The stock markets ticked up today on a little bit more good economic news. Following recent good labor market news and the Fed holding interest rates at zero, comes statistics showing last weeks jobless claims were at a 3 1/2 year low.

Also, several large companies reported good results.

Furthermore, two regional business surveys from the Federal Reserve showed better than expected growth for December.

Finally, the general business conditions index for New York was higher again showing an increase in both new orders and hiring. That’s yet more good news for the job market.

We’ll have new articles about end of year tax strategies, financial planning for those in extreme circumstances, and more in the coming days.

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Market Up on Good Economic News originally published at Finance Gourmet

Anyone want to guess how much went to share repurchases and how much went to dividends? If you are thinking 50/50, you aren’t even close.

As The Register points out, the share buybacks are a lot more beneficial for IBM executives hoping to keep the earnings per share, or EPS, growing at the proper rate to "earn" their bonuses than they are for shareholders looking to increase the value of their holdings.

Of course, there is nothing illegal or even unethical about IBM’s giant share buybacks, but it does raise the question, "Can’t IBM come up with anything better to spend its money on than its own stock?" If not, shouldn’t shareholders just get a check instead of the world’s biggest pile of treasury stock?

The company authorized an additional $7 billion dollars to buy its own stock this time around while authoring 75 cents per share for its dividend. In other words, the company will spend $7 billion to buy stock and $900 million paying the "owners" of the company, its shareholders.

On an annual basis, that is $3.6 billion for dividends and $7 billion to buy more of its own stock. As a shareholder, that probably isn’t the split you hope for.

Why Do Companies Buy Back Stock?

Companies buy back stock for two reasons. The first reason is that companies often award stock options to their executives and board members. That stock has to come from somewhere. By buying shares, IBM can then turn around and give those shares to its execs and board members.

The second reason to buy back your own company shares is that you believe that your company’s stock is a good value. IBM clearly ALWAYS believes its stock is a good value, since it has way more shares repurchased than it needs to pay out generous stock options.

Of course, the real reason IBM repurchases so many of its own shares is that it allows the company to massage its financials on a per share basis.

For example, if a company has 1 millions shares outstanding and earns $1 million, then it has an EPS, or earnings per share of $1.

If that same company were to buyback 100,000 shares, then there are only 900,000 shares outstanding. The same $1 million of earnings then becomes $1.11 per share. This is 10 percent growth in EPS, even if it is just an accounting trick that happens on paper.

Giant share repurchases theoretically also increase the value of the remaining shares of stock since some of the supply has been removed from the market. However, the stock market has a funny way of deciding what the right price is for a company’s stock all by itself.

It does work. IBM’s stock price has risen steadily over the past few years. How much of that rise comes from real company performance and how much of it comes from the company spending every extra penny to prop up its own stock is for its investors to decide.

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IBM Boosts Share Buyback Again originally published at Finance Gourmet

Of course, there is a long way to go until the end of the year and pressing economic matters like the debt crisis in Europe, the joint budget cutting committee and an unemployment rate that won’t go down are still to be resolved.

For the time being, non-day trading investors should remember that short-term movements in the stock market are notoriously difficult to predict.

End of Year Portfolio Rebalancing

Many experts recommend rebalancing your long-term portfolios like retirement accounts (IRAs, 401k, and other retirement plans) once a year. Traditionally, many people do it near the end of the year. If you haven’t rebalanced your portfolio since last year, it’s a good time to start thinking about doing it soon.

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Stock Market 4th Quarter Turn Around originally published at Finance Gourmet

The stock market took a huge dive starting July 21st and has never pulled itself back up. For those of you looking for the culprit, let me help you out. The debt ceiling deal was reached at the end of July, which means the 21st was pretty much the height of the shenanigans. The markets have had no truly good news since to pull themselves back up by.

Outlook for 2011 4th Quarter Stock Market

Don’t expect the news cycle to save the stock market during the fourth quarter of 2011. In the 4th quarter, we’ll see increasingly competitive rhetoric building in the Republican Presidential primary, the product of the debt ceiling committee, which most are projecting will fail, and the start of the holiday shopping season, which will likely get spun in the mainstream media as a disaster early on, no matter how it ends up going in the end. Furthermore, the Fed is out of the picture having approved its latest financial stability plan, “the twist.” And, finally, the European debt crisis has no indication that there will be any sort of grand resolution by year end.

In other words, there is not likely to be any sort of overall good news politically, economically or anecdotally. In fact, most of the news around the stock market will likely be bad news, not good news.

So, what will push the stock market up in 4th quarter of 2011?

The best answer is probably nothing. The markets may move in an upward trend over the last three months of the year if investors starting looking ahead to 2012 and liking what they see. (Remember, the stock market is a leading indicator.)

The other possible savior may come from earnings reports. With the third quarter over, companies will be reporting their 3rd quarter earnings in the coming months. If a sufficient number of companies are able to report good enough earnings, coupled with positive outlooks for next year, the markets could see a significant boost for the end of 2011. In other words, a Santa Claus rally is not out of the question. However, if this market is going to go up for the rest of 2011, it’s going to have to do it on its own.

Stock Market Outlook for 2012

How does the stock market look for 2012? That question isn’t as hard to answer as it may seem.

The news cycle has already punished the stock market, and it will continue to do so for the foreseeable future. The eventual Republican Presidential nominee will do their best to paint the economy as an unmitigated disaster and the short-term impact of billions of dollars of government spending cuts may just make that a self-fulfilling prophecy. (Don’t forget, tax-cuts and lower regulation are not short-term economic boosters, those things take time to work their way into the economy. The impact of government spending, or lack thereof, has an immediate impact, even if the full repercussions aren’t felt for many years.)

In other words, people aren’t likely to be in a big investing mood. On the other hand, most trades on Wall Street are computers talking to other computers and they might start to like what they see.

The U.S economy has been mired in a recession for longer than is typical. The boom (some say bubble) coming out of Silicon Valley may well be the last spark that is needed to push the economy forward and most economists do expect some growth next year, no matter how weak.

In other words, 2012 or 2013 is the start of the next bull market. Long-term investors may as well get in now, or wait until after the stink from the Congressional Joint Select Committee failure clears the air. Either way, buying low means buying when things sound bad but the future looks like the only way is up.

If your investing horizon is longer than the next 12 months, that time is now.

Disclaimer: This is not an offer to buy or sell securities. This is not specific investment advice and should not be relied upon for you investing decisions. Consult a financial professional for financial advice specific to your situation. Consult a tax professional for specific tax advice.

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2011 Stock Market Update Q3 originally published at Finance Gourmet

With short sales, however, there are a couple of tax tricks to know about how they get reported.

Long-Term or Short-Term Short Sales

The most important thing to understand about short sales, is that they are almost always considered short-term capital gains or losses.

Unlike a traditional investment where you buy and hold the property, with a short sell, you do not own the property at all. You borrow the shares from your brokerage who gives you the proceeds of the sale. You close the sale by buying back the same shares you sold.

It may seem like you determine whether a short sale is long or short-term by the amount of time that passes in between when the short sale is initiated and when it is closed. However, this is not the case.

In order to be a long-term capital gain, you have to OWN the property in question for more than one year. With a short sale, you never own the property. Or, if you prefer, you own the shares for a few seconds between when you execute the buy order and the brokerage takes those shares to repay the loaned shares. In other words, all short sales are short-term capital gains or short-term capital losses.

Long-Term Short Sale Exception

There is a way to have a long-term short sale, although it is not very common. If you don’t do it intentionally, it won’t happen.

Consider an investor who owns 1,000 shares of IBM stock. The investor chooses to sell 1,000 shares of IBM short instead of selling their current holdings. Some brokerages won’t allow this, but it is easy enough to execute via two brokerages.

If you have already owned the IBM stock in question for a period of more than one year, and if, and only if, you use those previously owned shares to close the short sale position, then the short sale may be reported as a long-term capital gain or loss.

However, this will be considered a “constructive sale” and you will have to report the gain as of the date of the short sale and your basis resets.

There is no way for a short sale to be a long-term investment unless you already own what you are selling short.

All of this, of course, assumes that you have not trigged the rules for wash sales.

Reporting Short Sales on Schedule D

Like other investment gains and losses, gains and losses from short sales are reported on Schedule D.

Enter the data from the short sale in the same manner as a regular trade. However, pay attention to what the columns say so that you get the income taxes right.

Column C is the date sold, this is the date you started the short sale, not the day it closed. Column A is when you “acquired” or bought the shares to close the position. Likewise, the Sales Price (Column D) is what you received when you sold short, and Cost Basis is what you paid to close the short.

There is no need to specially mark a short sale. You are the first person to sell a stock short and the IRS is well aware that if the Date Sold precedes the Date Acquired that you have engaged in a short sale. As long as you enter the right numbers in the right columns, all of the math on the form works out the same.

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Reporting Short Sales for Income Taxes originally published at Finance Gourmet

Banks and financial institutions that have repaid their government bailout TARP funds and passed the stress test have been given the go-ahead by the Federal Reserve to make new capital-based decisions such as increasing their dividend payouts or doing share buybacks.

Shortly after the Fed’s announcement, the financial sector came alive with press releases about how the banking stocks would take advantage of the new allowances.

J.P. Morgan announced both a higher dividend and a share buyback, for example.

Banks Raising Dividends After Drastic Cuts

During the height of the banking crisis, most banks and financial stocks were forced to cut their dividends to minimal levels, or even to zero. Eliminating their dividends took away one of the major reasons to invest in financial stocks, which historically have provided solid dividend income to investors. Even the the financial sector’s best preferred stocks were forced to slash their dividends.

The quick moves by the big banks and Wall Street firms to reverse their dividend cuts offer a glimpse at how the banks themselves feel about their current position in the capital markets.

It is not surprising that the same banks who did not have enough capital to weather the banking crisis now believe that they have enough capital to weather whatever comes next. The interesting part will be how banks choose to implement their newfound regulatory freedom.

Check out Citibank rewards Premier Card review.

Banks announcing big share buybacks are focusing their efforts on raising their stock prices. Buying back shares reduces the number of outstanding shares and theoretically, causes stock prices to rise by lowering the available supply of bank stock shares.

Banks announcing higher dividends are focusing on returning to their position as high dividend-paying stocks. This action suggests that the company is comfortable in their long-term revenue and balance sheet position. Unlike a share buyback, which is only a one-time authorization to repurchase shares, not a commitment, an increased dividend is an on-going capital commitment.

Cutting a dividend requires a high-profile announcement and is generally regarded as both bad news and a sign of bad management. As such, companies are very careful to only raise dividends when they are confident that they will be able to continue paying them.

Banks Good Investment With Higher Dividends?

Are banks stocks a good investment now that they will be paying higher dividends and repurchasing shares?

For financial stocks that lean more heavily to share buybacks, the message is mixed. A share buyback demonstrates that management is focused on the stock price, which can be a good thing. However, short-sighted focus on stock price in order to maker sure it rises so that executives can cash out stock options and bonuses can be a very bad thing.

If, on the other hand, management genuinely believes its stock price is undervalued, then a stock buyback signals a good time to invest.

In other words, investors must carefully analyze both the quality of management and an assessment of their motivation to make a good investment decision. Only experienced investors willing to do in-depth research are going to benefit from this kind of investment analysis.

Higher dividends are a better way to judge how legitimate a banking stock move should be read. As investors have learned (and re-learned) time and time again, real cash payouts in the form of dividends are harder to fake with accounting tricks and bogus bookkeeping.

Investors looking to get back into the financial sector would do well to consider higher dividend payouts a better signal than big share buyback plan announcements. J.P. Morgan’s increasing its regular dividend by 20 cents and approving a large stock repurchase is better news than Wells Fargo’s announcement of a one time special dividend coupled with a large share buy back, for example.

Are you more inclined to buy bank stocks that are raising their dividends?

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Banks to Buy Back Shares, Raise Dividends After Passing Fed’s "Stress Test" originally published at Finance Gourmet

Be that as it may, if you want an official government agency explanation of terms like Market Orders, Limit Orders, Stop Orders, and Stop-Limit Orders, here is a nice, short, easy to read one for you.

By the way, there are numerous investor education pieces available at the SEC website. Just search your topic and add site:sec.gov to the end of your search to limit results to those that are on the official U.S. Securities and Exchange Commission website.

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Trading Basics from the SEC originally published at Finance Gourmet

People are always asking me if I think certain stocks are a good investment. There is a flaw in the question, but we’ll get to that in a minute. Right now, let’s get right to the real question people are always asking me these days.

Is Apple Stock a good investment?

What people mean when they ask me that is not whether or not Apple is a good investment, but whether or not I think Apple stock will go up a lot … soon … really soon. They also want to know whether or not I think Apple stock will go down, but that is not why they ask the question. They want to buy Apple stock because it sounds like a smart investment, or because it feels like a smart investment.

Of course, none of this has anything to do with an in-depth analysis of the company’s stock and it’s prospects for future growth and earnings. It’s all about buzz. They heard about the iPhone and it’s a big hit! They heard about the iPad and it’s a big hit! They heard about the NEW iPhone, and it’s a big hit! Now, they hear that Apple’s earnings are higher than Microsoft’s earnings and a new iPhone is coming to Verizon, and…

Can I PLEASE buy Apple Stock and become a multi-millionaire?

Is Apple A Buy?

Whether or not Apple stock is a good investment FOR YOU has a lot more to do with you than it does with Apple.

Where is this money to buy AAPL coming from?

What are you planning on using this money for?

When are you planning on needing the money?

What is the purpose of investing in Apple stock in your own portfolio?

– I get a lot of blank stares.

I know you want to go buy some shares of Apple right away before "it’s too late," so I’ll get right to the point.

First, investing in stocks is usually a bad idea for money that you need or plan on using sometime in the near future. Even Apple stock goes down. Sometimes it goes down because of the company, and sometimes it goes down for reasons completely unrelated to Apple and its iPhones and iPads.

• Do you remember all of the times in the last year where the company reported that iPhone sales or iPad sales or iPod sales were down?
• Do you remember all of the times during the last year when analysts were negative on Apple’s financials and worried about the strength of their sales?
• Do you remember all of those times in the past year when the press and media were running those negative stories about Apple and all of those negative reports about iPads, iPhones, and iPods?

If you pay a lot of attention and have a really good memory, you might recall the whole Antenna Gate thing where there were ongoing reports of problems with the iPhone losing signal strength when people held it with their hands.

If you can remember anything else, you might be confusing another company, because other than the problem with the iPhone antenna there has been nothing but good news about Apple from the company, from technology analysts, and from the news media.

At an investor level, there hasn’t been a single downgrade of Apple since November 2009, and that was from Strong Buy to Buy. Not exactly a damning indictment.

In other words, there has been nothing but good new from Apple for the past year.

The point?

In the short-term, there is no way of knowing how the market will react to any bad news from Apple if there is any. It is also important to see that Apple doing great things is not new news. There are already a lot of investors in the stock expecting great things, not from the iPad, or the iPhone 4, those great results are already very much reflected in the price of the stock. The investors in Apple today are putting their money on great things happening with the iPad 2 and the iPhone 5. If you believe that too, then Apple is a good investment for you over a 2-year or longer period.

If you are looking at anything shorter than that, consider this 52-week chart of Apple’s stock price. Notice that there are plenty of times where buying Apple stock would have been a loss if you had to sell too soon. There’s a three month period beginning with the peak in June where your investment would have been nothing more than a capital loss deduction. If you bought in May it would have been five months before you made more than pennies on your investment. Even Apple stock is a tricky buy for the short-term.

Before you buy, fire up any one of the free stock charts online and take a look at how the stock price moves over weeks, months, and years so there are no surprises.

In other words, if you have money in a brokerage account sitting in cash, or if you have some other stocks you aren’t feeling as strong about, you could do a lot worse than AAPL. But, if you’re taking the $1,000 cushion out of your savings account to grab a handful of shares, don’t bother.

Remember if you invested $1,000 in Apple — or any other stock — and it went up 25 percent, you would make a whopping $250. That’s a good start for money that you have no plans for other than investing. It’s not worth the risk if you need that money to pay for Spring tuition this January.

Finally, before you get too excited about the guaranteed profit from owning Apple stock that you might be imagining, ask yourself one very hard question. Although it isn’t nice to think about, nice isn’t how investors profit. Steve Jobs is getting older and has had some major health issues. Deliberately or not, he has been positioned as more than just the CEO of Apple. If he were to die or need to step down from his position at Apple, what do you expect to happen to the stock price?

It’s a real risk, and one that should be considered by any serious investor.

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Apple Stock Good Investment or Passing Fad originally published at Finance Gourmet

The catch is, there is no Facebook. Not a Facebook company you can invest in at least. Should savvy investors be looking to buy Facebook stock when they can?

Investing In Facebook

Let’s start with the basics.

When most people think of stock, they think of the stocks that trade on the major stock exchanges like the New York Stock Exchange. The companies that trade their stocks here are called publicly-traded companies, because shares of their stock are bought and sold on public exchanged like the NYSE, AMEX, and NASDAQ. There are also many companies, both big and small, that do not have stock shares that trade on the public markets. These companies are often referred to as privately-held companies, although that is not always a technically accurate decision.

Facebook is NOT a publicly traded company. There are no Facebook shares of stock to buy on the NASDAQ or any other public stock exchange. That means that there is no way to use your brokerage account to buy stock in Facebook.

Technically, if you wanted to — and a lot of people do — you CAN buy shares of Facebook on certain boutique exchanges that allow people who own shares of the privately held Facebook to sell them to other people.

There are some very important things to understand before running off and trying to find one of these Facebook stock markets.

First, as a private company Facebook has no obligation to release ANY financial information of any kind. Everyone knows that Wall Street likes companies to massage their books a little bit to make things look good, but Facebook doesn’t even have to share THAT kind of data. Anything you have heard about the company is either, rumor, second-hand, or at the very least, unaudited and unverified.

How Is Facebook Valued At Billions of Dollars?

It won’t take you long to find a news story or blog post or financial analyst staying that Facebook is “worth” billions of dollars, or that the valuation of Facebook is billions of dollars. However, that number is in large part, a guess.

Typically, a company’s valuation is the current price per share of its stock times the number of share of stock outstanding. In other words, the number of shares times the price per share.

Since Facebook does not have a publicly traded stock, this number can’t really be used. But, remember those private exchanges where Facebook shares can be sold by Facebook insiders? There is a price per share when company stock is sold on those exchanges, and one could, multiply that number times the number of shares of Facebook there are to get a market valuation.

Is that a real value?

In a word, no.

Consider that these markets are highly illiquid. There simply are not that many shares offered at any one time, and there are not that many buyers at any one time. That means that the prices set on these exchanges are the price of a limited commodity with a limited pool of buyers. This is NOT the same thing as the public markets.

What is Facebook really worth?

Until the company goes public with a Facebook IPO, nobody really knows. Even then, the publicity and popularity of the company coupled with the number of people who think that the company is a good investment, no matter what any numbers say, all but ensures that the company will start with a bang. A high per-share IPO with a fast price increase in the opening days is all but assured. After that…

There is one thing that people should start thinking about when they are racing to attach these huge numbers to Facebook’s value. The company has not gone public yet.

Despite huge demand for the shares, and investors lining up to snatch-up pre-IPO shares, the company has not even made the most basic steps toward going public. The optimist would say that the company is waiting for the right time. A more realistic look might wonder if the company CAN go public without losing the mystique that makes it valuable.

Consider that many Facebook investors, including venture capitalists and early-stage angel investors, both of whom like to cash out as soon as possible, have been invested in Facebook for a very long time. Consider also that numerous large investments have been made over the last few years, often in exchange for big ownership stakes or very preferential treatment. Consider that Facebook just passed 500 million users and that many in the tech industry are wondering if Facebook is set to be a Google killer.

You have to wonder, what else could the company need?

The answer may very well be MONEY. Until recently, Facebook wasn’t focused on revenue, and often said so. Now, the company sells advertising and has released its Facebook Credits system to generate revenue from the Facebook website. As a private company, nobody knows how big those revenues are, or where they come from. The answer might not be a good one.

It seems that Facebook going public is inevitable in the near future, but for now, there are no moves in that direction. Perhaps the company simply needs longer to pretty up its balance sheet, or it just needs more time to grow its revenues.

Whatever it is, one thing is clear. If Facebook’s investors thought they could be getting $300 per share right now for their investments in an IPO, there would be a lot more rumblings about going public.

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Facebook Valuation Estimates Billions Wrong? originally published at Finance Gourmet

It is not that downgrading BP is incorrect. It is both the timing and the sanctimonious nature of how the downgrades British Petroleum (BP plc – NYSE:BP) stock and debt came about.

It has been six weeks since the April 20th explosion on the Deepwater Horizon oil rig and the company’s stock has already fallen over 40% since the incident. Which has been a big hit on Members of Congress are calling for BP to put $20 billion into some sort of escrow fund out of concerns that the company may end up not being able to fully pay its legal obligations resulting from the massive gulf oil spill. Yet, both Moody’s and Fitch’s statements act like their concerns about BP are actually news to anyone.

“Today’s downgrade of BP’s long-term debt ratings reflects Moody’s expectatoin that the protracted oil spill … will result in significant containment and clean-up costs as well as litigation costs.”

Really? Gee Mr. Wizard, thanks for letting all us dumb Main Street investors know that we should be concerned about how much the cleanup of the biggest ever oil spill is going to cost British Petroleum, because otherwise we would have naively assumed that there would be no impact on the earnings of BP nor its ability to repay debt.

In other words, what are the ratings agencies good for again?

While I completely understand that downgrading a company’s credit rating is a very big deal and should not be taken lightly, it seems that the rating agencies are a day late and a dollar short, as my father would say. What value is there in investors waiting for the opinions of the major rating agencies?

To put it another way, if your credit rating score from FICO took this long to update, Fair Issacs would be out of business within the year, and yet, the business equivalent moves so slow that if they handled consumer credit you would be able to open a dozen new rewards credit cards before your score got lowered from 750 to 600 after you defaulted on your home equity loan.

Today’s downgrade simply gives financial writers one more thing to talk about and provides the “proof” necessary for newspapers and magazines to start talking about how the oil spill has hurt BP financially. Otherwise, there just isn’t any value in being told what investors already know.

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Ratings Agency Downgrades British Petroleum originally published at Finance Gourmet