Technology and Emerging markets: The biggest losers would be the best buys

Wall Street is not in the spiritual realm, but it does cherish at least one verse from the book of Matthew: "So the last shall be first, and the first last."
The market's biggest losers habitually return in the role of top dog. That's happening right now to two of last year's most beaten-down groups, technology and emerging markets. And both seem likely to continue to outpace other stocks, both because they have good prospects and because they're still relatively cheap.

"You always look at two sides -- not only the (investment) concept but the price of buying that concept reasonably," says Lew Alfest, president and chief investment officer of LJ Altfest & Co. in Manhattan.

The technology sector and developing nations have little in common except that they both are unusually risky. Last year, when risk was punished without mercy, both groups declined much more than broader markets. The average tech-sector fund lost 43.5% of its value, according to Morningstar, while the S&P 500 Index ($INX) declined 37%. Emerging markets funds tumbled 54.4%, while developed foreign markets sank 43.1%.

This year those relationships have been reversed. Tech funds are actually up 2%, as of March 19, while domestic large-cap funds are down 11.5%. Emerging markets funds are down 3.7%, compared with the 13.7% decline of foreign large-cap funds.

Technology: Flush with cash
Technology companies are benefiting currently because they are displaying relatively high resistance to the troubled financial sector.

"Balance sheets for large-capitalization technology companies are phenomenal," says Robert Stimpson, manager of Black Oak Emerging Technology Fund (BOGSX). "They don't have a lot of debt, and they don't have big working-capital needs."

Rather, technology firms have held on to relatively high cash flows, which furnishes their working capital. Last week, IBM (IBM, news, msgs) showed its financial strength by bidding to acquire Sun Microsystems (JAVA, news, msgs), the developer of high-end computer servers.

"Within large-cap technology, there is a persistent characteristic that during times of economic distress, the strong get stronger," Stimpson says. Technology also continues to provide productivity improvements to its customers, enabling them to do more with less. And it continues to innovate, enabling successive waves of new business creation.

Technology was one of the first sectors for which mutual funds were designed, and there are hundreds of them. Among the best are Ivy Science & Technology (WSTAX), Seligman Communications & Information (SLMCX) and T. Rowe Price Global Technology (PRGTX).

Emerging markets: Growing, while the developed world shrinks
Emerging markets, too, are benefiting from partial immunity to the financial crisis.

"Emerging market financial companies have generally not had the exposure to toxic assets like they have in developed markets," notes Craig Shaw, manager of Harding Loevner Emerging Markets Fund (HLEMX).

And while growth has turned negative in developed economies, many developing nations continue to enjoy growth, albeit at a slower rate than last year. Gross domestic product is expected to fall 2.2% this year in the United States, 2.4% in the euro zone and 5.3% in Japan. In China, however, it is forecast to grow 6%, and in India 5%. In Russia it is expected to ebb only 2%, and in Brazil a slender 0.4%.

But after last year's huge losses, stock prices in emerging markets are lower than in developed-nation stock markets. "They're trading at a price-earnings multiple of roughly 10," Shaw says. The comparable numbers in developing nations are 12 to 14. "So you're getting a big discount on a number of really good companies out there with good long-term growth prospects and strong financials."

In addition to the Loevner portfolio, outstanding emerging-markets mutual funds include Acadian Emerging Markets (AEMGX) and Oppenheimer Developing Markets (ODMAX).

Calling a bottom
The recovery in these two groups could presage a stronger market overall, says Jeff Mortimer, chief investment officer of Charles Schwab Investment Management.

"During bear markets, the baby does get thrown out with the bath water, especially toward the end," he says. "And as things start to turn green, what typically happens is the risky stuff will do relatively better. The junk runs first."
Mortimer believes things started to turn green on March 9, when the S&P 500 ($INX) plunged to 656.73, its lowest level in more than 12 years. It immediately rallied sharply, and closed at 823 on Monday.

"It seems to me (March 9) was very significant," he says. "There was incredible pessimism, a sell-at-any-price mentality. Markets make emotional lows, and that to me was a severely emotional day."

Mortimer expects stocks to "meander down here for awhile" rather than continue to rally hugely. But he also expects the March 9 low to hold, meaning the bear is out of ammunition and it's safe to venture back into equities.

Of course, if the last truly shall be first, that means the financial sector should shoot up like a beach ball held underwater. And indeed financial sector funds were the No. 1 performer during the month ended March 19, sprinting ahead 8.8%, compared with the 6.7% gain of technology and the 6.5% advance of emerging markets. So do you feel lucky? After all, the book of Matthew is gospel.

Source from:By Tim Middleton MSN Money

The 5 Biggest Stock Market Myths One Should Know

When fiascos like the Enron bankruptcy, auditing scandals and analysts' conflict of interest occur, investor confidence can be at an all-time low. Many investors are wonder whether or not investing in stocks is worth all the hassle. At the same time, however, it's important to keep a realistic view of the stock market. Regardless of the real problems, common myths about the stock market often arise. Here we go over these myths in order to bust them.

1) Investing in stocks is just like gambling.
This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling, we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company.

In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company.

Assessing the value of a company isn't an easy practice. There are so many variables involved that the short-term price movements appear to be random (academics call this the Random Walk Theory); however, over the long term, a company is only worth the present value of the profits it will make. In the short term a company can survive without profits because of the expectations of future earnings, but no company can fool investors forever - eventually a company's stock price can be expected to show the true value of the firm.

Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products that can make our lives better. Don't confuse investing and creating wealth with gambling's zero-sum game.

2) The stock market is an exclusive club in which only brokers and rich people make money.

Many market advisors claim to be able to call the markets' every turn. The fact is that almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate; furthermore, the advent of the internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now there for individuals to use.

Actually, individuals have an advantage over institutional investors because individuals can afford to be long-term oriented. The big money managers are under extreme pressure to get high returns every quarter. Their performance is often so scrutinized that they can't invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook.

3) Fallen angels will all go back up, eventually.
Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt."

Suppose you are looking at two stocks:
XYZ made an all time high last year around $50 but has since fallen to $10 per share.

ABC is a smaller company but has recently gone from $5 to $10 per share.

Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one part of the investing equation (which is different from trading, whch uses technical analysis). The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don't confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.

Below is a chart of Nortel's decline. Imagine how much money you would have lost had you bought Nortel just because it kept on hitting new lows!

4) Stocks that go up must come down.
The laws of physics do not apply in the stock market. There is no gravitational force that pulls stocks back to even. Over ten years ago, Berkshire Hathaway's stock price went from $6,000 to $10,000 per share in a little more than a year. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $70,000 per share over the following six years.

Below is a chart of Wal-Mart from 1997 to 2000. We've circled every time the stock chart hit resistance to reaching a new high. Those investors who were waiting for the stock to come back to earth would missed out on a return of 500% or more. What's behind the stock? It's the company! Wal-Mart is another example of an excellent company that has dominated its industry by being innovative and creating value for both shareholders and customers.

We're not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won't keep on going up.

5) Having just a little knowledge, because it is better than none, is enough to invest in the stock market.
Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It's those investors who really do their homework that succeed.

Don't fret, if you don't have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.

Conclusion
Forgive us for ending with more investing clichés, but there is another old adage that is very much worth repeating: "What's obvious is obviously wrong." This means that knowing a little bit will only have you following the crowd like a lemming. Like anything worth anything, successful investing takes hard work and effort. A partially informed investor is about as effective as a partially informed surgeon; he or she will only hurt themselves and those around them.

Source from: investopedia.com

stock basics(4) What Causes Stock Prices To Change?

One of the most fundamental aspects of stock market trading is - "Stock prices change continuously". In fact, this is the driving force behind the stock markets. Without a change in stock prices there would be no trading at all!

Stock prices change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to comprehend is what makes people like a particular stock and dislike another stock. This comes down to figuring out what news is positive for a company and what news is negative. There are many answers to this problem and just about any investor you ask has their own ideas and strategies.

That being said, the principal theory is that the price movement of a stock indicates what investors feel a company is worth. Don't equate a company's value with the stock price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. For example, a company that trades at $100 per share and has 1 million shares outstanding has a lesser value than a company that trades at $50 that has 5 million shares outstanding ($100 x 1 million = $100 million while $50 x 5 million = $250 million). To further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the growth that investors expect in the future.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter). Wall Street watches with rabid attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection. If a company's results surprise (are better than expected), the price jumps up. If a company's results disappoint (are worse than expected), then the price will fall.

Of course, it's not just earnings that can change the sentiment towards a stock (which, in turn, changes its price). It would be a rather simple world if this were the case! During the dotcom bubble, for example, dozens of internet companies rose to have market capitalizations in the billions of dollars without ever making even the smallest profit. As we all know, these valuations did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, the fact that prices did move that much demonstrates that there are factors other than current earnings that influence stocks. Investors have developed literally hundreds of these variables, ratios and indicators. Some you may have already heard of, such as the price/earnings ratio, while others are extremely complicated and obscure with names like Chaikin oscillator or moving average convergence divergence.

So, why do stock prices change? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price extremely rapidly.

The important things to grasp about this subject are the following:

1. At the most fundamental level, supply and demand in the market determines stock price.

2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.

3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. Remember, it is investors' sentiments, attitudes and expectations that ultimately affect stock prices.

4. There are many theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.