The difference between down and out

: As turnaround investors, I prefer to invest in companies that are down but not out. This is important because a lot of times, investors misunderstood the two. Often times, these two types of companies are trading near or at their 52 week low. But the similarity ends there. Company that is Down. This is the company that experiences problem and it seems like it can weather the problem. It just needs time to right the ship and get back on track. How can we be certain that the company can weather the storm? The ultimate guideline is to look at the company's balance sheet and income statement. Does the company have a positive net cash?

Is the company expected to post a profit? If the answer is yes to both questions, then the company in question is most likely is just down, but not out. Company that is Out. This is the company that experiences problem but its future existence might be in doubt. It might right the ship but by then it might be too late. As a result, shareholders will be wiped out and lose 100% of their investment.

How can we be certain for the company that is out? Again, we have to check the ultimate guideline, which is the balance sheet and income statement of the company. Does the company have a negative net cash? Is the company expected to post a loss for the foreseeable future?

If the answer is yes to both questions, then the company in question has the high probability of being out of business. Using analogy without illustrations are confusing, in my opinion. Therefore, I will choose one company for each situation. Please do not treat this as a buy or sell recommendation.

This is merely my observation as someone who had watched these companies for a while. Pfizer Inc. (PFE) might be categorized as the company that is down. Stock price slumped to 8 year low this week due to weak sales of its drug franchises and tepid guidance. Management has refused to update guidance for 2006 and beyond due to uncertainty.

So, let's look at Pfizer's balance sheet, shall we? The latest information on Pfizer shows that the company has $ 15 Billion of cash and equivalent and $ 5.517 Billion in long term debt. In other words, Pfizer has $9.5 Billion of positive net cash. How about earnings?

Is Pfizer expected to post a loss? Nope, it is expected to post earnings of $ 1.95 per share for year 2005 or $ 14 Billion of net profit. Profit is plenty while balance sheet is solid. Pfizer clearly is a company that simply has a small bump in the road.

How about AMR Corp (AMR)? This is an excellent example of a company that is out. Looking at the balance sheet, AMR has a negative net cash of $ 9.5 Billion. What this means is that it has $ 9.5 Billion more long term debt than it has cash. Is AMR profitable? Not a chance.

It is expected to post a loss of $ 4.36 per share for 2005 or $ 714 Million. It doesn't look pretty. High amount of debt and big loss is the recipe for a company that is down. If AMR doesn't turn its ship anytime soon, it might be forced to file bankruptcy. To consistently make money, investors need to be able to differentiate the company that is down and company that is out. Weed out the company that is out and your investment return will be so much better.

Forex trading demystified

Forex involves the trading of currencies. It is the largest financial market in the world and has an estimated daily turnover of 1.9 trillion dollars. This turnover is larger than all the worlds’ stock market on any given day. The forex market does not have a fixed exchange. The forex market is considered an over-the-counter (OTC) market. The forex market is completely electronic and trades are executed over the phone or on the Internet. Until 10 years ago the forex market was the preserve of large financial institutions. Now an ever-increasing amount of individual traders thanks to the advent of the Internet and an increasing amount of online forex brokers are trading forex. Currencies are always traded in pairs. A typical pair would be EUR/USD (Euro over US dollars). The first currency is the base. The second currency is the counter currency. The pair can be viewed, as the amount of the secondary currency that is needed to buy 1 unit of the first currency. If you were to buy the above pair you would buy Euro and simultaneously selling US dollars. If the pair were sold the reverse would happen you would sell the Euro and buy the US dollar. This might sound confusing but simply think of the pair as one item and you are buying or selling one item. If you think the Euro will go up against the US dollar you buy the EUR/USD pair. If you think the EUR will decrease against the US dollar you sell the EUR/USD pair. When you see forex quotes you will see two numbers. If we use the EUR/USD as an example you might see 1.2350/1.2355 the first number 1.2350 is the bid price and is the price traders are prepared to buy euros against the US dollar. The second number 1.2355 is the offer price and is the price traders are prepared to sell the EURO against the US dollar. The difference between the bid and the offer price is the called the spread. The spread for the major currencies is usually 3 to 5 pips (explained later). The most common increment of currencies is the pip. If the EUR/USD moves from 1.2350 to 1.2351 that is one pip. A pip is the last decimal point of quotation. Most currencies quoted to 4 decimal points. The exception is the Yen, which is quoted to 2 decimal points eg 139.41. The term pip is just forex lingo so if a forex trader says the EURO has gone up 20 pips against the US dollar add 20 points to decimal part of EUR/USD pair. Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few a mini lot size of 10,000 dollars has been introduced and this has become increasing popular. Forex trading is leveraged with most forex brokers offering 1% margins. This means you can control one standard lot of $100000 with $1000. Typically you would need a minium of $2500 to open a standard size forex account. A mini account can be opened with $300 with most forex brokers. To trade a one mini lot you need a margin of $100, which in turn controls $10000. If the currency goes up 1% and if you traded one mini lot of $10000 you would make $100 dollars or 100% of your original margin. Forex trading is a very lucrative market to get into and it is suggested that traders new to forex trading trade a mini account for an extended amount of time. Trading a mini account is a low cost entry to the forex market, as only $300 is required to open an account. You can still make money while you become more experienced in forex trading. You can trade one mini lot until you have made your first $100 dollars then start trading 2 mini lots. As you gain more experience you can trade standard sized lots. Forex trading is becoming increasing popular with traders of other financial products. It can be traded in amounts a lot smaller than other financial products, which makes learning forex trading safer than other markets. Forex trading can be a very lucrative market, which no trader can dismiss.