Cyclical companies are companies who are strongly tied to the business cycle and their stocks move sharply up and down when economy turns around. Because of this, they require special handling by the intelligent investor.

Definition of a cyclical company

During recessions and economical downswings the stock market as a whole usually goes down, but a special type of companies suffers most: the cyclicals. Examples for cyclical companies are Caterpillar, US Steel, General Motors and International Paper, all makers of products with a fairly flexible demand curve. Automobile manufacturers, airlines, steel, paper, heavy machinery and hotels are the best examples. Examples for non-cyclical companies are Coca Cola, Proctor & Gamble, and Quaker Oats, all makers of products with a fairly inflexible demand curve. In bad times, people still have to eat and buy stuff for the household. Getting a new car or some new whirlpool parts on the other hand, can be delayed for some time.

Marc Thomson, a friend of mine who works at a big bank here in Munich, Germany, said last week: “A lot of our clients feel it now, the recession is hitting them hard. We’ve seen that before in downturns, but as usual, industries like the steel and automobile industry suffer the most and request new credits. ”

Chart for aviation support company AAR Corporation

Great opportunities ahead

When you look at charts of cyclical companies like the one above, there are always big up and downs. But when economy turns around, cyclicals can outperform growth companies and be great turnarounds. The problem is to catch the right moment of the cycle to buy. Take a second and analyse the chart of AAR Corporation for yourself and you will recognise that after this recession great opportunities will come ahead.

There are two problems when it comes to investing in cyclicals: timing and selection.

When it comes to timing, no one really can predict the economy as a whole and additionally cyclicals tend to doing well many months before the economy comes out of a recession. Best indicators seem to be interest rates and the companies’ financial ratios which show when demand goes up again, but also insider buying. It also helps if you know the industry. But all in all it is quite difficult to catch the best moment for the ride.

When it comes to selection, it makes sense to pick an industry that is due for a bounce. Choose the biggest company for more safety and smaller companies if you want to take some risk. These companies who suffered the most can produce the most impressive returns, but you have to make sure, they also don’t go bankrupt. More than usually, you have to check the balance sheet. An indicators that the company is healthy is for example a strong cash position.

If you do your homework well, I’m sure you can find plenty of good opportunities. While it certainly never hurts to have a college education you don’t need a bachelors degree to find good investments. Solid research, patience and a solid understanding of your limits will go a long way in your success.

How to invest successfully

So, successful investing in cyclicals requires careful timing and a good selection. At this point, it’s time to make a watchlist and be prepared to invest when the recession comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also set a stop-loss limit to protect you from loses.

Most of all, never forget the up-and-down nature of the economy. And be careful, some cyclical companies die when it finally comes to a economic slump, because of bad management which thought the good times will go on forever and building up a cash reserve is not necessary. When you decide to invest in a cyclical company, you have to follow the news about the global economy and the industry the stock is in. Also cyclicals are not suitable for long-term purposes because of no protection in recessions. Buy-and-hold doesn’t work here. Please keep that in mind.

Although I’m not an American I’m really happy to see that now for the first time in the history of the USA a man with Afro American roots became president. I think this decision has improved the image of the USA in the world very much. The image which has suffered under the government of George W. Bush, is now back with a new message “Change”. But what can the U.S. and the rest of the world expect from the new president and much more interesting which parts of the economy will benefit from him? First of all we shouldn’t expect too much from Mr. Obama, although he is a great speaker with fire in the eyes. The President-elect is facing some of the biggest problems the U.S ever had:

• The national debt has achieved the incredible amount of $1100.000.000.000

• The war in Iraq swallows up $5.000 per second, that’s $300.000 per minute and $432.000.000 per day
• The climate is in danger to collapse if the world and especially the U.S. won’t come to grips with their emissions we are in danger of loosing the planet as we know it

To say nothing about the financial crisis, new conflicts with Russia, the Iran or Venezuela or just the fact that we are facing a recession which consequences can’t just be estimated right now.

So above all these points it’s hard to imagine that Mr. Obama is able to spend any money for anything at all. But the promises Barack Obama made don’t have to be mutually exclusive. For example though investments and subventions of renewable energies new jobs can be created. That has the same effect like a stimulus package. Also it’s a good alternative for searching oil in far dessert countries. So I’m sure that Barack will make affords to support renewable energies, he also promised to spend $150 billion in the next 10 years in that industry. But which companies could benefit from that?

I picked out a few companies which could theoretically benefit from his plans, but before you buy these stocks now remember, just because a stock sounds interesting it doesn’t mean that it rises. If you want to buy these watch out for the right price.

The first one is First Solar [www.firstsolar.com (NASD: FSLR)], a producer of solar panels. Solar energy will have a lion’s share at the power supply of renewable energies. So First Solar will be the first address in the U.S.

The second one is Acher Daniels Midland [www.admworld.com (ADM)], a producer of food, fertilizer but also in bio fuels. Bio fuels will be very interesting for the government under Barack Obama because they can create jobs in the farming sector as well as they can make America independent of the so called pariah states.

Other interesting companies could be Repower, Solarworld, Nordex or Evergreen Solar.

The second promise senator Obama made is to make health care affordable for many of the 47 million Americans who are currently not insured. This point will be difficult because large health insurance companies like Aetna or UnitedHealthcare fear that they might suffer under lower profits. Also I don’t know if America is ready for so a social system, yet. Perhaps that’s why Obama didn’t say something concrete about this point, yet. But if a company would benefit from that it would definitely be Community Health Systems [www.chs.net (CYH)]. Community Health Systems provides hospitals and hospitals would be the direct winners of any health care plan. But you can of course disagree with me in this point.

So I hope that Barack Obama will be able to put his plans into practice. However I think many people believe in him and faith can be the beginning for “Change” also when it seems to be very difficult.

What’s your opinion? Do you know companies, that are likely to benefit from Mr. Obama’s plans? Please write a comment and let us know!

I have never seen that the Dow has reacted so strong on a decision of politicians, as it did when when I saw the decision about the 700 billion dollar bailout on CNN on Monday. CNN presented this decision really exciting and I think for many people this 15-minute decision was the most exciting decision of the whole year. Especially it was very funny to see how much the presenters believed in this plan and incredulous they looked when the votes finally were 228 against and 205 for it.

However the only problem is that actually this really was not funny, but I think everybody with a relative sound common sense knew that the house wouldn´t rubber stamp Bush´s funny 700 billion rescue plan so easily, especially in times of election campaign. So Bush has to hurry to find a new ingenious plan, but in my opinion the house of Representatives will be hard to convince because Bush already accumulated debts worth 10,6 trillion dollars. It´s really a bad bad situation but, let´s go back to what will happen to the markets and the economy, while I´m writing this post at Monday the 29th of September the Dow-Jones is 7 % in the red which meas that the wallstreet has lost more than one trillion U.S dollar again while the representatives are still debating if 700 billion could save the economy. So if the representatives don´t agree on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve insurance companies, then hedge fonds and private equity companies and in the end the whole world economy with every participant.

But let´s imagine what happens if the U.S. government would yet again make it the force the bailout through even only in another form?

Of course the wallstreet would leap for the joy and the Dow would probably close with a plus of 5 or 6 %, but does that really solve real problems? In my opinion the the bailout would just distort competition between the banks and in the end bad banks would finally become good ratings again. Also the idea that short sales on banks are forbidden is a very bad one because they short sales are an essential component of the price formation at the wallstreet. In my opinion and remember it´s a crisis of confidence we are facing. So be aware of the rise in the market if the bailout really comes because it won´t be here to stay. In my opinion the best thing the U.S. government could do know is to nationalize or bomb the rating agencies which in my opinion are the main reason for the crisis, because if they hadn´t distributed AAA rankings for incredible bad financial derivatives we probably wouldn´t have these enormous problems now.

So in my opinion we are facing a very very deep recession but despite that I hope that I was wrong with my last post that this crisis would finally end in a world monetary reform, but at the time many things point to that. However as hard as that sounds:

“Sometimes it´s better to burn the sick forest so that new trees can grow on a rebroductive ground.”

In 2006 the German economist Max Otte published a book with the title “The crash comes“, in which he pointed up the risks of the present housing bubble in the U.S. and the fact that most of these houses were sold on credit to people who actually couldn´t afford such high debits. He also predicted an enormous fall in the value of the dollar and a new world economic crisis in which all finally ended. When I read his book one year ago I thought either this guy is a bit crazy or this book is one of the most ingenious ones I ever read, nowadays I´m more given to the latter case.

Only now many people understand how serious the crisis is and the wishful thinking that governments could´t rescue every bank like they did in the case of Bear Stearns, Fanny Mae or Freddie Mac slowly disappears. But what are the consequences when the once fourth biggest investment bank of the U.S. files under chapter 11? First of all the stock quotation falls and many bank employees who believed their company are loosing everything their savings and later their jobs. That sounds bad but the real problem is another one, for example Lehman Brothers has a value of nearly 700 billion Dollars on the passive side securities, bonds, mortgages all these things are on the active side of other bank, funds or insurance companies. So if one bank falls under chapter 11 it´s logical that others will follow, but others could also be insurance companies like AIG although I´m not sure at this moment if the FED really has the nerve to let the biggest insurance company of the U.S crash. Sure this goes on so long till the market has adjusted all overratings and bad credits. That´s also why the governments won´t help the banks anymore, because they wouldn´t solve the problem and unless they help the faster the “crisis” or adjustment will be over, so we could say the crisis has just begun.

However let´s get back to the world economic crisis because a world financial crisis doesn´t absolutely have to be a world economic one, it´s just an actuator. The problem is that the people have forgotten that the international money supply has achieved absurd high worth, during the world industrial production stayed relative constant. So what did we do with all that money hadn´t that inevitably lead into an super inflation ? The answer is no because we always found ways to invest our money and funny bubbles like the Asia, DotCom or commodity-bubble arise which always burst again. By the way one reason for the incredible high money supply is also the fact that the issue banks always pumped more money into the system when a bubble burst so that the investors aren´t so gloomy. However these bubbles weren´t a big problem but the people have disregarded that since more than 10 years there accrued a new bubble, a super bubble, the housing bubble, founded on weak mortgages worth 9000 trillion U.S. dollar. This bubble burst now and what we are facing is the situation that the people have to find a new thing to invest in, before they realise that there is actually too much money in the system and this brings us to a very big danger because in my opinion the new investment target will be gold. But when the gold price will achieves to 2000-3000$ per unce the issue banks won´t be able anymore to cover the banknotes they printed. Finally the people will loose their trust in money and a super inflation coupled with a deep recession would lead into a financial failure.

If you don’t know how the US election system works, check out this educational video.

Compound interest is one of the most interesting things in the financial world. If you truly understand how it works, it can make you a lot of money. Check out this impressive quote:

Compound interest is the greatest mathematical discovery of all time.”
Albert Einstein

Compound interest can be explained as the adding of accumulated interest back to the principal. Interest is earned on interest. Compounding depends on three factors: percentage, basis and time.
Example: You have a bank account with $10000 in it and get 4% interest per year. After the first year you have $10400, but ten years later you already have $14802.44. Sounds great, doesn’t it?

Even 0.5% make a difference

Let’s take the example from above and modify the percentage to 4.5%. After ten years you have $15529.69. That means that you get 10.77% more than with a percentage of 4%. Amazing. Always seek for that extra 0.1% to 0.5% when searching for a good investment. Over time it changes a lot and you will see the difference.

The more you have, the more you will get

It’s true, rich people get richer. We earn $400 in our first example, but with a basis of $20000 we would have earned $800. The higher the basis, the higher the profits. Don’t forget to make regular payments into your savings account, so your basis gets bigger. Ideally you save money for a reason, for example your retirement. Then you need the endurance letting the money where it is for let’s say 20 years. But trust me, the motivation is great to pay in every month, because you will see amazing results and retire completely without financial problems.

Time is on your side

How long you let your money earn money is up to you, but the longer the better.
Remember, you earn money by doing nothing. And the money you earned by letting it earn more money will earn you even more money. You just put money in your account and watch it grow over time. If you don’t need the money, let it multiply. Be disciplined and patient enough and don’t touch this money.

The three factors have to work together

The whole concept of compound interest sounds great, but it is dependent on the three factors. They have to work together well, or you will get poor results. Basically, it is up to you how long you can do without the money you put in your account. It is also your choice how much you put in,dependent on how much money you have, of course. To get the max, the basis and time should be relative high, because the third factor “percentage” is aligned with risk. You get a small percentage with little to no risk but every percentage point more goes hand in hand with more risk. It is essential to find the right balance.

Sometimes it is magic

To conclude this article, here is a amazing example on compound interest at work:
“If the Native American tribe that accepted goods worth 60 guilders for the sale of Manhattan in 1626 had invested the money in a Dutch bank at 6.5% interest, compounded annually, then in 2005 their investment would be worth over €700 billion (around USD $1,000 billion), more than the assessed value of the real estate in all five boroughs of New York City. With a 6.0% interest however, the value of their investment today would have been €100 billion (7 times less!).”

Sources: Wikipedia

In the late 18th century our economy has changed, modern machines were rolled out, the division of labour was founded and the people started to work in big factories where they were specialised on different work steps. We called this process industrialization and it changed the way we worked and lived in many ways. Now, nearly 300 years later, we are facing a new revolution which sadly hasn’t got a name yet, so I fell so free to call it “robotalisation” temporary.

I want to introduce you to this post with a law of the famous computer scientist Gordon Moore which says that computer systems are doubling their performance every 18 months, so if we keep on doubling our computer performance at this rate we could theoretically be able to create humanoid artificial intelligence within the coming 30 - 50 years. That’s philosophically speaking - but it’s a fact that there are already dozens of wise folks in many universities and companies today who are doing research on artificial intelligence and new robotic technologies.

But what happens if the artificial intelligence of the machines is developed so far that it could replace the humans? A famous economist once called this situation a paradox and explained this way: if somebody in a cinema stands up he has an advantage because he sees better; but if everybody stands up everybody sees worse. So if one businessman replaces his workers by machines, he will surely have an advantage, but if everybody does it, everybody will have a disadvantage because the businessmen can’t sell their products anymore or rather the people don’t have the money to buy the products because they’re unemployed. The shear between the poor and the rich people would separate enormously and our economic system would not work anymore.

That would be the worst case. But as the old Chinese philosophy yin yang once told us that every shadow also has a sun, there is an enormous potential in this technology, a potential which could not just change our economy but could change the way we live on this earth and how we treat each other and our planet. Theoretically, we got the chance to create a world where everybody has access to all tangible values. A world without poverty, ecological destruction and wars. A world where people are free to decide what to do with their lives. But that’s just a dream, fact is that we have to find a new economic system, a system which is based on brain work and intellectual property.

Also we should not ignore this process because there are already thousands of industrial robots worldwide working in factories at the same assembly lines where the industrial revolution began 200 years ago and where humans worked 50 years ago. So in my opinion the robotalisation has already started by now. After the assembly line workers many jobs of the service sector will follow geriatric nurses, cashiers, charwoman… - all jobs which could possibly be replaced by robots within the next decades.