Downgrades into Earnings

Following Intel’s (NASDAQ: INTC) blockbuster earnings report, it’s now time for us stock market tech enthusiasts to turn our attention to Google’s (Nasdaq: GOOG) upcoming report.  The 2nd quarter of 2010 will go down in history as the quarter in which Google became a valuation play relative to its peers (yes, Google was a “value” play during the bust of 2007-08, but that was a time of equal opportunity hating across all classes of equities).  For the first time in its history as both a public company and a big tech bellwether, Google now trades with a forward p/e (based on consensus analyst estimates) of less than 20.

Many analysts have tempered expectations ahead of Google’s 2nd quarter report.  This is as much due to heightened macroeconomic volatility, as it is analysts concern over Google’s perceived inability to monetize on any line of business outside its core search and ad-based model.  JP Morgan (NYSE: JPM) analyst, Imran Khan cited slower sequential growth due to Eurozone weakness, the discontinuation of the Nexus line of phones, and FOREX hedging expenses in contributing to a slower overall growth rate.

Several analysts have expressed concerns over the lack of a foreseeable growth opportunity for Google revenues.  This stems as much from Google’s withdrawal from the rapidly growing Chinese market, as it does the failure of the Nexus to become a hot-selling end consumer device.  All in all, analysts are expecting earnings of $6.54 per share, on revenues of $5 billion.

Digging a Little Deeper

Analysts do a pretty solid job of projecting Google’s earnings from the search and ad-based revenues, as much of that data comes from comScore and cost-per-click data that is largely publicly available.  However, Google has historically been rather secretive about dividing its revenue sources into easily ascertainable information.  During the quarter, Google made it far easier for anyone to create advertising content on YouTube, and started implementing creative ways through which they can better value ads for their customers.

Several times this year, Eric Schmidt both hinted and outright stated that YouTube is on its way to becoming a profitable and integral component of Google’s overall strategy.  Google’s brass does a great job at tempering expectations, and Schmidt’s clue should be a hint to us all that at some point this year Google will unveil and earnings surprise.  I personally would not be surprised to see signs of YouTube’s profitability in this particular earnings report.

For a company engaged in an aggressive growth via acquisition and investment strategy, it is rather telling that Google’s $1.65 billion investment in YouTube is paying off.   Speaking of which, regulatory approval for Google to close on their acquisition of AdMob sets the stage for the company to turn the rapid uptake of its Android phone operating system into an earnings behemoth.  This acquisition sets the stage for Google to continue expanding their presence in the growing mobile advertising market, using their Android operating system as a catalyst through which to reach a growing market.

Oh, and about that Android uptake?  Well despite the Nexus One’s failure, the Android browser is soaring to successes beyond what any had projected.  In the second quarter, Android activations moved up to 160,000 phones per day, while the app market surged, growing from 50,000 total apps to 70,000 in the month of June alone.

HTC, a phone manufacturer which uses the Android browser in many of its top lines just last week announced stellar second quarter earnings, which far surpassed any analyst expectations: sales increased by a whopping 58% over 2q 2009.  This clues us into the fact that while much of the success in Android uptake has been a recent phenomenon, there should be actual signs of this trend in second quarter earnings for Google (Google doesn’t necessarily make money off of Android activations, they primarily monetize the Android via the Apps market and use of Google tools).

What I’m Looking For

Since earnings are inherently backwards looking, it’s not worth talking too much about the unveiling of GoogleTV.  What is clear is that analysts and traders are looking for the company to show some signs of significant revenue growth beyond the scope of Google’s tradition Internet ad model.  I want to see more clues that the YouTube and Android successes are turning into tangible profits for the Google.  Seeing this transition in the earnings is rather difficult considering the company’s secretive ways; however, should Google turn around and comfortably beat these tempered analyst expectations, it would be a great clue as to these new lines of revenues for the company.  Personally, I expect a beat considering the inability for analysts to project revenue growth in the Android and YouTube markets, two areas in which the evidence points to significant acceleration for Google.

Disclosure: Long GOOG

If you like the way Elliot thinks, check out his incredible resource for investors and traders the Tech Cheat Sheet. Subscribe in a reader

When the US Treasury website refreshes tomorrow (following the holiday weekend), we will see that the United States Total Public Debt Outstanding is now over $13 Trillion.

If we think the US Dollar is safe with that kind of debt imbued into the DNA of every printed greenback, we are living in a fantasy world. As the Euro, UK Sterling, and US Dollar are repriced to accurately reflect their hollowed bones, Gold (NYSE: GLD) may seriously be the only trustworthy currency in the world.

If you are interested in learning how you can make winning trades or investments in Gold, click here for a free trial of our Gold & Silver Premium service by Chicago Mercantile Exchange commentator Jordan Roy-Byrne CMT.

There is plenty to be bearish about: the sovereign debt crisis, the mess in the UK, a catastrophic oil spill in the Gulf, North Korea vs South Korea, Nouriel Roubini back on TV, and Google (Nasdaq: GOOG) Pac-Man zapping 4.8 million hours of human life. So, investors are selling first and asking questions later as the Dow Jones Industrial Average (NYSE: DIA) sinks below 10,000 to ~9900. So much for talk of Dow 12,000 … at least for now.

Before the markets sold off, we mapped it out in the May issue of our Wall St. Cheat Sheet Premium newsletter. Click here for your free copy.

Since Trader Monthly shuttered, we’ve decided to pick up the popular Top Traders Under 30 ball. However, based on your feedback and our research, we’ve made one huge change: we’ve decided there are not 30 top traders under 30.

Also, we feel these elite traders are worth watching because they have survived the shakeout since the Great Crash of 2008. It’s easy to win when the market goes in one direction. It requires skill to navigate up and down scenarios.

So, after 8 months of due diligence, we are proud to present to you the first annual Wall St. Cheat Sheet Top 3 Traders Under 30 …

3. Jan Sramek – Emerging Markets Trader,

Goldman Sachs

Like LA Lakers phenomenon Kobe Bryant, Jan Sramek — age 23 — has hit the big leagues with a ton of talent and promise. Having made the national headlines in the UK by breaking the world A-level record, Sramek enrolled to read Mathematics on a scholarship at the prestigious Trinity College at the University of Cambridge. Shortly afterward, he transferred to the London School of Economics to work during his studies because London-based hedge funds recognized his potential and snapped him up during his 1st year.

Having accumulated a wealth of experience on both the buy and sell-side during university, Sramek moved over to the area where many of the current superstars of the industry cut their teeth: the emerging markets fixed income trading desk at Goldman’s (NYSE:GS) London office (a very active area given today’s debt and currency volatility). Although neither Sramek nor Goldman would confirm or deny any details about this trading desk, we can assume the group has done extraordinarily well since Goldman’s traders had a perfect 100% win-rate last quarter .

Sramek is considered somewhat of a prodigy in Europe. He has repeatedly made the headlines with his various achievements. Most recently, Financial News named him the youngest financier ever on their list of 100 Rising Stars of Financial Markets Under 40 — a list which previously included the likes of Greg Coffey of Moore Capital and Pierre Andurand of BlueGold.

Out of all the firms with which we spoke, Goldman was the least revealing. Nevertheless, informed sources suggest that Sramek’s mentors include several of London’s most powerful hedge fund managers who are clearly grooming him for the very top. It’s therefore possible Jan deserves a higher place on our list. Regardless, given his age, we are confident he will be considered for Wall St. Cheat Sheet’s Top 3 Traders Under 30 list for many years to come.

Unlike some of his contemporaries, Sramek openly reveals the keys to his success, and makes it all sound quite simple. I highly recommend reading his book Racing Towards Excellence(a top rated book on Amazon). The book is a nice blueprint for anyone looking to maximize their ambition and take the steps necessary to be successful in any competitive environment, including finance.

2. Gilbert Mendez – Equities and Forex Trader,

SMB Capital

Gilbert “Gman” Mendez — age 28 — is as textbook a pro trader as Orlando Magic star Dwight “Superman” Howard is a NBA all-star. After studying mechanical engineering at Columbia University, Gilbert built a black-box trading model for the global Forex currency market. Such an awesome achievement led top Wall Street proprietary trading shop SMB Capital to give Gilbert a desk and trading account. Not long after, the firm awarded him “Head Trader” status.

When I asked about Gilbert’s trading style, he answered:

I trade news driven stocks and whatever sector happens to get in play. In essence I trade the flavor of the day or week. I make my trading decisions based on the intraday fundamentals, the medium term time frame charts (15 minute-hourly), and time my entries using my tape reading skills. My real strength as trader is the ability to read the tape and psychology of the big players behind a chart.

After proving his skills through the biggest equities crash since the Great Depression, Gilbert was recently made partner at SMB Capital. That’s what we’d expect from a guy who SMB co-founder Mike Bellafiore calls, “one of the best young traders on Wall Street.”

Unlike most professional traders, Gilbert is highly accessible to budding traders. He contributes public posts and educational material to SMB’s blog. If you are looking for a glimpse of what it takes to be a top trader on Wall Street, Gilbert has a ton to offer.

1. Adam Guren – Global Equities Trader,

First New York Securities

A year ago we called Adam Guren — age 28 — the Lebron James of trading. Given his consistent success like King James, Adam was the obvious choice for the top spot on our first annual list.

After graduating Duke in 2003, Adam played professional soccer for a season with the Cleveland Force before starting in the prestigious training program at First New York Securities. After a 14 month apprenticeship, Adam started trading his own book while expanding his focus from Europe to Asia.

Now, Adam focuses on global stocks. His day looks much like a British colonel’s when the sun never set on the British Empire. But with patience and discipline, Adam finds a way to replicate his success in multiple markets. He starts his process by logging on premarket. Then he spends approximately an hour, sometimes thirty minutes, seeing if there’s news out in the basket of stocks he follows. This is how he figures out if there’s any opportunities because he looks for newsworthy events that are going to move his stocks.

When I asked Adam about how he makes his moves, he said:

I’m not a technician and I really don’t study charts. That’s not to say I won’t look at them to see where things are. At the same time, I’m not a big fundamental guy based on the nature of how long I hold a position. I mean, I do understand the fundamentals of each stock and what people generally expect, but for the most part I rely heavily on intuition and the feel I have for a stock based on watching it for so long. After watching the same 50-100 names, you start to easily understand how they trade and what moves them. It’s pattern recognition.

Another key to Adam’s success is his risk management:

Every trade I get into I have a very good understanding of the risk-reward. One of the keys to success is measuring risk-reward. And one of the best ways to do that, as elementary as it sounds, is to buy low and sell high. So you want to buy when things are beat up and sell when things are overdone on the upside. I’d say I do a good job of measuring risk. It’s probably one of the main reasons why I am successful at trading.

Although this sounds very basic, it’s obviously easier said than done. Given that over 85% of traders lose money, Adam has proven that mastering the fundamentals is the key to success as a professional trader.

If you would like to nominate traders for future awards, please send us an email or comment below.

If you’re living outside Europe and looking for an inexpensive vacation, your time may be coming. This morning the Euro reached a 4-year low in early trading as investors continue to show little confidence in the currency.

If you’re interested in an in depth look at the sovereign debt crisis and how it may affect your investments, click here for a free copy of our most recent issue of  our Wall St. Cheat Sheet Premium newsletter.

Our partners at INO MarketClub have a free short video about trading FOREX (i.e., currencies). Click here or either image to watch now.

In the beginning of July I wrote a post examining the US Dollar’s long-term 95% crash. (See “Who Killed the US Dollar?”) However, on Friday Bloomberg noted, “The dollar declined the most since May versus six major counterparts as the greenback became the cheapest funding currency, prompting investors to sell the dollar and buy riskier assets.” Looking at a one-year chart of the Dollar Index, we can see purchasing power continues to erode as select assets such as precious metals, oil, and stocks advance:

Dollar Index

So long as the Dollar remains trapped below the 50-day Moving Average, traders will continue to sell the rallies. Note how the peak in March is a nearly exact inversion of the S&P 500:

S&P 500

As we have been saying for months in our Premium Newsletter, the Dollar has continued to be the best indicator of where the stock market is headed. Short-term traders betting against the stock market rally will continue to get slaughtered if large global institutions are forced to buy stocks (and other assets) in an effort to escape US Dollar deflation.

To try a 14-day, no risk free trial of our Premium Newsletter, simply click here.

If you are interested in real-time market analysis, click here to follow Wall St. Cheat Sheet on Twitter.

As traders thirst for 24/7 access, FOREX continues to increase in popularity. I cannot surf any investing or trading site without a barrage of ‘FOREX Trading Account’ ads flashing like 42nd St. signage before Giuliani was mayor of NYC.

Currency trading became relatively popular during the recent bear market in the US Dollar. Basically, trend traders spotted a clean textbook trend. Then the heard flocked to the pastures. But FOREX is a complicated world full of governments, huge institutional traders, and 24/7 reactions to a global information stream.

I recently spoke with professional FOREX trader German Santos to help us figure out where to start. German, a former embedded hardware/software engineer known as pipmaestro on the StockTwits Recommended list, was kind enough to school us on the basics of FOREX trading.

German Santos

Damien Hoffman: German, what is the exchange called “FOREX”?

German: The foreign exchange (FOREX) market is the most liquid market in the world — far surpassing the combined average daily volume of the equities and futures markets. Central banks utilize the FOREX market to stabilize and protect the value of the nation’s currency. Banks facilitate trades on behalf of clients. Banks also speculate for their own accounts. Corporations with foreign exposure hedge their currency risk. Hedge funds and retail traders speculate and attempt to benefit from the interest rate yield. Finally, travelers require currency conversion services for use in countries visited.

Damien: What currencies trade on the FOREX?

German: The US dollar (USD), Euro dollar (Euro), Japanese yen (JPY), British pound (GBP, sterling or cable), Swiss franc (CHF or Swissy), Australian dollar (AUD or Aussie), New Zealand dollar (NZD or Kiwi) and Canadian dollar (CAD or Loony) are the most heavily traded currencies. The EURUSD, GBPUSD, USDCHF, USDJPY, USDCAD, AUDUSD and NZDUSD are amongst the most actively traded pairs. [Pairs are the relationship between two currencies.]

The US dollar is the world’s reserve currency. Most commodity prices are quoted in this currency. The European Union’s Euro is influential because the combined member state GDP approaches that of the United States. As a result, the EURUSD is arguably the most actively traded pair. The USD, JPY and CHF are known for their safe haven status.  The USDCAD, AUDUSD and NZDUSD are known as the commodity currencies because of their close correlation to oil, gold etc. The USDJPY, GBPJPY and other yen “crosses” had been used by traders implementing the carry trade strategy (described later) because of the yen’s virtual zero interest rate characteristic. Currency pairs such as the GBPJPY are known for their high intraday volatility, whereas the USDCHF is relatively stable. Currency pair characteristics are dynamic in nature and can change with time.

Damien: Can you explain how the currency “pairs” work?

German: The basic retail FOREX trading instrument is the currency pair. A transaction consists of the selling of one currency in exchange for the purchase of another. Let’s use the EURUSD pair as an example. An exchange of US dollars for Euro dollars occurs when you purchase the EURUSD pair. The EURUSD is purchased when there is an expectation that the Euro will increase in value relative to the US dollar. Conversely, an exchange of Euro dollars for US dollars occurs when you sell the EURUSD pair. The EURUSD is sold when there is an expectation that the US dollar will increase in value relative to the Euro.

Currency pairs are typically quoted to the second or fourth decimal place. Furthering our example, if the EURUSD quoted price = 1.4000, then 1.4000 US dollars are required to purchase 1 Euro dollar. If after purchase the value of the EURUSD pair increases to 1.4100, the transaction close will result in a net gain of 1 US penny per Euro returned (minus spread and commission). In conjunction with leverage and your account type, the penny gained on the EURUSD pair could represent anywhere from 1 US dollar (a nano account) to 1 thousand dollars (a standard account) per contract.

Damien: Can you explain how you arrived at those values?

German: For many currency pairs like the EURUSD, the smallest change in price occurs at the fourth decimal place (0.0001). For other pairs (like the yen pairs), the smallest change in price occurs at the customary second decimal place (0.01). The minimum change in price is called a pip (percentage in point). For our EURUSD example, a pip represents a value from 1 US penny to 10 US dollars — again depending on account type. The pair increased in value from 1.4000 to 1.4100, or 100 pips. For a nano account, 100 pips x 1 US penny per pip = 1 US dollar gained per contract.  For a standard account, 100 pips x 10 US dollars per pip = 1 thousand US dollars gained per contract. The actual monetary value of each 1 pip increment varies based on the chosen currency pair and account type. So always verify with your broker.

Damien: What is a “carry trade”?

German: In addition to profiting from the rise and fall of the currency value, the interest rate differential between the currency owned and currency sold will either add to or subtract from your account on a daily basis at the close of the session. Trades specifically designed to profit from this interest rate differential are known as “carry trades.” Of course, owning the currency with the inferior interest rate results in a debit to your account on a daily basis. The amount credited to or debited from your account per open trade varies with currency pair, position size, and broker. The yen crosses had been the classic example of the carry trade until recently when the interest rates of countries like the United States and Britain essentially migrated to yen levels.

Damien: If traders are serious about trading currencies, how do you recommend they proceed?

German: Choice of FOREX broker matters! Adequate broker capitalization is crucial. Go to http://www.cftc.gov/marketreports/financialdataforfcms/index.htm and download the latest month’s report. Stick with companies that have the highest capital structures and are engaged in a reasonable marketing campaign. The federal government continues to increase the capital requirements for FOREX brokers and each occurrence seems to cause a broker to go the way of the dodo bird!

Also, abandon all notions of getting rich quick. Because of leverage and due to the fact that even a broken clock is correct twice a day, the FOREX market can give you the illusion of being able to make a huge amount of money quickly. The market can randomly reward you for bad trading behavior. Until you execute your bad trading habit one too many times and the account proceeds to blow up. Capital preservation is critical simply because you need enough time to be able to discover those “bad trading habits.” Go slow. Preserve your capital. Learn the fundamentals. Achieve consistency.

The FOREX-industrial-complex will dazzle you with all types of entry/exit systems guaranteed to have you on your island sipping margaritas in no time. The entry/exit component, however, is just one leg of a three legged stool. Learn all you can about risk, money management, and trading psychology. Familiarize yourself with the concepts of position sizing, expectancy, risk-reward ratio, win-loss ratio, and the random re-enforcement mechanism. Books by Van Tharp, Alexander Elder, Mark Douglas and John Murphy will go a long way towards helping you understand the fundamentals of trading.

Ultimately, there is no substitute for practice, practice, practice. Screen time is crucial in helping you make the transition to consistency and ultimately profitability.

Damien: In your opinion, what are the best free FOREX resources on the web?

German: The best free FOREX education resources on the web that I have seen are: babypips.com and the education sections of informedtrades.com and learningmarkets.com.

Damien: German, thanks for all this great information! I hope you will come back and teach us more in the future.

German: Thank you, Damien. Enjoy the journey and I’ll see you on the field.

If you are interested in real-time market analysis and trades, click here to follow Wall St. Cheat Sheet on Twitter.

If you are interested in trading currencies, click here to follow German Santos.

Feel like sponging up more Trading Basics? Try these posts:

Trading 101: Fibonnaci Indicators with Pro Trader Abdel Ibrahim

Risk Management for Small Caps with Trader Kunal Desai

Top Three Mistakes New Traders Must Avoid

Getting Started Trading: The Setup