/E of the S&P 500 is 17.1x. Vanguard is one of many, many fund companies that has their version of the S&P 500 Index Fund. There are a few things that can vary from fund to fund, so be sure to do your research.

This tells us the average price, as a multiple of earnings, that investors are willing to pay for stocks is roughly 17 times their total earnings.

Great, so what does this mean as a broke investor?

Very loosely, it means that if you can find a good company with earnings growth potential, that is trading at a P/E below the market average, investors may be willing to pay higher prices than what it is currently valued at.

Finding a bargain, by P/E standards would be finding any stock that's P/E ratio is lower than that of the S&P 500 index.

Let me reiterate: This thinking is loosely based on the law of averages.

Be careful to also make sure that the stock in question is traded on a major exchange, and is not traded on the Over The Counter (OTC) or Blue Book markets. These stocks are not tradeable quite like the equities listed on major exchanges.

This is one piece of research that should be utilized when deciding on a stock to invest in. This should not be the ONLY thing an investor looks at before making a purchase or sale decision.

brokeinvestor@Gmail.com @BrokeInvestor

Banks: One for Two with One Out, Heavy Hitters on Deck

2011-01-18T21:05:00.000-08:00

Seems like everything lately has been about banks here at The Broke Investor.

That's true, and for three reasons.

1. Without a growing financial industry, what else can grow?
2. Earnings season kicked off last week with a JP Morgan positive surprise, Citigroup missing estimates, and Wells Fargo, and Bank of America set to report on Thursday and Friday respectively.
3. Financial stocks seem to be trading at bargain prices that allow a broke investor the opportunity for nice gains.

I should let you know that The Broke Investor is Long Citi, with an option position.

It's not a strategy that is "advised" per se, but I see the risks as a necessary step in realizing nice gains. Afterall, the same position I opened for Bank of America a few months ago is now up just over 100%. Not bad for putting my money to work for me.

Getting back to the business at hand, though, the broader markets rallied despite Citi's disappointing pre-market announcement.

Having Dow 12,000 within a good days (and earnings reports) reach, investors have a lot to look forward to. And if the major banks (JP Morgan Chase, Citigroup, Wells Fargo and Bank of America) can bat .500 or better this earnings season, 12,000 will become merely a formality.

brokeinvestor@gmail.com @BrokeInvestor

Options 102: LEAP Call Buying

2011-01-16T16:16:00.000-08:00

You've seen The Broke Investor cover options strategies like the covered call, and mention others like protective puts, naked calls, etc.

Here's a new strategy which The Broke Investor put into play with Bank of America's stock in Q4 2010.

It's called a LEAP or LEAPS.

It stands for: Long-Term Equity Anticipation Securities. Basically, its an option contract with an expiration date one or two years in the future.

Buying a LEAP Call means that an investor is bullish on the stock in the long-term (12 months or more). Remember that you will pay a premium on the option, typically higher than a short-term call. The LEAP functions the same way as a regular option, with a strike price, expiration date, and premium value per share.

For example, a Citigroup LEAP for January 21, 2012, at a $5.50 strike costs $.58 per share. Each contract, remember, is 100 shares, so the premium for that LEAP contract is $58.

This contract gives you the right, but not the obligation, to purchase 100 shares of Citigroup stock for $5.50 at or before the expiration date. Stock options expire the third friday of the month, but the expiration date is listed as the following Saturday.

If an investor is bullish on the stock why not buy the stock outright instead of paying a premium for the option?

In some cases it makes more sense to purchase the underlying stock versus the call option, because you can collect dividends or partnership distributions.

In The Broke Investor's situation with Bank of America, a stock that pays a pathetic $.01 quarterly dividend, it made much more sense to purchase the option contracts.

At $12.50 a share, 1000 shares would have cost $12,500 (plus commissions). Buying 10 call option contracts, on the other hand, only cost $1,270 (plus commissions).

For an investor who didn't have $12,500 idling in a brokerage account, the options made more sense.

Over a one year period, the dividends would have returned just $40, and there would have been $12,500 of capital put at risk.

With the options, there is $1,270 risked, with unlimited gain potential.

Now on the other side of the coin, if BAC goes from $12.50 to $11.50 by the expiration of the option, the LEAP purchaser (The Broke Investor) loses $1,270. The shareholder with 1000 shares only lost $1,000.

So it's not a sure thing. But, optimistically, let's say BAC is trading at $18.50/share in January, 2012. The shareholder has a $6,000 gain, plus the $40 in dividends. There is no doubt that this gain will outweigh the option holder, but again, the shareholder put at risk, $12,500.

The option holder, at $18.50 a share has two directions to go. Sell the option , or exercise the option, and buy the shares at $12.50.

Let's say the premium is at $5.95/share for the option. The option holder's value is $5,950, on a $1,270 investment. If they sell the contracts they have, they walk away with $4,680, before commissions. This is a 368% profit.

If they choose to exercise, they'll buy the stock at $12.50/share, an outlay of $13,770 ($12,500 + $1,270), and immediately sell it for $18,000. Taking a profit before commissions, of $4,230, without the $12,500 ever being at risk.

Bottom line: The LEAP option can be a great strategy for a broke investor. But it is important to remember that when purchasing a LEAP Call option, you may lose 100% of your initial investment.

brokeinvestor@gmail.com @BrokeInvestor

Gold Sliding and Banks Rallying

2011-01-15T10:56:00.000-08:00

Call it a correction, or blame it on the slowly-but-surely recovering economy. Call it whatever you want, just understand that the price of gold appears to be at the beginning of a free-fall.

While the price of gold has run up impressively in the last 14 months, things may be starting to change for the longest traded commodity.

12/31/10 saw gold close at $1404/oz. Friday 1/14/11, just two weeks later, saw gold close at $1361/oz, a difference of $43/oz.

This represents just a 3% move to the negative for gold, but many signs of an improving economy, a strengthening dollar index and stabilization in Europe, could point to further declines in the value of the yellow metal.

Long term, The Broke Investor feels that gold is fairly priced. Don't look for it to break through the $2000/oz range anytime soon, but over the next 5-10 years, it is unlikely that gold will be worth less than it is today. Gold can be a very favorable investment vehicle, because price is really the only variable. (Please note this does not apply to numismatic gold, the "collectors" gold. This is referring the price of pure .9999 gold).

Meanwhile on Wall Street, bank earnings have been "as good as gold" so far for Q4 earnings season.

JP Morgan Chase announced earnings of $1.12/share, which outpaced analyst expectations. This is good for JPM, but also sets the table for a huge bank rally as other major US banks report their earnings.

Next weeks bank earnings reports:

Tuesday 1/18:
Citigroup

Wednesday 1/19:
Wells Fargo
US Bank

Friday 1/21:
Bank of America

Positive earnings surprises will launch the financials to new heights, and could push the Dow close to 12,000.

Conversely though, a negative surprise from even one of these financial beheamoths could derail the January rally that investors have been enjoying.

To reiterate, JP Morgan Chase set the scene for a massive rally next week. If the others can come to the party, it will not be something that any investor will want to miss.

brokeinvestor@gmail.com @BrokeInvestor

Precious Metal Investing: Bullion

2011-01-06T18:35:00.000-08:00

There are many different ways to "be in gold". You can buy gold mining stocks, corporate bonds (in some cases), government issued notes like Silver and Gold certificates, which are more collectors items now, ETF's and other sorts of funds and futures.

Another way to invest in metal is taking delivery of the physical metal itself. This is known as Bullion.

THIS IS GOLD BULLION.

THIS IS CHICKEN BOUILLON.

Not that the two are often confused, but the fact of the matter is, bullion is physical product.

The values of gold and silver have shot up in recent years and the new highs hit in 2010, in the opinion of The Broke Investor, were a result of a less-than-robust economic recovery.

It goes beyond bad economy = high commodity prices. You have to factor in things like a struggling Euro, highly manipulated Yuan valuation, and a depressed US Dollar. You have to factor in the fact that more and
more people are exposed to the opportunity to buy precious metal.

More recently than 60 days ago, a new ETF has hit the market, NYSE Arca, that is backed by physical bullion of "white" metals. It includes Silver, Platinum and Palladium in 55%, 33% and 12% respectively. The fund prospectus' overview says cash will be 1 percent or less at any time. It trades under the symbol, WITE, and comes from ETF Securities.

It's not just for the rich anymore. Many retail investors are adding gold and silver exposure to their portfolios. This could be owning bullion, futures, mining companies or ETFs.

Speculation on the price of gold and silver seems to be a fools errand. Especially since in the last 5 years, many ETF's have been added to the market, which will increase volatility and risk.

Here at The Broke Investor, we are going to take a long-term look at physical gold and silver, bullion, as a long term inflationary hedge. The gains that gold and silver have made are almost a perfect inverse correlation with the value of the US Dollar.

With continued devaluation pressure on the Euro, and the possibility of the EU countries moving away from a unified currency, further appreciation in the price of commodities, over the longer-term are likely. The longer-term here would be 1-3 years.

Because of a recovering US and world economy, and the unprecendented price appreciation, The Broke Investor expects to see a pullback in the pricing for gold and silver in the coming months. We are bullish long term when it comes to bullion, especially as protection against high inflation, but the buying opportunity may not be here just yet.

brokeinvestor@gmail.com @BrokeInvestor

Precious Metal Investing

2011-01-05T22:24:00.000-08:00

Everyone has heard about gold and the tremendous run-up the yellow metal encountered in 2010.

Because of the desire it creates among humans, gold has long been used as a means of transacting business. Whether actual currency, barter, or gold-backed government notes, it maintains share of mind.

Up nearly $400 per ounce in the last year, gold has been one of the most sought after investments in recent history. The high sits less than $80 away from Wednesdays price of $1376. In the last 52 weeks, gold has seen an impressive 20% appreciation in its value per troy ounce.

THE US AMERICAN EAGLE COIN IS ONE OUNCE AND HOLDS A GOVERNMENT GUARANTEE

What might be more impressive is the run-up that Silver has had in relatively, the same time period. Silver, shown below in bar form, is also valued per troy ounce (ozt), but has outpaced gold, rising better than 60% in 52 weeks time.

As of Wednesday, silver reversed a two day slip and closed at $29.41.

So how can a broke investor invest in the two most common precious metals? There are a wealth of opportunities, but one must carefully choose if, and how this vehicle can be right for them.

Check back tomorrow for Precious Metal Investing: Bullion.

brokeinvestor@gmail.com @BrokeInvestor

Bank of America Call Follow Up

2011-01-04T13:39:00.000-08:00

A few months back, The Broke Investor asked if we should invest in long term call options on Bank of America stock. At the time, mid-October, the stock was trading around $11.80 and the mortgage buyback discussion was heating up.

We decided to move forward with the strategy, and thus far it has been a good decision. Budget constraints and an initial foray into buying call options (other than to close a position), kept us from investing a large amount of money.

Staying true to our name, here is what we bought:

4 Call January 21, 2012 $12.50

What that is, is four contracts for call options. This gives us, the buyer, the right, but not the obligation to purchase 400 shares of the underlying symbol at the strike price, by or before the expiration date.

In this case the expiration date is January 21st, 2012. The strike price is the predetermined amount at which the shares will be bought.

Why did we make the investment?

1. The banking industry was in turmoil, and the prices were dropping. Because of a lower price, we were able to lock in a favorable strike price, at a cost that seemed fair.

2. The robo-signing allegations seemed to be just a snag in the recovery. Once people were over the fact that robo-signing wasnt as big an issue, the prices would stabilize.

3. The mortgage buyback lawsuits were beginning. Based on experiences with mortgage lenders, and horror stories, we thought that the lawsuits held water, but were not going to derail the industry.

Thus far, as you can tell by the price of the stock itself, this investment has worked out. While there are still threats, like WikiLeaks (doubtful to cause any real problems), and the lingering fear of a double-dip in housing prices and subsequent increase in foreclosures, the investment seems to still have legs.

There is still more than one full year for the stock to climb in value, and if 2009 and 2010 were any indicator of what the future may hold for the broader markets, a blue-chip like Bank of America will certainly fare well.

brokeinvestor@gmail.com @BrokeInvestor

2011 Starts With a Bang

2011-01-03T21:38:00.000-08:00

93 points up is how the dow finished the first trading day of 2011, with the intraday high hitting 11,711 before closing at 11,670.

Pent-up demand after closing winning positions in December started the year with a bang.

Interesting commentary from the Associated Press discussed an unlikely winner for investing over the last 10 years: Market Timing.

Market timing is considered to be a gambler's game, a fool's errand. It is largely considered that someone who "times" the market, either wins big or goes home broke, with the latter being the common outcome.

But, research from Standard and Poor's shows that over the last 10 year period, an investor who put $10,000 into the S&P 500 at year end 1999, and sold at year end 2010, would have a return of just over $8,200. A loss of nearly 18%.

Conversely, an investor who "timed" the market, and invested on the first day of trading each month, over the same period, would show a return of $13,800, a return of 38%.

Under normal circumstances, 90% or more of financial professionals will tell you that market timing is dumb luck, or it cannot be done consistently. In this case, though, there are a few reasons that it can work, even consistently.

Money goes into the market on the first trading day of the month. Institutional investors rebalance portfolios. Month-end paychecks are deposited, and deferred compensation dollars are shuffled into 401k plans. This money that is entering the market on day one of each month tends to drive prices higher, if only for a day.

It's not a perfect plan, but the research has worked to the favor of the program in recent years. The market crash in 2008 happened a few days into the month of October, therefore a "first day" investor would not have had any exposure to the markets at the time of the crash.

brokeinvestor@gmail.com @BrokeInvestor

Day Trading and Margin Requirements

2010-11-16T21:52:00.000-08:00

Call me crazy, but shouldn't and investor be able to buy and sell whatever stocks she has the money for, whenever she wants to?

The average retail investor probably doesn't realize that you are restricted from buying and selling a stock multiple times in a short period of time.

The official definition of day trading is: Making a "round-trip", either buying and selling, or selling and buying to cover, one stock in the same trading day.

If you do this once, your brokerage is unlikely to say anything. Twice in a short period of time (90 days) and you may get a warning. Do it 3 or more times, and you are likely to receive a cease and desist, and possibly an account suspension.

Why?

It's not your broker being a bully, it's based on a FINRA regulation. FINRA stands for Financial Industry Regulatory Authority, and they do not allow "day trading" for "cash accounts".

At first glance, there is a problem with cash transactions clearing. It takes three days for a cash transaction to clear your brokerage account. The problem The Broke Investor sees here, is that with many online brokerages also operating as banks, why would it take three days to clear a transaction that they execute wholly?

But the real issue, with FINRA, is the consumer protection angle. On average, a retail investor, or a broke investor, does not have the knowledge of the markets to trade with more risk than buying and selling stocks.

To get around the issue of cash-transaction clearance, you may set up a margin account.

Margin is basically borrowing money from your broker, creating leverage, so you can execute larger scale trades.

With a margin account, the money can come and go freely through the brokerage, because it is based on your buying power, rather than actual cash transactions. It's essentially the brokerage's money, theyre just letting you use it.

Getting back to FINRA and day trading though, there is a term for someone who day trades more than 4 times (round-trips) in a Five-trading-day-session. That is called a pattern day trader.

Pattern day traders are required to keep a minimum of $25,000 in cash/equivalents in their brokerage account through which they desire to pattern day trade.

Bottom Line: It looks like the phrase: "it takes money to make money", is proven once again. Since most broke investors don't have $25,000 to invest freely, pattern day trading should mostly be avoided.

brokeinvestor@gmail.com

@BrokeInvestor

America Needs Drugs. Bank on it!

2010-11-07T21:54:00.000-08:00

If you've read my twitter feeds, or my last few posts, you know Im bullish on B of A. I am also bullish on PFE.

First, Bank of America.

Like all major banks in the US, BAC has been battered by the financial meltdown. The stock price, and subsequently, the market capitalization lags most of its major competitors.

Interesting to note: BAC trades at a Price/Book valuation of .58. In the most basic of measurements, this means that BAC stock is only trading at 58% of what all the assets, less liabilities, are worth.

If the company were to be bought out there would, with much likelihood, be a premium of 42% paid on the stock.

Major banks P/B's:

BAC - .58
C - .80
JPM - .97
WFC - 1.33

With the foreclosure "robosigning" and buyback suits largely overblown, banks are getting back to the business of lending money, albeit, very slowly.

Bottom Line: Bank stocks look like a good value. They are not a huge growth opportunity, but who can argue with 42% on B of A? Or 20% on Citi?

We can't forget a quick look at what makes America operate: Drugs.

Caffeine is probably the most prominent, followed closely by Vicodin (mostly cheap generic versions), then a drug for high cholesterol.

On the list of the top 15 most often prescribed drugs in the good ol' USA is Pfizer's Lipitor, which is the only brand name in the top 15 list (available here on Forbes.com).

This is one of the reasons behind The Broke Investor's bullish feeling on Pfizer.

Another reason could be their current growth model: Buy out competitors.

With their expensive acquisition of Wyeth, Pfizer continues to dominate the Pharma market. Other acquisitions have continued to fill the pipeline full of new drugs, and drive amazing revenues for PFE.

The play here is a charge for $20 a share. Not too far from the $17.18 that the stock closed Friday's session, but a large enough leap to earn some decent returns.

Bottom Line: Don't look to get rich quick with Pfizer, but as they continue to rake in huge profits, broke investors can enjoy more than a 4% annual dividend yield.

Disagree? Let me know!

brokeinvestor@gmail.com

@BrokeInvestor

Expansion on the Bank of America Long Trade

2010-10-27T20:55:00.000-07:00

Options are nothing new here at The Broke Investor. Covered call strategies have worked well to generate small amounts of cash flow.

Selling a call option, especially a covered call, is a very low-risk move. It mitigates falling stock prices by collecting a premium, but it limits gain potential based on the strike price you are selling.

What is new here, is purchasing call options. Moving "across the aisle" if you will, to be on the purchasing end. It's more of a long position approach, but doesnt require as much cash outlay.

Instead of a buy-write strategy with BAC, I bought call contracts for a Jan 2012 call, at a $12.5 strike price.

Here's how the math works:

Buy 10 option contracts for $1.74 each. ($1.74 x 100 = $174 x 10 = $1740)
Add in the commission $1740 + $17.49 ($9.99 plus $.75 for each contract = $17.49) = $1758

Buying a call option gives me the right, but not the obligation to purchase 1000 shares of BAC stock by or before January 21, 2012, at a price of $12.5 per share.

You have to add in the premium outlay to get an accurate cost basis.

1000 x $12.5 = $12,500 + $1758 = $14,258.

It will cost me $14,258 to buy 1000 shares if I exercise the option. This means it is only profitable to exercise the option when the stock price reaches $14.26 or higher.

I am bullish on BAC over a 15 month period, and think the stock will be at around $18 in January 2012.

Assume the closing price on 1/21/12 is $17.99. I exercise the option, buy 1000 shares for $14,258, and immediately sell the 1000 shares for $17,990, leaving me with a nice little profit of $3732.

That's a 112% return on my investment, and not bad for risking less than $2000.

Of course things can go the other way. But here is why buying the option makes sense: If the stock goes down to $4.50 per share, my losses are limited to the $1758 in premiums I paid for the option.

If I buy 1000 shares outright at $11.54 (Wednesday's closing price) it costs me $11,560 (with commission). If the stock price goes to $4.50, I am looking at a $7060 loss, or 61%.

Its a new foray into long position investing, and it keeps my cash outlay to a minimum on a stock that I am confident in. With the lousy dividend that BAC pays (why they pay one at all is beyond me), it doesnt make sense for me to buy the stock outright. Sure, I can have a higher return if it hits the $17.99, but I have a much higher risk exposure too.

Please, if you see a flaw in my strategy, let me know. This is a learning experience for The Broke Investor, and if there are strategies that are more sound, I would love to be exposed to them.

Email The Broke Investor

@BrokeInvestor

What Do You Think About This???

2010-10-22T23:50:00.000-07:00

Bank of America's stock has been beaten down by the foreclosure mess. Right now, its almost at the yearly low, closing Friday at 11.44.

Here is the strategy - Buy-Write: Short term trade.

500 shares of BAC = $5740 (including $20 commission)
5 December 18 Contracts at $12 = $226 premium (less commissions)

On December 18 if exercised you have a $6000 sale, plus your premium of $226, for $6226
$6226/$5740 = 8.5% gain.

On December 18 if not exercised, you keep the $226 premium and 500 shares. Your per share cost basis becomes $11.03, giving you a $.41 cushion against depreciation of the stock. If the price doesnt change, you sell on Dec 21, at a 3% gain.

Please someone tell me why I should not execute this strategy?

brokeinvestor@gmail.com

@BrokeInvestor

It's Electric! Charged Up! Ready to Roll!

2010-07-29T22:18:00.000-07:00

Every major auto manufacturer is rolling out their version of the electric car.

These cars are designed to fit current lineups, and not designed as futuristic concept cars like the old electric models.

Chevrolet has the Volt. Nissan, the Leaf. Tesla has the Tesla lineup. Toyota, in partnership with Tesla, will enter the electric arena as well.

The other brands will present their electric offerings in the coming months as well.

Pricing for the Volt will boast a starting MSRP of about $41,000. It's likely the Nissan Leaf will start around $25,000, and Toyota's electric car, most likely a version of the Camry, will sell for an estimated $50,000.

So the cars are coming. Manufacturers have dedicated millions of dollars to production of these plug-in electric vehicles.

But what if you want to drive your electric car from Los Angeles to Miami? Most of these cars will get around 400 miles on a single charge. And after that, they need to be recharged.

EcoTality has the solution, with their blink branded charging stations. Blink charging stations will be available as in-home charging stations as well as public charging stations. The charging stations will not only charge the car, but any other electronic device supported, such as a cell phone, or laptop.

EcoTality Logo

EcoTality is working with big-box retailers to host some of the Blink charging stations, and the thought is that a retailer like Best Buy, would pay for the driver's charge.

EcoTality (Ticker: ECTY) closed at $4.83, up 2.77% on Thursday.

Rendering of a "FastCharge" Charging Station

While the Broke Investor is not clear on the revenue streams for EcoTality, the stock is definitley on the watch list.

Sales of the charging stations in-home models would provide some income, but even with the advent of the hybrid car, the penetration in the United States is only about 3%. This represents about 7.5 million vehicles.

Assuming the Electric Vehicle penetrates 3% as well, and 50% of the EV drivers purchase charging stations, that would be 3.75 million charging stations sold.

Let's also assume that EcoTality has the clear market-share advantage, and sells 30% of the total in-home charging stations, that is 1.125 million stations sold.

If each station costs approximately $5,000, that would be $5.6 billion in revenue, over about a 10 year period. That would be revenue of $562,000,000 per year. If EcoTality could maintain a 30% profit margin on the sales, that would translate to $168.7 million per year in profit.

With 9 million outstanding shares, and no further expenses, taxes or revenues, EcoTality could be easily worth $18 per share. That would represent a 360% return on your investment at today's price of $5 per share.

brokeinvestor@gmail.com @BrokeInvestor

Technical Range, Still a Buying Opportunity

2010-07-28T21:06:00.000-07:00

With the markets slipping on less-than-exceptional earnings from Boeing and a negative surprise with durable goods orders losing 1% in June, it looks like we won't break through our technical cieling.

If jobless claims beat expectations Thursday, that could spark a rally, but with a stagnant job loss number likely, another negative day on Wall Street is expected.

If the "Chartists" are correct, we could be heading back down to an S & P 500 level of around 1,040.

This earnings season has not had too many surprises, with most blue chip-type companies reporting positive earnings, and has been a fairly lacklustre period on the Street.

All daily and weekly fluctuations aside, now seems to be a great time to get into the market. Pricing for major blue chip US companies are, for the most part, very favorable.

The short-term turn-em and burn-em strategy will probably not work as well as it did in 2009, but a few well positioned companies that are growing their dividend distributions could be incredible anchors for a broke investor's portfolio.

Companies like GE, Disney and Exxon Mobil will continue to pay dividends to their shareholders, and reward long-term owners with substantial growth over the long term (10+ years).

When it comes to a short term strategy, The Broke Investor still likes Citigroup. (The Broke Investor owns Citigroup stock)

A bank that does as much business as Citi does, worldwide, cannot stay below $10 a share, and is more likely to approach a $20-$30 per share price in the next 1-5 years.

Sure the FinReg legislation will have an effect on part of the banks operations, but nothing that they will not be able to work through towards profitability.

It would be nice to see some sustainable growth in the stock price for Citi (Ticker: C), which seems to be trading in a range between $3.80 and $4.20. Preferably, to The Broke Investor, the range would be in the $5.05-$5.30 area.

The bank is not likely to reinstate any regular dividend distributions in 2010, but perhaps with better earnings numbers in the coming quarters, Citi will once again be a dividend paying stock.

The Broke Investor is buying Citi at anything below $4.

brokeinvestor@gmail.com @BrokeInvestor

Top of the Technical Range

2010-07-27T20:48:00.000-07:00

As you know, The Broke Investor does not make buy/sell decisions based on technical chart patterns.

This can be detrimental in the short term, however, because buying and selling in a range can be a very profitable practice. The problem with many trades, especially for a broke investor, is the commission.

If there is $1,000 to invest in a stock that is trading in a range of $7.30-$7.50, there is money to be made.

Let's assume that all the money is invested at $7.30. With a $10 commission, you can buy 135 shares. Your total outlay is $995.50.

At $7.50, you sell. Your net profit is only $7.

Nearly 2% of your total investment was eaten up by commissions. Your total return, which was $27 in price appreciation yielded $7 in new money. In other words, you were in the hole by $20 at the time of purchase.

On the flip-side, though, technical pattern investing can be fairly profitable for someone with a little more money to invest.

Let's use the same example, but this time, our investor has $5,000. He purchases 683 shares, and still pays the $10 commission. His total outlay is $4995.50.

When the stock is at $7.50, he sells and his net profit is $116.60. He still had to pay $20 in commission to buy and sell the stock.

More advanced traders, and investors who have more capital ready to move, are able to take advantage of trading ranges.

So the technicals say the S & P Index is trading in a range between 1040 and 1110. Tuesday's close was 1113, above the technical "cieling."

Three points hardly constitutes breaking out of the range, but if markets continue higher, the rally could really get moving.

Many technical investors likely pulled their money out of their positions today to "sell at the top" and to take profits. If the profits are there, taking them is a winning strategy.

The Broke Investor follows a more "value" investment strategy. Find a good company that is being sold at a level below its intrinsic value, and hold on to it for the long haul.

brokeinvestor@gmail.com @BrokeInvestor

2Q Earnings Reporting Underway

2010-07-15T21:23:00.000-07:00

Earnings largely kicked off this week, with many critical announcements coming Friday morning.

Before the bell, a Broke Investor favorite, Citigroup (Ticker: C), will report earnings from the second quarter of 2010.

Analysts have Citi pegged at a profit of $.05 per share, which would represent a dramatic decrease versus the first quarters profit of $.15 per share.

Though expectations are for a nickel, even a modest beat with Citigroup turning in a $.06 or $.07 would have a large impact on the price of the stock. One of the major factors that analysts will pay extra attention to is the amount of cash earmarked for bad loans.

Other companies of note that have reported this week are:

Google (GOOG): Missed estimate
JP Morgan Chase (JPM): Beat earnings
Intel (INTC): Beat earnings
Yum! Brands (YUM): Beat earnings

Although this is a very small sample, it is fairly representative of the earnings surprises thus far, with positive outpacing negative.

Meanwhile, concerns of slowed growth are clouding investors outlooks for Q3 numbers.

The important thing to remember about slowed growth, is that it is still growth. When we were losing jobs and "declining job losses" was good enough news to move the market, slowed growth will be enough to create a drag.

Brokeinvestor@gmail.com @BrokeInvestor

Limit Risk, Capitalize on Opportunity

2010-07-08T22:38:00.000-07:00

It's amazing how much "one" can effect a broke investor.

Here are some examples:

1. One transaction can cost 5% of your principal, or more!
2. One missed opportunity can cost you thousands!
3. One mis-read opportunity can cost you thousands!
4. One penny on a stock price can be worth $.01, $.10, $1.00, $10.00 and even $100.00
5. One percent gain on your portfolio can be worth $100 or more!
6. One covered-call can cost you your entire position in a stock!
7. One day can be the difference between IPO and Bankruptcy!
8. One percent decline in earnings can cost 50% of your position!
9. One dividend payment can cover your purchase and sale commissions!
10. One bad day in the market can wipe out a years worth of gains!

Some are more common than others, but the important thing to remember is that a broke investor looks for opportunities to limit risk, and capitalize on opportunity.

How can you limit risk? Diversify.

For a broke investor though, this is difficult. If there is only $5,000 in my account, how do I effectively diversify?

One school of thought is to buy a diverse mutual fund, or an index fund that tracks the S & P 500. This way, you'll earn dividends, keep a healthy sector spread, and most likely follow the market up and down.

Over the long term, most fund managers and institutional investors do not beat the S & P.

Another way of thinking about diversifying is to purchase different investments.

Although it is very expensive right now, owning gold is a great option for creating a diverse portfolio. Gold is often used to hedge against inflation and a weak dollar.

There are websites and programs that allow you to engage in Peer to Peer Lending. More about P2P Lending here:

- Peer to Peer Lending: Worth the Risk?
- Peer to Peer Lending: The Pro's and Con's

And of course stocks. Stocks are probably the most commonly traded investment vehicle, and definitley the most commonly referred to investment vehicle.

As a broke investor you can own a diversified equity portfolio, but it is very important to keep your stock mix balanced.

Investing in all growth stocks limits your income potential. Whereas investing in all income-producing stocks may limit your growth potential.

The bottom line is to research the different risks and opportunities associated with each type of investment. Not all investments are suitable for a broke investor, and many are not even suited for experienced investors with hundreds of thousands.

Be careful. Not all that glitters is gold.

brokeinvestor@gmail.com @BrokeInvestor

After a Seven Day Slide, a Positive Shift

2010-07-06T22:09:00.000-07:00

With the exception of Tuesday's market, seven consecutive losing days on Wall Street have plagued investors. From Dow 10,297 on June 24th, to Dow 9,686 on July 2nd, volumes, and volatility have been up.

Call it the 7-day theory, call it a bear market bounce, just dont bet your bankroll on a July 2nd bottom.

According to the latest ISM numbers the rate of economic improvement is slowing. The fact remains: The US Economy is improving.

And it should be. This is what happens to a developed nation after a recession and depression in the economic cycle.

The numbers are bigger this time. The Government is spending more money than ever on stimulus to get the ball rolling. We are digging a debt hole that we will never be able to climb out of.

Wait. This has happened before. And it will probably happen again. It's the same cycle that continues to repeat itself. It's the perpetual motion of a developed economy.

Alright, enough philosophy. What stocks can I buy on Wednesday and sell by the end of September for a profit?

Broke Investor Bulls:

1. Citigroup - C - This is a stock that I have been in and out of for a few months. I originally went long Citi in September 2009. While it hasn't been a huge moneymaker, there have been great opportunities to get in and out in that time:

Green dots are "buys" and red dots are "sells"

2. Verizon - VZ - If you were lucky enough to be in this recently, you may have recieved a special "distribution" in the form of Frontier Communications stock (Symbol: FTR). Verizon has sold off a large portion of its home-telephone service to Frontier. On the Verizon horizon is the iPhone, slated to be available in January 2010. If the rumors are substantiated, investors will price this into the value of the stock well before the release date.

Apple iPhone: Coming Soon to a Verizon Store Near You!

It is important to remember, of course, that all investments involve risk. You can lose some or all of your principal and any gains you may enjoy. This website and blog offer opinions and not recommendations to trade any security.

Brokeinvestor@gmail.com @BrokeInvestor

The Secret to ALWAYS Winning on Wall Street!

2010-06-09T22:23:00.000-07:00

Sell your stocks for more than you bought them for.

Do this, and you can't lose.

brokeinvestor@gmail.com @BrokeInvestor

Overwhelming Sense of Agreement on Wall Street

2010-06-08T21:52:00.000-07:00

Not to make predictions and certainly not to give advice, but it seems that more "Wall Street" professionals agreeing on further drops in market levels.

Whether it is Dow 7,000 or a level of less than 800 on the S&P index, the doomsayers seem to have regained control over the minds of the retail investor.

What will make this different than late 2008? The answer seems to be clear: Retail investors...sitting on the sidelines.

If there was more than $3,400,000,000,000 pulled out of the market by retail investors in 2008, and less than 25% had come back into the market, how much damage can negative sentiment (among retail investors) do to the valuations?

It also seems to be, that when "everybody" starts doing the same thing, that's when things change.

European debt concerns are very real. A large part of US businesses rely on their foreign counterparts to operate profitably. If one part of the supply chain, or large group of patron's are unable to fulfill their commitments, how can the business survive?

The oil spill in the Gulf is causing devastating damage to the environment, will cripple the Gulf-Coast marine-dependant economy, and may bring about strict legislation that further increases our dependancy on foreign oil.

Finally, FinReg, financial regulation reform, which is coming together on Capitol Hill may strike a blow to major US banking and Wall Street institutions, and hamper liquidity.

US Equity Markets may have priced in fallout from the European crisis. The ramifications of the oil disaster could be included in recent selling, and FinReg could end up so porous as to be largely ineffective.

Right now The Broke Investor is using a Covered Call strategy with Citigroup stock. This strategy can limit downside risk and create cashflow.

To learn more about Covered Calls Click here:
1. Covered Calls - The Basics
2. Protection in a Falling Market
3. Example of a Covered Call Trade

If this is not enough information, feel free to email us here at brokeinvestor@gmail.com or send us a tweet at @BrokeInvestor

brokeinvestor@gmail.com @BrokeInvestor

Greece, Portugal and a Computer Glitch

2010-05-06T20:21:00.000-07:00

In one of the most bizarre trading days in recent history, the Greek situation re-ignited angry riots, Portugal's debt concerns continued to drag on international markets and the Dow fell victim to a computer error that mistakenly sold billions of shares.

So far, it looks like Proctor and Gamble, Accenture, 3M and Sotheby's were the most affected issues from the glitch. But the cascading decline weighed heavily on traders and institutional investors as memories of late September 2008's massive declines were relived.

After it was discovered as an error, and the dow had reached and intraday loss of 998 points, the market came back to settle down 347 points.

This is not the beginning of the correction that so many people have feared would hit this market rally. We have been in a corrective pattern since April 27th, 2010, when the Dow lost 213 points.

According to a quick snap-shot look at a few Blue Chip afterhours trades, tomorrow session will be another major selloff.

How to play it:

Buy the depression, not the dip. Today the market dipped, it will likely dip again tomorrow.

Once we hit a "bottom" the time to buy will return.

This is the correction that had been feared, but it is a normal part of recovery out of a recession.

Stick to value-buying fundamentals. Look to invest in high-dividend yielding stocks that can bolster your gains as they come back to where they need to be. But dont be in a rush. With the European situation and financial reform legistlation on the near horizon, there are many factors that will continue to weigh on stocks.

brokeinvestor@gmail.com @BrokeInvestor

Ouch! Dow Sheds 213 Points on Greece and Goldman

2010-04-27T20:53:00.000-07:00

Even as earnings reports and other economic news continues to provide positive surprises, Wall Street can't figure out the problem.

It's all Greek. And Portuguese. And a little bit Goldman Sachs.

After Greece's debt rating was cut to junk status, the bottom began to drop out. The market plunged, and every bit of investor confidence seemed to have vanished.

Portugal's debt rating was slashed, though not as negative as the Greeks, and that also caused a drag on the major markets.

As of 9:30 Pacific Time, Asian markets have lost more than 2.25%, mostly on Greek debt woes.

Finally, the financial system in this country is suffering from one of the worst crises since the Great Depression, and the government is doing everything they can to gain control and oversight of everything that goes on during the trading day.

Now is probably not a good time to go long many stocks, but for someone with a little bit of cash, there could be great buying opportunities in the very near future.

While The Broke Investor holds a position in Citigroup, and money has been made, it may be time to take profits, in at 3.7 and out at 4.4 is pretty good for 7 months.

At the same time, afterhours trading of Citi stock which logged an impressive 11 million shares, brought the stock back up nearly 1.4%.

If the restricted session for Citigroup is any indication of Wednesday's trends, the market may have been oversold Tuesday, and could get a tick back up (probably no more than a quarter of a percent).

The Greek situation will have investors on edge until a resolution comes to pass. Allowing a country's financial support to fail would have major repercussions on US market, and other major international players around the world.

Until a plan is in place for Greece, be very wary of any long positions.

brokeinvestor@gmail.com @BrokeInvestor

Marginable Securities and What That Means

2010-04-14T21:22:00.000-07:00

As a broke investor, margin, in most cases, should not be a part of your vocabulary. Margin is trading on borrowed money. It's like taking out a loan to buy a stock, thinking you will make money and be able to repay the loan before the bank comes calling.

It's comparable to establishing a marker at a casino in Las Vegas, and playing with "house" money, unless you lose.

For this post, margin must be somewhat understood. Margin is an amount of stock buying power that a broker will allow an investor to have, in order to make certain trades. It is high risk, because when they make a margin call (ask for the money back), you have to return it promptly. If you dont repay the margin amount, you may be penalized by the brokerage house liquidating your positions to cover the margin.

What is important to know is that many mutual fund, hedge fund and other institutional investors use margin regularly when going long or short certain investments.

When a broke investor goes long, typically he will put money into a brokerage account, and purchase the amount of shares decided by the amount of available capital.

Institutional investors and market makers are able to use margin effectively, and often do not have to pay penalties for inability to make good a margin call.

Look at it this way: If a mutual fund has $100 million invested, and the average turnaround is $1 million per day (cash in and out of the fund), the fund's manager will buy or sell a position when the timing is right. Just because the timing is right doesn't mean that the fund manager has the cash on hand to make the purchase, so he buys the shares on margin.

Not all securities are created equally.

Citigroup, a stock owned by The Broke Investor, has been beaten down by the mortgage meltdown and other financial crises that have crippled other banks. Citi took such a beating that, with a few exceptions, the stock price has been below $5 per share since mid-January 2009.

Citigroup closed at $4.93 on Wednesday, up $.31, and in after-hours trading posted an increase of $.07 putting it right at the $5.00 mark.

So why is that important? Most brokerage's will not allow traders to use margin on a security that is below $5.00 per share.

It's even more important because mutual funds cannot (or will not) trade any stocks that are below $5.00.

With Citi's rally on JP Morgan's earnings report, the stock is likely to open Thursday's session with a bang. Over the $5.00 mark is huge for investors who have been holding on since the darkest days of Citi's tumble.

While The Broke Investor was unable to get in at the lowest, shares were purchased below $5.00.

Now that the stock is marginable, and able to be bought and sold by mutual funds, Citigroup (C) is open to a new world of investors. This new world brings new money into the stock, and allows the government to slowly sell off their stake without causing price disruption.

Citigroup will announce earnings on Monday, April 19th, and while the bank is largely expected to post a loss (of less than $.01 per share) any positive surprise over $.04 EPS will send the market rally into overdrive.

brokeinvestor@gmail.com @BrokeInvestor

The Rally is Way Too Strong

2010-04-08T22:05:00.000-07:00

The rally in the major US equity markets has become what seems unstoppable. In Thursday's session, the Dow struggled in the morning, and was down as low as 10,844, but battled back to finish the day up a quarter of a percent, closing at 10,927.

Why this is important is because it seems like the momentum and excitement on Wall Street is starting to catch main-street businesspeople and retail investors.

If the rally is so seemingly unstoppable, what can go wrong?

Everything.

Just when everybody gets on board, historically, the end is near. In the case of this market rally, the "end" would be the second V in the W shaped recovery. (This is not a plug for Volkswagen, but if there are any dealers, dealer groups or manufacturer reps reading this, i would be happy to work out some sort of deal.)

A rally that has carried investors so far since the March, 2009 lows, cannot last forever. With that in mind, when is a good time to start taking profits?

This goes back to the original reasons that you got into the positions you are in in the first place. The research that you put in to determine a fair strike price (a per-share amount that is a good entry point) and either a minimum return on your investment or a predetermined exit price.

Rather than getting nervous and selling, now is a great time to re-evaluate each position in your portfolio and make sure that your original analysis holds true. If all the new information puts your position in a positive light, hold on. If something has changed and your level of risk increased, that might be a good sign to take your profit and find the next position.

Overall, the extended rally on Wall Street is cause for concern, not panic, and not over-zealous purchasing. If you have enjoyed gains, protect them. Look to your own research to guide your next steps, do it quickly and do it thoroughly.

Brokeinvestor@gmail.com @BrokeInvestor

Dow 11,000; Recession Receding?

2010-04-05T21:10:00.000-07:00

As the excitement builds on Wall Street for the Dow to break the 11,000 mark, retail investors are slowly being coaxed back into the market.

From a Broke Investor's perspective, Dow 11,000 doesn't mean all that much. Would that represent a new floor? Unlikely. Would that represent an opportunity for the index to skyrocket back to the mid-teen levels that were seen in 2007? Unlikely.

What 11,000 might mean, though, is that more individual investors will have the confidence to put their money back into action. This would probably require the Dow to close above 11,000 rather than just move above it during a session, as most retail investors don't pay attention to intra-day activity.

With the recession seemingly over, and positive jobs numbers reported for March, it looks like the United States economy is headed for a period of expansion.

For some, including upscale neighborhoods in Washington State's King County, the recession has not begun to let up.

As you can see in the picture, a condominium home has been seized by the Sheriff and will be sold at auction to the highest bidder.

Rumors are, some banks do not seek being made good on these mortgages and walk away completely, often allowing these properties to sell for pennies on the dollar.

As a broke investor, it is unlikely that a deal of this scope is feasible. It can take thousands of dollars to capture the winning bid, and more capital outlay to do needed repairs and upgrades in order to resore the distressed property to market standards.

Lastly, the market rally continues to reward investors who have bought at almost any time since March 2009. In the Broke Investor's opinion, the market is due for a pullback at some point. As originally thought, it would have been around 10,000, falling back as far as 7,000, but since that has not happened, the 11,000 mark could be a time of major profit taking for institutional and hedge fund managers.

brokeinvestor@gmail.com @BrokeInvestor

Tuesdays Huge Move, End in Sight?

2010-03-23T21:18:00.000-07:00

Tuesdays grandiose gains on the Dow were buoyed by healthcare giant Pfizer (Broke Investor Long Position) and Kraft (recent addition to the Dow 30).

With major indices hitting their highest levels since pre-recession days, retail investors, broke investors, are beginning to think that the end of the rally may be near.

Institutional investors and other professionals seem to be long the market and are advising investors to "hold the course". So is the end to this rally really in sight? Only time will tell.

The big secret is no secret at all. The passage of the healthcare bill recieved cheer by investors on Monday and on Tuesday, but not because of the legislation that will take place, but because it signals the end of capital hill gridlock.

As an institutional investor, it is important to take profits when the opportunity presents itself. This would lead a broke investor to sell his position and find the next opportunity.

One of our earlier posts discussed a short-term strategy: Predetermined Strike and Exit Price.

This takes the emotion out of investing. If you are in love with a stock, you may not be able to sell it when you need to sell it. You may think that it has more room to grow, and you could cost yourself money.

If you have accomplished your goal with an investment, get out. That is one of the biggest mistakes an investor can make. They think the stock price rally wont run out of steam, and all of a sudden the stock gives back all of its gains.

If you have positions with solid gains, take your profits, and look for a longer term investment. Look for a stock with dividend growth. While many companies slashed or suspended dividends during 2009, other companies burgeoned their distributions and shareholders have continued to generate cash flow.

Of course a broke investor will not likely be earning dividends that they can live on, but enroll your shares in the companies DRIP program and increase your position. If research tells you the stock is a long-term keeper, enroll it in a DRIP and forget about it.

DRIPS and How to Use Them
Dividend Stocks and Monthly Distributions

Keep an eye out for inflation. While the Fed suggests that it will keep rates low for a long time, a long time to them may be less than six months.

brokeinvestor@gmail.com @BrokeInvestor

What Happened, What's Happening, What Will Happen?

2010-03-20T22:03:00.000-07:00

Last week ended up, but the rally showed definite signs of slowing as options expirations (and quadruple witching) pressured traders to get stock prices just out of the money.

Sunday, the Senate will vote on the healthcare overhaul that claims to save the country $1 Billion. Pardon the politics, but all the healthcare bill will do is shift the burden from one place to another.

An approval on the healthcare bill would likely cause a drop in stock prices across the board, centered around health care and biotechnology stocks.

Recently, The Broke Investor had the chance to speak with a high-ranking official with a major investment firm. For purposes of anonymity, this person will not be identified.

She said that on a personal level, after taking money out of the market during the recession, her plan is to be fully invested by the end of calendar 2010. Asset allocation seemed to be the name of the game for her, and she advised strongly against bonds.

With the risk of inflation, any bond that has a high-yield will be blown out of the water when inflation begins. She expects to see double digit inflation sooner rather than later in the US economy and has no faith that the bond market of today can deliver profitable results.

What she did recommend was for investors to get into large-cap value stocks, but not individually, through mutual funds. The two keys to selecting the right mutual fund are:

1. Large cap stocks
2. Reasonably high dividend yields

As a broke investor, while there can still be money made in individual stocks, the true goal is creating a profit with limited capital. If mutual funds provide cash flow, in the form of dividends, and growth, there is no room to argue that a mutual fund strategy is the wrong way to go.

brokeinvestor@gmail.com @BrokeInvestor

Quadruple Witching Excites Wall Street Traders

2010-03-17T21:49:00.001-07:00

If you have ever traded options, you know that the third Friday of the month is the last day that options can be exercised. You probably also know that Saturday following the expiry date is when the exercise takes place, or the worthless expiration is finalized.

What you might not know is an options/futures event called "Witching" or, in our case this Friday, "Quadruple Witching."

Witching, or double witching, is when two classes of futures or options expire on the same day. This Friday, quadruple witching will take place, which is the expiration of stock options, stock index options, stock index futures, and single stock futures.

The third Friday's of March, June, September and December are all quadruple witching days.

Here's what usually happens. Options and futures traders experience very high volumes, especially near the end of the session. Excitement for this opportunity to lock in profits usually leads to increased action the day before the witching occurs.

Assuming there are no major negative surprises with Thursday's Consumer Price Index (CPI) report and the weekly jobs numbers, Thursday and Friday could potentially be higher volume and charge markets ahead.

As a broke investor mostly involved with long positions (stocks that you think will go up), witching events have little to do with actual stock valuation. That being said, if there are major runs on non-expiring options, that can signal both positive and negative sentiment towards the underlying symbols.

brokeinvestor@gmail.com @BrokeInvestor

GE Upgrade and Forward-Looking Guidance

2010-03-16T18:39:00.000-07:00

Traders and investors cheered General Electric as shares rose sharply on analyst upgrades and the companies future outlook for profitability and dividend growth.

The overall feel seemed to be an "it's about time" sentiment as the huge conglomerate pushed past $17 to settle just above $18 per share.

As a part of The Broke Investor Portfolio, it is nice to see GE hitting its stride. Even if this rally is short lived, the companies guidance on dividend growth in 2011 provides long-term growth and income potential.

As a shareholder of GE, The Broke Investor participates in a DRIP program. The dividends are not taken as cash distributions, but rather additional shares of stock to grow the position.

A DRIP is a dividend reinvestment plan, and allows an investor to increase a position in a stock without paying fees or commissions. For more on DRIP's and DRIP Investing, click here: DRIP's and How to Use Them

With the markets nearing their resistance levels, a breakthrough could lead to more fervor in buying, and more retail money to enter the market. If your long positions are performing, don't get too anxious to sell, but set your trailing stops to lock in profits.

Its important to remember that even though the markets have appreciated a lot recently, there are still opportunities to buy undervalued issues.

brokeinvestor@gmail.com @BrokeInvestor

Diversified Portfolio vs. Individual Investment

2010-03-13T22:12:00.000-08:00

Is diversification really that important to creating a profitable portfolio?

As a broke investor, how much of a role does diversification play in being profitable? My answer is, not too much.

Let's say a broke investor who has been investing for 5 years has about $10,000 invested in the stock market. How much diversification can she achieve with $10,000 buying individual stocks?

If she bought two companies stocks for $1,000 each, every year, she would have 10 different stocks. According to most professionals, this would be inadequate diversification.

How can someone make that claim? Forget the market behavior in the last two years. Think of normal, expanding economies and the resulting market movement.

Sample portfolio:

1. Ford - Automotive industry, large cap value (income/growth)
2. Microsoft - Computer industry, large cap growth (growth)
3. Merck - Pharmaceutical industry, large cap value (income)
4. Disney - Entertainment indusrty, large cap blend (income/growth)
5. Wells Fargo - Banking industry, large cap blend (income/growth)
6. Linn Energy - Oil and Gas industry, mid cap value (income/growth)
7. Darden Restaurants - Restaurant industry, mid cap blend (income/growth)
8. Craft Brewers Alliance - Beer indusrty, small cap value (growth)
9. Arctic Cat - Recreation industry, small cap value (growth)
10. Plug Power - Fuel cell indusrty, small cap growth (growth)

With all of these stocks in her portfolio, it seems like our investor is very well diversified. She is spread across large, mid and small cap stocks, which all carry varying degrees of risk. There are no stocks in her portfolio that are in the same industry, and the objectives for each stock are different.

Now, is this type of portfolio necessary for a broke investor to be successful? What if a broke investor put the same $2,000 aside for five years, and had $10,000 that he could put into one stock at a time?

Let's say that over the course of a year, his investments performed like this:

Stock 1: Buy at $52/sh (192 sh), sell at $55/share. Balance = $10,560 (5.6%)
Stock 2: Buy at $27/sh (391 sh), sell at $25/share. Balance = ($9,775) (-7.5%)
Stock 3: Buy at $31/sh (315 sh), sell at $39/share. Balance = $12,285 (25.6%)
Stock 4: Buy at $11/sh (1116 sh), sell at $12/share. Balance = $13,392 (9%)

In this bullish example, our investor made the right purchase and sale 3/4 times, and his total return was 33.9%!

Please keep in mind that this example didn't take into account any commissions or other fees, dividends or other distributions.

So how important is it to have a well-diversified portfolio? It really depends on the risk appetite of the individual investor. For a broke investor it is important not to get too fancy. Don't invest in something that you have not given proper research.

brokeinvestor@gmail.com @BrokeInvestor

Every Dog has it's Day(s): Citigroup

2010-03-10T21:26:00.000-08:00

Citibank, Citicorp, Citi Financial, call it what you want. Options traders are "calling" as many contracts on Citi as they can.

But why? What caused the nearly 2,500,000,000 shares to change hands in the last two days? On Tuesday, Citigroup represented 20% of total market volume! That means if five shares of a stock were traded, one of those was Citi! Unbelievable!

If anyone was stupid enough to have invested in Citigroup prior to this week, (which this author did), they would have enjoyed a gain of almost 12% in the first three sessions.

The bailed out banking giant received roughly $36,500,000,000 in funds from the US Government under the Troubled Asset Relief Program, or TARP.

Citigroup announced a Trust Preferred Securities offering, priced at $25 per unit with an average initial return of 8.875%.

While a new equity offering usually has a negative effect on share price, this Preferred offering does not dilute the value of common shares.

While the TruPS will not dilute common shres, the common equity offering that took place in mid-December 2009 had a huge diluting effect. That offering was priced at $3.15, which at the time was below market value.

Aside from Citigroup increasing its capital ratios, and selling off its underperforming assets and subsidiaries, Capitol Hill testimony from CEO Vikram Pandit gave investors and traders confidence. This confidence was not only in Citigroup as re-emerging as a viable and profitable bank, but also that Pandit isn't planning on going anywhere and is working tirelessly to right the ship.

As a result of these two major positive signals, Citigroup stock enjoyed just over 1 Billion shares traded on Tuesday and close to 1.25 Billion shares traded during Wednesday's session.

Call options have been heavily bought in both Tuesday and Wednesday sessions, and Citigroup has been capturing headline positions in most financial sector news updates.

The hedge funds are buying Citigroup. With the amount of call options being bought, it is only a matter of time until the institutional investors get on the Citi wagon. Once the institutional "big boys" are in, the stock price will really get going.

While I can't recommend that you buy stock in Citi (or anything for that matter), I can say that if I had cash, it would be put into Citi. I am long Citi.

brokeinvestor@gmail.com @BrokeInvestor

Lackluster Day as Street Marks One Year Since Bottom

2010-03-09T20:44:00.000-08:00

The major US markets closed Tuesday, up slightly on the anniversary of the "Great Recession" lows, when the Dow was trading in the mid-6,000's.

While a rally brought the Dow up to the low 10,600 range, the market closed up just 11 points.

Broke investors have had some of the best opportunities to buy stocks at bargain prices for 365 days. While there are always opportunities for triple-digit percent gainers, they may never be as prevalent again, as they were in 2009.

Here are some high-performing stocks that a broke investor may have invested in:

1. Ford - F - 12.80 - Ford was beaten down by the worst market for automakers in recent history. On March 9th, 2009, one year ago, Ford closed at $1.74 a share.
$1000 invested at $1.74 would be worth $7,356, a 736% gain.

2. Bank of America - BAC - B of A, which suffered huge losses from the mortgage meltdown and credit charge-offs. On March 9th, 2009, BAC closed at $3.75.
$1000 invested at $3.75 would be worth $4,468, a 447% gain.

3. Starbucks - SBUX - In 2009, not only did the coffee giant begin to close stores, but the founder, Howard Schultz returned to the helm. On March 9th, 2009, SBUX closed at $8.27
$1000 invested at $8.27 would be worth $2,834, a 283% gain.

A few other major corporations that posted triple digit gains were:
Wynn Resorts (WYNN) 300%+

American Express (AXP) 250%+

Apple (AAPL) 150%+
General Electric (GE) 100%+
Walt Disney (DIS) 100%+

So you get the idea, 2009 was a good year for a lot of well-known company stock prices.

This illustration is not supposed to discourage investors from entering the stock market. The fact is, there is a long way to go to reach 2007 highs. Just look at the Dow, stuck between 10,000 and 11,000, and try to remember when it hit 15,000 for the first time in history just a few short years ago.

Tuesday's session was highlighted, perhaps the most, by the financial sector. Dig a little deeper, and you will realize that bailed-out companies, banks in which the US Government has ownership, performed the best.

- Citigroup was up 7.3% to close at $3.82.

- American International Group (AIG) was up 12.6% closing at $32.77.

- Fannie Mae and Freddie Mac (which are actually owned by the Government) were up 5.9% and 7.6% higher, respectively.

Tomorrow's Broke Investor post will highlight reasons for Citi's gains, and the future outlook on the company and stock.

Full Disclosure: The Broke Investor owns a long position in Citigroup, and would accumulate shares if I had any money for it.

brokeinvestor@gmail.com @BrokeInvestor

Normal Wall Street Behavior

2010-03-06T16:11:00.000-08:00

The last two weeks on Wall Street seem to have been a return to pre-crash behavior.

It looks as though the market has calmed down considerably in regards to volatility, and is back to work as being a leading economic indicator for the US main-street economy.

A recovery on Wall Street, while slow, means that the path to recovery on Main Street is near, but will likely be a slow march rather than a sprint as it was on the way down.

The unknowns are still a major factor in determining whether this recovery is for real, or if it is just a bear-market bounce.

The most likely indicator of true recovery is the job market. The numbers of jobs lost last month were not too devastating to the stock markets, but for the individuals who lost their jobs, the recession/depression is either just beginning, or re-starting.

If the markets are acting as a leading indicator, we should start to see job growth by May, and another strong rally in Q4.

Jobs hold the key to long-term economic success. If too many people are out of work, spending goes down. If spending goes down, business owners are forced to lay-off employees or shut their doors. It's a nasty cycle that is extremely hard to break.

Innovation often leads economies from the depths of recessions. In the 2001 Tech-Bubble burst, the innovation of online business (e-commerce) pumped up a lot of investments. One of the major factors in leading the stock market out of that recession was new investment vehicles in financial derivatives and a boom in sub-prime and zero-down mortgage lending.

It will likely be some sort of innovative idea that leads us out of this recession.

It will not be stimulus. It was not stimulus that sparked the economy back to life after the Great Depression. That was WWII, which, though we are at war, the manufacturing infrastructure is not in place for a war to drive our economy.

The innovation that might lead us out of the situation we are faced with could be "insourcing"

Insourcing is just that, bringing the jobs back home, rather than shipping them overseas.

In order to make this profitable for the businesses to insource, there has to be tax incentives to bring manufacturing jobs back home.

Here is my political pitch.

President Obama, please give a tax incentive to companies that bring manufacturing jobs back into this country. It will be expensive, and you won't have as much ownership of what should be private enterprise as you do currently. But the money that would be made with the federal income tax for the millions of employees that would be working again would probably pay for the tax breaks given to the businesses.

It gets better. Local economies would benefit from increased spending, meaning sales tax would get county and city governments out of the situations they are in. This reduces their need for federal government assistance, thus saving even more money as a nation.

Thank you.

brokeinvestor@gmail.com @BrokeInvestor

Can You Make Money Trading the Trends?

2010-03-02T19:27:00.000-08:00

The Dow industrial average posted it's first loss this week shedding just over 9 points to close at 10,396.

The Dow was up 2 points Tuesday. And at the close Monday, it was up almost 80. Rally might be the wrong word to use, but certainly trending in a positive direction. If you look at the recent behavior of the Dow, there are patterns and trends that are fairly plain to see.

Keep in mind that trending is not a fail-safe trading mechanism, but it is used by some traders, so seemed to be an applicable topic to discuss.

Volume has been right around 4 billion shares traded since the early part of February. So let's look at the range of closing prices in that period: the lowest close since February has been 9,908 and the highest has been 10,405, in Tuesdays session.

Looking at a longer period of time, our lowest close for calendar 2010 is that same 9,908, but our highest close was on January 19th, at 10,725.

If trends have any realistic prediction on the future, the Dow industrial average has another 300+ points to go before reaching the top of this years market and there should be little or no resistance until we reach 10,725.

Once that point is reached however, trending says that we could go back down as low as 9,900.

Trending is an interesting way to look at a market over time, but the major flaw in strategy here is that the past trends and performance are exclusive to future behavior. In other words, just because it worked out that way in the past doesn't mean history will repeat itself. Especially with such a short time period that we looked at.

brokeinvestor@gmail.com @BrokeInvestor

Rumor Trading and the Week Ahead

2010-02-28T20:03:00.000-08:00

Rumor trade is when traders catch wind of business news circulating before it is released, and posting trades as if the rumor is actual news.

Here is a perfect example of rumor trade: http://www.cnbc.com/id/35635201. Watch what happens to AIG on Monday.

This article on CNBC, as well as various other news sources, are reporting a "not yet public" sale of AIG's insurance business in Asia. If investors are happy with, or upset with this decision, the stock price in monday's pre-market session will tell you.

Rumor often fuels massive volume, whether up or down, for a given stock, before a piece of information is officially released. By the time the news has come out, the stock price will not move as much as when the rumor began to circulate.

Rumor's are often true. When there is a lot of talk about something happening, or something that is going to happen, stocks move, and usually the news is released officially. Of course there can be changes and exceptions, but on average, the rumors prove to be accurate.

In other news, the close of the Olympics Sunday night in Vancouver will likely turn more heads back to business, and volumes should be up in most markets. Big things to come, February data on Jobs, follow up to the Prudential-AIG deal and China recovery, will have sizable impact on overall market behavior.

Asian markets are up for Monday, which could be a leading indicator to a higher session for US markets as well.

Stocks are still a great way for broke investors to develop solid returns on their money, as the recovery presses on. Sure there will be dips along the way, but looking at an aggressive mutual fund could be a good way to stay just one step ahead of the S & P.

brokeinvestor@gmail.com @BrokeInvestor

Step Back and Watch the Markets

2010-02-24T21:15:00.000-08:00

After more than a week without a post, it feels like a lot has happened. The market, for all intents and purposes has not really moved much this week, yet there has been much activity.

On Monday, the Dow opened at 10,402 and closed today at 10,374, a difference of just 28 points in three sessions.

Although there were many contributing factors to market movement, the ups and the downs have been largely equal.

Here are a few highlights of what contributed to market movement so far this week:
1. Home prices dropped 2.5% putting pressure on market as a whole
2. Toyota begins to come clean, growth overshadowed need for recalls according to company spokespeople.
3. Bernanke Speaks, markets drop
4. Bernanke Speaks, markets rally

The deal between GM's Hummer brand and a Chinese company has fallen apart, and unless a last-minute deal comes together, Hummer will go the way of the Pontiac and Saturn.

After the Chinese Government denied the deal, GM, left with very little room to move, will most likely kill the brand altogether. Formerly the worlds largest automaker, GM has been actively marketing the brand for more than one year as a part of its bankruptcy restructuring.

Hummer's production shut down a few weeks ago, and the dealerships are likely to sell of their remaining inventory this year.

This news won't have much impact in trading for Thursday, but what might cause a stir is continued activity on Capitol Hill as Fed Chief Ben Bernanke continues testimony in front of the Senate Banking Committee.

Weekly jobless numbers, pending a negative surprise could drive markets lower. Post-Market trading signaled a slightly lower open, but using that as an idicator would be a fallacy.

There are less investors moving more money in the market, which causes an increase in volatility and a decrease in liquidity.

Finally, the health care debate continues in Washington and with continued stagnation and government-controlled options moving through Congress, the markets are likely to trend toward cash or cash equivalents.

Dividends seem to be the best place for broke investors to stash money. While they may not earn a great capital appreciation, the steady income will allow you to create cash flow, or DRIP your dividends into larger positions.

A few high-yield dividend stocks:

1. LINE - Linn Energy LLC - Oil and Gas Operations
2. KMP - Kinder Morgan Energy Partners - Oil and Gas Pipeline
3. VZ - Verizon Communications - Telecommunications
4. MCD - McDonald's - Food Service / Real Estate

brokeinvestor@gmail.com @BrokeInvestor

Home Price Decline Shows Recovery Vulnerability

2010-02-23T06:14:00.000-08:00

The Case-Shiller index tracking home prices around the United States showed that home prices have declined by .2% and for December and 2.5% for Q4 2009. These statistics are measured in 20 metropolitan markets, and give a fair idea of how the majority of the real estate market is performing nationwide.

While a 2.5% drop seems large, the annual decrease in home prices for 2009 was 3.1%, versus the 3.2% that was expected. It is unlikely that wall street will cheer this information, but the negativity may not be enough to derail the rally that the markets have enjoyed since March 2009.

While prices have been dropping for years, there are signs of the decreases slowing and life being breathed back into real estate.

For a broke investor, it would be nearly impossible to buy real estate with $500-$3000, but if a broke investor wants to get in on the real estate recovery, REIT's are a great way to go. A REIT is a Real Estate Investment Trust, which is a portfolio of real estate that must pay a minimum of 90% of its earnings to shareholders.

This is a great way for a broke investor to get in the game. While you will not own any real property, you can essentially become a part owner in residential, commercial or industrial property. There are REIT's that specialize in healthcare facilities and REIT's that specialize in shopping mall facilities.

The opportunities are endless, and the returns are usually fairly substantial. Will investing in REIT's make you rich? Probably not, but if you can get a return of 7-13% is it worth it? Of course it is.

brokeinvestor@gmail.com @BrokeInvestor

Was that the Correction? Time to Buy Again?

2010-02-16T21:09:00.000-08:00

The downturn that disrupted the bull market in the last two weeks seems to have been reversed as traders returned to Wall Street on Tuesday and rallied up more than 1.6% for the Dow.

While the negative trading on the Street wreaked havoc on retail investors, traders came back to the game well rested after a three-day weekend.

The US Dollar, which had been gaining strength, mostly against the Euro, gave back to both the foreign currency as well as the US Equity markets. The Dollar's reciprocal correlation with the US equity market makes sense because when US stocks valued in US Dollars, are lower as a result of exchange rates, the foreign investment money comes rushing in.

The carry trade, discussed more in depth here is a strategy where an investor takes a loan from a low-interest rate currency, and invests in a high-interest bearing currency, thus earning the spread between low-rate borrowing and high-rate investing.

The carry trade adds to pressure on the US Dollar, but in some cases as we are seeing now, that Dollar pressure leads to higher market movement.

The Broke Investor is invested in Linn Energy (LINE), which was up 2.3% on todays marketwide rise. Another stock that has been on the watch list, and in the portfolio, is KMP, Kinder Morgan Energy Partners, which boasts a dividend of 6.7% annually.

Both of these are energy stocks, with LINE being in oil and gas exploration and production, and KMP focusing most of their business efforts on oil and natural gas transportation through its pipeline business.

The benefit of LINE is that if oil and gas prices go up, so do their profits. As a consumer, this would be a negative, but as an investor, your position value increases along with the rising price of raw materials (in most cases).

The benefit of KMP is that no matter what direction oil and gas prices are moving, as long as companies have to get oil from point A to point B, Kinder Morgan is there to charge a fee. So when oil prices rise, KMP makes money, and when oil prices fall, KMP makes money. Because KMP is a partnership, the majority of the profits must be distributed to shareholders in the partnership. This is why the dividend for KMP is so high.

brokeinvestor@gmail.com @BrokeInvestor

After Crazy Week, Wall Street Rests

2010-02-12T21:38:00.000-08:00

Friday's closing session, which ended down 45 points on the Dow, capped off a schizophrenic week on Wall Street ahead of President's Day on Monday, keeping the market closed.

The impact? Not only is the next week shortened, but the impact from the large number of unknowns will be compressed into four days, instead of five. This could increase the VIX index, a measure of market volatility, and the swings seen this week could be exaggerated.

Bailouts seem like great ideas when the economy is tanking, and citizens tend to favor government interference, until they realize later that they are actually the financiers. During the bailout, a number of US businesses had their hands out; AIG, General Motors, to name a few. Now these companies are viewed in a negative light, and public favor tends to shy away from bailed-out institutions.

So why do the US equity markets cheer the European Unions decision for a Greek bailout?

One reason could be the fact that this money will not be financed by US Taxpayers. Another reason could be, and while this is a stretch, the US may lend money to the EU to pay for the bailout.

Perhaps the impact of the Greek economy, on the US and the developed world, is much larger than main street realizes. I hope someone can point out the reasons why the outcome of this bailout will have such a large impact. The economic situation in Greece is no laughing matter, but mere months ago, the major developed nations worldwide were in similar situations.

brokeinvestor@gmail.com @BrokeInvestor

I Don't Know What to Do!

2010-02-11T18:46:00.000-08:00

Reading headlines and articles written by professional financial analysts and stock market predictors can be overwhelming. Not because the information is difficult to understand, and not even because there are so many, but because nobody seems to agree.

On just about every news-related website, you can find the "pro's" talking about a correction, and about two or three stories down the other "pro's" are talking about a continuing rally.

Thursday's session did not get off to a positive start, but finished up nearly 106 on the Dow as the energy and materials sector forged ahead.

On the subject of energy, one of the favorites of The Broke Investor, Linn Energy picked up 1% in trading Thursday. Here are a few reasons why this stock should be on the hotlist for broke investors:

1. Dividend - LINE pays a dividend of $2.52 per year. It's paid quarterly, so your $900 investment could buy you about 35 shares at Linn's current price of $25.71. With a $.63 dividend multiplied by your 35 shares, you recapture $22 per quarter.

Here is an example of how much a stock like LINE can return:

You invested $6,300 over about two years, and youre total return is $6,835.50, meaning you've earned about $535, or about 8.5% in two years. The quarterly 1% price appreciation for the stock is fairly accurate, as this would represent 4% per year, during a time of economic recovery.

Please note that this is just an illustration of what could happen with a stock like LINE. It is in no way a recommendation to buy this or any other security.

2. Book Value - This stock trades at about 1.28x its book value, while the industry average for oil and gas ops is 3.28x. What this tells me, is that it is undervalued by the market versus its competitors. The market likely prices this stock lower because every quarter it has so much cash go out the door in the form of dividend distributions.

3. Potential - Linn Energy is owns oil reserves, and participates in oil and gas exploration. With gas prices likely to rise from their current levels, Linn Energy sells their raw materials for higher prices, and earnings increase. While your dividends, if they remain stagnant, will not pay the same return, you will enjoy capital appreciation for your shares. Buy Low, Sell High.

Of course LINE is not the only good play in Energy, it is a good stock to keep your eye on. Set up a practice account for free at one of the hundreds of websites that offer it, and try out your strategy. Test your ability to research a stock without taking any risk. The only downside to this is that you will wish you would have used real money when you're looking at a 14% gain.

brokeinvestor@gmail.com @BrokeInvestor

Wild Swings on Wall Street

2010-02-09T21:08:00.000-08:00

The first two sessions this week saw a wide range on the Dow, with the low coming in at 9904 and the high 10,138, before settling at the close Tuesday at 10,058, up 150 points in the session.

News of the European Unions likely rescue in Greece launched US equity markets, and was able to shrug off news of a worsening situation for Japanese automakers.

Toyota's well publicized recalls and threats of US Government intervention are not all that affect the island nation's automotive industry. Honda Motor Company announced plans to recall more than 430,000 cars worldwide, fueling the retreat from Japanese autos.

Toyota's stock was up 2.4% to 74.60, while Honda's value increased 2.1% during market session hours, but gave half back in the after hours session, finally settling at 34.16.

While it could provide a lot of excitement to trade during such a turbulent market, we have already seen a correction of about 8% and there are many predictions of further setbacks to come. Can we figure out a way to start adding some jobs?

How do we lose 20,000 jobs in a month, and have a decrease in unemployment? Something doesn't seem to add up. In my opinion, true market recovery cannot happen until after three months of jobs added with a marked increase in each monthly number.

How about a couple stocks worth taking a look at?

Plug Power - PLUG - This stock has been on a downward swing for quite some time. While The Broke Investor still holds a long-term bullish attitude, I am not buying any more shares. So why the bullish long term outlook? PLUG is attempting to enter the consumer market in the US with a low-cost, sustainable solution to home heating. If this happens by the end of 2010, the company could see incredible gains. However, it is in danger of being delisted from the NASDAQ as it has traded below the $1 threshold for far more than 10 days.

Alkermes - ALKS - This biotech/pharmaceutical company has two drugs pending approval from the FDA. Typically when a drug company has a drug approved, there is a large increase in value. Remember what Pfizer did when Viagra or Lipitor were approved? Remember what Dendreon or Vivus did recently? In a usual situation a company could have one major drug in a given year, up for approval. With Alkermes boasting the possibility of two different drug approvals in 2010, the downside risk is essentially cut in half.

Please remember that The Broke Investor is not a financial advisor, and these stocks to watch are not recommendations to buy. I could be wrong about both. Then again, I could be right. Either way, its not advice, or recommendation.

brokeinvestor@gmail.com @BrokeInvestor

John Thain and Other Weekend News

2010-02-07T20:54:00.000-08:00

John Thain was practically run out of town with the near-failing of Merrill Lynch. Whether Bank of America really wanted to buy Merrill, or they were coerced by the US Government to consume the debt and assets of the firm may be unknown, but why would CIT group willingly bring Thain on as CEO?

Perhaps this is the end for CIT Group and they needed a fall guy? Maybe the embattled ex-CEO can right the ship? Whatever the reasons for bringing Thain on board, The Broke Investor will stay away.

The saga continues for Toyota as rumor of a Prius recall have been swirling around in the automotive and financial industries. With the apology of Akio Toyoda, company president, the launch of the repositioning campaign has begun.

On Saturday morning in Japan, the decision to recall the Prius, to address and repair the brake system inadequacies was made. The recall will be announced shortly, but Japanese Toyota dealers have received notification. In the United States, however, the worlds largest automaker's plan to issue a recall is unclear. While the dealers have received similar notification to those received in Japan, no official decisions have been made.

The recall in Japan affects about 170,000 Prius cars, and if it were to happen in the US, the affected car total would be near 270,000.

According to Toyota, the problems with the brake can be easily fixed with a modification of on-board software.

Finally, the New Orleans Saints won Super Bowl XLIV (44), which really should have been sponsored by "XBOX LIVE" in the opinion of The Broke Investor. However, with sponsorship sales happening years in advance of the game, how did they know XBOX Live would have been such a success.

The rumor is, when the NFC team wins the Super Bowl, like happened tonight with the New Orleans Saints, the stock market has a negative year. Conversely, when the AFC team wins, which did not happen because the Indianapolis Colts lost, the stock market has a positive year.

Of course this indicator holds no true bearing on the outcome of the stock market, but it is something that cannot go without mention.

Earnings season continues tomorrow, and there will be plenty of news that will effect stock prices. Last weeks dip could be the beginning of a correction, so look for buying opportunities. If you have substantial gains, now may be a good time to think about taking some profits.

brokeinvesto@gmail.com @BrokeInvestor

Broke Investor: Special Early Edition

2010-02-05T06:11:00.000-08:00

Unemployment rate drops to 9.7%, giving traders a few reasons to buy rather than sell after Thursdays disastrous session.

Market futures and pre-market trading are pointing to a lower open, but as we get closer to the opening bell for today, the situation is improving.

Where is the best place for a broke investor to put their money right now? Stocks could be aiming lower, so a closer watch on strike prices can give you the opportunity for a bargain in the near future. CD's and Bonds are still yielding such low returns, when real recovery comes back and inflation rears its head, you will not want money tied up in these illiquid vehicles.

Solid dividend-paying stocks will yield higher returns as their prices depreciate during marketwide fluctuations to the downside.

As earnings season starts to wrap up, volatility may decrease. While yesterdays negativity will be difficult to shake off, and market indices will likely continue lower in the near-term, over the long haul, stocks that are available at bargain prices will yield excellent gains.

brokeinvestor@gmail.com @BrokeInvestor

The Hits Keep Coming for Toyota

2010-02-03T22:15:00.000-08:00

In the beginning there was 9...Now the Prius, subject of more than 100 complaints filed by US drivers, prompted a government investigation to see why the brake pedal, not the accelerator pedal, is functioning improperly.

Another 6% smash to the shareholders of Toyota who thought, after the sticky accelerator fix was distributed, they could rest easy and get back to the comfort level with their investment. Not so. After hours sessions further bludgeoned investors leading a negative charge of 2.5% more.

So the question becomes...is Toyota a good investment, and what would be an acceptable strike price?

Most importantly, The Broke Investor does not give market timing advice. Here are a few of the things that I would take into consideration:

1. Charts - During good economic times, what range was this stock trading in? This is not technical analysis, but it gives you an idea for the market consesus valuation. Since late 2003, the stock really has not been below $60/share and up around the $130 range. It's current price, around $72 is close to its 6 year low.

2. Earnings - Times are tough. The worlds former largest automaker, GM, went bankrupt, and is now owned in large part by the US government. Toyota had negative earnings in 2009, and is predicting negative earnings (thought not as poor) for 2010 as well. Do you want to put money into a company that is losing money? Do you want to buy a company that is almost half of its potential market value? Each question is equally loaded.

3. Consumer Perception - Toyota has had a great reputation for building a quality car that will last for 150,000-200,000+ miles. The recent recalls and product deficiencies are having a terrible effect on the perception of Toyota cars in the minds of the consumer. Will this negativity have a long term aspect on the price of the stock and keep it below the market values of the late 2000's? Will the negative press only be around long enough to suppress the prices temporarily?

These are just three aspects that I, as a broke investor, would look at. These are not all of the bits and pieces of information that should be examined to properly valuate a stock, or base an investment decision on. If you really want to know what is going on with Toyota cars, stop in your local Toyota dealership and ask them what they are seeing. The dealers are the troops on the ground that are going to make or break the budgets and figures that Toyota has set.

Toyota could be a good buy, but it could also be a dead-money trap. Right now it would appear Ford is a better buy in the automotive sector, but the value of Toyota, while depressed during this tough time for the Japanese automaker, could regain the strength it had in 2007.

brokeinvestor@gmail.com @BrokeInvestor

Toyota Begins Distributing Fix

2010-02-01T18:08:00.000-08:00

Toyota Motors is beginning the distribution of replacement parts for "sticky" accelerator pedals in an effort to stave off the bad press and damaged perceptions of its most favored brand.

Dealers will begin receiveing these parts at the end of this week, and will begin replacement on their in-stock vehicles as well as customer recalls. Looking at the localized economic impact of this process, the dealers, whose work will be paid for by the manufacturer, should come out in fairly good shape. This is assuming that the brand does not lose too much customer loyalty.

The impact that this will have on the market? Toyota, ticker symbol TM, plunged from its 52 week high of $91.97 on 1/19/2010, to $77 at close on the last day of trading for January. With the fix being shipped to dealers, the stock price rose nearly 4% on Monday to close at $79.94.

To The Broke Investor, this stock is a buy. There is a small dividend, and the stock price has at least $10 to climb. However, as a broke investor, it would be hard to purchase many shares in a company trading at $80. To buy only 10 shares means a commission of $10 to buy and $10 to sell would eat 20% of your profits when the stock returns to $90.

Long-term however, the stock could prove to be a good investment, as it seems to be the most reliable brand, in the mind of the American consumer, and the dividend is likely to grow as economics improve.

DISCLAIMER: Nothing stated in this post, or on this website should be considered financial advice. Consult your investment or tax advisor before making investments in any stock and understand that there are risks involved including the risk of losing your original capital.

With that out of the way, what is left to shake out of this Toyota fiasco? Ford shares enjoyed a 2.5% increase Monday, while Honda shares lost less than .5 percent.

An interesting note about Ford: Consumer perception study shows the US Automaker is taking share of favorability away from the Toyota.

Not only does this allow Ford to take advantage of its current position in the US Market, but also worldwide, as many car-buyers around the globe may shift gears toward a "safer" automobile.

Volvo would be wise to tout its overall safety ratings in upcoming ad campaigns. In fact, that big football game that will be nationally televised next weekend would be a good place to launch a new campaign.

brokeinvestor@gmail.com @BrokeInvestor

Bigger Noise Maker: Obama Talks, Toyota Balks?

2010-01-27T22:22:00.000-08:00

President Obama, in his first State of the Union address, seemed to reiterate his campaign promises. After a year of getting to know the lay of the land, it seems like all of those platforms he stood high upon during the campaign trail, still need work.

Jobs? The best thing around "Jobs" is Apple's Steve Jobs and the announcement of the iPad, which appears to be a giant iPod Touch.

Bringing our Boys Home? Well, that one hasn't really worked out yet.

The Hatchet and the Scalpel? We all knew the hatchet was the easier choice anyway.

In defense of the President, though, the economic situation is going to run its course. I truly believe that he is doing what he thinks is best. He walked in to a terrible economic situation, and is trying whatever he can to get the United States out of it. While I don't agree with his tactics, you cannot fault him for trying.

More importantly to investors, though, is the news of Toyota's recalls.

There had been issues before, a floor mat that interfered with proper accelerator function, but Toyota is cutting off sales of the Number One selling car in the United States, the Camry, until the problem can be solved.

As a result, the stock plummeted over 8% on Wednesday, and with more recalls rolling off the line after the closing bells, Thursday's session is likely to be a tough one for TM shareholders.

Different reports are telling different stories, but it seems like the total number of recalled Toyota's (and the Pontiac Vibe, which was built in a strategic partnership between GM and Toyota) is near 7.6 million vehicles.

To put this number into perspective, the Cash for Clunkers program led to the sale of about 690,000 cars, or about 9% of the total number of cars recalled by Toyota.

All in all, Obama is a great at delivering speeches, and Toyota may want to retool a plant to build tow-trucks.

brokeinvestor@gmail.com @BrokeInvestor

No Bear, No Bull, Dividend Market

2010-01-26T21:13:00.000-08:00

It's a bull market, buy! Wait, it's a bear market, sell! But now it's a (insert trendy market descriptor here).

All of the "professionals" claim that every little movement in the trading day is the signal of a new bull-run or a market correction. The truth is, they dont know from day to day where the market is headed, until it gets there.

The S&P 500 remains basically unchanged since early November, 2009. While the last two weeks have knocked out small gains posted since then, we're back down below 1,100. What can broke investors do when stocks can't pick a direction?

There are a few things that can help ride out bears, and take advantage of bulls.

Dividends are a great way to insure a return on your investment. While a company may lose value in the short term, the dividend yield is locked in at the time you buy. If a stock is trading at $10 a share, and pays a $1 dividend (annually), you will earn 10% per year on your original investment. Assume the dividend is distributed quarterly, and that you own 100 shares. every quarter, you will receive $25 just for holding your stock. That is true whether or not the stock price goes up or down.

Options are also a great way to create cash flow in sideways moving markets. Covered calls are great ways to generate cash flow, but the rule of investing that says to keep your emotions in check really comes into play. Let's say youre dividend stock has $12.50 call options, expiring in three months, earning a premium of $.25 per share. Because you have done a lot of research, you don't think the price will move past the $12.50 mark for 6 months or more. You sell one "covered" call option contract. The contract is worth 100 shares, and you collect a premium of $25, giving another investor the "option" to call away your shares by or before the third Friday in April 2010. This strategy pays off because if the stock price does not increase, you keep your $25 premium, and if the stock price passes $12.50, you keep the premium, plus your 25% return on your investment.

If you are emotionally attached to the stock however, and it is called away, you will feel upset that your shares were "called" away.

The basic message here is, there are always opportunities to make money, and generate returns on your money. Buying stocks and forgetting about them potentially leaves money on the table.

DISCLAIMER: Both of these strategies, as well as buying and selling stocks in general, include risk. Your investments can lose principal value. Please consult with a financial advisor before you begin trading stocks or executing any of the strategies discussed herein.

Share your experiences with these strategies or other strategies that you think can benefit other broke investors!

brokeinvestor@gmail.com @BrokeInvestor

A Few Monday Night Updates

2010-01-25T20:46:00.000-08:00

Monday was a largely uneventful day for US equities as the Dow closed up just shy of 24 points, a far cry from the 216 it shed during Friday's selling frenzy.

A few interesting things that have transpired since then:
1. Obama publicly endorses Bernanke, market apprehension fades
2. Apple produced positive earnings news, will announce tablet on Wednesday
3. China calls for added reserve ratios, batters Hang Seng Index

With Bernanke likely to remain, focus shifts to Geithner's re-election or re-appointment. It would seem that there was more pressure surrounding Bernanke than there is surrounding Geithner, and that makes sense, because Geithner's position as Treasury Secretary does not hold the same charge.

The tablet from Apple seems to be cutting edge, high-tech and just what Apple is known for. This product launch has the capability to match the release of the iPod and iPhone. While pricing will be a major issue, the user-friendly features will likely power the tablet to the top of its class.

The banking issues in China seem awfully similar to what we saw after the "stress tests" in US banking. If it has the same effect, it will hinder the Chinese bankers ability to do what banks do best, lend. However, even if cash flow is cut off to major Chinese businesses, the effects should remain largely within the borders of China. Exports power the Chinese economy, and as will probably be the case, the government will see to it that these exports are unharmed.

brokeinvestor@gmail.com @BrokeInvestor

Is Bernanke Good or Bad for the Economy?

2010-01-23T21:26:00.001-08:00

Confirmation of Ben Bernanke's second term as Chairman of the Federal Reserve is near complete, but he will face more opposition than any recent Chairman ever has.

By re-confirming Bernanke in his current role, the Senate is agreeing with the Fed Chairman on his views and forecasts of the US economy. This vote of confidence may be what the market needs to stop the current slide that paused for the weekend after sliding more than 216 points in Fridays session.

While our economy is walking on thin ice, what would normally cause minor setbacks can have immense repercussions.

However, it is important to keep in mind that a correction is a natural progression towards recovery and a "normal" state of the market. No small, single event, such as re-confirmation or failure to confirm the current Fed Chief, can bludgeon or buoy what an economic cycle brings. Hence "Cycle", it ebbs and flows, crests and troughs, and no amount of stimulus has been able to alter it.

So the question remains, is Bernanke good or bad for the economy? I would say good. Any change under current circumstances give traders an uneasy feeling, which usually translates to "sell" orders. After an alarming sell off last week, the last thing Wall Street needs is fuel the fire.

While it looks like Bernanke's position will be re-confirmed, questions will continue to put pressure on the markets.

Key earnings reports to come this week as follows:
Monday: Apple (AAPL)
Tuesday: Johnson & Johnson (JNJ)
Wednesday: United Technologies (UTX)
Thursday: Amazon.com (AMZN)
Friday: Mattel (MAT)

Based on this week being the heart of earnings season, the Street will have plenty to cheer or jeer, which should at the very least bring volatility and major swings.

If earnings continue to be poor, expect a "double dip" or at least the second half of a w-shaped recovery.

(((Disclaimer: I am not a financial advisor. The opinions here are strictly that of the author and should not be viewed as financial advice.)))

Now may be a good time to take profits and be cash-heavy to take advantage of depressed stock valuations. If there is a 10-20% market correction, it means buying time for those who can take advantage, and give them an awesome opportunity for incredible profits down the road.

brokeinvestor@gmail.com @BrokeInvestor

Last of the Lousy Bank Earnings?

2010-01-20T22:43:00.000-08:00

This earnings season has the potential to be a final send-off for this recession, as financials, especially major banks, seem to be on the up-trend, or at least are delivering "less-worse" reports.

If this turns out to be the case, and the non-free-market friendly administration is forced to allow the market to largely work itself out, this rally could not only be real, but bring the US equity markets to levels never before seen.

Conversely, however, if we are indeed due for a double-dip recession, the leading indicators will be jobless claims (a continued rise in unemployment filings), and further negative bank earnings.

If, when the January numbers are released, jobless claims have indeed increased, it would seem to be a good sign to start accumulating cash, take any profits if applicable, and prepare for a correction to provide excellent buying opportunities yet again.

Simply stated: this recession will end, its just a matter of when.

While Wednesday's session was largely negative, it does offer a look at the volatility brought on by lower volumes. With the number of dollars largely left out of the market by retail investors, stocks are at the mercy of the institutions.

It is true, that the institutions wield the most power in moving markets during a boom or a recession, but the impact is often less evident when the mom's and pop's are fully invested.

Just how much money is on the sidelines? From preliminary research, it looks like the number could be anywhere between four and eight trillion dollars. Surely an amount substantial enough to move the market.

Will all of that money return to the market? Doubtful. Why not? Many of the larger retail investors were of the baby-boom generation, and are retiring. As this number of retired baby-boomers continues to grow, more and more money will be ploughed into fixed-income investments. It would be a safe estimate to guess that the 50-70% of the retail investor money will come back, but nearly impossible to say when.

It would be very likely to see the majority of this money return after at least two months of jobs growth.

brokeinvestor@gmail.com @BrokeInvestor

US Equity Markets Continue to March

2010-01-19T18:34:00.000-08:00

After a slight pause and retreat last week, the bulls regained steam and forged ahead on Wall Street.

Why was this the case after Citigroup announced a loss of $7.6 Billion? Analysts consensus estimate was a loss of $.33 per share, and they were right on the money. No positive surprise, but also, and more importantly, no negative surprise.

While the economic and stock market recovery are underway, the underlying concern continues to be the unemployment numbers. As new jobless claims continue to pile up, true recovery will continue to be shuttered.

A few positives hit the market as Apple (AAPL) announced their latest gadget in the "tablet", which is hoping (and probably will) to challenge the Amazon Kindle. Apple is reportedly in talks with publishing giant Harper Collins to provide e-book content.

Around 5pm Pacific this evening, Scott Brown was announced as the winner of the Massachusetts Senate seat that belonged to the late Ted Kennedy. This win, for a republican, breaks the filibuster-proof democratic hold on the senate, and will likely throw a wrench into the Obamacare plan.

While Wednesday's session may include a marginal amount of profit taking, an upset in the balance of power in Washington DC will likely give investors reason to cheer.

Healthcare stocks seem to have led the charge, with Pfizer posting one of its biggest gains on higher volume.

In non-equity markets, commodities like gold were up, and in currency, the dollar was up as well. This is abnormal for gold, typically a hedge against the falling dollar, to correlate with the US currency, but if the rally continues this way, the US markets could see major positive growth throughout the rest of earnings season.

A few stocks worth looking into:
Xilinx - Semiconductor - XLNX
Pfizer - Pharmaceuticals - PFE (disclosure - owned by The Broke Investor)

As 3-D television becomes a reality, and an option in the home of the consumer, the semiconductor companies like XLNX will be poised for growth. The possible health care reform bust will also give a boost to the drugmakers like PFE, which closed Tuesday's session at $20.00. Pfizer had cut their dividend in early 2009, but since last quarter the dividend has been raised slightly, and at $20/share the stock yields 3.7%.

The opportunities continue to appear both in equity markets and elsewhere. You just have to keep your eyes open and focus on your goals. Do your research and find the right investment for you.

brokeinvestor@gmail.com @BrokeInvestor

Post-Recovery Inflation

2010-01-14T22:01:00.000-08:00

While much of the information on The Broke Investor explores different ways and opinions to earn a better than average return, this short post is much different.

Throughout much of the United States' economic history it seems that during deep recessions, such as The Great Depression, the Savings and Loan crisis, and 2009's Great Recession, the recovery period is followed by inflation. A major contributing factor to this, is the massive governmental spending that is used as a catalyst for economic motion.

Economies operate in a cyclical pattern. There is growth (expansion), a crest, then a recession (contraction), and a floor. It is a normal event in a free-market economy.

While looking at past recessions, and the recovery that takes place after a floor is established, it seems as though inflation rears its head.

As a broke investor, what is the best way to protect your investments during times of inflation?

TIPS (Treasury Inflation-Protected Securities) issued by the Treasury Department, are bonds that not only yield the low returns, but also move along with inflation so that a holder is not stuck earning less than inflation is rising.

Commodities seem to be a good hedge against inflation. As the US Dollar devalues, gold and other precious metals seem to gain.

Real Estate, and fixed rate mortgages become more valuable as the cost of borrowing money rises in correlation with the inflationary rates.

What is the best way to protect your investments? After the rise of the stock market over the last 10 months, when will it be time to take profits (if applicable) and move into a more diversified asset class?

Maybe inflation will not hurt broke investors as much because of limited exposure to massive markets. Conversely, the limited diversity of a portfolio can cause significant damage is a certain sector represents a large percentage of total holdings, and that sector is hit hard.

There are a lot of questions, but a lot can be learned from studying the effects of inflation after the recession-recovery part of the economic cycle.

brokeinvestor@gmail.com @BrokeInvestor

Lessons Learned from Past Recessions

2010-01-11T21:44:00.000-08:00

While there are many lessons to be learned from past recessions, the current recovery period is taking a familiar path, and investors may benefit from an understanding of how historical repetition may affect their portfolios.

While engaged in former Federal Reserve Chairman Alan Greenspan's book "The Age of Turbulence", The Broke Investor noted many similarities between the current recovery and recovery periods of the past.

Keeping in mind that the Fed plays a role in controlling major economics in the US, free-market business cycles all seem to be the same, but with varying extremes. The stock market crash of 1929 that sent the US economy into the great depression is an extreme example. Conversely, the dot-com bubble burst had a much smaller impact in the overall economy.

Here is what seems to happen in every US recession:

1. Major stock market crash

2. Unemployment skyrockets

3. Government steps in to "control" situation

4. Massive government debt increases

5. Fear that "things are forever changed"

6. Currency devaluation leading to inflation

It also seems that after a recession, the stock markets seem to rise, at an unexpected and unprecedented pace. Then growth slows, stagnates, and drops. The second drop, in the case of the Great Depression, which happened around 1937 (when the last major developed nations dropped off the gold standard), provided almost equal opportunities as the 1932 market to buy major company stocks at drastically discounted prices.

If the current economy proves to be a double-dip recession, it will be very important for investors to have some liquid capital on hand to take advantage of such opportunities as they may arise.

With that in mind, money on the sidelines is opportunity cost at its finest. If you have been "waiting" for the economy to improve, you have missed an incredible period of feverish market appreciation.

One of the rules of Billionaire Investor Warren Buffett follows is to have enough cash on hand to take advantage of situations that provide near-infallable buying opportunities.

Broke investors can follow this rule as well, keep 20% of your portfolio value in cash. If you don't have the cash available for 20% (or in my case, when you have that cash, it is immediately invested), start building that "opportunity fund" and keep it out of your investment account until you find the right opportunity.

Recession's are where money is made. You have to find a company that can survive the tough times, and will thrive as the economic climate begins its long journey toward new highs.

After the Great Depression, investors thought that the market would never get back to where it was in the 1920's. After the crash in late 2008, many investors thought that the market would never get back to its high. NEWS FLASH: It will, and it will set new record highs in coming years. Don't Miss Out!

brokeinvestor@gmail.com @BrokeInvestor

Government Bailout Pays You Back!

2010-01-06T23:00:00.001-08:00

This post is about Citigroup. Yes, the same Citigroup that was a major cause of the sub-prime mortgage bust. The same Citigroup that was taking enormous sums of taxpayer money in the government bailouts. The same Citigroup that was trading below One Dollar per share just 9 short months ago.

In the first week of trading in 2010, Citigroup has moved up slightly, but the percentage gains have been tremendous. Up over 8% in just three days, with room to improve. The Broke Investor portfolio owns Citigroup stock. This post is in no way an endorsement of, or a recommendation to buy Citigroup.

When troubling news surfaced about pending lawsuits against Citi, the effects of Senator Dodd's self-inflicted lame duck term seem to have powered Citi shares. Senator Dodd has lead a convincing push for the need for financial regulation reform, and his decision not to seek re-election has been a nice shot in the arm for investors holding financial stocks.

An investor who is looking long term should think long and hard about a company like Citigroup.
While there is still a long way to go for our financial recovery, Citigroup has shown resiliency in the face of the worst situations, and looks to have come out swinging in 2010. Give a stock like C a few years, 5-7, and it could be a 10x investment.

Let's not forget that just as recent as August 2008, the too-big-to-fail bank paid a quarterly dividend of $.32 per share (which had been lowered from its previous $.54 per share quarterly dividend).

The upside profit potential seems to far outweigh the risk. It looks like Citigroup has survived the toughest of times for a bank of its nature, and its international business presence will only buoy the stock price as world economies begin to return. All it takes is $364 to own 100 shares of Citigroup. If the price hits $10 by the end of 2010, a very real possibility, that would be a profit of 175%.

Ideally, the US Government, who owns billions of dollars worth of stock in Citi, will begin selling this stock back to the public, which would not only draw back the reliance on the government, but would also be a huge positive to institutional investors to put their clients money back into the stock.

To The Broke Investor, this doesn't seem like an opportunity to pass up. Risk vs. Reward.

brokeinvestor@gmail.com @BrokeInvestor

Dow Kicks Off 2010 with 156-Point Rally!

2010-01-04T20:26:00.000-08:00

A good way to shake off the nasty hangover of 2009 is to come out strong, and that is just what the Street did on Monday, with the Dow rising 1.5%, the NASDAQ rising 1.7% and the S&P up 1.6%.

It was hard to find a loser in the Dow 30, and while volumes were not unusually high, across the board, the majority of the components enjoyed gains of 1-3% in Monday's session.

While the Dow has come a long way since March lows in 2009, there is still a long way to go to get back to what many would call the "normal level" (15,000).

Study a few past recessions (not counting the Tech Bubble Burst of 2001), and you will see that the recovery of the markets took place ahead of main-streets recovery. As the financial markets are leading economic indicators, this makes sense.

While reading a non-fiction book about the Great Depression of 1929, The Broke Investor discovered startling similarities to current day. A few things that stood out the most were the shift from Republican to Democrat administrations, the unprecedented speedy recovery by financial markets, and the opportunities that seemed to be missed at the bottom, but proved to be bargains even at mid-recovery stages (like right now).

Many mom-and-pop, or retail investors, were afraid to get back into the stock market, and missed tremendous opportunities for gains, profits, and even financial independence.

More past-recession lessons teach us that the year or two following the recovery year (2009) is usually followed by a lackluster year in comparison. This may or may not be the case, but in the long run through all the previous recessions, the stock market grew back to "normal" and then surpassed many top financial professionals "cielings."

The future is just as unknown now as it was when the market was crashing in 2008, and when the market was forging ahead in 2009.

Don't forget, it never hurts to take profits. If you found a good investment today, you can find a good investment yesterday. It might require more research and tedious study, but gains are gains.

After countless hours researching different investment opportunities for investors with limited capital (a broke investor), The Broke Investor looks forward to the challenges and opportunities that 2010 is sure to bring, as well as discovering new investment opportunities in the $500-$2,500 range.

If you have any ideas to discuss, please feel free to share them. You can email me at brokeinvestor@gmail.com or follow me on Twitter @BrokeInvestor.

Some of the items that will be discussed in coming posts are Peer to Peer Lending, getting involved in real estate investing, how options can generate cash flow, new legislation such as Cap and Trade, health care reform, and anything in between that gives us broke investors an opportunity to make some money.

brokeinvestor@gmail.com or @BrokeInvestor

Analyst Upgrades/Downgrades and Institutional Holdings

2009-12-30T11:13:00.001-08:00

Every single day that equity markets are open, there are analyst upgrades and downgrades, and reaffirmation of these positions.

What does this mean to a broke investor? Almost nothing. When a ratings firm such as Standard and Poor's, or Moody's puts a rating on an individual company, it is their opinion of how the stock is likely to perform.

An individual company can have many different ratings from different groups. A lot of the time, a company stock will reflect the rating with a one-day "pop" or "drop" and higher volumes.

Here are common ratings (although different agencies will use different names):

1 - Conviction Sell
2 - Sell (Underperform)
3 - Hold (Neutral)
4 - Buy (Outperform)
5 - Conviction Buy

Here is the Broke Investor's theory:

If a stock is traded with enough volume to be often rated by agencies, it's worth more research than the ratings delivered.

What this means is when a ratings agency pegs Ford (F) at "Hold", you need to look at their reasons for this judgement, and compare them against your own.

I own Citigroup stock. By most ratings agencies, it has the lowest ratings (underperform, sell, avoid, etc.). But my research, compared against the ratings agencies, makes it a good risk in my portfolio.

While I don't claim to be "smarter" than anyone who works in the equity markets, I do think that my investment strategies, research and logic allow me to be successful while going against the ratings agency recommendations.

Broke investor's all have similar goals, but also have very different appetites for risk. Risk does not always equal reward in the case of equities. Look at 2007 versus 2008. Virtually any stock purchased in early 2007 was a winner, while stocks purchased in 2008, by years end were mostly losers.

This brings up the measurement of institutional holdings. Institutional holdings are the percentage of outstanding shares owned by financial institutions. Pretty simple.

The Broke Investor looks at a high institutional holdings ratio as less opportunity for growth. That doesn't mean that these companies will not outperform the market (regardless of ratings agency opinions)

There are extremely high-volume, well-known companies that trade on the major stock indices. These are companies like GE, Microsoft, Apple and Pfizer, and they tend to have higher institutional holding ratios than smaller companies (the IH for these stocks range from 49%-71%)

Smaller-traded, less-known companies that trade on the major indices include: Kinder Morgan Energy Partners (Broke Investor Favorite, owned), Plug Power (Broke Investor Favorite, owned) and PolyMet Mining. These are not all small-cap companies, but their IH ranges from 11%-21%)

Here is the theory behind Institutional Holdings:
The intsitutions make up the majority of the volume in a given trading session. If a company has a lower institutional holding ratio, that company likely has not been discovered by more institutions.

With the proper research, and the belief that this company is worth more than its current trading price, once the institutions widely hold the company stock, price appreciation follows.

Disclaimer (this is just a thought, a theory of The Broke Investor, and should not be taken as advice or recommendation to buy and sell any securities mentioned herein)

So while you are doing your research, don't overlook the rating agency recommendations, but dont overvalue their opinions either. Keep in mind the institutions that hold shares of a company that you want to invest in, and give yourself the opportunity to beat the market.

brokeinvestor@gmail.com or Twitter: @BrokeInvestor

Shortened Session Ends Positive in Holiday-Shortened Week

2009-12-24T17:21:00.001-08:00

The US Securities markets closed early today in observance of Christmas, but not before the bulls made more headway in the shortened week.

Since March, it seems as though the Dow's growth cannot be stopped. If history is any indicator of future performance, it is reasonable to plan for a small correction in 2010.

With that in mind, a correction is not a reason to get out of the market, or put any money to "sleep"

Those who kept their money on the sidelines during the market recovery have suffered tremendous opportunity cost in equities. With the Dow trading around 10,500 it is likely that the market will continue to climb, and eventually beat the 15,000 number that we enjoyed in 2008.

At the risk of sounding like a broken record, what it all comes down to is research. Properly researching a stock is more than looking at a chart and 52-week range. You have to know how the company is poised for growth, how it is managed, where its main sources of revenue come from, and a myriad of other things to give you an idea of whether the stock is likely to rise or fall.

There are many more aspects, outside the company's control that can affect the stock price, both positively and negatively, and they cannot be overlooked.

While the markets are not in motion too much during the holiday time, it is a great time to put in the proper research on your target securities.

brokeinvestor@gmail.com or Twitter: @BrokeInvestor

Back in Business

2009-12-22T22:18:00.000-08:00

After about two weeks of no new information, The Broke Investor is back in business. A lack of posting is a result of extremely busy times at work.

The markets in 2009 have given back a large percentage of what it took in 2008. While the recovery seems to be slowing, the leading economic indicators continue to point upward. There are two things that are certain during this recovery: 1- The economy has been artificially assisted through government stimulus, and 2- True recovery is beginning to take shape, but will have a lot of bumps in the road.

Here is an update on some of the stocks that The Broke Investor is tracking.

Citigroup (C, 3.34) - Disclosure: The Broke Investor owns this stock.
Citigroup has been one of the hardest hit major banks in the "Great Recession" and dropped to a 52-week low of just $.97.
While that would have been the best time to purchase, it would have taken a much deeper knowledge of the banking business, government stimulus and complete research of the company and management team.
What makes Citigroup a good buy at current prices, is the price-to-book ratio, and the fact that C is trading below its intrinsic value. Another attractive feature is the international business arm of Citigroup that is in many developed economies as well as some undeveloped nations. the growth opportunities are limitless and the stock price, over the next few years 1-3 years, will reflect world economic growth.

Plug Power (PLUG, .72) - Disclosure: The Broke Investor owns this stock.
Plug Power, is a fuel cell manufacturing company based in New York. The primary revenue comes from warehouse applications of its fuel cells with companies like Pepsi and Whole Foods on their client list.
While this is a speculation play, the government stimulus money that was earmarked for "green" projects has helped Plug Power endure a tough economy. A market that will be new to PLUG is the residential heating market. They are conducting real-world applications of their residential heating products currently at university dormitories in New York State. The opportunity to enter the residential market will provide for huge growth, or possibly buy-out from a larger company. (Plug trades at a price to book of .96, which means that its asset value is worth more than its market cap. In a takeover, the buyer would likely pay a premium for the company and lead to shareholder gains)
Notice received from the NASDAQ for failure to meet the exchange's minimum price of $1.00 per share weighs heavily on the short-term success of Plug Power.

Kinder Morgan Energy Partners (KMP, 60.63) - Disclosure: The Broke Investor owns this stock
Classified as a Natural Gas Utility, Kinder Morgan has a widespread basis of revenue producing assets. This stock is a dividend play, with growth potential. A stock that trades at $60 is tough to justify for a broke investor, but the dividend yield is where this stock makes sense.
The current yield of 6.95% is enough to turn heads, but the fact that the company plans to increase the current distribution from $4.20 a share that it paid in 2009, to the $4.40 it plans to pay in 2010 is remarkable.
For a broke investor, here is the strategy with KMP: Buy just enough shares so that your dividends cover the cost of trading. If you have to make up $20 in commissions, you need to buy 20 shares. This yields $21 in dividends and helps your cost basis to provide better returns.

brokeinvestor@gmail.com or @BrokeInvestor (Twitter)

Hot Stock Tips

2009-12-09T20:38:00.000-08:00

You've heard it all before: "This stock is guaranteed to rise 500% in just six months!" or "My last four stock picks from my email newsletter have made millions for my readers"

Anyone who is diving in to stock market investing for the first time is, without a doubt, going to be bombarded with numerous claims of fortunes made, simply by investing in the newest, hottest company.

When you receive an unsolicited postcard that claims to have found "the solution to the worlds energy crisis" and them gives you a ticker symbol, you may be tempted to look into it. A little research cant hurt.

You will most likely find, though, that this company barely meets listing requirements for the exchange that it is currently traded on, and the people behind the mass mailings are hoping to swindle just enough people to purchase shares of the stock.

Promises of 100-200% appreciation in just a month, or a history of a stocks performance in the four-digit increase column is sure to sucker a few people in.

What this does, is raise the price of an otherwise worthless company to a point where the individuals behind the scam can sell at a huge profit. The only loser? The individual broke investor.

As author on The Broke Investor, I have looked into these "stock tips" and found them to be laughable. There is almost no cash to support any type of business activity, let alone business expansion. The operations are so miniscule that anyone in a related field would most likely have never heard of this company.

Here is the kicker: If the stock is so hot, why do they have to spend money to convince people to buy it?

Recently, Dendreon, DNDN, a drug company in Seattle had a huge pop on the NASDAQ with no outside marketing needed for the gains. (In Q2, 2009 DNDN increased from about $5 to about $20 per share in just one session)

Another example is Amazon, online retailer, increased nearly 25% in one day after an earnings release. Aside from the release of data, there was no paid advertising used to inflate the price (In Q3, 2009 AMZN increased from just around $95 to just under $125 per share)

Bottom Line: Avoid the "HOT STOCK TIPS" and stick to your research.

brokeinvestor@gmail.com or @brokeinvestor on twitter

Dividend Stocks and Monthly Distributions

2009-12-07T21:18:00.000-08:00

Part of being a broke investor is being broke. Be sure not to confuse the word "broke" with the word "poor." Limited capital doesn't mean no capital and part of every balanced portfolio looks for cash producing investments.

That is where dividend stocks come into play. With dividend stocks, you keep a continuous flow of cash coming into your account. Depending on the dividend income and the frequency of personal contributions, this cash flow allows you to have the needed cash on hand to take advantage of solid investment opportunities.

For the most part, investing in dividends is a steady, long-term thing. It seems boring, and even makes you rethink your investment strategy at times, but when that distribution gets posted to your account, it always makes you feel good.

With a typical blue-chip dividend stock, volatility is low, and relative trading ranges take excitement out of this investment type. That doesn't mean that dividend investments are boring, but it means that you must go in with a long term, investment outlook rather than a short term trade opportunity.

Dividend distributions can be automatically reinvested by enrolling in a DRIP or a DSPP.
Learn more about DRIP Investing here
Learn more about DSPP Investing here or even more here

Dividends are taxed as regular income, unless they fall under the category of qualified dividends. The taxation must be calculated into your accounting for this type of investing.

DISCLAIMER: Please contact your tax advisor for specifics on your responsibility for any income you may earn. The Broke Investor is not, and does not provide tax advice. Anything included on this site is for informational purposes only

Most often, a company that pays a dividend will make quarterly distributions (payments) to shareholders of record. In some cases, most often with mutual funds and bond funds, distributions are made on a monthly basis. A lot of Real Estate Investment Trusts use monthly distributions as a way to meet there obligations to pay out the minimum 90% of profits to shareholders.

Monthly distributions play an interesting role in cash-flow investing. As opposed to waiting for a dividend payment every three months, you are paid out every thirty (or so) days. This can go a long way in creating positive cash flow.

Stocks that distribute monthly payments are not the be-all, end-all investment strategy. It is one more idea that can help a broke investor get to where they want to be.

So how do you know if a stock that pays a dividend is a good stock to own? Research. Dividends can come and go as easily as the board of directors wants them to. Here today, gone tomorrow. When researching a dividend stock, it is important to look at the history of dividend distribution.

If the company just started paying dividends, or pays a dividend that seems high, more research is required. Some things to look for when researching a dividend stock are:
1. Consistency of Distributions - Companies like GE, Disney, Coca-Cola have paid dividends consistently through ups and downs in the market.
2. Distribution Growth - Does the dividend stay the same if a company performs better? If earnings are up over a year, would you invest in a company that isn't sharing those profits with shareholders?
3. Valuation - Does the company have enough cash in the bank to continue to pay the dividend? If the dividend outweighs the balance sheet, find something else.

Income is important. Cash flow is important. Dividend stocks probably won't provide as great an opportunity for capital gain, but in some cases, slow and steady wins the race.

brokeinvestor@gmail.com

Market Rally Full Steam Ahead

2009-12-03T21:41:00.001-08:00

The major US Equity Markets have been on a steady growth pattern over the last six months. The Dow has grown by about 20%, moving from about 8,700 points to its close today at 10,366.

The Broke Investor does not use technical analysis as anything more than a tool to evaluate extensive research, but the patterns are undeniable, and the moving averages show nothing but further growth to come.

While it is important to learn from history, it is also important to understand that past performance does not guarantee future performance. While many recovery periods have experienced a rising stock index in the United States, there have also been adverse situations during the times of recovery.

One lesson learned from The Great Depression was that a solid investment, even at its lowest point, remained a solid investment. In our current downturn, stocks like General Electric, Pfizer, and Alcoa all saw the lowest trading prices they have seen in years. Alcoa (AA) hit a 20 year low. Pfizer (PFE) hit a 12 year low, and General Electric (GE) hit prices not seen since 1991.

While these stocks are doing markedly better, GE and AA are still trading at nearly 25% of their 2007 highs. Pfizer has come out looking better and is trading at about 60% of its 2007 levels.

When the equity market is in a situation like this, the research that is such a big part of choosing individual investments, becomes doubly important. Just because a stock may go down in the short term, if it is a smart purchase at a good price, and you have the research to justify the investment, there is no reason to be discouraged.

With that in mind, extenuating circumstances can always change the underlying reasons behind an investors research and reexamination of facts would be in order.

Remember to take your emotion out of an investment. If the reasons you invested change, change your strategy accordingly.

brokeinvestor@gmail.com

Carry Trade Keeps U.S. Dollar Falling

2009-11-28T10:06:00.000-08:00

The United States dollar has long been the world's currency of choice, but with the devaluation that is taking place as a result of U.S. stimulus and the Carry Trade, the dollar is at risk of losing the unique position it has held for so long.

The stimulus, the printing and borrowing of money in an attempt to stave off the financial woes that our economy faces, has led to a weaker dollar. The money has already been borrowed, spent, or designated, so the resulting effect of stimulus money is inevitable.

The Carry Trade is a very speculative currency play. Here is how it works:

Let's use a Yen-Dollar Carry example:

An investor borrows $10,000 from a Japanese bank at a rate of 1%, then turns around and buys a $10,000 bond in US Dollars, that yields 3%. If exchange rates don't change the investment will yield a 2% return.

This is the simplest way to explain how the carry trade works. Currency investing often involves leverage, and at a 10:1 leverage ratio, gains and losses are 10x what they would normally be.

A leveraged investment like this is not only highly speculative, but it can absolutlely demolish the value of the lower rated currency. The way the Carry Trade is hurting the US dollar is because investors are using the US dollar as the low yield currency, and betting against the growth.

What is the reason for the negative correlation between the US Dollar and the US Equity Markets?

The most basic answer is that foreign investors view the US Markets as more affordable when the dollar loses value. In a basic explanation, if a stock costs $100 USD per share and the dollar loses 10% of its value, foreign investors can buy those shares for $90.

Another reason is that prices naturally go up as a currency loses value. If a gallon of gas costs $3, and the dollar loses 50% of its value, that gallon of gas will cost twice as much, and the price will become $6.

brokeinvestor@gmail.com

The Broke Investor and Jim Cramer Agree!

2009-11-24T22:13:00.000-08:00

If you have ever read more than one article on The Broke Investor, you are probably aware that conventional investment advice is not well-heeded.

(((side thought))) The rule that says there are exceptions to every rule appears to have no exceptions itself.

In this case, Mad Money's Jim Cramer said today that AT&T and Verizon are both good dividend plays for investors looking for cash flow.

The Broke Investor has been following the two communications stocks for the past three months, and our research is in total agreement with Cramer's assessment.

He said something to the effect of "I want my dividend stocks to be boring." Absolutely!

The Broke Investor does not believe that technical analysis is the answer, but look at the patterns in this chart from mid 2007 through today:

You can see a zig-zag pattern from the 2008 crash in Q4, which looks like equal positive and negative moves getting closer and closer to a stagnant stay at $30/share.

The dividend that VZ pays on its common shares is $1.90/year, or $.475 per quarter. This represents about a 6% return on your money. A $1,000 investment in VZ, over a 9-month, assuming no price movement, would yield a 4.2% return.

Without price appreciation, a 4.2% return is pretty good. Figure in an additional 5% gain in per-share price, and you've found yourself a nice little investment.

It is important, however, to note that you shouldn't look for a growth play when you're buying a dividend stock. With dividends, its about income. It doesn't seem like much with a $1,000 investment, but over time, additional investment into a company like VZ will likely yield market-topping returns.

Another good way to grow dividend-paying investments is through Direct Stock Purchase Programs or even a Dividend Reinvestment Plan.

As a broke investor, dividends allow you to mitigate risk. Example, you invest $1,000 in a single stock. If you have to pay $10 in commission to buy, and $10 to sell. You're operating at a 2% loss. This is risk. If your stock will pay $20 in dividends over the course of a year, that 2% risk is gone. If your stock pays $40 in dividends over the year, youre ahead by 2%. Both these scenarios assume that you hold the stock through all "record" dates.

If the stock goes down by 4%, but you're dividend yield is 4%, you have no loss.

Dividend stocks are a great way for a broke investor to get started investing in stocks. If the commissions cut into large portions of your investing, make sure you pick a stock with a solid dividend yield. It is also impotant to research the company to make sure that they can afford to continue or raise the current dividend level.

I would like to say "Thanks" to Jim Cramer for giving advice that helps the broke investor's of America.

brokeinvestor@gmail.com