On the heals of recent negative job numbers reported by the U.S. Department of Labor, comes news that bankruptcy filings increased by 14 percent during the first half of 2010. Does this bode well for the economy or is this one of the signals of a recession coming back to haunt us?

Unfortunately, as is always the case when it comes to finance and the economy, the answer is complicated. The most important thing to notice is that the first half of 2010 includes January through March of 2010 which are the months of this year that came before the stock market started recovering. Those months also came before the some lending started loosening back up. They also came before job numbers started going up suggesting that more people will not need to file for bankruptcy if they can make their loan payments with the salary from their new job.

However, it would be foolish to dismiss the news of increasing bankruptcy filings as a non-event. It is just as important to note that the 14 percent increase in filings being reported is as compared to the first half of 2009 when bankruptcy filings were not exactly at all time lows. In fact, the first half of 2009 was very bad for bankruptcy filings already. To actually increase over that number, things in the economy had to be really bad.

What does high bankruptcy filings mean for the economy overall, and does this signal a stock market downturn or a coming recession or even depression?

Bankruptcies Get Worse Economic Outlook for 2010 Gets Clearer

The bad news, of course, is that if people are filing for bankruptcy that means that financial institutions will suffer losses due to those bankruptcies. Furthermore, plenty of the bankruptcies from “irresponsible” borrowers who were clearly overextended in order to buy real estate – remember how “fix and flip” was the easy way to get rich just a few years ago – and those who just overspent and never had any real chance of paying back their loans without selling their house to get the equity, already filed for bankruptcy months ago. That means that these bankruptcies are the “hard” ones, the bankruptcies that come from people who have lost their jobs being out of work for so long that they had choice and no other way to make it work.

Now, for the good news.

Americans in general have far too much debt and far too little savings. This so-called savings deficit is a big problem. Furthermore, for many Americans who have been jobless for too long, there is almost no way they could get out of the hole they are in even if they got a new job paying what they used to make tomorrow. Finally, the U.S. real estate market has bottomed out or is only declining slowly in all but the most overheated real estate bubble markets.

Doesn’t sound like good news does it?

Here is where the good news for the economy is.

As has been widely reported, banks and financial institutions took government stimulus dollars and bailout money to shore up their own balance sheets and did very little additional lending. That means that a majority of debts being wiped out by bankrupt borrowers are old loans instead of new ones. That means that a lot of these debts have already been written off or assigned very low values on the bank’s balance sheets. In other words, this isn’t going to make things any worse for them than it already was.

With that being the case, at least for the short term, there is little concern for the banking sector as bankruptcies rise, so long as they come to an end soon. This is where the good news comes from.

As bankruptcy filings accelerate, they clear out the pipeline of possible bankruptcy filers that might otherwise come later. Banks will find that the profits they managed to squeeze out earlier this year are gone, however, when they come back, there will be much less potential danger overhanging them.

On the other side of each bankruptcy filing is a person or family that no longer has to pay off debts that had grown so unmanageable that they could have choked off 100% of discretionary spending from that family for years. In the aggregate, this would be much worse news for the economy than high bankruptcy numbers now. While bankruptcy is a huge blow it is a one time event from which recovery, albeit a slow one, begins immediately.

Many bankruptcy filers are baby boomers approaching retirement. These people have gotten the very pleasant surprise that, in most cases, retirement accounts such as IRA accounts and 401k accounts cannot be touched in bankruptcy. These same borrowers will also find out that as long as they make their mortgage payments, they are also very unlikely to lose their home during bankruptcy, because a certain percentage of equity is considered untouchable by creditors, as well. Having borrowed against this equity earlier, and with home values dropping, many filers will find themselves well under the equity limit.

Add it all up, and you have a large collection of people who will actually find themselves in a pretty decent position as the economy turns around. Those without jobs will find employment again, and those with them will find their paychecks much easier to stretch to make ends meet without all of those credit card payments. In other words, it will take a lot less economic improvement to put these households back to “normal.”

In short, higher bankruptcies and accelerating filings will cause pain in the short-term, but may be just what the doctor ordered for the economy for next year and beyond.

In addition to writing this blog for fun and profit, I am also a professional financial freelance writer, as well as a freelance technology writer, among other things. So it is not without some professional writing background that I read with shock the financial news that Yahoo is acquiring Associated Content for “slightly more than $100 million.” Ostensibly, Yahoo buying Associated Content was done in order to boost Yahoo’s content offerings. If that is true, then it time to sell Yahoo! stock. Sell, baby, sell.

Before we go any further, let me just say that I think the publicly released one-liner about why Yahoo would buy Associated Content is either incomplete, or an outright bluff. There are plenty of other things Yahoo gets from buying Associated Content, not the least of which is a big fat swath of Internet real estate that ranks obscenely high in Google search results and Bing search results. A great deal of the traffic generated from these high ranking searches is monetized via, you guessed it, Google AdSense which pays content publishers based upon ads placed by Google on those websites. Yahoo, can now switch out those Google Ads and replace them with their own Yahoo Ads. Frankly, this strikes me as a pretty cynical move, and one made largely to dupe the investing public at large that is not savvy enough to sort out the results of Yahoo’s acquisition of Associated Content.

Value of Yahoo’s Associated Content Purchase

In my mind, here is how the buyout of Associated Content by Yahoo plays out. First, as always, there is the generous write down of “goodwill” and other acquisition related costs. All but the most unsavvy of investors are wise to the so-called value taken by acquiring companies when it comes to these intangible assets, but it still makes things look better for a while to those who can’t or won’t parse company stock filings and investor reports.

Secondly, once Yahoo has milked the costs of acquisition dry, it will move advertising on Associated Content to its own Yahoo advertising platform or to its partner ad platform with Microsoft’s Bing search engine. In the meantime, the company may be all too happy to simply collect revenue from online competitor Google based on existing AdSense advertising that already exists on the site. Of course, Yahoo management will not break out the “growth” in Yahoo advertising that is nothing more than swapping out Associated Content ads for its own from the true organic growth of its Yahoo Ad platform. (Management is under no obligation to do so, of course.) So, analysts will be left guessing how much real growth is occurring in Yahoo ad revenue and how much was simply bought via its Associated Content acquisition.

Here is a hing for savvy investors, however. The revenue Associated Content generates today has no reason to decline in the coming months. There is no radical shift in online advertising going on, nor is Google seriously updating its search ranking algorithm that provides fresh meat for the Associated Content content mill on a daily basis thanks to the large interlinking done by the site itself. Thus, once Yahoo advertisements start appearing in place of Google advertisements, investors should discount the current volume of revenue generated by Associated Content from the revenue numbers reported by Yahoo for its advertising platform as the purchased revenue. Any remaining growth can be considered real Yahoo earnings growth.

I do not own any Yahoo! stock as of this writing, but that may change at any time. This is neither a recommendation nor an offer to buy or sell securities.

I have written  for Associated Content in the past; some articles I have been paid for. However, no payment was made or offered for this article.

Dow Jones Indexes publishes lot of averages and indexes. They are best known for the Dow Jones Industrial Average and the Down Jones Transportation Average.

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The Dow Jones Industrial Average is featured on most stock market news reports and makes an appearance on the nightly news. It is often referred to as just The Dow, or Dow Jones. The Dow Jones Index is composed of the stocks of 30 big U.S. companies which are supposed to represent the majority of the US economy and industry, with the exception of the transportation industry; they have their own index.

Dow Jones Industrial Average Components

The Companies In the Dow Jones Industrial Average
3M Company (MMM)
Alcoa Inc (AA)
American Express (AXP)
AT&T (T)
Bank of America (BAC)
Boeing (BA)
Caterpillar (CAT)
Chevron (CVX)
Cisco (CSCO)
Coca-Cola (KO)
du Pont (DD)
Exxon Mobile (XOM)
General Electric (GE)
Hewlett-Packard (HPQ)
Home Depot (HD)
Intel (INTC)
IBM (IBM)
Johnson & Johnson (JNJ)
JPMorgan Chase (JPM)
Kraft Foods (KFT)
McDonald’s Corp (MCD)
Merck & Co (MRK)
Microsoft (MSFT)
Pfizer (PFE)
Procter & Gamble (PG)
Travelers Companies (TRV)
United Technologies Corporation (UTX)
Verizon Communications (VZ)
Wal-Mart Stores Inc. (WMT)
Walt Disney Company (DIS)

Dow Jones Transportation Average is composed of companies from the transportation industry. The idea is that if American business is making and selling goods, someone else is making money by getting them from Point A to Point B. Of course, with declining manufacturing influence and an increasingly prevalent service economy, that theory might hold less weight. However, some would point to increasing travel as representative of additional service, although this discounts the impact of technologies like conference calls, emails and social networking on providing quality service to customers and clients.

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Stocks In the Dow Jones Transportation Average
AMR Corp (AMR)
CH Robinson Worldwide (CHRW)
Con-Way Inc (CNW)
Continental Airlines (CAL)
CSX Corp (CSX)
Delta Airlines (DAL)
Expeditors International (EXPD)
Fedex Corp (FDX)
GATX Corp (GMT)
JB Hunt Transportation Services (JBHT)
JetBlue Airways (JBLU)
Kansas City Southern (KSU)
Landstar System (LSTR)
Norfolk Southern Corp (NSC)
Overseas Shipholding Group (OSG)
Ryder System Inc (R)
Southwest Airlines (LUV)
Union Pacific (UNP)
United Parcel Service (UPS)

Lesser Known Dow Jones Averages

There area handful of other Dow Jones Averages. Most of them are calculated by taking predefined subsets of either the Dow Jones Industrial index or the Dow Jones Transportation index.

Dow Jones Utility Average – Tracks the performance of utility stocks associated with the generation and delivery of energy.

The Global Dow – Tracks 150 worldwide stocks to track the global economy.

The Dow 10 – Made up of the 10 stocks from the Dow Jones Industrial with the highest dividend yield.

The Dow 5 – The 5 lowest priced stocks from The Dow 10 Average.

Dow Jones High Yield Select 10 Index – The 10 stocks of the Dow Jones Industrial average that have the biggest indicated dividend yield on an annual basis.

What other stock indexes or market averages do you follow?

To hear many of the newspapers and other media outlets tell it, Google’s blowout third quarter is the official signal that the recession is over and that businesses are spending again, because customers are spending again, and everything is fine again.

The logic goes something like this. Google is not only the largest search engine, but it is also the largest provider of Internet advertising, particularly in America where its ad market share is something like 75% or so. Thus, Google acts as a bit of a proxy for the online advertising market in general. Online advertisers, then, spend money on online advertising only when, a) they have the money available to spend, and b) there are customers out there spending money to attract. So, theory is that since Google’s earnings came in above expectations, then that shows that advertisers are spending more money on online ads, which therefore means that more consumers are spending money online. That’s the idea, anyway.

Google Is Not The Economy

It is tempting to pronounce everything that Google does and everything that happens to Google as very important to major aspects of American life, including the overall business environment, and the U.S. economy. After all, Google is probably one of the most followed stocks in the country. Those who own shares can’t stop obsessing about them (and using them as proof that they are smart investors) and those who don’t own them can’t stop obsessing about whether or not they should cost as much as they do. Analysts trip over themselves raising their 12 month price expectations and revenue forecasts, each one dying to be the one who was "right" by calling the huge upward move in the most popular stock.

However, there is a major problem with using Google’s fortunes in this way. Regardless of whether or not Google’s stock is or is not a good investment now, the company makes a very bad barometer of the current state of business and by extension, the economy overall.

Google’s advertisers are almost exclusively smaller businesses. As such, Google’s fortunes do not connect very much with the major corporations whose fortunes move the most widely followed market barometers like the S&P500 Index, the Dow Jones Industrial Average, and even the NASDAQ 100.

While small business is a major component of the U.S. economy – some statistics suggest that small businesses are THE drive force of the American economy – there is a very big disconnect between most small businesses, and those who advertise online via Google and other ad networks. Entire segments of the small business economy have nothing to do with online advertising. Mom and Pop stores on Main Street, U.S.A. typically do not find their customers online.

In fact, the vast majority of all online ads are placed by online retailers, which is a very small subset of small businesses overall. Furthermore, increased online spending could actually be an indicator of LESS spending by U.S. consumers. After all, many people turn to online retailers hoping to find cheaper prices, different products than they would normally buy, a way to save money by not paying sales taxes, and of course, to shop around for the lowest prices without ever leaving their homes.

While many other indicators seem to be pointing toward a recovering U.S. economy, including the fact that over 70 U.S. cities are no longer statistically in a recession at all, using Google as the proverbial canary in the coal mine for the American economy, carries a very significant possibility of providing the wrong signal at the wrong time.

You’ll forgive me if I don’t give a flying leap about whether or not Abby Joseph Cohen things the recession is over.  The Goldman Sachs perma-bull was famous for being “right” about the ever rising stock market of the 1990s.  Too bad she has never been right about a single declining stock market.

Imagine you had a warning light that would light up red whenever the market was going to decline.  Imagine that light was broken and could never light up.  That light would be exactly as accurate as Abby Joseph Cohen has been since the 1990s.

Compare the light to Cohen and you’ll find they have the exact same track record.

Cohen Always Predicts Bull Markets

The recession may actually be over.  In which case, her apologists will trot out this proclamation as another example of her being “right.”  Just keep in mind, the warning light is always making the same prediction.

Ok, here it comes.

After the government released the results of its stress tests, banks are scrambling to come up with ways to raise huge amounts.  It seems that the government money that was a much vaunted and absolutely necessary lifeline to banks has become tainted now that it comes with, horror of horror, strings on how the money can be spent.  As if the banks ever handed out a huge loan to anyone without some sort of control on the collateral.

Be that as it may, banks want out of TARP and they want out now.  Even banks that would be much better off holding on to their TARP dollars are looking to buy back the government shares of preferred stock that they had to put up in order to their money.  Seems there is a feeling that the banks that do keep their TARP funds will be viewed as sickly or less stable than their counterparts who repay, regardless of the cost or wisdom of doing so.

The only way for these banks to raise the kinds of dollars being thrown around is by selling off assets, which is fine if they are not part of the core business (which begs the question why they were acquired in the first place), and by selling more stock to the public.  The latter means undoing decades of stock buybacks in some cases, and flat-out printing new shares in other cases.  Either way, that is a huge flood of bank stocks headed for the market. 

Buy, Sell, or Short Bank Stocks?

What’s an investor to do?

Get out of the way.

Frankly, there are too many variables here for any bank stock investment to be anything other than an educated guess at this point.  Trading on banking stocks based on whatever methodology or information you have analyzed can be nothing more than the equivalent of counting cards in blackjack and may be nothing better than picking red or black on a roulette wheel.

When you start using gambling analogies to discuss trading options, its time to step back.

At issue, is what will happen as the various banks strive to implement their business plans to both get out from under the government thumb and pay back their TARP money.  What is about to occur is unprecedented.

Typically, large corporations carefully time any additional stock sales or new issues into markets viewed as particularly favorable to their goals.  Nobody is saying that is the market we are looking at today, and yet, oodles of banks are looking to unleash the single largest infusion of bank stocks into the market in…well, forever.

Secondly, as banks focus on implementing their TARP pay backs and mending their image, they are more likely than ever to take their eye off the ball when it comes to actually running their businesses.  Already, companies have made consumer relations missteps that have become front page news, and Congress is talking about making credit card issuers make money fairly, instead of with fine print and contract double-talk, something most of them haven’t done in years, and may not be able to do anymore at all.

In other words, it is completely possible that thanks to a recovering economy, the largest government intervention in recent history will be a huge success and the Feds will get back all of their investment dollars and get to claim credit for saving the economy.  Along the way, bank stocks may absorb the huge infusion of supply and continue upward.

It is also completely possible that more than one bank will bungle throwing off the government shackles, or in doing so weaken itself too much to stay competitive, resulting in the credit crunch failing to unwind, a short-lived dead cat bounce in the economy and the onset of a second recession or banking crisis, this time that may cause the banks to stay in government hands for good, or that will leave investors holding the bag…and their shiny brand-new shares of common stock that are now worthless.

Go buy Wal-mart or GE, or company that’s upside during a recovery is not tied solely to how it plays the game during the next 10 months.

This coming week will be an important one for the stock market.  With some analysts calling the recent month long up trend a bottom, investors will be closely watching earnings reports from US companies releasing this week.

Everyone knows that the Q1 2009 news will be bad and that companies probably continue to lose money even today, but the focus will be on what the companies say about the future. Company projections for the rest of the year will determine if Wall Street has been right in predicting an economic turn around and the end of the recession or if the latest rally was nothing more than bottom fishing followed by overly optimistic traders hoping to get in early on the next big up move.

Start your trading machines and keep an eye on the charts because the ride could get bumpy.

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Recently, people have begun to draw all the wrong conclusions about the stock market for all the wrong reasons.  It is a common phenomenon and it happens every time the stock market moves up or down long enough for the average citizen whose only market investments are in IRAs or 401(k) plans to notice.

The first bad conclusion is that now is the time to pull money out of the market.  While this market has fallen long and fallen fast, it is almost always the case that when the average person looks to get out of their investments, they have already fallen significantly which means that getting out now just means locking in losses, especially because precious few of them have any idea about when or how they will get back in.

The second miscalculation that continuously happens to virtually everyone who is not a seasoned investor is the mistaken notion that the stock market is moving and pricing based on now, as in today.  It isn’t.

The stock market is now, and has always been, priced based on the future.  Investors buy stock not because the stock will be higher today, but because it will be higher in the future (day-traders excluded.)  Thus, when a professional investor looks at GE or IBM in today’s market they aren’t interested in today, they are interested in next quarter, next year, next five years, or whatever.

This all adds up to the stock market being what is known as a leading indicator.

Leading Indicator

A tool or system whose value indicates the direction of movement, usually in regards to the overall economy, prior to the actual change occurring.

The catch to this, of course, is that no one knows precisely how far out the market is leading, nor how far forward the masses who buy and sell stocks each day are looking.  So whether today’s drop in the stock market signifies predicts a drop next quarter or next year is difficult to ascertain.  The best one can hope for is to see clues or signs that things might be changing soon.

One such sign may have popped up today.

Merck announced today that it was offering to rival drug titan Schering-Plough in a $41 billion deal. 

While it is possible that this is an anomaly and that it means nothing, it may also mean that some of the big money out there is starting to think that prices are at the levels where buying makes sense.  A $41 billion deal isn’t the kind of thing you throw together because you are bored on a Sunday afternoon.  Merck must see some value at that price in Shering-Plough.

Obviously, a single data point is meaningless in predicting anything, much less the stock market, especially coming on the heals of the yet un-accepted Roche offer for Genetech. It is possible that this is nothing more than biotech consolidation, which is good for the long term, but hardly bullish.

However, if this marks the beginning of a series of mergers and acquisitions, it will be time to start looking at where you want to put your investment dollars for the beginning of the next bull market.

To no one’s surprise, all of the major stock market averages ended January down for the month.  This has drawn out the media to file their annual (when the market is down in January) stories about how sometimes January being up or down can predict how the year goes as well.

This is about as accurate as which conference wins the Superbowl, the AFC or NFC, predicting how the stock market will perform for the year.  That is, not accurate at all.

The flaw in both is a fundamental misunderstanding of the nature of mathematics and statistics.  Just because something is true 75% of the time in no way makes it a reliable predictor of anything, and yet, here we are.

I’ll write up an article on this later, but for now just keep in mind that smart investing is about facts, not old wives tales, and arthritic knees predicting the weather.  Watch the numbers, not the headlines.

By the way, don’t expect February to be any better, but after that…well, we’ll just have to watch the numbers.

I’ve been a professional writer and business consultant for over a year now, but many people still remember me from my financial advisor days.  So, I get plenty of questions about investing, the stock market, and real estate.  The number one question I get these days, is, “Should I be buying real estate now?”

The answer?

Yes, if you need a new house.

Real Estate Investment Cycles are Long

The funny part about all of this to someone who has been “on the inside” is that these are the very same people who refused to have anything to do with the stock market following the Internet bubble of the late 1990s.  While I patiently tried to explain to them that buying low and selling high meant buying now, when things looked at their worst, they shook their heads and said they were going to do something else. 

The same thing about the stock market holds for all investing.  Buying low and then selling at a higher price is how you make money.  But, here is the thing everyone seems to have forgotten, or maybe they just never knew.  Real estate market cycles take much longer than stock and bond investment cycles. In other words, the time from bottom to top (and vice versa) is much shorter in the stock market than it is in the real estate market.

This is not true, but for example, if today was the bottom of real estate prices and the bottom of stock market prices, and if both markets are headed for 25% gains, the stock market will be up 25% way before the real estate market will be up 25%.

How do I know?

History. Facts. Reality. – Take your pick.

Real Estate Bubble – Stock Market Bubble

There is a reason people keep calling the real estate market of the last few years the real estate bubble.  Just like the stock market bubble of a few years prior, it was an unsustainable, and phony rise in real estate prices.  Prices were driven up by a variety of factors, all of which led to increases that were too quick and not supported by the fundamentals.  Just like in the stock market bubble.  If you are intelligent, you don’t count on 50+% up years for the stock market any more.  Similarly, if you are intelligent, you don’t count on 20+% up years in the real estate market any more either.

What can you expect from the real estate market?

When the price increases do come, numbers like 5% are much more common in real estate than numbers like 10%.  A little math is in order.

If you buy a $200,000 with 5% down (good luck getting an investment loan like this anymore) that means you will pay $10,000 out of pocket.  We’ll ignore closing costs, but they could be a thousand dollars or so.  If your real estate goes up 5% starting next year and keeps going each year thereafter(unlikely) then, it will be worth $210,000 at the end of 2009, $220,500 at the end of 2010, and $231,525 at the end of 2011.  That is a $31,525 profit in raw numbers.

Now, real estate cheerleaders will point you toward the math of $31,525 from a $10,000 investment is around a 100% per year return.  Of course, the devil is always in the details.

Your monthly payment on that $190,000 mortgage at 6.0% for those 36 months is $1,139 for a total of $41,004.  Some of that pays down the mortgage, but thanks to the way amortization works, those first few years are mostly interest.  At the end of year three, you will still owe around.$182,500.

So, the real math is $10,000 investment (down payment) + $41,000 in payments = $51,000 total investment.

$182,500 remaining mortgage value sold at $231,525 = $49,000 profit.

OOPS! 

And we haven’t even included property taxes yet. 

Right about now, someone will mention the mortgage deduction, and yes, there is some value there.  Rough math suggests that if you are in the 30% tax bracket then you would have saved around $10,000 in taxes if you deducted the mortgage.  Of course, if we are going to get detailed, there is also possible capital gains taxes, maintenance, upkeep, repairs, real estate commissions and so on.

The next argument involves renting the house to pay the mortgage.  The counter argument is that there are costs to renting a property, it might sit empty for some number of months, and the taxes all change when you rent a property.  (You can’t claim a home as your primary residence if you are renting it out.)  Again, there are a million ways to slice this, but no matter how you do, this is not a no-brainer.  And, no matter how you slice it, the same arguments being made now for real estate are the arguments made for stocks. 

Keep in mind that I am not your stock broker or your real estate agent, so I don’t get anything out of it either way.  Just don’t give in to the feeble minded tricks that social conditioning creates.  If real estate is a good investment at the bottom, then so are stocks.  If you are too afraid to invest in stocks right now, why aren’t you too afraid to invest in real estate?  Answer those questions honestly and completely and you will be in a much better position to think rationally about your money and investing, both now and in the future.

The point still remains the same.  Yes, a LONG-TERM investment in real estate might make sense now.  Of course, so would a LONG-TERM investment in stocks.  Just THINK first, and remember that you are not sitting on a “sure thing” idea.