Market Update

Currently the Dow is down 136 points (-1.1%), the S&P is down 15.5 (-1.22%). and the Nasdaq is down 35.7 (-1.36%).

What seems to be moving the markets today? The answer does not seem to be as clear cut as it usually is. From the news I've gathered, the markets are off today on the large decline in the Euro vs. the US Dollar. The Euro fell 1%, and closed at 1.2939 This seems to have pushed people the press the 'sell' button. Perhaps it is a small spark which has refocused peoples' attention back to the European crisis, which has been largely overshadowed by good news in the U.S. in the past week or so.

The weaker Euro/USD, which means a stronger U.S. Dollar, has hurt commodities today. Gold and Silver have been hit hard, as they are hedges against a weak dollar. When the dollar is weak, people buy gold and silver as "currencies". When the dollar gains strength, people sell off these assets. I believe this is what has happened today, as the ETF that tracks the price of silver (SLV, which I have in my virtual portfolio) is down 5.8%. The GLD is down 2.5%.

Have a look at this link for a great visual explanation of how the Dollar correlates to silver and gold prices.

Here  is a link to a sort of cheesy yet informative video regarding silver and its future prospects. It's only 4 minutes long, you should have a look. 

You will notice also that oil has taken a hit today. "Dollar strength generally depresses commodity prices, as it lowers their appeal as an alternative asset and makes dollar priced commodities more expensive for holders of other currencies" (Forexpros.com). This is part of the story. The other part is that Iran has threatened over the past few days to close the straight of Hormuz- "a vital waterway through which a third of the world's tanker traffic flows — if western nations embargo the country's oil because of Iran's ongoing nuclear program" (Associated Press). This news has caused an increase in the price of crude oil, as it would cause a serious dearth of supply. Supply decreases, price increases. Anyway, the price of crude has come down today as Saudi Arabia has pledged to increase supply to fill any void that would be caused by the action of the Iranians. The U.S. Navy also pledged that any such action by Iran would "not be tolerated". The stronger dollar, along with the seeming resolution to the Iran issue, have caused the price of crude to drop today.

Yes, I did not quite correctly time my purchase of SGY yesterday, as it is down a painful 3.86% for the day. I am not worried though, as I am confident in the due diligence I performed and the long term outlook for oil as an investment. (After all, it's better to hold a company for over a year due to tax benefits.)

The following is a side note inspired by a gentleman who was on CNBC today. He mentioned the returns of the market during different years of the 4 year presidential cycle.

The average return in the 3rd year of the Presidential cycle since WWII has been 17%. In any year that the market has returned less than 8.5% in the 3rd year, the 4th year has returned an average of -10%. Currently, the Dow is up 5% for the year, while the S&P is down 0.6%. What does this say for 2012? Well, if history is to repeat itself, it bodes a negative outlook for 2012, with the potential for a large decline in the indexes. With the European crisis looming, a slowdown in Asia, and the United States' own struggling economy and astronomical debt load, I would have to agree with the prediction that we are due for a decline in 2012. Of course this is just a prediction, and could be terribly wrong. If the situation in Europe is magically solved, then I am very confident we would see the market rise considerably higher.

You're probably wondering what the heck I am doing then being invested in 6 different equities and various ETFs (not all of which are short) for my virtual portfolio.
First, it's a virtual portfolio. This allows me to do things I wouldn't otherwise do if real money was involved. To be quite honest, if it were a real portfolio, I'm not sure I'd purchase any stocks. The market is extremely complex and volatile, and I do not feel that I have enough experience yet to be able to trade and manage a portfolio in this environment.
Second, I really wanted to show my readers how one could analyze different companies for investment. This is what I've done via the "Warren Buffett and I..." stock analysis piece and the various DCF analyses I have performed and shared with you all. Using this data, I compiled a virtual portfolio.
Third, I feel that it is a very strong "long term" portfolio. The most successful investor to ever live is Warren Buffett, and he focuses solely on long term investments. It's said that the reason the wealthy are wealthy is because they have "long term time horizons", while the poor have "short term time horizons". I would say that this philosophy carries over to investing.
Fourth, it is fun to be able to manage a virtual portfolio, without the consequence of losing money along the way.

So as always, never buy stocks based on my recommendations alone. But do enjoy and take what you like from the analyses I will try and provide in weeks to come.

Cheers,
EZ