Tuesday, July 29, 2008

Is your online bank account safe?

A recent report by researchers at the University of Michigan demonstrates that bank & brokerage websites are plagued by security flaws. These widespread design flaws make it easier for accounts to be compromised. According to Finextra, an examination of 214 bank websites revealed that more than 75% have cracks in security that hackers could exploit to access customer information and accounts.

‘Says Atul Prakash, professor in the department of electrical engineering and computer science: "To our surprise, design flaws that could compromise security were widespread and included some of the largest banks in the country. Our focus was on users who try to be careful, but unfortunately some bank sites make it hard for customers to make the right security decisions when doing online banking."’

This should be a cause for concern for all banking customers, the prospect of going online and finding your account cleared out is a nightmare. Security remains the top concern for banking institutions, and regular steps have been taken to improve the situation. The state of affairs is not as dire as outlined by researchers because many of the security flaws are difficult to exploit.

The real issue with the banking industry is the lack of a systematic defined approach to security testing their websites. There needs to be a single standard that all online financial institutions are tested against.

Cisco has some excellent initiatives such as SAFE that improve the security of customer deployments by defining configurations and testing steps that reduce vulnerabilities. The company also has service-focused teams of specialists that aid customers in securing their networks.

During my time at Cisco, I drove an initiative called SITE (Security Integration, Test and Evaluation) which defined a structured process for evaluating potential vulnerabilities, performing boundary & penetration testing, and evaluating the results in a logical matter. This approach was incorporated as part of the quality system and utilized across the company in testing multiple product lines. The process could be scaled from “light” to “heavy” based on the needs of the team performing the evaluation. The use of automation tools for “fuzzing” (sending in deliberately mal-formed packets) and other security testing was crucial for meeting tight deliverable schedules within the framework of SITE. Over the years, the original SITE initiative has evolved and now is included within the scope of other security enhancement programs (run by some real sharp engineers) that raise the standards to even a higher level.

What does the banking industry lack? Basically the online financial industry needs to define a SITE type of initiative and a set of common standards for securing their websites. The problem is not the inclusion of vulnerabilities (which will always pop-up), but the lack of screening for vulnerabilities in a structured manner. Banks do not have a methodical approach to find the vulnerabilities, nor a structured system for ranking and resolving the issues. Most banks are flying blind to what potential vulnerabilities currently exist on their websites because testing has only been performed piecemeal over time.

Banks and brokerages have a lot at stake; losses from compromised accounts continue to mount. It is time to raise the bar in the financial industry and reduce the exposure faced by customers. This requires a change in direction for security practices, and includes a need for information services cooperation between competing institutions. The best approach would be to create a focused team with IT representatives from multiple banks to define a central testing standard utilizing a structured approach for evaluating the security of online banking websites. After adoption, the methodology would need to be driven as a requirement across the industry.

Friday, July 25, 2008

Important: Funds over the FDIC limit at WaMu

If there is one post to sit up and pay attention to this month - This is the post.

Get your funds over the FDIC limit out of WaMu now! There appears to be a run on the bank forming and one likely end-game will be the FDIC seizing the bank; similar to the situation with another large bank, IndyMac, recently.

Knowledgeable investors have been removing funds for several weeks and now the situation has caught the attention of the mainstream press. A recent report by Gimme Credit cited liquidity concerns with Washington Mutual.

"We won't use the phrase `run on the bank,' but we would be remiss if we did not observe that many creditors have quietly been pulling funds,'' wrote Shanley, based in Chicago. Their actions are "presenting an increasing funding challenge,'' she wrote.'

The bank disputes the findings stating that 7 billion cash infusion led by TPG Inc, cost reduction plans, and a lack of need for commercial paper will help Washington Mutual ride out the storm. Many analysts are skeptical. These restructuring actions are helpful but will not enable the bank to survive a crush of depositors withdrawing funds from an institution that is increasingly looking like a house of cards. Standard depositors are likely to follow the lead of savvy unsecured creditors over the upcoming weeks as more bad press continues.

The second day of WM stock in free-fall is a more telling sign about the challenges facing the institution. While some would state that withdrawing your funds over the FDIC limit does not help the stability of the bank, the other side of the coin states that why should your be out of your funds from a personal finance perspective because you did not take action in the early stages while the crisis was unfolding.

Wednesday, July 23, 2008

Ignore the Press, Hedge Funds are still a Viable Investment

The hue and cry from the press regarding Hedge Funds continues unabated. Obviously a good number of funds have blown up over the past year, causing a sizeable investor headache.

One recent article “4 Reasons Why Investors Should Avoid Hedge Funds at All Costs” outlines issues with oversight, managerial churn, investment concentration, and short life spans. These aspects should be concerns for many individual investors, but should not serve to rule out hedge funds as appropriate portfolio component for qualified investors. Despite the recent turmoil, Hedge Funds have a long history of serving the needs of qualified investors; one excellent summary of Hedge Funds can be found in the Knowledge Base section on the HingeFire website.

One financial industry issue is that everyone and their brother opened a Hedge Fund in the past few years. Most chased similar strategies involving credit spreads that all fell apart at the exact same time as the black swan came for a visit.

Most of these funds did not have a long track record and a number of the managers simply marched down the street and opened a new fund after the wheels fell off their previous effort. Investors need to differentiate between hedge funds with long track records, some spanning decades, and those opened within the past few years.

Hedge Funds should only be used by investors who understand the risks and expectations. During the past few years, the sales of Hedge Funds have gone down-market as the funds were sold to people who were marginally qualified, many times wrapped up by major brokerage firms as fund-of-funds (or a pyramid of fees). Certainly the unscrupulous account representatives made plenty on commissions but they were not selling a product that was appropriate for the customer. Many investors were convinced to place nearly their entire portfolios into Hedge Funds will the promise of huge returns, a good number of these individuals are now crying foul to regulators.

Hedge Funds are only appropriate for institutions and qualified investors who understand finance. These customers recognize the investment is long term and are using the funds as a diversification mechanism in context of a larger portfolio. Hedge Funds do have an appropriate place in the market. It would remain best that they are not regulated except for stronger restrictions on the qualifications of investors who can utilize these vehicles.

Before advent commodity ETFs and mutual funds, many well-heeled investors used funds requiring investor qualification for exposure to the commodity markets. Most of the funds were CTA/CPO run by individuals with Series 3 licensing. This was a very appropriate diversification method for investors with sizeable portfolios.

Hedge Funds are also in the forefront of offering products that are difficult to obtain exposure from using standard retail financial products; some examples include currency, private equity, and credit spreads. For qualified investors the Hedge Fund products serve as an important diversification tool.

Investors who meet the qualification requirements of Hedge Funds should not automatically rule out these investment vehicles due to all the recent bad press. An investor should evaluate the needs of their portfolio in regards to diversification, returns, and timeframe in order to make an informed decision about Hedge Fund investment. It is important to use on-line resources to properly investigate the returns, longevity, and track record of Hedge Funds rather than simply investing in a fund-of-funds pushed by major brokerage firms. Hedge Funds can serve an important role in your portfolio, and investors should approach these vehicles with an open mind, and more importantly with open eyes.

Wachovia Earnings Call

Wachovia held its earnings call Tuesday. As expected the news was bleak; headlined by an $8.9 Billion loss, a steep dividend cut, and 10,750 job cuts. However, the stock rallied on the news and earnings call. While the loss and job cuts are painful, it appears that Wachovia has a plan to turn its operations around and deal with the bank’s mortgage exposure.

The stock rally demonstrates the confidence that Wall Street has in new CEO Robert Steel. Some of the points in the turn-around plan were outlined in the conference call transcript. Wachovia will not be raising more capital or selling additional stock that would dilute current shareholders stake. The dividend cut to 5 cents per share will save $700 million per quarter, while the wholesale mortgage operation will be shut down. Analysts expect that the bank will remain an independent operation.

Sunday, July 20, 2008

Wachovia: Turning the corner

The recent press headlines for Wachovia have been bleak recently; auction-rate security investigation raids, analyst downgrades, and sliding share prices. It seems that the bank can't catch a break from the negative media coverage. This is on top of all the earlier problems that led many to question the underlying integrity of the entire institution which in the past has joined telemarketers to scam it's own customers, and was fined $145 million from the Feds.

Despite all the difficult news there is a bright spot -- and his name is new CEO Robert Steel . Right from the initial conference call it appears that he is on the right track. He is going to first evaluate the "challenges" faced by the bank with particular focus on the residential mortgage portfolio and exposure to commercial real estate. Steel promises to outline his strategy on July 22, when the bank is slated to report its second quarter earnings. In a couple days we will be able to see how Wall Street reacts to the earnings and the vision of the new leadership.

Based on his reputation in both capital markets and government; Steel is likely to restore what is most important to Wachovia - a reputation for integrity.

Thursday, July 17, 2008

FREE forecasts for all the major commodity markets

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Tuesday, July 15, 2008

Crushing the American Family

Once in a while a cartoon comes along which really drives home a point. Despite political pundits waving their arms and claiming that we are not technically in a recession, the circumstances facing American families are so dire these proclamations are nearly meaningless.

The credit crunch, housing market, gas prices, job losses, and rising food costs have left consumers in a tough position. Families are having to cut back many activities and purchases simply to cover necessities - this is not good news for the two-thirds of the economy dependent on consumer spending.

Well for the good news - At least we are not technically in a recession!

Monday, July 14, 2008

Is Your Bank Next?

A slew of mainsteam press articles a month back stated that the credit crunch was over. Not so fast! As outlined in articles on HingeFire in May (see Is the Financial Crunch over?) the financial sector is ripe for continued turmoil.

The top headline news today outlined the shares of U.S. banks plummeting amid stability fears. Sizeable regional banks such as Wachovia, WaMu, and National City are near the top of the list that investors believe have the likelihood to fail.

‘"It's the cockroach theory. You don't just have one bank failure -- when you have a big bank go under, there's always more than one," said James Ellman, president of hedge fund Seacliff Capital, who is short some financial stocks.’

The failure of IndyMac in many ways was a standard run on a bank. Panicked depositors lined up outside the doors pulling out $100 million a day causing what regulators called the second-largest bank failure in U.S. history. It was clear to regulators, politicians, and investors that IndyMac was in trouble, leaving only the question of degree. This type on depositor driven panic could easily happen to other struggling regional-type banks.

'One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.'

At some point the FDIC will not be able to handle the level of defaults. While the FDIC has staffed up expecting more failures, the federally sponsored insurance agency is primarily focused on merging banks in trouble. The FDIC does not have deep pockets to bail out a chain of sizeable cascading failures.

Regional banks are not the only concern. Fannie Mae and Freddie Mac are in deep trouble. To avoid total financial market panic, the White House administration has ask Congress this past weekend to approve a plan that would provide a credit line of some $300 billion to the troubled GSEs and buy their stock. The Fed passed measures to allow both Freddie Mac and Fannie Mae to borrow at its discount window. Clearly, the government's hand was forced by a $3 billion Freddie auction scheduled for today that would have revealed the extent of the disaster without government intervention.

Is your bank next?

Will you be lined up at the door of your local institution begging to get your money out while the door is slammed in your face?

This is a time to carefully evaluate the safety rating of your local bank where you have deposited your money. If the bank looks the least bit shaky then your should get your funds out before a wide-spread panic develops.

Sunday, July 13, 2008

Hitting Top Returns in midst of Market Turmoil

What does it take to hit solid market returns even when market conditions are leaving the most experienced investors fearful? It comes down to proper stock selection and having the appropriate tools to find the best investments on both the long and short side of the market.

The FREE HingeFire stock screener is a powerful product that merges fundamental and technical indicators in a single tool. This helps put the market edge in the corner of investors.

GregB is now ranked 267 out of 18824 players in the Wall Street Survivor Contest (Traders Wanted - Play $50,000 Stock Trading Game). The evening before the contest, I ran the HingeBuy and HingeSell screens in the HingeScreen 1.5 product. These screens normally produce 30 to 50 results. HingeBuy provides a list of stocks that have the potential to out-perform the market; while HingeSell produces a list of stocks that are likely to under-perform.

It comes down to proper stock selection enabled by the HingeScreen product. I only had to pick a set of stocks once, at the very beginning of the contest to be successful. No need to churn the portfolio or trade.

A summary of the results to date are provided below. Note that all of the longs are still above water despite the violent downtrend in the market over the past few weeks. The balanced long and short portfolio is an excellent example of how to squeeze excess alpha out of the market. The overall return of the portfolio was +14.74% over a few weeks (72.68% on a yearly basis).

Symbol Return
MOS +15.92%
XEC +0.86%
AXYS +0.46%
DAR +10.36%
BMI +0.06%

Symbol Return
FSNM +53.83%
GSAT +31.12%
CIX +22.65%
LYTS +19.54%
MEDX -5.19%

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

Thursday, July 10, 2008

The Gold prediction

A few months back we held a survey regarding the expected price of Gold on July 1st. The results were as follows:

Above $1100 24%
Between $1000 and $1100 24%
Between $900 and $1000 22%
Between $800 and $900 15%
Below $800 15%

The actual price of gold on July 1st was around $937. Congrats to the 22% of poll takers that correctly predicted the $900 to $1000 price range.

Since the start of July, gold has been looking bit toppy as if the momentum has disappeared in the market for this precious metal. It sunk to near $916 before staging a rebound in the past couple of days. This may be setting the stage for the next leg of the run up, however it is more likely a small bounce before further downward action. The next few weeks will be interesting to watch in this market.

Wednesday, July 9, 2008

Cisco dashes 2008 recovery hopes but there is light

Earlier commentary associated Cisco outlined hopes of a tech sector recovery in 2008. Recent comments on Tuesday by CEO John Chambers dashed those hopes. He stated "I think most of us realize that it's probably going to be a little bit longer than the one to two quarters that some people had hoped for.”

In reaction most analysts cut their forecasts for CSCO citing that both the remainder of 2008 and 2009 could be challenging for the company.

Cisco stock dropped to $21.76 late Wednesday afternoon. Despite the bearish trend of CSCO and the overall market recently; a basic predictive analysis spreadsheet that utilizes volatility, mean return, standard deviation, trend, and other factors indicates the future is not so gloomy. A quick run of the spreadsheet shows that CSCO has a 5% chance of hitting $30 in the next 90 days and only a 1% chance of hitting $16.

This shows that a basic short-term analysis is leaning towards a more bullish case for Cisco stock – hopefully the market follows through and provides shareholders with some type of short-term rebound. However the long term price is always driven by the fundamentals, which in this case is dependent on an overall tech sector recovery.

At minimum a soft economic patch will provide the 800lb gorilla Cisco the opportunity to shake some of the smaller competing monkeys out of the trees. Cisco has tradition of leaving competitors in the dust; especially taking advantage of downturns to enhance their position in both existing and newly emerging markets.

Sunday, July 6, 2008

Screening for the Top 2%

How does an investor land up ranked in the top 2%? It takes a serious approach to screening the universe of stocks to sort out the wheat from the chaff. Screening a list of potential candidate stocks is just the first step.

GregB is now ranked 284 out of 17989 players in the Wall Street Survivor Contest (Traders Wanted - Play $50,000 Stock Trading Game). The evening before the contest, I ran the HingeBuy and HingeSell screens in the HingeScreen 1.5 product. These screens normally produce 30 to 50 results. HingeBuy provides a list of stocks that have the potential to out-perform the market; while HingeSell produces a list of stocks that are likely to under-perform.

The next immediate question is how did I narrow these lists down to 5 stocks as longs and 5 stocks as short to use in the Wall Street Survivor contest.

In terms of the five stocks I selected from the HingeBuy list for the contest. I pulled up each stock on the list at the time (there were about 30 to 40) and took a detailed look at the charts, industries, fundamental info, and technical indicators to narrow down the selection. For the HingeSell (short) candidates I basically look for the inverse of the outline below.

Basically the following were evaluated for each potential long stock:

1) Strength of the chart over the past year. Look for a chart where the stock is continually rising with some minor pull-backs. Look for strong increases in the past six months. Do not want a stock where the stock price had a one time big bump due to a news event; nor a stock where the chart is basically flat but still outperformed the associated indexes.

2) Evaluate the industry that the company is in and the industry performance over the last six months compared to other others.

3) Rank the stock within the Industry from a relative performance perspective.

4) Fundamental information evaluation with a focus on earnings growth, revenue growth, cash flow, debt and their associated ratios. Do not focus on forward P/E etc. because many times the projections are nonsense.

5) Technical evaluation of the price chart looking for divergence between the price action and technical indicators (MACD, RSI, etc.). Divergence may indicate an impending change in price action. Also look for extreme readings in oscillator-based indicators which may show that a bounce-back is overdue. Keep in mind that technical indicators are good for evaluating short term action; long term price is driven by fundamentals.

6) Take a look at news from corporate press releases. Look for management churn, re-orgs, layoffs, product cancellations, guidance (vs. price reaction), and regulatory action. These are generally not positive developments.

Basically rank all the stocks on the HingeBuy candidate list from 1 to 5 using the criteria above. Five being the strongest. Select the five stocks with the highest rating.

For HingeSell and shorts - look for the inverse.

Note in my terms, the outline above is my light-weight starting point evaluation. I normally dig into the 10Q / 10K reports when selecting stocks for my actual portfolio. I would urge everyone else to do the same. A stock screener is a tool to find stocks that meet your basic criteria - a more detailed follow-up analysis is needed to find the best stocks for your portfolio that meet your diversification and risk-tolerance needs.

Disclosure: These stocks have been selected in a fantasy stock selection contest. They are not held in my real portfolio. Investing involves risk. Your results using software screening informational tools may vary. Proper portfolio diversification is important and any outlined investments may not be appropriate for your financial objectives or risk tolerance. This is not a solicitation to buy or sell securities.

Thursday, July 3, 2008

Global Inflation: The New Crisis

A new monster has raised its ugly head to spook investors. Inflation is accelerating at a rapid pace providing policy makers with a new set of ulcers. Unfortunately basic antacid tablets will not cure the unsettled guts of national regulators.

The spike in inflation gives flashbacks to the dreaded 1970s with stagflation era. Many older investors do not enjoy reminiscing about interest rates above 14%, food rising in price each week, investors hoarding gold coins, and long gas lines. The dilemma is that all the statistics indicate that we are heading towards a scenario with run-away rising inflation worldwide.

Regulators have commented on rising inflation, raised interest rates in hopes of moderation, and are shocked to see the numbers running upward like an out-of-control train down the tracks. With rising commodity costs, pent up wage increase requirements, and tightening credit; there is not very much the regulators will be able to do to apply the brakes.

Certainly the news flow has not been encouraging, the ECB raised lending rates today amid record inflation, while U.S. Treasury Secretary Henry Paulson said inflation was becoming the top economic focus of many countries.

Inflation is a global phenomenon; impacting countries as diverse as Iran (with 26% inflation), the Philippines, Brazil, India, Russia, South Korea, Mexico, and Indonesia. No country is immune and no market is safe. Rapidly increasing inflation is the top concern in most nations, and the situation rapidly appears to be heading towards stagflation.

The immediate question becomes how should an investor prepare for this situation? The first emphasis is that a greater portion of your portfolio needs to be placed in commodities and precious metals, or in stocks focused on these industries. There is also a need to have your income oriented investments placed in vehicles which are inflation indexed in regards to interest rates. The other alternative is the keep cash in shorter term CDs as inflation and interest rates rise, allowing an investor to ride the rising curve.

Successful investing in a rising inflationary environment is difficult. Usually the stock market returns are dismal and many other investments are also victims of an inflationary spiral. Still it is best to keep your focus on the long term, and maintain a diversified portfolio of stocks that have wide economic moats. These companies invariably become stronger in downturns as competitors fall by the wayside.

Investors should pay close attention to news about inflation during the remainder of 2008 and start making appropriate adjustments to their portfolio to ride out the storm.

Dark Pools going strong

Despite regulatory concerns and consolidation worries, the Dark Pool business is still showing enormous strength. New dark pools venues are implemented regularly and the profits are looking solid.

Reflecting this strength, LiquidNet has now filed for a $500 million IPO. Goldman Sachs and Credit Suisse Securities are overseeing the transaction. Despite the generally weak IPO markets, there is the expectation that this will be one of the strongest public offerings of the year.

Wednesday, July 2, 2008

Circuit City: So Toxic that Nobody Wants It

Is there such a thing as a bride so ugly that no one will marry her? Apparently there is such a thing as a business so toxic that everyone steps away from buying it.

One of the great fears of any party seeking to close a deal to purchase Circuit City (CC) is that the due diligence would reveal information so negative that potential acquirers would drop their bids. Apparently this scenario is playing out.

Blockbuster (BBI) dropping its bid may be due to other bidders pushing up the price; more likely it is that further disclosure revealed that Circuit City is already deeply entangled in its death throes. Blockbuster's Chief Executive Jim Keyes cited "market conditions" as a reason for withdrawing its offer, valued at up to $1.3 billion, and said the deal was not in the best interests of its shareholders.

Circuit City dropped over 16% on the open on Wednesday after this news. Blockbuster climbed over 12%, the shareholders gleeful that this proposed merger has been dropped. It is interesting to note that Blockbuster had offered at lest $6 per share for Circuit City. CC stock now sits at $2.19; effectively the proposed deal was at triple the price of Circuit City stock. The failure of Circuit City management to grease the skids on this deal will probably go down in financial history as one of the worst executive decisions ever; unless some other suitor actively closes on a transaction.

Philip J. Schoonover, the CEO of Circuit City, kept hope alive for a deal by commenting, "Our exploration of strategic alternatives is intended to serve the interests of our shareholders by considering every possible alternative to enhance shareholder value. The board's review was not dependent on Blockbuster's (BBI) participation. We are diligently working with the parties involved in the process, and intend to continue our thorough approach until such point as the board determines upon a particular strategic course of action. The board has not established a deadline for completing the review."

Loosely translated this means, “We are trying to find a deal that will leave the existing management team employed with large compensation packages despite our ruinous track record. The board is hoping some magical deal materializes shortly with a private equity fund. If something does not pop up soon; the company will be dead as we complete the review of the bankruptcy paperwork.”

The only constant is that the long suffering Circuit City stockholders will continue to be disappointed.