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Is the trend your friend? Investing in the Up or Down Cycle

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When you talk to stock market experts, one thing that they will tell you is that the economies of countries all over the world are linked much more closely together, to the point that they can easily impact one another.

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No longer do you have to think about just one economy if you are going to invest in something. You have to look at all of the trends, the news from the entire globe, and you have to consider how each story or event is going to play into each other. Only then can you make investments that are going to be successful.

Contracting Markets: Expanding Markets

For example, a failing economy in one part of the world might mean that more people are out of jobs. Consumers do not have extra money to spend on luxuries, on products or services that they do not need. All of their money has to go towards rent, food and other necessities that they cannot live without, while they spend their time trying to find new jobs. Can you imagine how the luxury goods market has been impacted in Greece, for example?

If you have invested in the stock of a company in your country that produces luxury goods, you might see their stock plummet. Were they making most of their money on exports, sending the goods to well-to-do people overseas? They may be based near your home, but their market could be everywhere else. When that dries up, they are going to lose a lot of domestic sales, even if the international sales keep going well. Or vice versa.

Taking Greece, as our example, the market for premium quality olive oil produced by local growers might contract as home consumers are hard pressed, and prefer to choose smaller amounts or cheaper brands; but export markets might welcome new olive oil for their salads or pizzas!

Depression vs. Recession: History Repeats

This is something that happened during the Great Depression in the United States, after the stock market crash at the end of the 1920s, and it happened again – though to a lesser degree – in the recent recession. When the economy was down, people were losing their jobs and their homes.

They stopped spending money on luxury goods from other countries. They held onto their savings or lived off of them. The economy is just starting to come back now, but a lot of luxury companies in other countries suffered simply because America was not doing well. And America is still one of the biggest markets in the world for exporters in Asia & Europe.

Does this spell opportunity?

Well, let’s take a look at some recent upcycle/downcycle stories. Did you buy Microsoft at $25 recently? If not, you’d be looking at a missed opportunity at an easy 40% upswing. However, if you had plonked your cash down for Lululemon stock, you might be sucking on lemons right now as they’re stock crashed nearly 50%.

And yet in those two stories, there are two vastly different products serving vastly different markets and in vastly different phases of the companies’ lives.image

Microsoft’s Rough Patch

Microsoft (NYSE: MSFT) has hit a rough patch with its consumer products division. Its new Windows 8/8.1 has not received much popular support despite being a nice OS; consumer staples are getting old; and repeated failures in Mobile have all challenged the ‘old’ dog. And wow! Have you seen those clunky Surface Notebooks? OMG.

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However, new upcoming products are getting good buzz. Business & Services are going gangbusters… and (let’s face it) Microsoft just isn’t cool right now. Is this a good contrarian play? Perhaps…

Lululemon: SeeThru Performance?

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Lululemon makes wonderful & popular quality Yoga & Sports Clothing for women (and men). (NYSE: LULU)

But botching a product redesign, consumer complaints, mishandling of their customer relations, a CEO switcheroo, and the P/E multiple got sliced in half.

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Have their products suddenly gone from hot to not? Or is their customer message as see-through as their Yoga bottoms? Clearly the market is voting one way on Microsoft and the other on Lululemon. But when it comes to the final weigh-in, will Mr. Market be right?

As an Investor

… you need to know how this cycle works so that you can decide when to buy and when to sell. If you sold your shares before the recession, you got the most out of them. If you then bought them back after prices plummeted, you could have made a lot of money in the upcycle, as things turned around.

Love to hear your take on this: What are you voting for? What are you weighing?

Citigroup – is it sleeping now (NYSE: C)

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This is the sixth installment of my look at the Dow Jones Companies, the thirty finest American companies. Today we’ll be looking at Citigroup. This company is now trading somewhat in the doldrums due to the rather tricky credit crunch. Having already looked at JP Morgan, many banks are under pressure, underwater, could this be the right time to buy into the banking sector?

Citigroup (NYSE: C)

Citigroup is a worldwide financial service with 200 million accounts in more than one hundred countries. It provides a range of financial products to governments, consumers and corporations that includes investments, brokerage accounts, wealth management and consumer banking and credit. It merged with Travelers Group in April of 1998 and as of 2008 is one of the world’s largest banks (having dropped from first place just recently).

Early History

Citigroup began in 1812 as the City Bank of New York. As the company grew and absorbed other businesses and banking institutions, it diversified to include many different financial interests such as insurance companies and brokerage firms. Because of the diversity of its many branches, each balances out the other as financial cycles rise and fall.

Citigroup has historically been a very good investment due to this long-range planning for stability. However, the corporation has been involved in many questionable practices. In 2004, Citigroup disrupted the European bond market by selling billions in bonds and then buying them back cheaply when their trades forced the market to drop.

Would you tell your grandmother?

In 2005 the NASD levied more than $21 million in fines against Citigroup for violating mutual fund sales practices. In 2007, NASD again fined Citigroup more than $15 million for misleading retirees in seminars and not adequately disclosing risks to those investors. The banking institution was also heavily implicated in the Terra Securities scandal which negatively impacted the United States bond market. Just this year, in 2008, the attorney general of California disclosed that Citigroup was guilty of a computerized “sweep” that robbed its customers, mostly poor or recently deceased, and deposited their money in the bank’s general fund without notifying the victims of the robbery.

A Laggard, Really

Citigroup has underperformed for the past half decade, showing losses in nearly every quarter according to the Dow Jones Industrial Average index. Although the diversity of financial products and investments would seem to make Citigroup an excellent choice for a healthy portfolio, its questionable business practices and recent poor decisions should be cause for second thoughts. Whether or not business ethics matter to you as an investor, the recent spate of bank failures combined with Citigroup’s losses in the past few years indicate that a great deal of caution is advisable when considering Citigroup as an investment.

Caution is certainly the word: having grown its dividend steadily for years, the recent losses forced Citigroup to cut its dividend from 54 cents to 32 cents, this bank may warrant careful scrutiny if you should be interested in it. It currently falls at or near the bottom of the Dow Jones, and is of interest to Dogs of the Dow investors. But a look at the charts indicate that it has lost more than 60% of its stock value since the latter part of 2007. It is currently still loss making. Are you willing to take a punt? But then when there are still lots of other profit making banks out there, why would you?