Highlights of the Business Week – 10/4/14

This was an exciting and interesting week for financial markets. Aside from yo-yo like fluctuations of pharmaceutical and biotechnology stocks, large corporations made far-reaching moves that have implications in the future market developments.  

1.       The Chinese dragon has not fallen asleep and we are often reminded of its prowess through economic fireballs that it likes to shoot at us. Surprisingly enough, this time it was an Internet-based e-commerce company that decided to go public with aspirations to become a counterweight to Google. From the glorious days of its IPO on September 19^th, the Alibaba stock has fell this week and was recently traded as low as $85.61 per share. This is a shame, considering all the hype that was broadcasted by every news channel.

I would be charting this territory very carefully, because Alibaba is a relatively unknown company and its future is highly depended on Chinese quasi-liberal policies. China is not an open society which espouses liberal ideals of democratic conduct. Therefore the marketplace remains highly unpredictable and is at the mercy of Chinese politburo. As long as this company is run and monitored by Chinese officials, I wouldn’t bet on its future creativity and dynamism.

Alibaba can spread its tentacles beyond the Great Wall of China only if it is given similar autonomy as Google and Yahoo companies enjoy in the West.   

Furthermore, there are reports that children of Chinese officials are either employed or have significant stakes in the company. Although key figures with ties to the government could be interpreted as a good sign, many investors remain skeptical.

Alibaba is a risk prone conglomerate, but is worthy enough to be put on my Market Watchlist.

2.       On Monday, September 29^th, eBay announced that it will spin off PayPal, which was eBay’s electronic payment service business. This was followed by reports that Alibaba and Google juggernauts are contemplating its acquisition, which will expand their empires and will certainly enrich their portfolios. If Google succeeds with this deal, PayPal will be introduced into the Android system and pose direct competition to the new Apple payment system.

      PayPal is going to become a separate company and a very attractive one due to its healthy cash flow. Apparently, half of eBay’s revenue was derived from PayPal’s electronic transactions and commerce.

      The New York Times reported that venture capitalist Carl Icahn had been working tirelessly pushing for the break up, but faced fierce opposition from the eBay management.

      Eventually, eBay management acquiesced to the spin-off calls made by Icahn and PayPal became a separate publicly traded company. This move will be completed by the end of next year.

      Carl Icahn saw eBay as nuisance and hindrance to the thriving nature of PayPal and believes that becoming a separate company will help it focus on its core values.  

      The financial metrics sing praise to PayPal and since it is going to be a publicly traded company I would put it on my Watchlist and monitor its developments very closely.

      

Important PayPal numbers from The New York Times article:

Accounted for 41% of revenue of eBay

153 million active digital wallets

Handles mobile payments, employed by apps such as Uber and Airbnb

3.       This week kicked off a historically volatile month of October, which is a great month for both big gains and big losses. A month of great opportunities and unexpected threats. In a Yahoo Finance article, Patti Domm of CNBC quotes Jeff Kleintop, chief global investment strategist at Charles Schwab:

"October is historically a turnaround month, where the markets tend to turn around after weakness but often the weakness carries on into October. Maybe, we have to get to the middle of the month-until we get some Chinese data and then we turn around. We think stocks are probably headed higher from here to year end."

This is a perfect time to search for stocks that have temporarily fell in price due to outstanding uncertainties in the marketplace. As the dollar continues to grow its muscles, I wouldn’t bet on commodities, such as gold and silver but keep trading stocks with high volatility ratings.

**Please note that all referenced articles are embedded in the blog post and can be accessed by clicking on the blue colored text.**

Update on Silver - 10/2/14

As was discussed in my previous blog post, silver is still in the downward trend and is most likely to stay on this course. The price of silver has fallen to $17.01 per troy ounce, which is more than $1 drop comparing to the prior 2 weeks. The price of gold continues to trade sideways, but has more hopes of returning to the new highs.

Historically speaking the health of the economy is directly correlated with the price of gold and silver. The downward trend of these commodities is indicative of improving economic times.

The positive reports on the improving US economy, including a 0.5% increase in consumer spending, will continue to drive down the prices of precious metals. Consequently, the Fed might increase the interest rates next year to offset the inflation and provide stability to the macroeconomic climate. There are many other signs in the economy that signal positive trends.

Due to the continuing downward trend of silver, my recommendation is to hold off of any purchases and continue to wait until silver hits mid-teens or gets close to that mark. At that point, it is advisable to start slowly accumulating silver at relatively low prices. The next phase of the business cycle will be shaped by a downward curve, and coupled with the increased federal interest rate, the price of silver might go up in the 2^nd half of the year 2015.

Unfortunately, the price of commodities is difficult to predict. Don’t fall for the hype or doom and gloom scenarios, which are broadcasted to get you to buy their silver and gold products. Unless you are looking for a long-term hold of commodities, gold and silver can be profitably traded only during the times of high volatility, akin to what was happening during the Great Recession of 2007-2009. At that time, the prices of silver and gold were fluctuating every day and gains were made in a matter of weeks. Due to the sideways trading, silver and gold remain a long-term solution at this point.  

**Please note that all referenced articles are embedded in the blog post and can be accessed by clicking on the blue colored text.**