Archive for September, 2010
Does the Dow Have Caterpillar Inc. (NYSE:CAT) to Thank?
by Jared Levy on September 28th, 2010
I mentioned the need for infrastructure in this country a couple weeks ago. One of the companies that could potentially benefit from this would be ole’ CAT tractor … Caterpillar Inc. (NYSE:CAT).
Caterpillar, the agriculture and construction machinery giant, maker of everything from pavers to excavators and even turbines for energy generation, continues on its breakout to the upside after eclipsing its last resistance point of $72.00. Though the stock was down slightly in Monday’s trading, the long-term upside prospects still hold from a technical and fundamental standpoint. The stock was resilient in Monday’s session as the broad market moved lower in late-session trading.
But maybe we need to look at this situation the other way around. The 30 stocks that comprise the Dow Jones Industrial Average have collectively been a barometer for many investors for quite some time. But the fact of the matter is that this index may be somewhat flawed.
Consider this:
- If you were to remove CAT from the Dow, the index would only be up 2.5% year-to-date compared to its current gain of 3.7%.
- The Dow Jones’ stocks are weighted by stock price…
Smart Investing Daily – Top 10
The Top 10 Things That Separate Pros From Amateurs
Monday, September 27, 2010
I’ve just returned from our Global Opportunities Summit in Las Vegas and my mind is swirling with ideas for Smart Investing Daily. I not only had the pleasure of meeting many of you, but also got the chance to have some in-depth conversations with many of my fellow editors from around the country.
At the summit, I noticed that there were common threads that wove their way through the minds of both the speakers and attendees.
Our goal at Taipan Publishing Group is to not only help identify potential investment opportunities, but close the gap between what has made many professional traders successful and what the average investor needs to know.
I assembled 10 of the most important techniques and mantras you should use to take your trading and investments to the next level.
In coming issues, you can be sure I will take each one and more into great detail, but this should at least get you started.
No. 10: Hedge Your Bets/Diversify
- If you are an options trader, you can use spreads to reduce your investment’s exposure to the overall market. Some option spreads can not only greatly reduce how volatile your account is, but they actually can put the probability of success on your side.
- Diversify your investment portfolio not only with stocks in different sectors, but also with BETA! Beta tells you how your stock will typically react to the market. If all your stocks have high betas, your account may be susceptible to just as much if not MORE volatility than the market, even if you bought stocks in different sectors.
No. 9: Plan Your Risk Ahead of the Trade
- Have a maximum downside dollar and/or percentage risk spelled out ahead of your investment, not after the fact.
- Use stop-losses, put options or spreads to solidify your plan if you understand how to use them.
- Don’t exceed your comfort zone; this may cause irrational decisions in your trade. In other words, don’t make your investments too large in any one security.
No. 8: Be a Contrarian
- It’s usually better to buy on rumor, sell on news.
- By the time everyone is talking about it, it might be too late.
- Don’t be scared to think “outside the box.”
No. 7: Sell or Protect While the Trend Is Still Strong
- It’s much easier to sell when a stock is rising in value vs. when it’s in free fall.
- Remember, insurance is cheaper before you have an accident, so if you are an options trader, buy your puts when the market is complacent, not panicking.
- Think of a climber who is 30 yards from the summit of a mountain and runs out of oxygen. He may touch the top, but he won’t get down. This is analogous to a stock that has been rallying for a long time and you take no action to exit. While you may see the top in the stock, stocks can change direction frequently, and most investors don’t get to sell the highest high!
No. 6: Learn From Your Losses, NOT Only Your Profits
- Your losses can tell you just as much if not more about your trading personality.
- Sometimes just limiting losses can turn an unsuccessful trader into a thriving one, or at the very least, allow you to live to trade another day.
Traders Fear ‘Wall Street’ Sequel Will Bash Banking
Published: Friday, 24 Sep 2010 | 11:27 AM ET
By: Jesse Bergman with Kate Kelly
CNBC.com
Back in 1987, the movie “Wall Street” inspired a generation to enter the world of finance. But within that industry, attitudes toward the long-anticipated sequel are surprisingly subdued.
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20th Century Fox
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The main concern: that the new movie will be a platform for bank-bashing.
Already smarting from the anti-Wall Street rhetoric from the Obama Administration and hopeful that Republicans will gain control of Congress in the mid-term elections, some traders see “Wall Street: Money Never Sleeps” director Oliver Stone as a liberal mouthpiece and believe he’ll use the new film to embarrass their profession.
Check out the Story HERE on CNBC.com
Notes on Risk versus Probability
Taking a much-needed quasi-vacation in Las Vegas, I couldn’t help but offer a couple words on strategy, risk, and probability. Walking through the casino last night, I couldn’t help but observe the throngs of tourists … some sober, but many partaking in the free alcoholic beverages offered by the house.
What a bighearted gesture by the casino, right? Anyone (over the age of 21) can sit down, bet a couple bucks, and get what would normally be a $12.00 drink for free. As many of you know, there is no such thing as a free lunch or in this case, a free drink.
What the casino is hoping is that you partake in as many of those as you can handle (without passing out of course) because as you imbibe those libations, your ability to manage your money (control your risk) is being depleted. Even though you may have started with a rational plan, you are now out of control and the result is usually not positive.
What’s worse is that in EVERY game on the casino floor, the odds and probability are generally NOT in your favor. For example, the version of roulette that has a zero and double zero gives the house an advantage of 5.26%. Basically, they take about five cents of every dollar played as their “edge.” This actually decreases a roulette player’s probability of winning to less than 50%.
Unfortunately – whether at the gaming tables or in the markets – you can lower your own probability all on your own, without even having a drink. Frustration, lack of experience, minimal familiarity with a strategy, and emotional strains can all cause a reduction in the probability of success. Improper strategy selection and poor planning are typically the causes of a reduction in the probability of success.
In options trading, however, you can actually increase your probability of success through the use of some spreads. (Remember that generally, when you improve your probability, you decrease potential profit).
For most new options traders, the long call and the long put are the first strategies they employ. While both these strategies offer benefits – such as reduced costs and leverage – they both put a trader at a statistical disadvantage.
Let me clarify this; just because you have a statistical disadvantage, you are not doomed to lose money. Plenty of traders are able to invest successfully in long calls and puts. Both calls and puts typically have a higher profit potential than a vertical spread, for example.
The reason I say they have a statistical disadvantage (compared to stock or some vertical spreads) is because when you purchase an option outright, you are paying for the “optionality,” or time value, of that option. That theta (time decay) continually works against your profitability as well as your statistical probability of success.
Deep in-the-money options have less “time value,” proportionally speaking, which means you will pay less theta. At-the-money options generally have the most dollar amount of time value, which means have the highest-dollar theta. Finally, out-of-the-money (OOTM) options, though cheaper with generally lower thetas, will have the highest percentage of their value being paid as theta (remember OOTM options have NO intrinsic value).
Risk
With any trade – whether it is an individual option or spread –
Smart Investing Daily – Alternative Economic Indicators
Why Government Reports Aren’t the Only Indicators of Economic Health
Wednesday, September 22, 2010
When I am not traveling to New York City, Philly or Chicago, I work mostly from my home office. I tend to look out the window while I write and trade. I get a nice view of the Dallas skyline and trees, but I also have a fairly clear view of the neighborhood dry cleaner, whom I have been going to for many years. Over the past year, I have noticed the parking lot fairly empty and the drive-through window not as busy as it used to be.
Observing this for months, I thought I would visit Joseph, the owner of the dry cleaner (and friend), and ask how he was doing. Usually I just drive through and pick up and drop off my dry cleaning with one of his friendly staff and give Joe a wave, but this time, I wanted to know how Joe (and his business) was doing.
Joseph, who is young and extremely involved in his small — but usually busy and integral part of my diverse neighborhood — business, is a very personable and smart man who has his finger on the pulse of the local economy here in Dallas.
He has to, because in the dry-cleaning/alterations business, the profit margins are relatively low, which means that changes in flow of customers and/or articles of clothing can have a profound impact on business and this can happen in a relatively short period of time.
This dry cleaner serves a community of multimillionaires from Highland Park to college students from SMU and everything in between. The neighborhood has a large, dense base of young white-collar professionals, which is Joe’s bread and butter.
Joe mentioned that he has been in a lull for a while and mentioned that every day still, long-time customers of his are losing their jobs. He said this with a surprised…
President Obama Speaks on CNBC… Here’s What I Heard
President Barack Obama gave us another chance yesterday to witness his eloquent, seemingly Switzerland-like delivery and response to some fairly direct and tough comments and questions. Deflect, deflect, deflect (and maybe spin a little).
I happen to respect the man greatly for his intelligence and his ability to handle situations. I also think his job in office has certainly been better than I could ever do, but certainly not one that deserves acclaim.
This opinion was shared by a devout Democrat who was a CFO and mother of two kids headed off to college, when she expressed her disappointment in the actions (or lack thereof) of the current administration. She was hoping for change, but like many of us has had yet to see it. I understand that changing the economic health and sentiment of a nation takes time, so maybe it’s the grand promises that were made that are now blossoming into disappointments.
I did agree with some of his commentary and rationale yesterday. Some is the obvious operative word here.
While I think the bailout of the banks, brokerages, automakers, etc. may have helped buffer the catastrophe we were facing, I AM NOT a believer in big government. Nor do I think increasing regulation and reform can help the markets behave and operate more freely (as was suggested by the President).
The failure of U.S. corporations is unfortunately a part of the American way. As those companies fail, new companies – perhaps ones that are more efficient and innovative – take their place. Bailing companies out is almost like rewarding someone for doing the wrong thing.
In the President’s defense, he did require massive changes in the way companies like General Motors did business and provided major concessions for many of the hard-working men and women there. Personally, I think it’s a blow to a company like Ford Motor (NYSE:F), who managed to not only get through the tough times, but grow and improve their products. (Maybe that’s the reason Ford has been around for so long).
The quality and ingenuity of American products and our nation’s ability to innovate and overcome adversity are what set us apart from most of the world. These qualities are also what allowed this very young country to flourish and become the world’s “super-power.” I feel that if we Americans just lay back and expect our government to bail us out when our backs are against the wall, we are doomed to failure or even worse, mediocrity.
Trust me, coming from a middle-class, hard-working family in Philadelphia, I don’t want to see anyone lose their job. My mother struggled as a teacher and my father as an electrician to put food on the table and give us a good life.
But by the same token, why does the government get to decide who gets “bailed out” and who doesn’t? What about the thousands of small businesses that have failed and gone under and the millions of Americans who lost their jobs as a result? Where is their bailout?…
Smart Investing Daily – 3 Things You Must Do!
| The THREE Things You Must Do to Be a Successful Investor |
| Written by Jared Levy, Editor, Smart Investing Daily | |
| Friday, September 17, 2010 13:57 | |
 In over 15 years of trading, investing and risk management, I realized the three things that make the real difference between a successful investor and one who struggles have nothing to do with technology, strategy or even a personality type (although some personalities have an easier time applying them).I mean, when you think about the multitude of successful strategies and investments that are made every day, there may be some common threads between them, but with all the diverse and sometimes conflicting methods used, how can they all be the key to successful investing?
They can’t… Here are a few smart investing ideas for you to remember: |
Expiration Friday – Are you Prepared?
After Steve Claussen and I wrapped up our weekly webinar on expiration risks , I thought it might be helpful to highlight what we discussed and offer a couple of other important pointers to remember for this monthly (and now weekly and quarterly) event. Expiration for professional traders is a time to reduce risk and unwind any trades that could be “unknowns” going into expiration Friday.
The third Friday of each month is also a time to look ahead to what positions will be kept open through Monday morning. Finally, it is the time to make decisions on whether to “roll” open trades. This basically means buying or selling a spread to extend an open position to the next month (or beyond).
“Unknowns”
When I use the word “unknowns,” I am mainly referring to options positions, both long and short, that are at-or near-the-money. The term “Pin-Risk” directly applies to options expiration. Pin-risk is the phenomenon where the underlying stock “pins” right at a strike. For professionals, there are advanced tactics like converting or reversing to neutralize pin-risk.
For the average retail trader, generally the real risk is associated with shorted options, which give the seller NO control over whether their options will be exercised or not. The stock doesn’t even have to “pin” a strike to create complications at expiration.
This risk may either be naked short options or (perhaps even more dangerous) short options that are part of a spread. Traders may find themselves in situations where they do not have the funds available to cover, nor do they have the intention of ultimately being long or short the stock.
Expiration Risk Example
If you were short 20 (uncovered) IBM 130 calls and IBM stock closed at $130 on Friday afternoon, you have no way of knowing if these calls will be assigned or not. The Options Clearing Corporation (OCC) stipulates that any option that is one cent in-the-money or greater will be automatically exercised, unless the buyer specifically specifies he does not want them to be exercised. So even if IBM were to close at $130.05, there is still some chance that some or all of your short calls will NOT be assigned.
But what if IBM closes at $129.90? Anyone who sold the 130-strike calls is probably pretty happy. Let’s say you decide to let your calls expire instead of buying them back for three cents each (the offer price at 4:00 pm ET).
At 4:05 pm, you run out for a round of golf since the market is closed and it’s the weekend. At 4:20 ET, Intel issues a forecast for higher-than-expected PC sales. This report sends IBM shares higher in sympathy and the shares are now trading at $132.00 in post-market trading.
While you’re out golfing, the buyer of those calls, which are now in-the-money by $2.00, exercises all of them. Your broker notifies you of this on Saturday and come Monday, you are short 2,000 shares of IBM at $130. IBM opens Monday at $135 on the good news from Intel … this is not good news for the short call holders!
What would have cost you three cents a contract…
AAPL and PANL or, Looking Behind the Curtain (For Values)
About a year ago – on September 18, 2009 – I wrote about a company called Universal Display (NASDAQ:PANL), which is at the center of the blossoming OLED technology sector and its derivatives. OLED stands for organic light emitting diode and is a relatively inexpensive, high-efficiency method of producing light and images.
PANL’s focus is more on the development of new technologies within the OLED space and patents as opposed to distributing the actual products to consumers themselves. I bring this up not to gloat about the tremendous year the stock has had, but to remind you about hidden gems that are usually just out of sight when it comes to investing.
After researching PANL last year, I simply thought their technology and patents allowed them a strong position in the fast-growing display and efficient lighting space. The shares are up roughly 80% over the past 52 weeks.
Most of the U.S. is gaga over smartphones these days (myself included). I therefore thought I’d focus on the iPhone and the new Samsung Galaxy Tab as examples for today’s article.
I was recently listening to my 80-year-old grandmother (who is not a technology geek like myself) wax poetic about her new iPad. She just cannot put it down and she says it’s changing the way she reads (she’s up to three books per week). This got me thinking about how great innovations throughout the generations have not only changed the way we lived, but made many people a ton of money over the course of history.
When Apple (NASDAQ:AAPL) first went public in 1980, the IPO created more instant millionaires than any that had come before it – about 300 more, to be more exact. Remember, this was way before the iPod, iPhone, iPad (and even the iMac) were even a vision.
But investors don’t have to buy a stock ahead of their IPO to capitalize on a company’s success. What shrewd investors must do, however, is a bit more homework about a company’s product line.
After finding a product or technology you believe could either change the way we live or become an integral part of our daily lives, don’t just look at the company distributing the product to the masses and paying all those advertising dollars. Rip off the cover and look inside (and around it) for some potential hidden values.
The day the iPhone first came out, some of the initial videos were showing not just how cool it was to use, but what components were inside! Of course, the iPhone is an extreme example because everyone wanted to know who was manufacturing the guts of the device.
Everything Apple had touched in recent years seemed to be turning to gold. As such, if millions of iPhone units were flying off the shelves, the Broadcom..
Smart Investing Daily – Major Infrastructure Stock Too Cheap to Ignore
Monday, September 13, 2010
Last week the president announced his $50 billion plan to repair, rebuild and improve our nation’s crumbling infrastructure systems, while adding jobs in the process. Of course, any new spending plan bill will most likely be met with some opposition and scrutiny. Let me first say that I am not a supporter of deficit spending, nor do I agree entirely with our current fiscal and monetary policies, but that’s another article all together. What I can tell you is that a large portion of this country’s infrastructure is in extremely poor condition and MUST be repaired by any means necessary.
An Infrastructure System in Dire Need of Repair
Our 50+-year-old interstate highway system has a total length of over 47,000 miles, which need constant maintenance to maintain traffic flowing freely (the interstate system has had a good reputation for keeping roads at least partially open over the years). Many other roads, bridges and highways are not in as good of shape. According to the AASHTO (American Association of State Highway and Transportation Officials), bridges that were constructed in the mid-20th century generally have a life expectancy of about 50 years. The problem is that the average age of most of the nation’s 590,000 bridges is over 43 years old and many bridges are reaching the 50-year point. What’s even more frightening is that 74,000 of those bridges (that’s 12.4%) are reported to be “structurally deficient,” meaning that one or more aspects of a bridge’s structural condition requires attention.