Subprime for Dummies
Some entertainment for those of you that are interested in better understanding the subprime crisis.
Market Overview 3-6
The market is heading toward a pivot point as support at the 1300 level and downward-sloping resistance converge. Look for a big move once there’s a breakthrough in either direction.
Web 2.0 Companies That Can Help Your Investments
Mint.com - Mint is essentially an online version of Quicken that will help you manage all of your bank accounts and spending habits.
CakeFinancial.com - Cake is a social network for investors where you can see other people’s real investments.
Zopa.com and Prosper.com - Person to person lending systems that can produce some significant returns compared to the uncertain results of this volatile market.
Caps.Fool.Com - An online voting network for investors to rate and discuss stocks.
Zopa - Another Social Lending Site
As I discussed before with Prosper, social lending is gradually grabbing a chunk of the banking market. Zopa is another social lending site that is trying to help member to member loans. How does this affect you? Well, Gartner predicts that this newfound trend called “social banking” will capture 10% of the banking market by 2010. Not only will making investments on these currently small online networks become more mainstream in the coming years, but they’ll gradually put a dent in the current financial system as we know it. Traditional commercial banks like Bank of America and Citi will have to adapt to these growing trends in order to stay at the top of the food chain.
As the online space has begun to crowd source everything from social networks to news, it’s no surprise that banking is the next big thing.
Market Overview: 12/13
The market continues to stay in a rocky state even after the Fed decision to cut interest rates by $0.25. We’re on the fence for a move in either direction, but it’s too difficulty to argue which way the ball will roll.
- RSI hovers at the 50 level (neutral)
- Price hovers at the 50-day and 200-day moving averages (neutral)
- MACD hovers at 0 level (neutral)
The next week will really guide the market in the coming months. The holiday season will slow things down a bit though. You can expect volume to dry up as we near Christmas, so not all price movements will be legitimate as the professional traders on Wall Street hand off the trade books to their assistants.
Stock Market Overview - December 5, 2007
Market has been shaky for the last few months, but overall the market still looks healthy. The technicals look good, as seen in the chart below.
- RSI indicator sloping up and crossing the 50 mark is bullish.
- MACD crossover indicates a change in trend from the downswing, which is bullish.
- Price is currently testing the 200-day moving average and could move up significantly on a crossover.
Best of luck in your holiday trading!
Money For the People and By the People
This is an essay I wrote to conclude my Google Associate Product Manager internship. Enjoy.
Imagine a world where banks are no longer needed and the stock market is no longer the primary vessel for investment returns. Prosper.com has transformed this unlikely vision into a foreseeable future by providing America’s first people-to-people lending system. Prosper offers an online auction website that matches borrowers with lenders (it’s essentially an eBay for loans).
Prosper’s value proposition is to provide borrowers with loans at lower rates than the bank can offer and to provide lenders with higher returns for their money than the bank can offer. In the process, they charge a small fee to both the borrower and lender. Borrowers simply create loan listings by specifying the desired loan amount and the maximum rate they are willing to pay a lender. Lenders can bid in increments of $50 and up to the full size of the loan on many different loan listings, thereby diversifying their risk. Furthermore, once lenders have completed bidding on the full amount of the loan, more lenders can come in and bid the rate down.
Prosper’s value proposition sounds excellent, but it requires high volume and liquidity in order for its marketplace to function successfully. One of the most difficult challenges for Prosper has been in establishing a large and active user base. The company launched in February 2006 and, according to its website, now has over 330,000 registered members. While that may sound like a lot of users, according to quantcast.com, only half of those users are actively using Prosper. If you consider the tremendous volume and liquidity of the stock market, a stock with only roughly 160,000 traders is typically considered illiquid. There tends to be higher volatility associated with these illiquid stocks and they are often considered to be priced away from fair value due to this fact. In Prosper, you might expect only a few hundred lenders to bid on a particular borrower’s listing, so borrowers are not getting rates that are as low as they could be getting in a liquid and fairly priced market. On the other hand, lenders are probably obtaining higher rates of return than they would in a liquid and fairly priced market. In order for Prosper to provide the best user value and experience possible, it needs to find ways to increase its user base.
Prosper can improve both its user experience and thereby increase its user base by partnering with eBay in order to leverage their established user credibility system. Currently on Prosper, borrowers establish credibility through two means: their credit rating and groups. The credit rating is obtained from the borrower’s credit report and the groups system helps borrowers within a credible group lower each group member’s rates. Prosper can partner with eBay by linking Prosper accounts with eBay accounts so that borrowers can utilize their eBay feedback score as another basis of credibility. This will reduce the switching cost for borrowers who wish to establish strong credibility in order to decrease their loan rates. In return, Prosper can offer eBay some form of advertisements or create a special partnership program for loans that result in eBay purchases.
If Prosper grows rapidly and establishes a solid brand image, it could very well change the entire landscape of the financial industry. Currently, most of the loan listings on Prosper are for borrowers to pay off or consolidate their debt. Given the current credit crisis, Prosper has gained many borrowers who are looking for the cheapest way to fix their credit situation. In addition, many investors have decided to move portions of their investments from the stock market to Prosper in order to diversify their portfolio as well as to seek higher returns. One of the appealing aspects to borrowers about Prosper is that even a borrower with a low credit rating is given the opportunity to obtain a loan, given that lenders are willing to take the risk. Borrowers who have defaulted on a loan, however, will never be allowed to borrow again on Prosper. Therefore, many desperate borrowers have the motivation to use Prosper as a stepping stone to reestablish their credit and to change their ways for the better. This single-shot system serves as a filter to ensure the quality of the borrower base, thereby increasing the trust of lenders in the Prosper marketplace. If enough borrowers come to Prosper and establish good credibility, Prosper can expand into and replace the credit card business with person-to-person lending.
Over time, more and more entrepreneurs have flocked to Prosper to obtain loans to launch their businesses. These entrepreneurial borrowers typically have very good credit ratings and have lenders complete the bidding on their loans fairly quickly. Prosper can increase its potential customer base by targeting these entrepreneurs looking for funding by increasing the borrowing limit from $25,000 to a much higher level. An automated system can be devised that raises the limit based on credit rating and Prosper can hire a team to manually examine abnormal cases. While funding entrepreneurs can be risky, these investments can also be very rewarding to lenders. Prosper can stand to gain a lot by branching off to make a separate entrepreneurial loan division that has special rules. For example, one such special rule might be to eliminate the single-shot default loan system, and to provide a different safeguard to account for the risky nature of entrepreneurship. Furthermore, Prosper can add a feature where entrepreneurs can post their business plan for lenders to examine. If Prosper can enter this space with a well-planned system, it can essentially become a marketplace that replaces angel funding and venture capital funding.
With so many directions Prosper can head in to revolutionize the financial industry, it remains to be seen whether their success thus far will be replicated in the future. There are many battles still to be fought, including lawsuits, competitors entering the same space, and potential changes in the law surrounding people-to-people lending. It is exciting, however, to envision a financial world no longer driven by the institutions but by the people.
Federal Reserve Interest Rate Decision
The Federal Reserve Governors will meet on 9/18/2007 to make a decision on interest rates. Historically, this has been a good sign for the stock market. Take a look at this attachment on the Fed and historic rate cuts.
Will this time be the same or is it too little to late? The events unfolding in England with some of their lenders and banks is very disturbing, but remember, all bottoms are created when you have a large amount of fear. We definitely have a large amount of fear right now.
The markets are expecting at least a quarter point of easing in the Fed Funds target rate. Whatever they announce, it will be the reaction that matters. Most traders and analyst seem to feel that we will sell off afterward since an easing is priced into the market at this point. I would be careful about shorting right now because that is a really crowded trade. The other event to consider are the brokerage stocks earnings. Lehman Brothers comes out early before the market opens on Tuesday 9/18/2007 and will set the tone for the day. The anticipation is really building for something big to happen. This one seems like a toss up on which side it will swing.
Stock Analysis: Hewlett-Packard Co. (HPQ)
Hewlett-Packard (HPQ) is the largest information technology company in the world and produces printers, computers, and servers. HPQ has reached record levels since the dot com bust.
Stock Market For Beginners:
- HPQ fluctuated in a trading range in July and August and has recently broken through resistance at the 49 level.
- Look for a strong move up on the breakout and for support at 49.
Market Looking Bullish
We are still in a fundamental and news-driven environment, but the technicals are becoming more bullish by the day and we may have potentially priced in most of the bad news. If you look at the VIX, which is the index for how volatile the market is expected to be in the coming month, you will see that we have formed a potential top and the expectations are that we will have less volatility and a more positive market ahead.
The capitulation bottom that formed on August 16th might be the low for the year and we may have a tradable rally forming. According to Dorsey Wright, an institutional technical analysis firm, the wash out of investor confidence experienced during August 2007 was the lowest confidence reading since October of 2002, which just so happens to be the last huge bottom.
The next huge pieces of fundamental news to come out will be the employment numbers this Friday, September 7th, the PPI and CPI in the middle of the month, and the Federal Reserve Meeting on September 18th to decide on interest rates (see the upcoming economic calendar). The brokerage stocks will release their earnings in the third week of September. Their earnings are expected to be dismal. How the market reacts will be crucial because if their earnings are horrible and the stocks rally, it will be safe to say that most of the bad news is priced into those stocks and they have bottomed. If the financials can rally, this will provide a huge lift to the S&P 500.
Technically, the market is saying that the worst is behind us. A tradable rally is forming where buying on the dips will be profitable and technical trading patterns and strategies can be used once again. This will be put to the test the next time we have some bad news. If the market does not sell off hard and no technical breaks downs appear, it will be safe to get long. The ultimate proof will be if we get bad news and the market actually rallies. Then you will know we have bottomed.