At a time when the general public has lost nearly all confidence in the financial services industry, JP Morgan proves once again that some things will never change. Their announcement of $2 billion in trading losses due to complex derivative positions brings us back to 2008 when similar news surfaced from companies like Lehman and AIG. Yet just when we think we’ve turned the corner on these matters, along comes another such announcement that leaves the financial world shell-shocked.

So why does this continue to happen? Let’s consider five reasons:

1. Banks are no longer banks. Banking in the purest sense no longer exists with the exception of community lenders. Otherwise, the banks that generate the most headlines are complex investment firms with operations that extend into nearly every realm of finance. Understanding their operations is next to impossible.
2. High risk = high reward. This simple equation compels banks to assume high levels of risk in order to meet investor demands.
3. Compensation. Bankers are paid a lot of money and usually this payout is tied to how much they generate for the bank. They’re unlikely to collect fat bonuses if they make conservative investments. This leads to excessive risk taking.
4. The threat of financial regulation. Believe it or not, more financial regulation may only lead to more creative risk taking. Bankers are driven by returns and if reform proves costly, they will only seek out more complex ways to make money and offset the high costs of compliance.
5. Public apathy. Let’s face it. Most of us are tired of the financial headlines and have come to expect more problems within the banking sector. Our apathy only encourages bankers to assume risk given a lack of accountability. Occupy Wall Street was fun but lacked a clear agenda. If you want to change the banks, playing hacky sack and singing songs is not the way to do it.

So there you have it. Now the hard part: coming up with the right solutions to this problem. Stay tuned…

The latest buzz on Wall Street centers on Facebook’s much-anticipated IPO. In the midst of all the chatter, a debate surrounding the company’s valuation is taking shape. Two questions emerge from this: 1) how do you value the company and 2) what is the proper valuation?

Let’s start with the first question. Of course, you could calculate the present value of future cash flows, which is a popular and credible method. Unfortunately, it is next to impossible to predict where Facebook’s cash flows will be five years out. Even predicting cash flows next quarter is daunting. Simply put, Facebook is a company built on its users and determining who pays to target these users and how much they pay is anyone’s guess.

You could also consider assigning a multiple of earnings based on some industry average. Here’s the problem: we’re not entirely clear which companies form Facebook’s industry. LinkedIn? Google? Where do you draw the line? Any multiple you find will be highly subjective as Facebook seems to form an industry unto itself.

So what is the real value of Facebook? I’ll say somewhere between $1 and $1 trillion. Too broad a range? In that case, we’ll have to wait until market euphoria settles and we get a better sense of how the company performs.

You be the judge. Last week, Apple reported blowout earnings. The result was a nearly ten percent movement in stock price and a spill over effect into other parts of the global financial system.

Let’s consider the facts. After the earnings announcement, NASDAQ futures were up significantly indicating a strong opening the next day. Dow futures were up as well which is often the case when the NASDAQ shows strength. Overnight, most Asian exchanges rallied on the Apple news. And of course, the next day U.S. and European markets showed strong gains.

In essence, Apple sent two strong messages to the market: 1.) Consumer buying power remains strong in spite of a challenging economic climate and 2.) Investors are willing to deploy capital when the growth story presents itself. Apple’s results made a case for each, which impacted global financial markets. The bigger question is whether one company can move the entire global economy. We’ll have to wait and see but I’m willing to bet that Apple may somehow help to answer this question.

Technical traders place a great deal of emphasis on what is called the moving average. In the stock market, the moving average is an average of a stock’s price over a period of time. Over time, older data is dropped from the calculation while newer data is added.

In essence, the moving average allows traders to pinpoint trends and, more importantly, track changes in these trends. Stock market moving averages are often calculated over ten day, 50 day and 200 day periods. Traders believe that a stock trading above its moving average is a buy signal while a stock trading below its moving average is a sell signal. Of course, the moving average is a lagging indicator so the trend observed may not necessarily determine future movements.

Traders believe the moving average offers a fairly accurate hint as to where a stock is headed and data would tend to support this. So be careful. Betting against the moving average trend can prove costly.

Why do we care so much about the banks? Why does the stock market, and the overall economy, seem so dependent on this sector of the economy? Let’s consider the reasons why this sector generates so much buzz.

For starters, the banking system was largely blamed for the financial crisis and ensuing recession. Banks, like many other segments of the economy, were swept away in a flood of euphoria stemming from the housing boom. No loan was worth passing on and the larger banks not only underwrote these loans but sometimes bundled and resold them as complex financial instruments. We all recall what happened next when the complexities of these instruments, combined with a declining housing market, created a recipe for disaster. Let’s just say it wasn’t pretty.

So here we are today. The economy and financial markets show signs of recovery. The answer to whether or not this recovery is real may very well be reflected in the performance of the banks. Increased lending, improving capital ratios and growing profits will ease economic fears and hopefully restore confidence. When Main Street is happy, Wall Street is happy. And when Wall Street is happy, Main Street is happy. Right now, a major source of that happiness could very well be the banks. Think of the economy as a three-ring circus and right now, the clown in the center ring is the banking sector. Let’s hope he makes us all laugh.

These days, we encounter a fair amount of confusion over the terms return on capital (ROC), return on capital employed (ROCE) and return on invested capital (ROIC). While often used interchangeably, the distinctions between them are worth noting. Here is a quick guide:

ROC takes net operating profit after tax and divides it by the book value of debt and equity less cash. It’s a popular way to assess the return relative to the company’s capital base.

ROCE takes net operating profit after tax and divides it by fixed assets less working capital. It basically looks at the returns relative to capital invested in or put to use by the company.

ROIC takes net operating profit after tax and divides it by invested capital including debt plus common and preferred equity. It basically measures the return to shareholders and debt holders.

As you can see, the formulas are related but each offers something different depending on the user.

The anticipation is over. Apple announced a dividend payout and a share buyback. If you have been following the business headlines of late, you’ve noticed that Apple’s biggest problem has been its ever-growing coffers of cash, which is nearing the $100 billion mark. Now, Apple is able to alleviate some of the problem, at least for now. Was it the right choice? Perhaps.

Aside from buying Facebook, these were likely the only viable options for Apple. The dividend payout is a smart way to reward existing shareholders and even attract new ones. Many funds invest in dividend paying stocks so the move could attract a new class of fund managers. The share buyback reduces the float of shares meaning earnings per shares should increase. The combination of these two strategies could push Apple shares higher, which is something any Apple shareholder can appreciate.

The only issue now is whether the market already priced in these moves. Since debate regarding Apple’s cash stockpiles began some time ago, many argue that the dividend and buyback were all but a foregone conclusion. Now that the news is out, will the market bid the stock lower? Stay tuned…

The headlines today reference Warren Buffet’s successor. Unfortunately, no one except for Mr. Buffet seems to know who that is. One thing is for sure, whoever this person is, he or she will clearly have a Buffetesque approach to investing. Here are five lessons from Mr. Buffet that we can all learn from:

1. Buy low, sell high. Cliche? Sure. But how many people truly follow this? This is precisely why Buffet skipped the Internet boom of the late 90’s. While everyone else was piling into high-flying Internet stocks, Buffet continued to seek out value plays. After the bubble burst, he was standing tall while many investors were wiped out.
2. Cash is king. Look for companies that a.) have cash and b.) generate cash. In the end, you really can’t go wrong with cash. The only problem that might surface is when a company has too much cash and nothing to do with it. Overall, that can be a good problem to have.
3. Understand the business model. If you don’t understand what the company does, why would you invest in it? It’s easy to fall for the next big thing but when that big thing doesn’t even have a defined business model, it’s best to stay away.
4. Do your homework. Preparing to make an investment is like studying for an exam. Read the press releases, study the industry and analyze the financial statements. This will ensure the best grade in the class…or highest return on investment.
5. Be patient. Stocks go up and down for many reasons but if you believe in what you own, you should have the patience to ride out a downturn. This is not to say you should hold on to a dying company but if you believe the company is sound and the future looks bright, hang
in there.

Let’s hope Mr. Buffet’s successor can teach us as much about investing as Mr. Buffet has.

Apple stock recently reached an all time high and a critical psychological threshold of $500 per share. Given Apple’s meteoric rise and tremendous growth prospects, many analysts believe Apple could very well become the world’s first trillion-dollar company. Whether that happens or not remains to be seen. What could impact the stock, at least in the near term, is what Apple does with the approximately $100 billion in cash on its balance sheet. Let’s consider the options.

Doing nothing for the time being certainly creates a nice cushion for Apple. Even a Recession 2.0 would have difficulty derailing a company with this much cash. You can pay for quite a few employee lunches with $100 billion. On the other hand, investors grow anxious when cash lies dormant as one percent money market returns rarely appeal to stock market investors. Another option would be for Apple to simply return some or all of the cash to the shareholders. Dividends are a nice bonus for patient shareholders and would allow them to seek higher returns elsewhere. The problem is that if Apple establishes itself as a dividend paying company, perceptions could change as the company might resemble a Microsoft or worse, a utility! In other words, investors fear the growth story is over when dividends are paid. Finally, the company might institute a share buyback. This reduces the shares outstanding and in turn, increases earnings per share. The problem, of course, is that they would be paying a hefty price to buy back the shares at current prices.

As Apple has proved to be on the leading edge of technology, it’s likely their cash management strategies will have a similar effect on the financial world and inspire CFOs everywhere. Stay tuned.

Groundhog Day was last week but lately every day in the world of financial markets feels like Groundhog Day, at least as it was portrayed in the classic Bill Murray movie. Low interest rates, a surging stock market and Internet IPOs at sky-high valuations make 2012 seem a lot like the happy golden bygone days from a few years back. Will this time around be different? Let’s look at the facts.

The Fed pledged to keep interest rates low until at least 2014. In essence, we have access to cheap money for a few more years. However, banks remain reluctant to lend to individuals and small businesses. Corporations, on the other hand, should fare better in terms of access to capital. Speaking of which, if the emerging euphoria surrounding Facebook’s planned IPO continues to push the stock market higher, you can bet on more corporate stock offerings. This access to capital can help corporate expansion initiatives, create jobs and create a positive wealth effect for consumers.

So is it Groundhog Day? On the surface, perhaps. But upon closer examination, 2012 is different from years past. Today, the financial markets today just might help the consumer and the job market. Let’s hope so.