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From Seeking Alpha by Five Plus
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I have a confession to make. I am an “extreme couponer”.
If you have seen the TV show “Extreme Couponing”, you know exactly what I’m talking about. I’m one of those crazy ladies that clips mounds of coupons and plans my shopping trips to the last detail based on store sales, cash back bonuses and coupons.
Laugh if you will, but in the last month I obtained all my family’s toothpaste, deodorant and paper products for FREE. Why pay more for something when it can be obtained for nearly nothing?
I carry this same sense of bargaining when looking for dividend-paying common stocks to invest in. I never buy retail in my real life – why should I start in my investing life?
“We Interrupt This Series to Bring You the Following Special Article…”
I debated about whether or not today’s article belongs in my “Sleep at Night Series”. The “Sleep at Night” series focuses on certain classes of investments that one can hold in good markets and bad. So far, we have focused on certain classes of fixed income investments. These investments generate high dividend yield and may not appreciate much in a good market…but they won’t depreciate much in a declining market either.
While the “Sleep at Night” series may open the investing jungle up to new classes of investments that most common stock investors aren’t aware of, we still have the “elephant” in the room…the “eighteen hundred pound gorilla”…
What about high dividend common stocks?
Common stocks are typically more volatile than preferred stocks or debt instruments. They are the market’s general proxy for a company’s financial health, and therefore are more subject to depreciation and dividend cuts upon bad news. This can differ – sometimes dramatically - from most companies' related fixed income instruments.
At the same time, common stocks are also the general proxy for a company’s good news. Common stocks are the primary beneficiary of a growing healthy company. As a result, common stocks are better with rising stock prices in a bull market, and are superior to fixed income instruments for dividend increases.
If you want to grow the capital appreciation and dividends of your portfolio, there is no better vehicle than common stocks. The question then becomes:
Can I invest safely in common stocks?
There is a “sleep at night” way to say “yes” to this question, and I will address that strategy in a future article. But saying “yes” to that strategy, in most cases, leaves a key component off the table, and that is: capital appreciation.
“I’ll Take a Side Order of Capital Appreciation with My Dividends, Please…”
For the pure dividend growth investor, capital appreciation is strictly optional. These investors are buy-and-hold until a dividend cut, and they view depreciation as an opportunity to buy, not sell. I fully concede that this is a more “sleep at night” approach to common stock investing than what this article proposes.
If, however, you want a side order of capital appreciation with your dividends, this article will address a key concept in obtaining capital appreciation, and that is:
Buy the right dividend stock - at the right price.
The danger for the new retail investor is assuming that by taking a common stock position, they will experience capital appreciation - automatically. I read (with understanding humor) comments from new investors that they view a particular stock as “dangerous” because the stock sank upon taking a position. May I gently propose that, just as you wouldn’t hunt the elephant or the “eighteen hundred pound gorilla” without scouting the landscape, consulting with experienced hunters and gathering the proper ammunition, you can’t take a position in a common stock without proper guidance and tools - then expect success on your quest for capital appreciation.
This article endeavors to assist new investors with the guidance and skill needed to take a good position - at the right price. We will address two primary factors that influence buy/sell decisions:
Market / Stock Environment (Fundamentals)
Market / Stock Performance (Technicals)
The article then proposes the steps needed to assess environment and performance:
Evaluating the Market
Evaluating Sectors
Screening for Stocks
Evaluating Candidates for a Watch List
Finalizing the Watch List
Taking Your Position
Gathering More Information
Exiting if Needed
Step One – Evaluating the Market
Use Fundamentals and Technicals
There is no real debate that fundamental factors are more important than technical factors. However, because the technical aspects of the market affect the pricing of stocks, the blended approach investor looks at both factors. This is a theme we will address throughout this article.
When we evaluate the market, we are simply looking at how the indices are currently performing, in relationship to current news and technical strength.
Fundamental factors to look at when evaluating the market are how the economy is currently performing; current political climate; and news that affects the markets. In general, when there is good economic news, the market will usually react with rising stock prices. On a broader scale, there are bull and bear markets where markets rise or depreciate, spanning over years, and even decades.
How you visualize the market environment (and the performance of a particular stock) is where technical analysis comes in. In a nutshell, technical analysis plots market buy/sell activity and seeks to show in a visual way how the market and individual stocks are performing.
Let’s look at the market today. The political and economic news of late has been mixed. The markets have been jolted by more bad news regarding the ongoing European debt crisis. There is also the old trader’s saying – “sell in May and go away.” There is a fundamental reason to wait for your buying. What does this look like visually?
Technical Analysis Tools
There are two extremely simple ways to “visualize” the markets and individual stocks. These are:
Use ETFs as a proxy
Use Finviz.com as your chart tool
In my opinion there is no better website to understand basic technical factors than Finviz.com. ETFs, which are primarily index funds, also act as basic (although imperfect) proxies for the market and market sectors.
Therefore, looking technically at the market as a whole, we are going to use index ETFs, plugged into Finviz.com, to chart out current technical strength.
An Introduction to Technical Analysis using Market Indices
DIA is the Dow Jones Index ETF and SPY is a S&P Index ETF. We can use these ETFs to track easily how the Dow and S&P are performing.
click on each chart to enlarge
At this point I will pause to explain two key concepts of technical analysis: support/resistance, and moving averages. There are many other concepts, but these two are the most accessible to most investors.
The blue lines on the charts above are support lines, and the purple lines are resistance lines. Support lines chart the low points of the stock’s closing prices, and resistance lines chart the high points. The swirling pink, orange and tan lines are 20-, 50- and 200-day moving averages. Moving averages follow pricing trends, based on past closing prices, and are another way to define support and resistance.
The support and resistance lines form a pricing channel. When a stock is appreciating, it normally follows a channel up pattern, where the support and resistance lines create a tube-like formation that inclines. Conversely, a channel down reflects a depreciating stock price, and forms a tube-like pattern that declines.
Ideally, one wants to buy into a stock that is channeling up. The closer one can ascertain that a stock is trending up and can buy into the up trend - or visually, the bottom end of the tube - the greater likelihood of experiencing capital appreciation.
As well, one wants to buy closer to support lines, rather than resistance lines. Buying on the low end of the channel (support), rather than the high end (resistance) better insures a good price for your buy. Conversely, buying on resistance may mean the stock will likely channel back down. This means the stock will depreciate, and you must hang on to the stock, hoping it will continue channeling up, in order to attain any capital appreciation.
Back to our charts: looking at DIA and SPY, we can see that in terms of general market direction, now may not be the right time for buying, period. The SPY especially looks troublesome, as we see that the pricing trend has broken below the support line. This usually means that the market may be heading lower.
When these technical factors are combined with bad fundamental news, this usually means we are headed for some corrective trends in the market.
Simply put, one does not want to be doing most of their buying on the cusp of a market correction. This is how portfolios lose out in capital appreciation, and how many an investor lost their shirt in the 2008 market crash.
Step Two – Evaluating Sectors
In any bear market, statistics show that 70% of stocks decline in value. The good news in that statistic is that 30% of stocks do not decline. One of the keys to holding, or even growing, your portfolio appreciation in the tough times is to invest in those sectors that are prospering in the midst of a declining market.
After evaluating the market (Step One), you may well make the good decision not to buy right now. But curiosity may get the best of you. Are there sectors that may be ready for a comeback?
For fundamental trends, there is no substitute for being well-read. The successful retail investor never rests on what he/she already knows. Instead, they devote themselves to daily reading Seeking Alpha and reputable investment/economic publications. For other media input, avoid TV and stick to Bloomberg radio, which gives balanced and thorough analysis of economics, politics, stocks, sectors and trends.
For technical trends on various sectors, we can use sector-specific ETFs as a proxy for sector direction. For purposes of this article, we will look at two sectors – oil/gas, and shipping.
DIG is an oil/gas ETF. Oil and gas has lately been a hot sector for investment, as commodity prices rise while the dollar deflates. But is now a great time for a buy? According to the chart above (click to enlarge) the answer could be both “yes” and “no”. DIG is off the highs of resistance, but it has also broken support. DIG was a better buy at the sub-$40.00 level.
If you assess fundamentally by recent news, the answer may be, “wait”. The U.S. currently has an abundance of strategic oil reserves, and there are hints from the current administration that they may allow more drilling permits. Since we are looking for a “buy” and not a “wait”, we will move on from oil and gas and explore a different sector.
Here’s a sector that has caught the author’s eye – shipping. The shipping sector ETF is SEA:
This chart (click to enlarge) makes the contrarian investor wake up and take notice. The shipping sector has been declining since November 2010. You see on the chart two blue support lines. One is trending downward since early December 2010. The other is holding steady since September 2010. Right now, the ETF is trading just below support. The question then becomes – is shipping as a sector on a decline, or is it showing signs of recovery?
To answer that question we need to go back to the more important aspect - fundamental analysis. Most brokerage accounts include research on sectors and stocks by Moody’s and S&P. You can also access Morningstar through membership at most public libraries. There are many reputable investing websites that publish articles on investing. Looking at information readily available, the outlook for the shipping sector is cautiously optimistic. Most analysts predict increased shipping activity for 2011 – 2012:
Consolidation in Shipping Will Rise in 2011 – Reuters
Shipping Sector Shows Sporadic Growth – MarketWatch
Tide Is Turning for Shipping Sector – Ali Rampurwala for Moneycontrol
High Conviction: Tide Is Rising for the Global Shipping Sector – Seeking Alpha
Conclusion? Now may not be the right time to buy into the shipping sector. However, it is a great time to evaluate the sector to create a watch list. If the sector begins to trade above the support line (the $25.00 level), making higher highs and higher lows, then technically the sector will be in recovery mode. If this happens, getting in early is the key to experiencing the most appreciation on your stock picks.
Step Three – Screening for Stocks
Once you locate a sector of interest, it is time to screen. The purpose of the screen is not to buy immediately, but to create a watch list of potential buys.
Before you run your first screen, set your criteria.
CAVEAT: For the purposes if this article, I am keeping it simple on the fundamental metrics. Let me state from the outset: there are a whole set of fundamental metrics that must be considered before taking a position. I am only using one metric (P/E) NOT as a recommendation, but for simplicity's sake.
For the purposes of the article the criteria is set at:
Dividend yield of 5% or more
Stable or growing dividend
No dividend cuts in the last five years
Undervalued sector
P/E under 20
“Buy” or Better Analyst Recommendation
Technical indicators ripe for rebound
Your First Stop….
A great place to locate a dividend performer is David Fish’s Dividend Champions, Contenders and Challengers list. Click here for the list in Excel, and click here for the list in PDF. I propose that the David Fish lists be your first stop in locating possible candidates for your watch list.
You can sort the Excel version according to “industry” or sector. David Fish lists shipping stocks in the “Transportation” sector. There are no “Champions” in Transportation, but in the “Contenders” and “Challengers” sections there are several selections.
For the purposes of this article, none of these yield 5% or more. So we will move on to our stock screen. The blended approach / high yield investor can let go of a growing dividend, if the dividend is stable.
Screening for yield, PE and a buy
Using Finviz for our screener, we screen for stocks in the shipping sector with:
low P/E (under 20)
High dividend 5%
Shipping sector
Analyst recommend of “Buy” or better
The screen gives us seven possibilities: Costamare (CMRE), DHT Holdings (DHT), Euroseas Ltd. (ESEA), Globus Maritime(GLBS), Navios Maritime Partners (NMM), Teekay LNG Partners (TGP) and Teekay Offshore Partners (TOO).
Finding a Stable or Growing Dividend
To determine if the dividend is stable or growing, one needs to ascertain the dividend history.
There are several ways to find the dividend history:
DailyFinance.com – input your stock quote, then click “Dividends & Splits”.
Your brokerage house charting tool: set the chart for 5 years and
click the “dividends” tab.
Looking for Technical Strength
You can accomplish this with your brokerage house charting tools and with Finviz.com for a complete picture. This will be detailed in Step Four.
Step Four – Evaluating Candidates for a Watch List
Let’s put it all together to see which of our screened stocks may meet our criteria for a watch list “buy”, based on fundamentals and technical strength.
CMRE – Costamare, Inc. Click to enlarge:
P/E: 10.21
Forward P/E: 9.08
Dividend Yield: 5.8% ($1.00 yearly, stock price now $17.11)
Dividend History: only trading since November 2010
Analyst Rating: Dahlman Rose ranked “Buy” on May 11,2011
Technical: Now trading on support
Fundamental: Low P/E. It has analyst support, although only from one analyst. The dividend is stable at 25 cents per quarter. The greatest fundamental “hiccup” on this stock is its history. It has only been trading since November. Since CMRE is so new we must consider it speculative buy at best.
Technical: This stock has quite a run-up since its introduction. Right now, it appears to be taking a breather from making higher highs. It is trading nicely on support, but the secondary resistance line that is lower gives cause for concern.
Verdict: CMRE gets placed on my speculative watch list, but not on a watch list for an immediate buy.
DHT – DHT Holdings, Inc. Click to enlarge:
P/E: 16.40
Forward P/E: 9.76
Dividend Yield: 9.76%
Dividend History: Dividend Cut in 2009
Analyst Rating: Last upgrade was September 2010
Technical: Channel Down
Fundamental: Dividend was cut in 2009. It has been well over 8 months since the last analyst upgrade. S&P gives DHT only 2 stars.
Technical: Channeling down, and has yet to reach a bottom.
Verdict: DHT does not make my watch list.
ESEA – Euroseas, Ltd. Click to enlarge:
P/E: Not available
Forward P/E: 12.86
Dividend Yield: 5.18%%
Dividend History: Variable dividend, based roughly on stock price
Analyst Rating: Upgraded to Outperform by FBR Capital in March
Technical: Channel Up
Fundamental: Stock price is trading below $5.00. The lower the price of the stock, the more volatile it will behave. Dividend is worrisome, although the dividend increased in 2009 and is stable this year.
Technical: Not a bad chart, but it remains to be seen whether or not the stock will make a higher high, or dip back down to $3.50 support.
Verdict: Stock price too low and dividend history too questionable to make my watch list.
GLBS – Globus Maritime, Ltd. Click to enlarge:
P/E: 10.90
Forward P/E: 15.15
Dividend Yield: 7.16%
Dividend History: One dividend in 2008; no dividends 2009; restarted
dividend in 2010; one dividend increase since
restarting dividend
Analyst Rating: Yahoo reports “Strong Buy” but does not give analyst
Technical: Trading above moving averages
Fundamental: Low P/E, but Forward P/E is not lower than present P/E. Dividend history is of concern, but it is encouraging that the company has recently increased dividend. Globus Maritime’s website did not state a dividend policy.
Technical: Price is very slowly creeping upward, and is trading above moving averages.
Verdict: More information needed. Contact Investor Relations to ascertain dividend policy. Place on a speculative watch list.
NMM – Navios Maritime Partners, LP. Click to enlarge:
P/E: 13.53
Forward P/E: 14.30
Dividend Yield: 8.59%
Dividend History: Increasing dividend; increases 1-2x per year
Analyst Rating: Scale 1 to 5 – ranks 2.5
Technical: Off resistance, testing moving averages
Fundamental: NMM is a shipper with one of the industry’s most consistent dividends. The forward P/E is essentially stable. Analysts are tepid as to whether or not NMM is currently a buy.
Technical: Current direction not clear. Support line at just under $18.00. Currently testing the moving average, may break downward to 200-day moving average.
Verdict: Goes on watch list just for dividend history, but not for a buy right now.
TGP – Teekay LNG Partners, Ltd. Click to enlarge:
P/E: 23.83
Forward P/E: 16.88
Dividend Yield: 7.14%
Dividend History: Increasing dividend; increases 1-2x per year
Analyst Rating: Last upgrade was in October 2010
Technical: Trading on upward support line
Fundamental: Teekay Corporation is a well-known shipping operation. Dividend history for last five years is solid. Current P/E is pretty much at valuation, but forward P/E is lower, and at 16 is on the cusp of being considered “undervalued”.
Technical: At a nearly perfect point for a buy, trading right on support. However, direction is not clear, as there is also a downward support line.
Verdict: BUY NOW at more risk; wait for future direction for less risk.
TOO – Teekay Offshore Partners, LP. Click to enlarge:
P/E: 23.20
Forward P/E: 18.03
Dividend Yield: 6.80%
Dividend History: Increasing dividend; last dividend payment was increased
Analyst Rating: Neutral to Sell
Technical: Broken support, trending downward
Fundamental: Teekay Corporation partnership. Dividend history is solid but does not have the frequent dividend increases that apply to TGP. Forward P/E does not indicate an undervaluation.
Technical: Not the prettiest of charts. Just broke channel support.
Verdict: Due to valuation and technicals, does not go on watch list.
Step Five – Finalizing a Watch List
Based on the evaluations made above, I am placing CMRE and GLBS on a speculative buy watch list, and NMM and TGP on a watch list.
Step Six – Gathering More Information
Many experienced investors perform this step first of all. They familiarize themselves with a sector or industry; research the best performers; then go about creating a watch list based on their research.
Whether you do this before or after you screen for stocks, it will be important to dig deeper before taking a position. More information on the company can be gathered from:
Company website
Annual reports
Investor relations
Magazine and online articles (Wall Street Journal, IBD, et al)
Morningstar (available through public library)
S&P and other ratings services (reports often available with brokerage account)
Seeking Alpha
Online communities (Fool.com, brokerage forums)
Step Seven – Taking Your Position
When you see the convergence of a favorable market and an undervalued stock that is ripe for rebound – and you’ve done all your homework and are confident you are picking an under appreciated winner – then treat yourself to the fun part. Take your position. Stick to the rule of thumb that the position should not take more than 5 – 10 % of your total portfolio.
Step Eight – Exiting If Needed
Hopefully after taking your position, you reap the rewards of your hard work and see the stock appreciate. While you greatly increase your chances with abundant due diligence, Mr. Market has a mind of his own. Sometimes he simply determines that your trade won’t work…and it has nothing to do with you.
When a trade goes south, what should you do?
Option One: Sit idly by. Wring your sweaty hands. Believe that if you just hold on a little longer it will certainly go better. I mean - look at all the homework you put into it! Certainly, you can’t be wrong?
Option Two: Cut your losses and move on.
My advice is: choose Option Two. The hardest part of implementing a trading strategy is being a steely-eyed realist about your success. At the end of the day, it’s not all up to you – both the successes and the failures. Mr. Market has the final say, and he is not to be argued with. Therefore, before you ever take a position, determine your exit strategy.
Some investors put in a stop loss order immediately upon taking a position. I don't recommend this for a new investor. Instead, pick a percentage or dollar point of depreciation at which point you would sell, and monitor your position and the market closely.
My stop-loss criteria: I allow an equal percentage of negative depreciation to the stock yield. So – if a stock has a 5% yield, I allow it to go into negative territory up to 5%. A 7% yielder is allowed up to 7% depreciation. The standard benchmark for depreciation is 10%, as beyond 10% it becomes exponentially more difficult to make up the loss.
If your position reaches your pre-determined negative benchmark - SELL. Don’t look back. Move on. Look to the next opportunity. Above all, don’t take it personally. Even the most seasoned fund managers on Wall Street don’t get it right 100% of the time.
Concluding Remarks
High dividend common stocks, unless held in a DRIP or long-term for income regardless of capital appreciation, may not be a “sleep at night” investment for many new investors. However, buying common stocks well, represents the best opportunity for a growing dividend base with capital appreciation. The key to buying well is – buy the right stock at the right price.
Getting the right price for your stock means assessing the market, looking out for undervalued market segments, and creating a watch list of individual stocks with fundamental and technical characteristics that look to be on the rebound. Once a new investor learns some basic assessment and trading techniques, they can better “sleep at night” with common stocks that they hold for dual purposes of income and capital appreciation.
Disclosure: I have held NMM for several years. I have held ESEA in the past. I took a position in TGP two weeks ago, before writing this article.
Disclaimer: Five Plus Investor is written for the retail investor, from a retail investor’s experience and point of view. The articles presented by the author are for informational purposes only. Five Plus Investor is not a professional investment counselor. Before investing one should conduct their own due diligence or seek the advice of a professional as needed.
This article is tagged with: Investing for Income, Income Investing Strategy, Editors' Picks, United States
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'Sleep at Night' Investments, Part Two: Utility Exchange-Traded Debt Securities May 3, 2011
Sleep at Night Investments: Utility Preferred Shares Apr 27, 2011
Saturday, May 21, 2011
Friday, March 4, 2011
The link if it is still available, click here.
Happy 2nd birthday, bull market! What now?
chart_bull_market.top.gifResearch shows that different sectors historically outperform during each of the three stages of the stock-market cycle. The market is currently heading into the middle- to late-stage of the bull market. By Hibah Yousuf, staff reporterMarch 4, 2011: 8:04 AM ET
NEW YORK (CNNMoney) -- The bull market is celebrating its second birthday. Banks and retail stocks have led the way but investors may want to think about changing their bets if they think the party is going to continue.
The S&P 500 has doubled in value from the bear market low of 666.79 on March 6, 2009. All ten sectors in that index have rallied, according to Standard & Poor's Equity Research.
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* Email
* Print
Bull market's big winners
Here's how the S&P 500 sectors have performed since the March 2009 lows.
Financials 170%
Consumer Discretionary 145%
Industrials 140%
Materials 123%
Information Technology 115%
Energy 86%
Consumer Staples 52%
Health Care 47%
Telecommunication Services 42%
Utilities 41%
Source:Standard & Poor's Equity Research
But if the economic recovery continues to pick up steam, different sectors of the market will begin to take the lead.
"It's important for investors to understand how different sectors perform during different periods of a stock market's cycle and as the economic recovery matures," said James Stack, a market historian and president of InvesTech Research.
According to Stack, the average period between the start of a bull market and the start of the subsequent bear market is less than four years.
"As we come upon the bull market's second birthday, we're moving into the latter half of this rally," he said.
By historical standards, that means financial firms and consumer discretionary companies, which have been among the current bull market's biggest winners, may lose some of their luster.
"Financial companies suffered the most severe pain during the recession and have bounced back to become the best performing sector because the government stepped into to offer support," said Christian Hviid, chief market strategist at Genworth Financial Asset Management.
That includes AIG (AIG, Fortune 500), which nearly collapsed in September 2008 before the government bailed it out with $182 billion. The insurer's stock has shot up a remarkable 430% since the market bottomed and is among the S&P 500's best performers during the past two years.
While they may not shine as brightly, Hviid said financial company shares will continue to deliver solid returns.
"The financial sector is still unloved, so it may be a good contrarian play," he said. "Banks are still trading at deep discounts, and it seems like we're turning a corner in terms of loan growth and charge-offs."
Bulls on parade. Is rally getting ridiculous?
Meanwhile, the retail sector, which has surged nearly 150% from two years ago, won't continue its stellar run, Hviid said. He thinks profit margins will come under pressure from higher commodity costs.
Technology stocks are also typically strong performers in the early part of a bull market, but since consumer and business spending has been only slowly recovering, the sector has barely outperformed the broader market.
But as consumers and corporations begin to loosen their purse strings, experts say tech stocks will continue to rise.
Take me to your new leaders
As the bull market continues its course, energy stocks, which have thus far underperformed the market, are likely to take the spotlight.
"Investors are already looking at the energy sector because of surging oil prices, but the sector will do well even beyond the unrest in the Middle East," Hviid said. "It's attractive based on global growth outlooks, especially as energy consumption increases in emerging markets."
Materials, industrials and telecom stocks are also poised for solid gains, InvesTech Research's Stack said.
0:00 /3:48Will this Bull be tamed?
While the health care sector is usually a defensive pick during a falling market, the sector may begin to surprise investors a bit earlier.
"Health care stocks didn't have a good 2010, but we're past the aftermath of health care reform," said Joe Milano, portfolio manager of T. Rowe Price's New America Growth Fund (PRWAX). Health care companies, including Covance (CVD) and WellPoint (WLP, Fortune 500), represent about 10% of the fund's holdings.
Plus, even though experts largely agree that the broader market has yet to peak, it's never too early to play it a little safe.
"We have all the ingredients for the bull market to continue," Stack said. "But we know it won't last forever, and it's better to add some defensive positions on a gradual basis than it is to make a dramatic move after all the warning flags pop up." To top of page
Happy 2nd birthday, bull market! What now?
chart_bull_market.top.gifResearch shows that different sectors historically outperform during each of the three stages of the stock-market cycle. The market is currently heading into the middle- to late-stage of the bull market. By Hibah Yousuf, staff reporterMarch 4, 2011: 8:04 AM ET
NEW YORK (CNNMoney) -- The bull market is celebrating its second birthday. Banks and retail stocks have led the way but investors may want to think about changing their bets if they think the party is going to continue.
The S&P 500 has doubled in value from the bear market low of 666.79 on March 6, 2009. All ten sectors in that index have rallied, according to Standard & Poor's Equity Research.
* 12
*
*
Bull market's big winners
Here's how the S&P 500 sectors have performed since the March 2009 lows.
Financials 170%
Consumer Discretionary 145%
Industrials 140%
Materials 123%
Information Technology 115%
Energy 86%
Consumer Staples 52%
Health Care 47%
Telecommunication Services 42%
Utilities 41%
Source:Standard & Poor's Equity Research
But if the economic recovery continues to pick up steam, different sectors of the market will begin to take the lead.
"It's important for investors to understand how different sectors perform during different periods of a stock market's cycle and as the economic recovery matures," said James Stack, a market historian and president of InvesTech Research.
According to Stack, the average period between the start of a bull market and the start of the subsequent bear market is less than four years.
"As we come upon the bull market's second birthday, we're moving into the latter half of this rally," he said.
By historical standards, that means financial firms and consumer discretionary companies, which have been among the current bull market's biggest winners, may lose some of their luster.
"Financial companies suffered the most severe pain during the recession and have bounced back to become the best performing sector because the government stepped into to offer support," said Christian Hviid, chief market strategist at Genworth Financial Asset Management.
That includes AIG (AIG, Fortune 500), which nearly collapsed in September 2008 before the government bailed it out with $182 billion. The insurer's stock has shot up a remarkable 430% since the market bottomed and is among the S&P 500's best performers during the past two years.
While they may not shine as brightly, Hviid said financial company shares will continue to deliver solid returns.
"The financial sector is still unloved, so it may be a good contrarian play," he said. "Banks are still trading at deep discounts, and it seems like we're turning a corner in terms of loan growth and charge-offs."
Bulls on parade. Is rally getting ridiculous?
Meanwhile, the retail sector, which has surged nearly 150% from two years ago, won't continue its stellar run, Hviid said. He thinks profit margins will come under pressure from higher commodity costs.
Technology stocks are also typically strong performers in the early part of a bull market, but since consumer and business spending has been only slowly recovering, the sector has barely outperformed the broader market.
But as consumers and corporations begin to loosen their purse strings, experts say tech stocks will continue to rise.
Take me to your new leaders
As the bull market continues its course, energy stocks, which have thus far underperformed the market, are likely to take the spotlight.
"Investors are already looking at the energy sector because of surging oil prices, but the sector will do well even beyond the unrest in the Middle East," Hviid said. "It's attractive based on global growth outlooks, especially as energy consumption increases in emerging markets."
Materials, industrials and telecom stocks are also poised for solid gains, InvesTech Research's Stack said.
0:00 /3:48Will this Bull be tamed?
While the health care sector is usually a defensive pick during a falling market, the sector may begin to surprise investors a bit earlier.
"Health care stocks didn't have a good 2010, but we're past the aftermath of health care reform," said Joe Milano, portfolio manager of T. Rowe Price's New America Growth Fund (PRWAX). Health care companies, including Covance (CVD) and WellPoint (WLP, Fortune 500), represent about 10% of the fund's holdings.
Plus, even though experts largely agree that the broader market has yet to peak, it's never too early to play it a little safe.
"We have all the ingredients for the bull market to continue," Stack said. "But we know it won't last forever, and it's better to add some defensive positions on a gradual basis than it is to make a dramatic move after all the warning flags pop up." To top of page
Mr. Buffett
With utmost respect, Buffett's ideas may not be valid to us, today's common retail investors.
First, we do not make big bets like buying most of a company. Second, in many cases, his bets require him or his company to run the company. Third, he has connections and sweetheart deals that most of us do not have access to. Fourth, we can dump losers and sellers any time we want without public opinions. Fifth, most of his bets require him to pay extra to get in and get out.
There are exceptions. If you follow him to buy Chinese Petro. (I did) and the Chinese auto company (I could not find any US exchange), you do good.
Contrary to Mr. Buffett's philosophy, I believe after 2000 buy-and-hold is dead. Most books/articles defending buy-and-hold based on data before 2000. The market changes so fast that a good company could not be profitable due to circumstances beyond their control.
I will buy the company whose technology I do not know - but try to find time to understand it. I believe some companies will die eventually like Washington Post he owns unless they move out from the paper product.
For the past 3 years, my largest account (based on 1/31/11, so a month off) beats Buffett by 100% - his cuumulative profit is 22% and mine is 50%). It could be just luck.
If Buffett only handled a portfolio of $5 millions or so, he would beat me year after year. No one including Peter Lynch can make a decent return with that size of his current portfolio.
First, we do not make big bets like buying most of a company. Second, in many cases, his bets require him or his company to run the company. Third, he has connections and sweetheart deals that most of us do not have access to. Fourth, we can dump losers and sellers any time we want without public opinions. Fifth, most of his bets require him to pay extra to get in and get out.
There are exceptions. If you follow him to buy Chinese Petro. (I did) and the Chinese auto company (I could not find any US exchange), you do good.
Contrary to Mr. Buffett's philosophy, I believe after 2000 buy-and-hold is dead. Most books/articles defending buy-and-hold based on data before 2000. The market changes so fast that a good company could not be profitable due to circumstances beyond their control.
I will buy the company whose technology I do not know - but try to find time to understand it. I believe some companies will die eventually like Washington Post he owns unless they move out from the paper product.
For the past 3 years, my largest account (based on 1/31/11, so a month off) beats Buffett by 100% - his cuumulative profit is 22% and mine is 50%). It could be just luck.
If Buffett only handled a portfolio of $5 millions or so, he would beat me year after year. No one including Peter Lynch can make a decent return with that size of his current portfolio.
Friday, March 26, 2010
20 signs we're on top of the market.
Via TheStreet.com:
A few weeks prior to the markets hitting a generational low a year ago, I created a watch list that enabled me to better gauge the bottom.
Now, nearly 13 months later and with the S&P 500 almost 500 points higher, it is time to focus on a new checklist of some potential adverse developments that could contribute to a market top and a reversal of investors' good fortunes since March 2009.
1. Interest Rates: The yield on the 10-year U.S. note might climb to over 4% (now at 3.85%). A 4.00% to 4.25% yield would likely provide a tipping point for increased competition to equities and produce an interest (mortgage) rate headwind to the nascent housing recovery at a time when stock dividend yields have nearly halved and when a large phantom inventory of unsold homes is about to begin to enter the residential for-sale market.
2. Jobs / Economy: A more sluggish-than-expected expansion in new jobs and the weight of higher taxes in 2011 might translate to a downturn in consumer confidence, reduced business fixed investment and a more shallow domestic economic recovery in the second half of this year.
3. Retail: Cautious forward comp guidance in retail could reverse the February-March strength.
4. Europe: There could be growing signs of weakness in the European economies.
5. Credit: Over there, we might witness evidence of more sovereign (Spain?) crises, and, over here, we could see more U.S. municipal -- the universe is large! -- financial woes. Forced austerity measures would likely produce lower growth.
6. Credit (Part Deux): Credit spreads might widen.
7. Geopolitical: We could see a possible rise in geopolitical tensions or even another terrorist act on our shore.
8. Monetary Policy: We might have a less dovish Fed in words (jawboning) and in action (through an increase in the federal funds rate).
9. Tightening Abroad: It is likely that central banks around the world will begin to clench their monetary fist, especially in China.
10. Protectionism, Trade and Currency Wars: Things might get ugly, especially on the U.S. / China front.
11. Housing: A renewed leg down in home prices is possible as the spring selling season could fail to appear. (It hasn't gotten off to a great start.)
12. Sentiment: We could witness the birth of a 5x to 10x levered bullish ETF, a burst in bullish investor sentiment, an expansion in hedge fund net long positions, a further drawdown in mutual fund cash positions, a meaningful increase in retail mutual fund equity inflows and massive outflows out of Rydex bear funds.
13. Technical: Stocks could fail to respond to good news, suggesting that the sharp corporate profit recovery has been baked into prices. A breakdown in financials and/or transports could occur. Overseas markets might fail to make new highs, or we could see a further contraction in NYSE / Nasdaq exchange volume.
14. Deflation: Industrial commodity prices could weaken.
15. Speculation: We might see an increasingly speculative market for low-price issues.
16. Underwritings: The emergence of a record syndicate calendar is possible.
17. Wall Street: A substantial increase in Wall Street industry hirings could be announced.
18. Dr. Doom vs. the Sunshine Boys: Dr. Nouriel Roubini could see green shoots, causing bullish strategists and money managers to demonstrate even more swagger. Reminiscent of late 1998, a sell-side analyst (perhaps the new Henry Blodgett) might raise his 12-month Apple (AAPL) price target to $375 a share, leading another analyst to top that target and move to $400 a share a week later.
19. The Media: CNBC could throw another celebratory party. Time magazine might declare the death of the bear market on its cover or run a cover story offering a new bullish economic and/or stock market paradigm. Sir Larry Kudlow could have trouble finding a single bear to appear on CNBC's "The Kudlow Report." Record ratings might induce the management of CNBC to expand "Squawk Box" from three hours to four hours (6:00 a.m. to 10:00 a.m.) and add an additional anchor to join Joe, Becky and Carl.
20. Dougie: Maybe I turn bullish.
A few weeks prior to the markets hitting a generational low a year ago, I created a watch list that enabled me to better gauge the bottom.
Now, nearly 13 months later and with the S&P 500 almost 500 points higher, it is time to focus on a new checklist of some potential adverse developments that could contribute to a market top and a reversal of investors' good fortunes since March 2009.
1. Interest Rates: The yield on the 10-year U.S. note might climb to over 4% (now at 3.85%). A 4.00% to 4.25% yield would likely provide a tipping point for increased competition to equities and produce an interest (mortgage) rate headwind to the nascent housing recovery at a time when stock dividend yields have nearly halved and when a large phantom inventory of unsold homes is about to begin to enter the residential for-sale market.
2. Jobs / Economy: A more sluggish-than-expected expansion in new jobs and the weight of higher taxes in 2011 might translate to a downturn in consumer confidence, reduced business fixed investment and a more shallow domestic economic recovery in the second half of this year.
3. Retail: Cautious forward comp guidance in retail could reverse the February-March strength.
4. Europe: There could be growing signs of weakness in the European economies.
5. Credit: Over there, we might witness evidence of more sovereign (Spain?) crises, and, over here, we could see more U.S. municipal -- the universe is large! -- financial woes. Forced austerity measures would likely produce lower growth.
6. Credit (Part Deux): Credit spreads might widen.
7. Geopolitical: We could see a possible rise in geopolitical tensions or even another terrorist act on our shore.
8. Monetary Policy: We might have a less dovish Fed in words (jawboning) and in action (through an increase in the federal funds rate).
9. Tightening Abroad: It is likely that central banks around the world will begin to clench their monetary fist, especially in China.
10. Protectionism, Trade and Currency Wars: Things might get ugly, especially on the U.S. / China front.
11. Housing: A renewed leg down in home prices is possible as the spring selling season could fail to appear. (It hasn't gotten off to a great start.)
12. Sentiment: We could witness the birth of a 5x to 10x levered bullish ETF, a burst in bullish investor sentiment, an expansion in hedge fund net long positions, a further drawdown in mutual fund cash positions, a meaningful increase in retail mutual fund equity inflows and massive outflows out of Rydex bear funds.
13. Technical: Stocks could fail to respond to good news, suggesting that the sharp corporate profit recovery has been baked into prices. A breakdown in financials and/or transports could occur. Overseas markets might fail to make new highs, or we could see a further contraction in NYSE / Nasdaq exchange volume.
14. Deflation: Industrial commodity prices could weaken.
15. Speculation: We might see an increasingly speculative market for low-price issues.
16. Underwritings: The emergence of a record syndicate calendar is possible.
17. Wall Street: A substantial increase in Wall Street industry hirings could be announced.
18. Dr. Doom vs. the Sunshine Boys: Dr. Nouriel Roubini could see green shoots, causing bullish strategists and money managers to demonstrate even more swagger. Reminiscent of late 1998, a sell-side analyst (perhaps the new Henry Blodgett) might raise his 12-month Apple (AAPL) price target to $375 a share, leading another analyst to top that target and move to $400 a share a week later.
19. The Media: CNBC could throw another celebratory party. Time magazine might declare the death of the bear market on its cover or run a cover story offering a new bullish economic and/or stock market paradigm. Sir Larry Kudlow could have trouble finding a single bear to appear on CNBC's "The Kudlow Report." Record ratings might induce the management of CNBC to expand "Squawk Box" from three hours to four hours (6:00 a.m. to 10:00 a.m.) and add an additional anchor to join Joe, Becky and Carl.
20. Dougie: Maybe I turn bullish.
Wednesday, March 24, 2010
Does trader contribute to the society
Taipan Daily: Do Traders Add Value to Society?
by Justice Litle, Editorial Director, Taipan Publishing Group
A few days ago, an interesting note showed up in the Taipan Daily mailbag. Via e-mail, reader James K. wonders aloud whether traders add value to society. He isn’t sure that
they do.
Here is an excerpt:
Dropping a ton of money into a company, running it up, and then pulling out your winnings can't be much benefit to society as a whole. It's not company ownership, or intending to own a company, it's company manipulation to make the few rich and have others less astute pay their bill…
The charge seems to be that investing is a legitimate activity, whereas trading is not. (After all, who would challenge the need to invest?)
Speaking as a trader, your editor is clearly biased. But, given that caveat, there are two ways of looking at this question. The first requires stepping back and contemplating what “adding value to society” really means. The second requires asking what service the act of trading provides (i.e. what do traders get paid for).
The Truth About Gold
Don’t invest a cent until you read my report. It reveals an astonishing fact few gold investors know: you can actually… Buy Gold for $438 an ounce! Yes, gold sells above $1,200 per ounce. But I’ve discovered an easy way to buy it for only $438 an ounce. That’s 65% off --- Not bad for free information.
Get my full gold report now.
Not About the Job
The first important point, from this trader’s point of view, is that it’s not about the job. That is to say, what you do to make a living is not the best reflection of your social worth (or your impact on society as a whole).
So a trader isn’t out to save the world – or even change it for the better – with his day-to-day actions. This is more or less true. But what about someone in middle management at a shampoo company? Does apple-scented conditioner really make a difference to the well-being of the human race?
Or what about the person who bakes chocolate chip cookies, sells aluminum siding, or manufactures those little buttons that sit on top of baseball caps? Do those humdrum activities really “make a difference” in the long run?
It’s actually a trick question. There are very few jobs that “make a difference” with dramatic and obvious flair. If you happen to be an ER doctor, a nurse who specializes in prenatal care, or a bush pilot who delivers food and medical supplies to disaster zones, then your “value add” is obvious (and has a certain Hollywood quality to it). But the vast majority of jobs – probably 99% of them – aren’t like that.
This is why, assuming you make your living legally, the better measure is what you do with your time and energy, not how you earn your daily bread. The man (or woman) who adds value to society is a good neighbor… a part of the community… a supporter of charitable causes, a loving parent and friend and so on.
Society is bettered by law-abiding citizens – and sometimes law-breaking citizens, when the law is in error – living out their lives in positive ways. Unless you are Tony Soprano, it’s not so much about the job.
What Service Do Traders Provide?
One can further ask, “what service do traders provide?”
We know that investors, at least in theory, provide capital on a long-term basis so that healthy businesses can grow. This process of capital allocation – again in theory at least – is driven by constant assessment and re-assessment of which companies deserve more capital and which do not.
But traders, as it has been pointed out, do not stick around long enough to make a difference to the ultimate fortunes of a business. So what is the service they provide? What do traders really get paid to do?
Your editor can think of at least five different “services” that traders provide. They are:
* Liquidity
* Price Discovery
* Risk Transfer
* Counterbalance
* Entertainment
Liquidity
The first thing that traders do is add liquidity to the markets. Liquidity is a measure of how easy it is to buy and sell something, possibly in large quantities.
A stock like Exxon Mobil (XOM:NYSE), which routinely sees 20 million shares a day change hands, is extremely liquid. Most “pink sheet” stocks, which might only trade a few hundred shares a day, are not.
If there were no traders, markets would be far less liquid. This is because traders buy and sell much more frequently than investors do. An investor, who may only want to buy or sell on infrequent occasions, enjoys the peace of mind of knowing that, when he wants to make a transaction, there will almost certainly be someone on the other side willing to provide him a fair price. All things being equal, the person on the other side will often be a trader.
Market makers and floor traders were the original liquidity providers. Their frequent activity, and their willingness to buy and sell over and over again as large outside orders came in, helped to literally “make the market.” These days, floor traders are a dying breed and market makers are being replaced by high-powered computers. But the liquidity providing function is still there.
Price Discovery
What is the proper price of crude oil at this very moment? How about lumber? Treasury bonds? Microsoft shares?
The answer is, nobody knows for certain what the proper price should be. There are millions of complex variables swirling around the market place, and those variables are shifting and changing moment by moment.
The only way to determine the proper price, then, is for active market participants to “vote” on their best estimation of that price, over and again, through their buying and selling decisions. (It’s not a democracy though – rather than “one man, one vote,” it is more like “one dollar, one vote.” The large player who buys a million shares has more clout than the thousands of smaller players buying 100 shares each. )
Traders participate in the price discovery process by “voting” – with their own capital – on what the proper price of something should be. To the degree that the trader is correct, he or she is paid in proportion to the number of votes cast (i.e. shares or contracts bought and sold).
The trader’s shorter time frame doesn’t matter. Whether the holding period is three weeks or three days, the only way for the trader to get paid, in the long run, is to be more right than wrong in terms of contribution to the price discovery process. If you help nudge a market that much closer to its “correct” price – a price that is always changing – then you get paid.
And this constant process of price discovery is valuable because it allows non-investors and non-traders to know the price at which it makes sense to transact. The trucking company can know that spot gasoline is X dollars per gallon at such and such a time, that price being determined by an open and competitive market (with the help of trader inputs).
Risk Transfer
Another very important service traders provide, particularly in the commodities markets, is that of risk transfer.
Say that you are a wheat farmer with a very large crop out in the field. Your entire livelihood depends on this crop. If something happens to the crop – blight, drought or what have you – your farming operation could be wiped out. How do you address this risk?
Or say that you are a cereal manufacturer with high exposure to fluctuating grain prices. If the price of wheat or corn rises too high, your input costs will be too high and your cereal operation will go bankrupt. Again, how do you solve this dilemma?
The answer to both questions is, you find a speculator who is willing to take the unwanted risk off your hands. This is why futures markets were invented – so that suppliers and end users of commodities, like farmers and cereal manufacturers, could get shed of their unwanted risk and “transfer” it to someone else.
This process is known as hedging. When a cereal manufacturer buys grain futures contracts, those contracts act as a “hedge” against the risk of grain prices rising. If the cereal manufacturer has to pay an extra 5 million dollars in the cash market for physical grain, but those costs were offset by a 5 million dollar gain on the futures contracts, then the risk has been “offset,” or hedged.
The trader, of course, is only willing to take on someone else’s risk if there is an opportunity to make a profit. And that is why speculators (traders) are willing to step in and take the other side of the farmers’ and cereal manufacturers’ positions. Their trading provides a service in the form of voluntary risk transfer.
Counterbalance
Another important service traders provide is counterbalance. One need only recall the many bubbles of the past two decades to observe that investors sometimes lose their minds.
The idea of the sober, rational investor who never lets emotions get out of hand is a complete fiction. Sometimes investors get euphoric and bid prices up to the sky. At other times investors become manically depressed and send prices crashing to the depths.
At times like these, contrarian traders are like chiropractors. When the market gets out of whack, they help “adjust it” back to more rational levels by going against the herd.
In order to provide this service, though, it is necessary to stand back from the investing crowd – to focus on exploiting temporary aberrations in the market, as opposed to ignoring fluctuations and always investing for the long haul.
Short sellers – who are almost always traders – can even help provide stability in a falling market. This is because short sellers routinely “cover,” or buy back, their short positions at various levels during a down move. If things are ugly, this may be the only buying coming into the market at that time.
Without short sellers (and traders in general) counterbalancing the herd-like activities of investors, markets would spend more time shooting straight up and then plummeting straight down.
How Gov’t-Sponsored “pShares” Could Hand YOU 808% Gains Within the Next 12 Months
As the U.S. government continues to funnel money into an industry most folks have foolishly left for dead… little-known “pShares” are shooting up as much as 808%.
Here’s how to claim your share…
Entertainment
Last but not least, good traders are like the friendly locals in a poker room. They are there to play with those who choose to play. If a tourist (or other casual player) wants to come in and make a market wager, the locals are happy to oblige.
And who knows? The tourist may, in fact, walk away with some money. When this happens, the locals do not begrudge the tourist their winnings. They smile and look forward to playing again some other time. (At least the smart ones do.)
In other words, traders provide an entertainment service in the marketplace. For those who want to play – to compete with the hope of winning money – the trader says “I’m your huckleberry.”
And when an investor buys a share of some super hot growth stock with the hope of making a killing, this is just what the investor is doing – competing! The trader provides a service in taking the other side.
Of these five dynamics – liquidity, price discovery, risk transfer, counterbalance and entertainment – no single dynamic dominates. The mix will vary from trader to trader, depending on the style employed. But most, if not all of them, are active to some degree at all times.
So what do you think? Do traders provide a useful (or at least justifiable) service to the marketplace… or are we all just parasites? Inquiring trader minds want to know: justice@taipandaily.com.
Warm Regards,
JL
by Justice Litle, Editorial Director, Taipan Publishing Group
A few days ago, an interesting note showed up in the Taipan Daily mailbag. Via e-mail, reader James K. wonders aloud whether traders add value to society. He isn’t sure that
they do.
Here is an excerpt:
Dropping a ton of money into a company, running it up, and then pulling out your winnings can't be much benefit to society as a whole. It's not company ownership, or intending to own a company, it's company manipulation to make the few rich and have others less astute pay their bill…
The charge seems to be that investing is a legitimate activity, whereas trading is not. (After all, who would challenge the need to invest?)
Speaking as a trader, your editor is clearly biased. But, given that caveat, there are two ways of looking at this question. The first requires stepping back and contemplating what “adding value to society” really means. The second requires asking what service the act of trading provides (i.e. what do traders get paid for).
The Truth About Gold
Don’t invest a cent until you read my report. It reveals an astonishing fact few gold investors know: you can actually… Buy Gold for $438 an ounce! Yes, gold sells above $1,200 per ounce. But I’ve discovered an easy way to buy it for only $438 an ounce. That’s 65% off --- Not bad for free information.
Get my full gold report now.
Not About the Job
The first important point, from this trader’s point of view, is that it’s not about the job. That is to say, what you do to make a living is not the best reflection of your social worth (or your impact on society as a whole).
So a trader isn’t out to save the world – or even change it for the better – with his day-to-day actions. This is more or less true. But what about someone in middle management at a shampoo company? Does apple-scented conditioner really make a difference to the well-being of the human race?
Or what about the person who bakes chocolate chip cookies, sells aluminum siding, or manufactures those little buttons that sit on top of baseball caps? Do those humdrum activities really “make a difference” in the long run?
It’s actually a trick question. There are very few jobs that “make a difference” with dramatic and obvious flair. If you happen to be an ER doctor, a nurse who specializes in prenatal care, or a bush pilot who delivers food and medical supplies to disaster zones, then your “value add” is obvious (and has a certain Hollywood quality to it). But the vast majority of jobs – probably 99% of them – aren’t like that.
This is why, assuming you make your living legally, the better measure is what you do with your time and energy, not how you earn your daily bread. The man (or woman) who adds value to society is a good neighbor… a part of the community… a supporter of charitable causes, a loving parent and friend and so on.
Society is bettered by law-abiding citizens – and sometimes law-breaking citizens, when the law is in error – living out their lives in positive ways. Unless you are Tony Soprano, it’s not so much about the job.
What Service Do Traders Provide?
One can further ask, “what service do traders provide?”
We know that investors, at least in theory, provide capital on a long-term basis so that healthy businesses can grow. This process of capital allocation – again in theory at least – is driven by constant assessment and re-assessment of which companies deserve more capital and which do not.
But traders, as it has been pointed out, do not stick around long enough to make a difference to the ultimate fortunes of a business. So what is the service they provide? What do traders really get paid to do?
Your editor can think of at least five different “services” that traders provide. They are:
* Liquidity
* Price Discovery
* Risk Transfer
* Counterbalance
* Entertainment
Liquidity
The first thing that traders do is add liquidity to the markets. Liquidity is a measure of how easy it is to buy and sell something, possibly in large quantities.
A stock like Exxon Mobil (XOM:NYSE), which routinely sees 20 million shares a day change hands, is extremely liquid. Most “pink sheet” stocks, which might only trade a few hundred shares a day, are not.
If there were no traders, markets would be far less liquid. This is because traders buy and sell much more frequently than investors do. An investor, who may only want to buy or sell on infrequent occasions, enjoys the peace of mind of knowing that, when he wants to make a transaction, there will almost certainly be someone on the other side willing to provide him a fair price. All things being equal, the person on the other side will often be a trader.
Market makers and floor traders were the original liquidity providers. Their frequent activity, and their willingness to buy and sell over and over again as large outside orders came in, helped to literally “make the market.” These days, floor traders are a dying breed and market makers are being replaced by high-powered computers. But the liquidity providing function is still there.
Price Discovery
What is the proper price of crude oil at this very moment? How about lumber? Treasury bonds? Microsoft shares?
The answer is, nobody knows for certain what the proper price should be. There are millions of complex variables swirling around the market place, and those variables are shifting and changing moment by moment.
The only way to determine the proper price, then, is for active market participants to “vote” on their best estimation of that price, over and again, through their buying and selling decisions. (It’s not a democracy though – rather than “one man, one vote,” it is more like “one dollar, one vote.” The large player who buys a million shares has more clout than the thousands of smaller players buying 100 shares each. )
Traders participate in the price discovery process by “voting” – with their own capital – on what the proper price of something should be. To the degree that the trader is correct, he or she is paid in proportion to the number of votes cast (i.e. shares or contracts bought and sold).
The trader’s shorter time frame doesn’t matter. Whether the holding period is three weeks or three days, the only way for the trader to get paid, in the long run, is to be more right than wrong in terms of contribution to the price discovery process. If you help nudge a market that much closer to its “correct” price – a price that is always changing – then you get paid.
And this constant process of price discovery is valuable because it allows non-investors and non-traders to know the price at which it makes sense to transact. The trucking company can know that spot gasoline is X dollars per gallon at such and such a time, that price being determined by an open and competitive market (with the help of trader inputs).
Risk Transfer
Another very important service traders provide, particularly in the commodities markets, is that of risk transfer.
Say that you are a wheat farmer with a very large crop out in the field. Your entire livelihood depends on this crop. If something happens to the crop – blight, drought or what have you – your farming operation could be wiped out. How do you address this risk?
Or say that you are a cereal manufacturer with high exposure to fluctuating grain prices. If the price of wheat or corn rises too high, your input costs will be too high and your cereal operation will go bankrupt. Again, how do you solve this dilemma?
The answer to both questions is, you find a speculator who is willing to take the unwanted risk off your hands. This is why futures markets were invented – so that suppliers and end users of commodities, like farmers and cereal manufacturers, could get shed of their unwanted risk and “transfer” it to someone else.
This process is known as hedging. When a cereal manufacturer buys grain futures contracts, those contracts act as a “hedge” against the risk of grain prices rising. If the cereal manufacturer has to pay an extra 5 million dollars in the cash market for physical grain, but those costs were offset by a 5 million dollar gain on the futures contracts, then the risk has been “offset,” or hedged.
The trader, of course, is only willing to take on someone else’s risk if there is an opportunity to make a profit. And that is why speculators (traders) are willing to step in and take the other side of the farmers’ and cereal manufacturers’ positions. Their trading provides a service in the form of voluntary risk transfer.
Counterbalance
Another important service traders provide is counterbalance. One need only recall the many bubbles of the past two decades to observe that investors sometimes lose their minds.
The idea of the sober, rational investor who never lets emotions get out of hand is a complete fiction. Sometimes investors get euphoric and bid prices up to the sky. At other times investors become manically depressed and send prices crashing to the depths.
At times like these, contrarian traders are like chiropractors. When the market gets out of whack, they help “adjust it” back to more rational levels by going against the herd.
In order to provide this service, though, it is necessary to stand back from the investing crowd – to focus on exploiting temporary aberrations in the market, as opposed to ignoring fluctuations and always investing for the long haul.
Short sellers – who are almost always traders – can even help provide stability in a falling market. This is because short sellers routinely “cover,” or buy back, their short positions at various levels during a down move. If things are ugly, this may be the only buying coming into the market at that time.
Without short sellers (and traders in general) counterbalancing the herd-like activities of investors, markets would spend more time shooting straight up and then plummeting straight down.
How Gov’t-Sponsored “pShares” Could Hand YOU 808% Gains Within the Next 12 Months
As the U.S. government continues to funnel money into an industry most folks have foolishly left for dead… little-known “pShares” are shooting up as much as 808%.
Here’s how to claim your share…
Entertainment
Last but not least, good traders are like the friendly locals in a poker room. They are there to play with those who choose to play. If a tourist (or other casual player) wants to come in and make a market wager, the locals are happy to oblige.
And who knows? The tourist may, in fact, walk away with some money. When this happens, the locals do not begrudge the tourist their winnings. They smile and look forward to playing again some other time. (At least the smart ones do.)
In other words, traders provide an entertainment service in the marketplace. For those who want to play – to compete with the hope of winning money – the trader says “I’m your huckleberry.”
And when an investor buys a share of some super hot growth stock with the hope of making a killing, this is just what the investor is doing – competing! The trader provides a service in taking the other side.
Of these five dynamics – liquidity, price discovery, risk transfer, counterbalance and entertainment – no single dynamic dominates. The mix will vary from trader to trader, depending on the style employed. But most, if not all of them, are active to some degree at all times.
So what do you think? Do traders provide a useful (or at least justifiable) service to the marketplace… or are we all just parasites? Inquiring trader minds want to know: justice@taipandaily.com.
Warm Regards,
JL
Friday, March 19, 2010
Identifiy big swing in prices
The Oxen Report: Five Keys to Fundamental Day Trading
Identifying the Fundamentals
Stocks move under the influence various factors that we can use to identify stocks that are likely to move 3-5% in a single day. Even the best technicals seldom give you 5% upward (or downward) movements intraday alone, but combined with fundamental factors, we can find stocks that are likely to make these large daily moves.
To begin to seek that perfect stock or ETF, we first need to look for something that can propel a stock or, in the case ETFs, the represented sector. This 3-5% movement is not from the previous day’s close, but between the market’s open and close. We want to identify a stock that can be bought sometime in the morning to give us that significant movement by the end of the day. The first type of information that is prone to easily move stocks is earnings.
1. Earnings
There are multiple ways to play a company’s earnings. One of the most effective ways to invest based on earnings is after a company has already announced their earnings. We are looking for earnings that were surprising, especially ones that say something about a sector.
For example, if one company announces positive earnings because it had a large profit from a lawsuit, this information does not tell us much about the earnings potential of the sector in general. However, if an important company in a sector has positive earnings due to an increase in sales or because it saw higher demand than anticipated, this information is more telling of its sector as a whole, and the news may move many similarly situated stocks.
We like the sector-telling earnings because it suggests something about the sector is most likely bullish (or bearish). For example, if Burger King Holdings Inc. (BKC) reported earnings and noted that they were seeing increased demand for fast food because customers were cutting back on more expensive restaurants, this would suggest a general transferring of food money from high-end restaurants to fast food. This information should propel not only BKC, but also McDonald’s (MCD) and Wendys/Arbys Group (WEN). The positive earnings may benefit companies that are closely related to the reporting company. Typically, we do not want to invest for a single day-trade in the specific company that reported the earnings. The reporting company is likely to gap up the next morning and have less room to run due to the large jump up from the closing price.
Instead, we look for competitors that will profit from the good news. Take for example, J. Crew Group Inc. (JCG) and Gap Inc. (GPS). On May 28, 2009, J. Crew, in after hours, announced earnings that significantly exceeded estimates when it reported an earnings per share at 0.34 EPS. The street was estimating 0.11 EPS. This was seriously bullish news for JCG. The next day the stock jumped 26.4%. The stock gapped up so heavily that traders jumping on in the morning missed most of that movement. So, in the morning, the Oxen Group recommended Gap Inc., a close competitor of JCG, especially with their Banana Republic line. On the same day, GPS moved up almost 5%. The Oxen Group was able to get in at the beginning of the day while the stock was still at a low price, and then ride the wave upwards.
We find that earnings releases can be used to make gains on competitor companies because the competitors’ stock often reacts slower than that of the company releasing the earnings. We look for competitors that have similar product lines. The same is true in the reverse direction. If a company bombs estimates, many similar companies will be pulled down with it, providing us with a good shorting opportunity.
Additionally, extremely good earnings in an important company within a particular sector may suggest a day-trade with an ETF that models the sector. In the case of JCG, related retail ETFs are sparse and have low volume, not the best vehicles for trading. But with an energy or financial company, sector ETFs are heavily traded, and playing an ETF the same way we played Gap could be very profitable.
In summary, earnings can be a very solid fundamental bull or bear signals for a single day-trade. However, earnings do not come out everyday. Where else can one look when trying to identify a bullish or bearish fundamental trade for the next day?
2. Upgrades/Downgrades
Upgrades and downgrades are extremely powerful mechanisms that can propel a stock up or down significantly. Ratings can move a stock up or down anywhere from 1% to 10% depending on the rating company’s significance, the ratings change, and the company being rated. Moody’s, S&P, Credit Suisse, Goldman Sachs, Morgan Stanley, and Fitch are rating companies that are particularly significant. Smaller equity firms tend to have less impact on a stock’s next day movement. Upgrades and downgrades typically come in the morning or intraday. However, when they do come in the evening, they work in the same way as earnings - an upgrade can give rise to a sizable stock movement.
An upgrade or downgrade will have a strong effect on an entire sector if it has something to do with the broader picture. If a company gets downgraded because of risky investments or bad credit, it is not likely to bring down its competitors. However, if the downgrade is due to lower sales expectations, its competitors are more likely to trade down in sympathy.
For example, on Saturday, June 6, 2009, Torchmark Corp. (TMK), an insurance company, was downgraded by Fitch Ratings for bad investments as well as a sector wide decline in the ability for insurance companies to be profitable in this market. All the insurers ended in the red, most likely due to the questioning of insurance companies’ profitability in general. Obviously, a multitude of factors go into companies within a sector, but upgrades and downgrades can be very significant in predicting the movement of single stocks and sectors.
3. Foreign Markets
Another way to gage how well a stock may do the next day is to see what is going on in foreign markets. Typically, this will have the most impact on commodities, such as oil, and products that are sold overseas or overseas companies that have a PLC or ADR on the American stock exchange system.
For example, oil, oil and gas stocks, oil and gas ETFs, and anything that has to do with oil will be affected by changes in the price of oil. What the oil market is doing overseas can be a great fundamental predictor of what the oil sector will be doing when our markets open.
For example, if the oil inventories are skyrocketing in Asia, demand is down, and the price of oil plummets in the Hang Seng and Nikkei, this will have an effect on the NYMEX. In our globalized world, what happens in one country affects us all. If oil demand is dropping in China, any company connected to selling gas or pumping oil out of China will be impacted by the demand drop. The price of oil will be affected negatively, which will in turn negatively affect other oil companies, oil producers, and ETFs.
The same is true, in reverse. On June 1, 2009, The Oxen Group recommended Toyota Motors Corp. ADR (TM). The company, in Asia, had skyrocketed due to booming Prius sales in Japan that were significant in Japan’s extremely weak consumer economy. Therefore, if Japan was able to do well with the Prius, one might conclude that while the car may not have done as well in America, it was bullish news that would positively affect the ADR. It was not so directly bullish, however, that it would send the stock up 5-6% out of the gates, and we would never have a chance to buy in. The stock did gap up, moved back, we were able to get in and make 2% off the ADR for the day.
4. Financial News
News can come in many ways and can be fundamentally bullish or bearish. Often, big news stories comes out intraday and move stocks so quickly that the opportunity is gone by the time you see it. Though intraday opportunities may vanish as quickly as they arise, investors should be looking for news after hours that may be significant enough to help a stock or a sector, as a whole, the next day.
For example, one of my favorite pieces of news to use to invest is box office weekends. The company that owns the movie that wins the box office tends to have a very good day on the Monday after that weekend, especially if the movie’s success was extremely bullish and surprisingly. For example, on May 29-31 "Up" won the box office and it was the third largest revenue maker for a Disney-Pixar animated flick, coming in way above estimates. It sent the stock up a solid 4% on that Monday simply based on that fundamentally bullish news. On June 5-7, "Up" retained the top spot but the news was less significant. Disney ended June 8, 2009 without the 4% gain and finished sideways.
News has to be significant to truly propel a stock. However, if the news is too large and too visible, the stock may jump too fast to buy it at a good entry point.
One of the interesting ways to use news is with a sector ETF. For example, if on a given day, in after hours, three or four major financial companies have some bearish news, it may be a good time to buy into an inverse ETF that will move in the opposite direction to the financial sector in general.
In trading news, however, be careful. It does not always have the effect you expect.
5. Futures
The final key telling-signal of fundamental bullishness or bearishness is the futures market for the Dow, S&P, and Nasdaq. These markets open at 12 AM on trading days and trade until the start of the session. The futures markets can give an investor a general sense of market direction.
For example, suppose you are excited about Dryships Inc. (DRYS) because the shipping indexes are jumping up significantly in Asia. At the same time, though, the futures are significantly in the red for the coming trading day, due to a multitude of bearish news and earnings that were reported the afternoon and night before for the American market. This could really hinder DRYS’s movement the next day because the market is in the red.
In the reverse, futures can help you feel more confident that a stock with fundamentally bullish indicators could continue upwards when the market is looking healthy. Futures are a helpful indicator to determine if a stock will be a good or bad day trade; they’re definitely worth considering.
So, there you have it — the five fundamental indicators to help you identify the perfect day trade. There are a number of other indicators that go into any trade. Technicals are very relevant, the entry and exits are important. The fundamentals are the start of the ability for a stock to move up. The patterns that were identified in the piece should help you find and search out stocks that would be bullish.
Everyday, the Oxen Group chooses our Oxen Picks starting with the ideas above.
The final piece of advice to keep in your tool belt is to stay confident in your picks. If you have done the research and the evidence is there for the stock to move up, then you should feel confident that your ideas will work. If it does not work to perfection, it is okay because if you keep identifying fundamentals, it will work more often than not.
Identifying the Fundamentals
Stocks move under the influence various factors that we can use to identify stocks that are likely to move 3-5% in a single day. Even the best technicals seldom give you 5% upward (or downward) movements intraday alone, but combined with fundamental factors, we can find stocks that are likely to make these large daily moves.
To begin to seek that perfect stock or ETF, we first need to look for something that can propel a stock or, in the case ETFs, the represented sector. This 3-5% movement is not from the previous day’s close, but between the market’s open and close. We want to identify a stock that can be bought sometime in the morning to give us that significant movement by the end of the day. The first type of information that is prone to easily move stocks is earnings.
1. Earnings
There are multiple ways to play a company’s earnings. One of the most effective ways to invest based on earnings is after a company has already announced their earnings. We are looking for earnings that were surprising, especially ones that say something about a sector.
For example, if one company announces positive earnings because it had a large profit from a lawsuit, this information does not tell us much about the earnings potential of the sector in general. However, if an important company in a sector has positive earnings due to an increase in sales or because it saw higher demand than anticipated, this information is more telling of its sector as a whole, and the news may move many similarly situated stocks.
We like the sector-telling earnings because it suggests something about the sector is most likely bullish (or bearish). For example, if Burger King Holdings Inc. (BKC) reported earnings and noted that they were seeing increased demand for fast food because customers were cutting back on more expensive restaurants, this would suggest a general transferring of food money from high-end restaurants to fast food. This information should propel not only BKC, but also McDonald’s (MCD) and Wendys/Arbys Group (WEN). The positive earnings may benefit companies that are closely related to the reporting company. Typically, we do not want to invest for a single day-trade in the specific company that reported the earnings. The reporting company is likely to gap up the next morning and have less room to run due to the large jump up from the closing price.
Instead, we look for competitors that will profit from the good news. Take for example, J. Crew Group Inc. (JCG) and Gap Inc. (GPS). On May 28, 2009, J. Crew, in after hours, announced earnings that significantly exceeded estimates when it reported an earnings per share at 0.34 EPS. The street was estimating 0.11 EPS. This was seriously bullish news for JCG. The next day the stock jumped 26.4%. The stock gapped up so heavily that traders jumping on in the morning missed most of that movement. So, in the morning, the Oxen Group recommended Gap Inc., a close competitor of JCG, especially with their Banana Republic line. On the same day, GPS moved up almost 5%. The Oxen Group was able to get in at the beginning of the day while the stock was still at a low price, and then ride the wave upwards.
We find that earnings releases can be used to make gains on competitor companies because the competitors’ stock often reacts slower than that of the company releasing the earnings. We look for competitors that have similar product lines. The same is true in the reverse direction. If a company bombs estimates, many similar companies will be pulled down with it, providing us with a good shorting opportunity.
Additionally, extremely good earnings in an important company within a particular sector may suggest a day-trade with an ETF that models the sector. In the case of JCG, related retail ETFs are sparse and have low volume, not the best vehicles for trading. But with an energy or financial company, sector ETFs are heavily traded, and playing an ETF the same way we played Gap could be very profitable.
In summary, earnings can be a very solid fundamental bull or bear signals for a single day-trade. However, earnings do not come out everyday. Where else can one look when trying to identify a bullish or bearish fundamental trade for the next day?
2. Upgrades/Downgrades
Upgrades and downgrades are extremely powerful mechanisms that can propel a stock up or down significantly. Ratings can move a stock up or down anywhere from 1% to 10% depending on the rating company’s significance, the ratings change, and the company being rated. Moody’s, S&P, Credit Suisse, Goldman Sachs, Morgan Stanley, and Fitch are rating companies that are particularly significant. Smaller equity firms tend to have less impact on a stock’s next day movement. Upgrades and downgrades typically come in the morning or intraday. However, when they do come in the evening, they work in the same way as earnings - an upgrade can give rise to a sizable stock movement.
An upgrade or downgrade will have a strong effect on an entire sector if it has something to do with the broader picture. If a company gets downgraded because of risky investments or bad credit, it is not likely to bring down its competitors. However, if the downgrade is due to lower sales expectations, its competitors are more likely to trade down in sympathy.
For example, on Saturday, June 6, 2009, Torchmark Corp. (TMK), an insurance company, was downgraded by Fitch Ratings for bad investments as well as a sector wide decline in the ability for insurance companies to be profitable in this market. All the insurers ended in the red, most likely due to the questioning of insurance companies’ profitability in general. Obviously, a multitude of factors go into companies within a sector, but upgrades and downgrades can be very significant in predicting the movement of single stocks and sectors.
3. Foreign Markets
Another way to gage how well a stock may do the next day is to see what is going on in foreign markets. Typically, this will have the most impact on commodities, such as oil, and products that are sold overseas or overseas companies that have a PLC or ADR on the American stock exchange system.
For example, oil, oil and gas stocks, oil and gas ETFs, and anything that has to do with oil will be affected by changes in the price of oil. What the oil market is doing overseas can be a great fundamental predictor of what the oil sector will be doing when our markets open.
For example, if the oil inventories are skyrocketing in Asia, demand is down, and the price of oil plummets in the Hang Seng and Nikkei, this will have an effect on the NYMEX. In our globalized world, what happens in one country affects us all. If oil demand is dropping in China, any company connected to selling gas or pumping oil out of China will be impacted by the demand drop. The price of oil will be affected negatively, which will in turn negatively affect other oil companies, oil producers, and ETFs.
The same is true, in reverse. On June 1, 2009, The Oxen Group recommended Toyota Motors Corp. ADR (TM). The company, in Asia, had skyrocketed due to booming Prius sales in Japan that were significant in Japan’s extremely weak consumer economy. Therefore, if Japan was able to do well with the Prius, one might conclude that while the car may not have done as well in America, it was bullish news that would positively affect the ADR. It was not so directly bullish, however, that it would send the stock up 5-6% out of the gates, and we would never have a chance to buy in. The stock did gap up, moved back, we were able to get in and make 2% off the ADR for the day.
4. Financial News
News can come in many ways and can be fundamentally bullish or bearish. Often, big news stories comes out intraday and move stocks so quickly that the opportunity is gone by the time you see it. Though intraday opportunities may vanish as quickly as they arise, investors should be looking for news after hours that may be significant enough to help a stock or a sector, as a whole, the next day.
For example, one of my favorite pieces of news to use to invest is box office weekends. The company that owns the movie that wins the box office tends to have a very good day on the Monday after that weekend, especially if the movie’s success was extremely bullish and surprisingly. For example, on May 29-31 "Up" won the box office and it was the third largest revenue maker for a Disney-Pixar animated flick, coming in way above estimates. It sent the stock up a solid 4% on that Monday simply based on that fundamentally bullish news. On June 5-7, "Up" retained the top spot but the news was less significant. Disney ended June 8, 2009 without the 4% gain and finished sideways.
News has to be significant to truly propel a stock. However, if the news is too large and too visible, the stock may jump too fast to buy it at a good entry point.
One of the interesting ways to use news is with a sector ETF. For example, if on a given day, in after hours, three or four major financial companies have some bearish news, it may be a good time to buy into an inverse ETF that will move in the opposite direction to the financial sector in general.
In trading news, however, be careful. It does not always have the effect you expect.
5. Futures
The final key telling-signal of fundamental bullishness or bearishness is the futures market for the Dow, S&P, and Nasdaq. These markets open at 12 AM on trading days and trade until the start of the session. The futures markets can give an investor a general sense of market direction.
For example, suppose you are excited about Dryships Inc. (DRYS) because the shipping indexes are jumping up significantly in Asia. At the same time, though, the futures are significantly in the red for the coming trading day, due to a multitude of bearish news and earnings that were reported the afternoon and night before for the American market. This could really hinder DRYS’s movement the next day because the market is in the red.
In the reverse, futures can help you feel more confident that a stock with fundamentally bullish indicators could continue upwards when the market is looking healthy. Futures are a helpful indicator to determine if a stock will be a good or bad day trade; they’re definitely worth considering.
So, there you have it — the five fundamental indicators to help you identify the perfect day trade. There are a number of other indicators that go into any trade. Technicals are very relevant, the entry and exits are important. The fundamentals are the start of the ability for a stock to move up. The patterns that were identified in the piece should help you find and search out stocks that would be bullish.
Everyday, the Oxen Group chooses our Oxen Picks starting with the ideas above.
The final piece of advice to keep in your tool belt is to stay confident in your picks. If you have done the research and the evidence is there for the stock to move up, then you should feel confident that your ideas will work. If it does not work to perfection, it is okay because if you keep identifying fundamentals, it will work more often than not.
Thursday, March 18, 2010
Appreciating the Yuan
First, no country including US has the right to tell other countries to appreciate their currency. The era of ‘you’re either my puppet or my enemy’ is long past and Obama is still living in the past glory. He blames China for all our ills, as he cannot fix our problems.
Keeping the Yuan low actually helps US's consumers and US in buying wind turbines or HSRs from China at lower prices. Not to mention the huge loans from China. China does not want to withdraw the bad loans as they do not want to kill the goose that lays the golden eggs.
The major products of China and US are not the same, so there are no direct competitions. If we do not buy the products from China, most likely we'll buy same products from Mexico or India.
Until China builds up its local market for its growing middle class, I do not see Yuan will appreciate by more than 5% a year.
A strong China is good for the world including US! China is just one part of the global economy. The other players are research companies from the west and the US, oil from Middle East and Africa, and commodities from Australia, Brazil… Everyone benefits including the consumers in every country.
Lord Obama and his 'advisers' including Uncle Ben and Tiny Tim can do a lot of good if they looked longer-term (more than 4 years for re-election). To give generous welfare to buy votes and creating jobs for the lazy government servants are definitely not good for the country. Have we learned from California?
Throwing money on HSR is stupid and reckless without calculating basic return of the investment. China is successful with HSR due to its dense population, but not here.
Keeping the Yuan low actually helps US's consumers and US in buying wind turbines or HSRs from China at lower prices. Not to mention the huge loans from China. China does not want to withdraw the bad loans as they do not want to kill the goose that lays the golden eggs.
The major products of China and US are not the same, so there are no direct competitions. If we do not buy the products from China, most likely we'll buy same products from Mexico or India.
Until China builds up its local market for its growing middle class, I do not see Yuan will appreciate by more than 5% a year.
A strong China is good for the world including US! China is just one part of the global economy. The other players are research companies from the west and the US, oil from Middle East and Africa, and commodities from Australia, Brazil… Everyone benefits including the consumers in every country.
Lord Obama and his 'advisers' including Uncle Ben and Tiny Tim can do a lot of good if they looked longer-term (more than 4 years for re-election). To give generous welfare to buy votes and creating jobs for the lazy government servants are definitely not good for the country. Have we learned from California?
Throwing money on HSR is stupid and reckless without calculating basic return of the investment. China is successful with HSR due to its dense population, but not here.
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