Recent dramatic drops — two of them over 700 points each— were followed by almost immediate rebounds. If this doesn’t repeat itself, the Dow could slip closer to closing below the 8,000 mark, which hasn’t happened since March 31, 2003. Since stocks began tumbling on Sept. 15, the Dow has plunged as low as 8,451.19 on Oct. 10. On Wednesday, it closed at 8,519.21. Big rallies last Monday and Thursday were enough to send all the major indexes higher, giving Wall Street its best week since 2003. The Dow gained 4.75 percent for the week — a gain that was erased in Wednesday’s trading alone.
Stocks dropped across Asia and Europe, falling even harder in South America, where Brazil’s Bovespa index and Argentina’s Merval had losses near 10 percent. Argentina’s president announced plans to nationalize private pension funds to protect retirees from the financial crisis.

World Leaders to Meet Again

World leaders will gather in Washington on Nov. 15 to discuss the crisis. A senior US administration official said Wednesday that the forum will be the first in a series of international meetings to discuss what economists predict could be a long and deep downturn. But for many companies, the damage has already been done.

Meanwhile, members of Congress are moving forward with efforts to overhaul the regulatory system. The changes could be the most sweeping since the 1930s, when Congress revamped how the financial system was regulated in response to the 1929 stock market crash and a wave of bank failures.
Democrats in Congress are also pushing to assemble a second economic stimulus program that could total $150 billion or more. On Monday, Fed Chairman Ben Bernanke said a significant stimulus package is forthcoming. The White House has yet to endorse the idea, but has said President Bush was at least willing to consider a second stimulus measure.

Credit Markets Do Better

On a positive note, credit markets showed some signs of a thaw. Yields on Treasury bills and the interest rates banks charge each other have both fallen back to late-September levels. Bank-to-bank lending rates fell sharply overnight.

The London Interbank Offered Rate, or Libor, on three-month loans in dollars fell to 3.54 percent from 3.83 percent, dropping for an eighth straight day. Libor is significant because many mortgage and credit card rates are pegged to it and it’s a good barometer of banks’ willingness to lend. However, despite declining rates, the volume of loans remained weak.

On the currency scene, while shares in Asian markets fell to four-year lows, the flight from emerging market debt and stocks helped push the dollar to a two-year high against a basket of currencies with the dollar index up 0.2 percent to 85.6 after hitting a two-year peak above 86.

The P/E ratio is usually calculated as the stock price divided by some measure of the company’s annual earnings. Most analysts use last year’s Net Income for calculating the current value of the P/E and next year’s forecast earnings to calculate the forward P/E. However, history has shown that this measure is very volatile, and more troublesome, too optimistic. Therefore, it is preferable to calculate the P/E ratio based on the earnings of a longer period; usually it is averaged on the past 5-10 years.

At current heights, where the S&P500 index is traded around 900 points, the 5-year P/E ratio is around 12.5. Last time it went below 12.5 was more than 20 years ago, in late 1985. Over the past 137 years, the average 5-year P/E ratio stood on 15.6, more than 20% higher than the current P/E. The current average 10-year P/E is a bit higher, around 14.5, but it is still lower than its average (16.4).

This could be a sign that many stocks are traded at attractive levels. However, one has to keep in mind that the P/E ratio usually falls way below its average before the market starts to rebound. Moreover, if the market does go into a lengthy recession, it’s possible that the earnings of many companies will decrease dramatically, thus lowering their P/E in the future.

No one knows for sure if the stock market has already bottomed out, and many stocks could still fall further down in the near future; however, I think that most of them are traded at reasonable levels and are definitely not overpriced like they have been in the past. So, if you haven’t done it already, you should start digging the market, searching for great businesses that lost too much value and are currently being traded way below their intrinsic value.

CEO - Chief Embezzlement Officer

CFO - Corporate Fraud Officer

BULL MARKET - A random market movement causing an investor to mistake himself for a financial genius

BEAR MARKET - A 6 to18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no s…

VALUE INVESTING - The art of buying low and selling lower

P/E RATIO - The percentage of investors wetting their pants as the market keeps crashing

BROKER - What my broker has made me

STANDARD & POOR - Your life in a nutshell

STOCK ANALYST – An idiot who just downgraded your stock

STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves

MARKET CORRECTION - The day after you buy stocks

CASH FLOW - The movement your money makes as it disappears down the toilet

INSTITUTIONAL INVESTOR - Last year’s investor who’s now locked up in a nuthouse

MOMENTUM INVESTING - The fine art of buying high and selling low

‘BUY, BUY’ - A flight attendant making market recommendations as you step off the plane

FINANCIAL PLANNER - A guy who actually remembers his wallet when he runs to the 7-11 for toilet paper and cigarettes

CALL OPTION - Something people used to do with a telephone in ancient times before e-mail

YAHOO - What you yell after selling all you owned to some poor sucker for $240 per share

WINDOWS - What you jump out of when you’re the sucker that bought Yahoo for $240 per share

PROFIT - Religious guy who talks to God

BILL GATES - Where God goes for a loan

ALAN GREENSPAN - God (past tense)

Recently, Warren gave an exclusive, detailed, interview to Charlie Rose (featured by Google Videos). It is very interesting to see how Buffett still strongly believes in his investing philosophy despite the steep market drop.

The average analysts or your investment advisor will probably tell you just the opposite, but I definitely agree with Buffet that if you have a long term investing horizon, now is the right time to buy new stocks, and definitely not sell your holdings. Even if the market drops further down, there are already plenty of undervalued stocks in the market; these stocks could possibly be cheaper next month, but they will surely trade at substantially higher prices a few years from now. Since the price movements of stocks cannot be predicted in the short term, it’s not a wise idea to wait for next month.

Warren has already started using his large cash reserve to buy many additional stocks. As usual, he is focused on strong and stable companies that have lost value or their earning was decreased in the short term, such as General Electric (GE) and others.

Note that as always, Buffett recommends that the average (passive) investor that doesn’t want to spend the extra time required to evaluate companies’ fair value and pick his stocks by himself, to concentrate on buying a low cost Index Fund or an Exchange Traded Fund (ETF). This doesn’t require any additional research and it gives the market the opportunity to do the work for you.

Bush Signs Bill at Oval Office

The original bill, rejected four days before, sent the Dow Jones Industrial Average to an historic 777-point drop. President Bush quickly signed the bill at his desk at the Oval office and Treasury Department officials vowed to move swiftly to use the sweeping new powers to try to stabilize financial markets and ease deepening fears about the economy.

Before the House vote, members of Congress were deluged with calls and e-mails from constituents opposed to the rescue plan, but Monday’s brutal market plunge was met with public outrage and led to four days of heavy lobbying for the proposal. In order to ensure its passage, Senate leaders added tax breaks and other sweeteners to the measure and it was passed there on Wednesday. On Friday, the bill won 58 new “yes” votes in the House, thereby clinching its approval. Both presidential candidates, Democratic Sen. Barack Obama and Republican Sen. John McCain, participated in a broad-based effort to lobby lawmakers, joined by outside groups and local government officials across the country.
“We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Bush said.

Markets Decline Despite Bail-out

Despite the move, the markets declined on Friday, a reflection of broader economic uncertainty and worries about a government report indicting that unemployment rose sharply in September.

The 451-page Emergency Economic Stabilization Act grants the Treasury Secretary unprecedented authority to buy up to $700 billion of troubled assets from failing financial institutions in an effort to stave off more bankruptcies and provide cash for new loans to ease the credit market freeze-up. The bailout plan divided members of the same party, many admitting that they objected to the bill but simply had no choice but to vote for its approval.

Lawmakers demanded numerous changes to the Treasury Department’s 3-page proposal, including limits on how much executives may be paid if their firms sell assets to the government. Congress also raised the cap on Federal Deposit Insurance Corp account coverage from $100,000 to $250,000, required provisions to help homeowners avoid foreclosure and added an oversight board to supervise the program.

In fact, the financial industry will now faces greater congressional scrutiny in the months to come.  Previously obscure corners of the industry now subject to few rules governing complex derivatives and hedge funds, for example, could face federal supervision for the first time. At the same time, heavily regulated sectors, such as banking and insurance, are likely to face even greater oversight. Hearings to begin next week will focus on the causes and effects of the Lehman Brothers’ bankruptcy and the $85 billion bailout of the giant insurer, AIG, and
will examine the failures of current regulations.

After the Congressional session, lawmakers headed home to start their fall campaigns. Tougher regulations will have to wait till next year. Rep. Barney Frank, chairman of the House Financial Services Committee said lawmakers will have to “do some serious surgery on the financial structure.”

The financial sector should mostly be affected by the current crisis. However, many other, non-related companies have lost value tremendously. There is no logical reason why healthcare companies, for example, won’t continue earning substantial cash in the near future. Thus, the recent declines have made many stocks very attractive. In addition, the U.S. should mainly suffer from this crisis. However, other countries (not only emerging countries) that should not necessarily be affected from it also experienced sharp declines, which has made investing in them currently attractive.

After the commodities bubble burst, commodity prices declined sharply to a point that seems much lower than to what it should be traded at. Therefore, investing in the stocks of commodity-related companies (but definitely not in future contract) at current prices could be interesting.

On the other hand, the common analyst on Wall Street will tell you just the opposite. They will tell you that the financial sector is still scary and unstable. Thus, other banks will probably collapse in the near future and drag the market further down. Also, the level of volatility is currently too high for you to jump into stocks; you could lose substantial amounts of your investments in a relatively short period.

Analysts will probably also tell you that there is a growing number of companies that predict declines in their earnings in the next few years, since the sub-prime results still affect not only the real-estate sector, but other sectors as well.

So, who’s right?

Well, Wall Street has always had a short memory. Too late after every main market drop occurred, they recommend you sell your position and keep your savings in treasury or cash; and, crisis after crisis, they were wrong. Usually, after the market bottoms out, it quickly soars. If you’re not holding stocks at that point, chances are that you won’t catch this fast moving train before it leaves the station. So, the best advice is to invest in stocks all the time and definitely after substantial market declines.

It’s definitely not the right time for everyone to invest in stocks. Since the market is currently very volatile, the short-sighted investors who check their positions on an hourly or daily basis should probably reduce their exposure to the stock market. However, for long-term investors, those who intend on investing for at least 3-5 years into the future and can bear additional temporary losses, the current period is the best time to invest. I’m sure that in 5 years from now this crisis will be history. By picking the right stocks now, your chances of earning money are much greater than losing money in the long term.

In general, there are two different concepts for analyzing a stock. The first one is the fundamental analyses, which focus on fundamental parameters of the company such as its financial strength, earning growth prospects, quality of management, products or services, and other. This method is based on the underlying assumption that price follows value, which means that the price of the stock will eventually represent the true value of the business.

The other method, technical analysis, on the other hand, examines technical properties of the stock, such as its price fluctuations, changes in volume, and other issues. This method assumes that past behavior of the stock can be used to predict what will happen in the future if similar patterns are repeated.

More explanations of fundamental analysis and technical analysis are available in our blog. It would take me far too long to explain these concepts in more detail. So, let’s let the nice instructors from zecco explain these issues further.

Fundamental Analysis

Technical Analysis

Low Commissions
Before the days when it was possible to trade online, anyone who wanted to invest in the stock markets needed to retain the services of a broker—something that still exists today, regardless of the fact of whether or not you are trading over the internet.  Brokers in the real world are able to charge their customers quite large commissions based on trades executed. So, unless you are trading or others on your behalf are trading in a large volume of stock, the net cost of the commission means that it is not economically viable for you to trade small volumes of shares.
The introduction of the Internet changed all this.  It is now possible to offer customers online trading services with far lower commissions, sometimes as low as $5.00 or sometimes at no cost whatsoever.

Limitless Available Information
When it comes to investing in the stock market, knowing the right moment to buy or to sell a stock is what separates the winners from the losers. In the real world, you would have to research the information yourself, or have someone else provide it. Past experience certainly helps and luck is the always the lady. With internet trading, an online stock trading software program provides technical charts, such as bar charts and line charts; technical analysis indicators, such as the Bollinger band: real time stock trading prices.  With all this information, you should be able to make an educated decision whether or not to invest in a particular stock.

You Decide When You Want to Invest
Choosing a stock via the internet is a choice only you make without any outside interference. You are in full control and can choose any investment vehicle, 24 hours a day, 365 days a year.

Disadvantages of Trading Online

Investors Have Little or No Investment Experience
Statistics show that 80% of new online stock traders will have a lose from day one. In addition, the new trader has no understanding of how technical indicators and stock charts work, will not know to diversify his portfolio, and will not know when to make the right stock trade.

Lack of Information Service
In the real world, brokers provide their customers with investment information in the form of a monthly bulletin or some other publication.  Since online traders do not normally receive this information, it is more difficult for investors to make informed investment decisions.

Limited Access to Market
It is more difficult to execute trades on many bourses.  Most trades on multiple exchanges will be within the USA—such as both the NYSE and NASDAQ. In addition, there is limited “real-time” stock ticker-tape prices, and the quotes on many screens relayed to traders are time-delayed prices. By the time you come to sell the stock, the bid/ask price of the stock could well have changed.

No Exit Plan
An exit plan is an instruction you give to your broker to the effect that if the share hits a high of “x” amount, the broker is required to sell the stock. Alternatively, if the stock hits a low of “y” amount, the broker is required to sell the stock.  Because trading online is instantaneous, it is not always possible to provide a broker with your instructions.

Could these occurrences have been predicted in advance? Definitely. One person that wasn’t caught unprepared is Nouriel Roubini of NYU’s Stern School, whose alarming predictions about the housing market and financial system have been heard in the past.

Currently, Roubini forecasts another 20% drop in stock prices, and reiterated a prior view that there will be no major independent broker/dealers standing before this crisis ends. In other words, investment companies such as Goldman Sachs and Morgan Stanley should be seeking emergency funding today, or face a similar fate as Lehman later.

I’m more optimistic than Mr. Roubini, but his words must be taken into consideration.

Cisco Systems first introduced this technology in October 2006. This product was built to provide high-definition video and spatial audio designed to link two physically separated rooms so they resemble a single conference room even though the two rooms may be on opposite sides of the world.

Since 2006, the product has been improved and was recently presented by the company’s CEO in a presentation to investors.

Most companies and private users won’t be using this expensive product, soyou probably shouldn’t run to buy Cisco’s stock (CSCO) the moment. However, I’m sure that Cisco will definitely continue to grow and lead global technology in the future.

In any case, Cisco is among the NASDAQ stocks that are traded in Yalicoo’s stock trading competitions, so continue to keep an eye on the developments in the company. If the stock price continues to decline, like what has been happening since October 2007, the stock might be attractive in the near future.