A couple of days ago I received an email from a reader, who like so many other Americans, is having difficulty paying their monthly mortgage payment. He asked me if I would recommend a short sale or a foreclosure on his property. He said his home is worth significantly less now than we when he originally bought it and his mortgage payments are now 1.5 times more than his family’s monthly income.

There’s a big difference between a short-sale and foreclosure. A short sale is when the home owner and the mortgage lender agree to sell a property for less than the full loan payoff. Meaning, if a homeowner bought a house for $300,000, took a mortgage from a bank for $270,000, and now both the bank and the owner agree to sell the house for $220,000.

Foreclosure is the process whereby the mortgage lender takes possession of the property; the borrower fails to make mortgage payments for a significant amount of time. The borrower is legally kicked out and the bank becomes the homeowner.

Though both have negative results, short sales are the lesser of 2 evils.

A short sale will result in approximately a 200 point drop in your credit score but a foreclosure can be a 300 point hit.

After a foreclosure, a borrower needs to wait 5 years to avail a new mortgage, subject to establishing a new credit score. In the case of a short sale, the waiting period is only 2 years.

As of a year ago, the Obama Administration announced the Making Home Affordable Program (MHA) in order to prevent foreclosures. The program reduces mortgage payments so that the struggling homeowner might stay in their home. If they are still unable to make payments, the homeowner may get up to $1,500 as a relocation expense if he/she opts for a short sale, rather than a foreclosure.

My advice to the reader is to first contact your bank to see if you mortgage rate can be adjusted, under MHA, to a more affordable amount. If you can accomplish this, you’ll be able to stay in your home for years to come without damaging your credit score. Remember, a credit score is important if you want take a loan to buy a car or borrow money to help pay for your kids college tuition.

If making even a reduced mortgage payment isn’t an option I suggest you try to come to terms with your lender for a short sale. Though it won’t do your credit score any good, it will have less lasting effects than foreclosure.

If you are considering a short sale, make sure you consult with a CPA and an attorney, rather than a realtor. Short sales can be complicated and having these professionals advice is important.

I know that you must be stressed and frustrated. Do your best to think with your head when you make these decisions and don’t let emotions overcome you. Try and make the best out of this tough situation and you in the future, you will be that much stronger for it.

After the 9/11 tragedy, the U.S. economy stalled and deflation (for an understanding of deflation) fears ran rampant.  Ben Bernanke, then a Fed Governor, gave a speech in 2002 entitled, “Deflation: Making Sure “It” Doesn’t Happen Here.”  In that speech, Bernanke states:

“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.”

In that same speech he also discussed how the government can always avoid deflation by printing more dollars and referred to a statement made by Milton Friedman, a Nobel Prize winning economist, about using a helicopter drop of money to fight deflation.  Since then, Bernanke has had the nickname of “Helicopter Ben.”

Bernanke, now the Chairmen of the Fed, seems willing to take drastic steps to fight deflation.  In the past couple of years the Fed has dropped interest rates to virtually zero, it has bought $1.4 billion of mortgages back securities and $300 billion of government bonds. 

Though we aren’t seeing major signs of deflation right now (consumer prices in July climbed 1.2% from year-earlier levels), we are witnessing a weak economy and stalled rebound.  It makes me wonder if “Helicopter Ben” is going to take additional steps to avoid deflation preemptively, rather than wait for it to arrive.  If he were too, it would most likely be in the form of quantitative easing (for an understanding of quantitative easing: http://www.thestockenthusiast.com/?p=617).

On Friday, August 27 at 10 a.m. Eastern, Bernanke will deliver a keynote speech in Jackson Hole, WY.  The title of the speech is “The Economic Outlook and the Federal Reserve’s Policy Response.”  What he says will be scrutinized closely by Wall St. for hints to if Bernanke is moving towards more measures of quantitative easing (QE).  If “Helicopter Ben” hints to that, the market will most likely rally and if not, it will most likely fall.  Keep a close watch, as even the slightest nuances in his speech could have a major impact on the stock market.

On or about the 25th day of every month the National Association of Realtors (NAR) releases the existing sales number.  This number is the amount of previously owned condos, co-ops, and single-family homes that are sold each month.  NAR then reports what the annual rate would be if the relative pace for that month were maintained for 12 consecutive months. 

On Tuesday, August 24, 2010, NAR reported a number that was far worse than analysts expected.  The consensus number expected for July was a drop in sales of 12% from the June figure, which would have brought the annual expected rate of 4.7 million sales.  Instead, a 27% drop was reported, bringing the annual rate to 3.83 million units.

This is the lowest pace of sales in 15 years!  This is an ominous sign for the economy. 

According to NAR, historically home sales in April through July outpace the balance of the year.  Not only was this terrible number within one of the four the busiest months for home sales but mortgage rates were under 5%, which is a historical low. 

The stock market took a hit on this number, with the S&P 500 dropping 1.45% and the Dow Jones Industrial Average dipping under 10,000 intraday.  July’s horrendous existing homes sales data predict fewer purchases of housing-related consumer products.  A weak housing market also points to a higher personal savings rate, which is a big negative for an economy where 70% GDP is consumer related.

Now, with so many economic warning signs popping up, it is important for you to take charge of your financial future.  Not only do I want you to protect your finances if the stock market continues to fall and the economy worsens, but a smart trader/investor can take advantage of such situations and profit immensely.  Don’t be a bystander.  Seize this moment and take the necessary steps to ensure you and your family’s financial well being.

In the past couple of weeks there has been a lot of talk in the media about the Hindenburg Omen.  This omen is a technical anomaly in the stock market that potentially signals a severe down move in the not too distant future.  It got its name from the German airship, the Hindenburg, that burst into flames and crashed in the late 1930’s.  Jim Miekka, the blind mathematical whiz that created this omen, confirmed that as of August 12^th a Hindenburg trigger had occurred.  Investors and traders are scared; should you be?

There are 5 complex technical criteria that make up the Hindenburg Omen.  These criteria occur when there are an unusually high number of companies in the New York Stock Exchange that reach 52 week highs and lows at the same time.  This scenario is a result of severe uncertainty and confusion; 2 things that the market is suffering from right now. 

However, running to sell all of your stock right now is premature.  History tells that it takes at least 2 Hindenburg Omens occurring within 36 days to potentially trigger a significant down move in the stock market.  Some even claim that it requires 3 – 5 Hindenburg events to signal that we’re headed lower.  In 2008, the Omen signaled 7 times before the S&P crashed.  As of August 23^rd 2010  we’ve seen the Omen occur only once.

Within the past few decades there have been plenty of times when the Omen occurred and were nothing more than false alarms.  Art Cashin, head of floor operations at UBS, stated on CNBC, “Though we have never had a large sell-off without at Hindenburg Omen, we’ve had Hindenburg Omens without a sell-off.” 

However, a serious concern is that with all the media attention this technical anomaly has gotten, and continues to receive, the Hindenburg Omen could be a self-fulfilling prophecy; if enough people are scared into thinking the sky is falling they could all pull their money out of the market and a market crash could ensue.   Lucky for us it’s August and the masses aren’t paying too much attention to the stock market. 

Don’t make any rash decisions and keep a close eye on the markets.  These next few weeks will be crucial; if the market can make it to mid-September without another Hindenburg Omen being triggered we will know that August 12^th was a false alarm.  If another trigger does occur make sure you monitor your portfolio.  Not only do I want you to protect your personal wealth but if the market does crash there will be many opportunities for us make a lot of money.

On August 20th I was a guest on the Business News Network. The hosts asked me about gold, fertilizer stocks, and my thoughts on the market in general. We also discussed a great trade my Trifecta readers/subsrcibers and I made in Salesforce.com (symbol:CRM). We had been monitoring CRM for the past 10 days and I had called out a targeted buy level at $104.69. Friday morning the stock opened at $104.25 and immediately went higher. Our buy orders were filled and within 30 minutes the stock was trading over $109! We made over 4.5% return on our money in half an hour!!

To check out the interview, click the image of me below:

P.S. My wife and I disagreed with my choice of tie for the interview. As always, I encourage your comments, if nothing else, help me prove my decision was a good one.

Sylvester Stallone, and his costars in the movie The Expendables, rang the opening bell at the New York Stock Exchange on August 19^th.  In his interview with CNBC, I was shocked to find out that The Expendables, which Sylvester Stallone co-wrote, directed, and starred in, had the biggest opening weekend of any movie he has ever been a part of.  The Expendables made $35 million in a couple of days and now Stallone, in his mid Sixties, has rejuvenated his career.  It got me thinking, if he can do it, why can’t you?

Stallone had major success early on with Rocky.  He enjoyed A list status in Hollywood for nearly 20 years before his star, like that of so many aging action heroes, began to fade.  Like Stallone, many of The Stock Enthusiast’s readers have seen their share of success and failure but in the stock market rather than in movies.  Presently, most people are still reeling from when the stock market drastically fell in 2008 and the beginning of 2009.  Though many of their 401K’s and IRA’s have recovered from lows, most people are afraid to dip their toe back into the investing and trading world.  They have been scared out of the stock market.

Stallone didn’t make many movies from 2001 – 2006.  I assume many people in Hollywood told him he was washed up, too old, and not good looking enough anymore.  Stallone was probably afraid of making another flop, but instead of taking the easy road and turning his back on Hollywood he persevered.  He had mediocre success with another Rocky movie in 2006 and another Rambo in 2008.  Now, in 2010, he has grabbed the brass ring.

You also need to persevere.  Don’t turn your back on the stock market.  If you lost money, learn from your mistakes.  There isn’t a better way to supplement your income than trading and investing and you too can see more financial success than ever before. 

If you’ve lost money in the past it’s probably because you didn’t know what you were doing or you entrusted your hard earned dollars to someone else and they didn’t know what they were doing.  If that’s the case it’s time to get a financial education and to fire your stock broker.  Personally, even after 11 years in this business I still consider myself a student of the markets.  I am constantly learning about new trade ideas and investments.  Also, I manage my own personal wealth and have never let anyone else have that job.  Though not all of my trades have always been right, like Stallone, I have persevered.  That perseverance has paid off handsomely for me but I truly believe that my best years are still ahead of me. 

In my wildest dreams, I never thought I would be writing a post that had anything to do with Sly Stallone, or how he is an inspiration.  However, sometimes life works in mysterious ways.  The fact is that this man continues to do what he wants to do, no matter how many flops he has made, and is finding more success in his Sixties than he’s ever had.  It’s a lesson for all of us; don’t let age, fear, or past failures dictate your financial future.  Learn more, read more, and get more involved in the stock market.   There’s plenty of money to be made and your biggest successes lay ahead of you.  (And if you need some motivation once in awhile, you can always think of Sly and play the song “Eye of the Tiger!”)

On Tuesday, the largest mining company in the world made a bid to buy one of the largest fertilizer companies.  BHP Billiton (symbol: BHP), an Australian based diversified mining conglomerate, bid $130 a share or $39 billion dollars to acquire Canadian based Potash Corporation (symbol: POT).  POT quickly announced that this bid was too low for them to consider a sale.  

Before this news was made public on Monday, POT’s stock was trading at $112.  By Tuesday morning POT was trading at $143!  Though BHP only offered $130 a share, it is widely speculated that POT would only accept a bid for more than $150. 

This bid isn’t only important to the companies involved but for the market as a whole.  BHP’s bid was in all-cash, rather a mixture of cash and stock.  Not using their own stock as currency in this potential transaction means they think their own stock is undervalued.  That’s a bullish sign for stocks and thus you have seen the stock market rally for the past 2 days.

There are other names in this sector but the one most similar to POT is Mosaic (symbol: MOS).  MOS is also one of the largest fertilizer producers and like POT it has a strong presence in North America.  It has been rumored that if BHP can’t get POT to cooperate than they might try and buy MOS.  Not to mention, if BHP is interested in having a large presence in the fertilizer industry, other mining companies might as well and look to buy MOS.  Thus, we have seen an 11% up move in MOS shares in the past 2 days.

Even if BHP ups its offer to levels that are acceptable to POT, politics will come into play.  A high profile takeover from a huge foreign company will bring intense scrutiny from the Canadian government.  BHP will have to convince regulators that the deal for POT is good for Canada.

Though Wall Street seems to have mixed opinions as to whether this deal will come to be or not, the stock is telling us that it probably will happen.  POT has remained trading in the mid $140’s for the past 2 days; over 25% higher than Monday’s closing price. Remember, BHP only bid $130 a share.  If the majority of shareholders thought BHP wasn’t going to bid any higher, you’d probably see the stock trade at lower levels.  I am keeping a close eye on this mega deal and other fertilizer stocks.  There will be plenty of opportunity in the weeks and months to come to profit in this sector.

Most people have heard of Tim Geithner and Ben Bernake and they know that the Treasury and Federal Reserve are parts of our government concerned with money.  However, I find that most people don’t know what exactly these entities do, how they are related, or how it affects you and your wallet.

Tim Geithner is the Secretary of the United States Treasury.  The Treasury was created in 1798 and is responsible for managing the government’s finances.  It collects taxes, prints currency, mints coins, and manages debt.  The Treasury oversees the IRS, U.S. Mint, Bureau of the Public Debt, and the Alcohol and Tobacco Tax Bureau.

The Secretary of the Treasury is appointed by the President of the United States.  As a member of the President’s cabinet he is a key advisor on all economic issues.  The Secretary also works with foreign federal institutions to “encourage global economic growth, raise standards of living and to the extent possible, predict and prevent economic crises.”

Ben Bernake is the chairman of the Federal Reserve, or “Fed” as it’s often called.  The Fed was established in 1913 and is the central bank of the United States.  Unlike the Treasury Department, the Federal Reserve is independent of the U.S. government.  Its responsibility is to regulate the U.S. monetary and financial system.  The Fed is comprised of 12 regional banks in major cities throughout the United States. Though the chairman of the Federal Reserve is appointed by the President he is not a cabinet member and he must be confirmed by the Senate. 

The Fed’s mandate is to “keep our money valuable and our financial system healthy.”  To do this the Fed balances the access to money through adjustments of the federal funds rate and the discount rate. The federal funds rate is the interest rate on very short-term loans from one commercial bank to another in the United States.  This is the interest rate you hear about in the newspapers, which after the economic melt down of 2008 was lowered to 0-0.25%.   The discount rate is the rate at which member banks can borrow money from the Fed. 

Though these 2 institutions have different responsibilities, they share the common goal of keeping the United States’ government and its citizens financially healthy.  As we have seen since 2008, they often work hand in hand in times of crisis.  Mainly, the Fed has been able to keep the Treasury flush in cash in order to fund stimulus programs such as TARP and PPIP.

As our economy continues to see challenges, we will see more cooperation between Mr. Geithner and Mr. Bernake.  Whether the Fed is buying Treasury Bills or we see quantitative easing, I want you to understand the different roles these entities play.  Understanding how our government operates economically is the gateway to figuring out how you should maneuver your finances in order to protect your money and how to profit.

Chances are most of you have seen advertisements for online degrees and some of you might have obtained one.  For-profit education is a multi-billion dollar a year business and there are many publicly traded companies in this industry; The University of Phoenix (symbol: APOL), Devry symbol: DV), ITT Techinical Institute (symbol: ITT), etc.  They offer degrees in a wide range of programs and certificates, from associate’s degrees to MBAs.  Lately, the for-profit educators have seen their stocks slide through 52 week lows.

For-profit educators have been the subject of many high-profile hearings in the Senate,  and there was a report by the Government Accountability Office that chronicled allegedly misleading and in some cases, fraudulent recruiting tactics.  As a result, the Department of Education has been focusing on this industry promising greater oversight and tougher rules.

On Monday the industry took another hit when government data was released showing that many of their students aren’t repaying school loans. This is a significant issue for these educators because the bulk of their revenue comes from the federal financial aid the students receive.  If the government isn’t getting paid back by the students who receive these degrees, why should they keep lending?

The federal government lends money to students because people with higher education get better jobs which leads to economic expansion.  What their data is showing is that many of these schools are graduating unqualified students.  Why else wouldn’t they be able to gain employment?

One could argue that the job market in this country is awful right now and it’s not easy for anyone to find work.  Though this is true, the government is proposing very lenient requirements in order for these schools to receive federal aid; schools must have at least 65% of their graduates paying the principal on their federal student loans and those students can’t be spending more than 12 percent of their income to pay down student debt. 

Some of these for-profit educators have better repayment percentages than others but have been swept downward with the entire industry.  I hope the government weeds out the bad eggs in the group and those universities that graduate students with a solid education remain and thrive.  Keep a close eye on how this story plays out as we will be seeing continued volatility and opportunities in this sector.

This week marks the 75^th anniversary of the Social Security program being signed into law by President Franklin Roosevelt.  For the past decade there’s been a lot of talk about the grim future of social security and it is important for you to understand what the problems are and if you are going to be affected.

Social Security was created after the Great Depression in 1935 as means of taking care of people that were too old to work.  The program is funded through taxes on workers income, companies that employ those workers, and those that are self employed.  Presently, the youngest age you are able to elect to receive social security is 62 but the government incentives you with higher payouts if you wait a few more years.  In 2008, the program paid out more than $600 billion, making it the largest government program in the world. 

In theory, the idea of social security is a good one; the people currently working pay into the system and their money immediately goes back out in the form of benefit checks to retirees.  This cycle would continue for generations to come and therefore be able to fund itself forever.

Unfortunately, this theory doesn’t work in reality.  In 1935, there were many more people paying into the system than those receiving benefits.  In the future, the retirement of millions of baby boomers will hurt the ratio; there will be so many retirees that the working people will not be able to support them. If the population had grown steadily this would not have been a problem, but there is no good way for the design of the Social Security System to handle a population spike like the baby boomers. In addition people are living longer, which means benefits need to be paid for a longer period of time.

Even with these issues, I want to assure all those readers who are presently receiving social security checks not to worry.  Most likely, social security won’t see serious problems until 2041 when the Social Security Trust Fund would be exhausted.

However, for people a decade away from retirement and those who are younger, this is going to be a big issue for you.  If nothing changes, in 31 years from now Social Security benefits will drop by 27% annually, and will continue to be cut each year after.  Most of America relies on social security to sustain them financially after retirement.  How will retirees make ends meet?

To fix social security some suggest that we should increase payroll taxes or decrease benefits.  Obviously, Americans don’t like either of these options.  Another intensely debated alternative is privatizing social security.  This would mean that a person could take the money he/she pays into social security and invest it into private accounts.  Republicans support this idea and note that if a worker was able to invest their social security in a 401k plan a much larger amount of money would be generated based on historical returns.  Democrats point to the stock market crash in 2008 as to why they believe privatizing social security is a bad idea. 

The future of Social Security is uncertain and you must design your retirement plans accordingly.  Whether you are 22 or 52 years old, or if you are already a retiree and are concerned about the future economic welfare of your children and grandchildren, I recommend everyone start saving money now.  Usually, the necessary amounts needed for retirement cannot be saved during the last few working years. If you don’t know how to invest money, I recommend you learn now, so you can take advantage of the tax savings a 401k, IRA, or SEP plans provide.