On February 14th, shares of nVidia, the premier GPU chip maker in the world fell over 16%.  The company announced their fiscal 2008 earnings after the bell the day before.  They announced that revenue is up by 37% and net income is up by 57%.  This sound to me like a great thing.  So why did the company get punished?

1. The past is history

2. Overall bearishness in IT sector.

My knee is almost done involuntarily kicking after this week on the Street.  The FED came out on Tuesday morning and lowered interest rates by 75 basis points (that is .75%) taking the rate to 3.50%.  This does not eliminate the possibility of a further rate cut when the FED meets at the end of the month.  So what is the FED rate, why does the stock market react to violently to it, and how does it affect me? I think this is something that many do not understand, so I thought I would take a minute to lay it out for you.

What is the FED rate.
The Federal Funds Rate is the overnight interest rate that the Federal Treasury will lend to banks and other institutions at. Banks balance their book on a constant (hourly) basis.  At the end of the day, when they have taken new deposits, made loans, and moved money around, they may not balance until the next day (maybe it is a check that you deposited that will not clear until the next day).  If each branch does not balance they must borrow money for just one night to make sure they do balance.  So they call up the FED and get the money they need to balance their books.  This overnight rate used to have a much bigger influence on the longer term rates that affect consumer borrowing power.  When the FED changes the rate for the banks, they should be able to lower their rate to you.

So why does the stock market react to violently to rate changes?  Mostly it is everyone trying to get out ahead of everyone else.  The rate change does not have an immediate or change, but the market reacts immediately to it.  The rate change adds liquidity to the banking market and the money supply by making it easier to lend and borrow.  This is why bank stocks go up much more than tech does on the announcement of a rate cut.

So how does this affect you?  Well in all reality it does not.  Not in the short term.  The interest rates on your credit cards and on your house remain the same.  If the rate stays low for a longer period of time, the idea is that longer term rates will tend toward the overnight rate.  This is when you see the 30 year fixed mortgage rate declining.

…more to come peeps.

Portfolio Update:

The portfolio was up last week on a couple of earnings annoucements from our friends in the bank and loan sector.  Citi (C) announced earnings on Tuesday which were amazing… They were amazingly bad.  They missed terribly and the stock went into free fall all week.  Since I had some put options that were expiring on Friday, I was anxious to take my money and run.  I got out earlier than I could have, but the gains were signifigant.

Washington Mutual (WM) annouced earnings on Thursday.  People were expecting bad and they got it.  But the problem was, they were already expecting it.  The stock dropped $0.93 on Wednesday going into the earnings announcment, and bounced back a dollar after the announcment.  I got out at break even as the action was too shakey for me.  After a huge win with Citi earlier in the week, I was in protection mode during this one.

Now that the January options have expired, it is on to the February option chains.  These next 2 weeks are going to be very interesting.  I will be doing quite a bit of homework on the upcoming earnings announcments from thelikes of Microsoft (MSFT), Apple (AAPL), eBay (EBAY), Bank of America (BAC), Motorola (MOT), E*Trade (ETFC), and the list of heavy hitters goes on.  I will be making some moves, but I want to track all of them (I have made a list of about 25 companies I am interested in).  I believe that about 70% of the bad news is out in the financial sector, I think that we are already in a recession, and I think other companies will be hurt in 2008; I want to find them.

Folks, there is a storm coming. The is panic all over Wall Street. The housing collapse, a credit crunch, high oil prices, lower consumer spending, the weakening US Dollar, and now we find out that inflation is at 4.1%. wow. The FED is being pushed to lower interest rates again this month to continue to add liquidity to a battered market, and last week we heard from the White House that a quick and dirty aid plan for all of us poor folks could be on the way. They have said for the aid to be meaningful, it will need to be at least 1% of GDP; this would put the payout at about $150 billion. Warren Buffett has said, in his annual letter, and more recently to the press, that the market will grow very slowly during the next several years. What what does all this mean for us? It means fasten your seat belt cause we are on the down side of the roller coaster.

So how will you weather this coming storm? Should you invest in assets outside the US? Or maybe buy hard assets like gold or diamonds? There is an ETF for just about everything these days. The question is; can you earn more than 15.50% on those assets? why? Because I have a stock for you that will get you that kind of return with little risk. The stock is Penn West Energy Trust (PWE) of Canada. This is an energy trust, meaning the company pays out about 90% of it income in dividends. This dividend is also paid monthly, and by the time we are singing and welcoming in the new year, you could be 15% richer. Furthermore, the stock price has actually gone down recently, so there may be some capital appretiation you can get from it too. But even if the stock goes down, you still get your 15%, and the further it slides, the better the dividend payout as a percent of the stock price, so just take those dividends every month and reinvest them to get an even bigger payout. This form of passive income can help shield any portfolio from the declines that are expected this year.

One final thought, as I know many of you have most of your capital allocated right now. A word of caution: do not let your losers run! If you have a stock you are worried about going down in this market, don’t hold on to it. There is nothing wrong with holding cash until you feel batter about what you are doing. In my opinion there are very few stocks that will perform in this market, and finding them will be difficult. Normally I am all about capital appreciation, but in this market, a little dividend income might be just the remedy to help me sleep at night.

Back a couple of months ago I told you that I was shorting Countrywide Financial (CFC). In that time not a lot has happened. The fed lowered rates again, but not as much as wall street was hoping ( 25 basis points ), and we wen through the holidays. there was very little news about our dear mortgage lender who has beaten to death since August 2007. The stock fluttered between $11 and $9. At this time it had a 52 week low of $8.21.

Today was an amazing day for (CFC). News came out that (CFC) had been dishonest with a customer. There are many current pending law suits to that effect, but this one was a sure thing. This news came out last night after the bell. I knew the stock was in trouble for today and I had some open put options going.
After a huge gain on my CFC puts yesterday (294%) my portfolio is now up 27.49% for the year (in 8 days!).

So yesterday was a great move. (CFC) was down 28% to about $5.46 when all was said and done. Things were so volatile for the stock yesterday that around 3pm, the NYSE actually halted trading on the stock on worries that bankruptcy worries would bring the stock to nil. They resumed soon after and the stock took another dive.

The future:

I will be strangling CFC on Jan 29th (2 days before actually) on their earnings announcement. I think that they will miss (although they said they would return to profitability in Q4).

Otherwise, I think that there are other things that could happen to CFC in the mean time:

– Another downgrade
– Cut the dividend
– More litigation / progress on current litigation.
– more news of SEC probe into the company or Algelo Mazillo (CEO) himself.

I am thinking of buying the $2.50 FEB put. But I am in wait and see mode for tomorrow. I may miss the chance, but I want to protect an already huge gain.

Those of you that know me, know that I have been hesitant to write on this blog. I have given reasons to many of you. To some I have said that I did not want to make my trading public because I did not want to be blamed for a bad call, and to others I have said that I have just been too busy. I think that both of these reasons are are false. I truly believe that anyone who reads trading information on the web does so with a healthy skepticism ( I know I do), and if I ever placed a trade from someone else’s advice without first investigating the equity I am buying, then there is no one to blame but myself when I end up in the red. As for the busy excuse, I really am busy, but for those things that are important in our lives, no matter how busy we are, we always manage to find the time. So in this new year, I have decided to write on this blog. I cannot promise that it will be pretty all of the time, but I will try to get across the basic points about the market and offer insight into specific companies I am watching and to different asset classes and how they are handled.

This is a test post for the new stock symbol plugin:

Countrywide (CFC), and Citibank (C) are two stocks I am shorting right now. They will go lower and lower.

China Natural Gas (CHNG) will go up. Right now is buy time for this stock.

Here I bring you the things you need to know about your financial world. This blog will be one of personal discovery and I will not seek to be right about the stock market, but more so to learn from being right. Therefore this will not be a blog about telling the world how right I am, but about how good it feels to be right so much. This blog will be serious and financial. I will not be sarcastic.

Are you ready to begin the experience? Sho’nuff.