Archive for June, 2011
The New Defensive Stock of the Decade
Jared A Levy, Editor, Smart Investing Daily
Tuesday, 28 June 2011
Things have gotten rough in the financial markets. Investors are looking for the next “safe haven” stock. And I’ll show you how you can buy it for 10% less than where it’s trading at!
Let’s look at why investors are looking at defensive stocks right now.
When times get tough, investors start to eye traditional defensive companies like Johnson & Johnson (JNJ:NYSE), Clorox (CLX:NYSE), Pfizer (PFE:NYSE) and Procter & Gamble (PG:NYSE). Utility and energy companies like Exelon (EXC:NYSE) and Exxon Mobil (XOM:NYSE) also attract investors when the future looks murky.
Tobacco and alcohol giants like Phillip Morris (PM:NYSE) and Diageo (DEO:NYSE) tend to come into favor, too, because consumers take up more bad habits when they are experiencing hardships in a down economy.
Usually defensive companies like these increase in popularity after the market has had a bullish run and a slowdown seems like the next step of the economy. Investors see these defensive stocks as a “safe haven.” But even though they are considered defensive, these stocks can and will drop in value.
In fact in 2009, many of these defensive stocks lost nearly as much of their value as the major market indexes! That’s not really defensive, is it?
What About America’s Situation Now?
We are supposedly emerging from a recession, but economic data doesn’t look so rosy. Do you really want to put your money into traditional defensive sectors like food and energy, or even “vice” companies that only seem to be safe havens?
What if I told you about a “defensive” stock that could outperform traditional safe havens? And what if I told you that Read more
How I Navigate Trades In a Tricky Financial Market
Thursday, 23 June 2011
If you are like me, you are nervous about the future of our economy. What happens to the stock market after QE2 ends and we are left with a cheap U.S. dollar, low home prices, and high food and energy costs? Not to mention high unemployment and spotty top-line growth for many American companies?
Some are even calling for a repeat of 2008… scary!
We will come out of this. But the question is not only when, but how volatile will the exit be? How do you trade and invest in such a confusing landscape?
To compound the problem, we live in an age of information overload. All that chatter creates noise and hides the truth behind the action.
How Do You Trade With So Much Uncertainty in the Financial Markets?
In Burton G. Malkiel’s book A Random Walk Down Wall Street, he pointed out three potential flaws in fundamental analysis:
- Information and analysis may be incorrect.
In gathering objective data, we may rely on many different sources to aggregate, sort or help us interpret data. During this process, data points may be bad, misinterpreted or miscategorized. - Analysts’ forward estimates of value may be incorrect.
Analysts must make certain assumptions. Even with quality, organized, objective data, the analyst must make a subjective forecast that is dependent on a multitude of factors, none of which have to come to fruition and even if they do, the market may have already priced in that data. - The financial market doesn’t have to “find” estimated value.
So let’s assume that your thesis and the analyst’s thesis is correct and that all of your assumptions become reality — your stock of choice may still decline in value. Perhaps because the “market” wants Read more
Is This the Ultimate Sell Signal?
Tuesday, 21 June 2011
Last week I discussed the chance of a major drop in the S&P 500. And for the past couple of months, Sara and I have accurately warned of sell-offs and market corrections. After all this selling you would think we would look at the bright side of the equities markets… unfortunately there is more bad news.
We may have just gotten the ultimate sell signal.
Those of you who have read or watched my commentary for some time know I am a fan of technical analysis and am an ardent statistical observer. In fact, I made a career out of numbers. It’s not because I believe in some secret mathematical code that controls the stock market, but rather I use numbers to find patterns in human behavior.
You don’t have to be a psychologist. With a smidgeon of knowledge, math reveals the truth behind human logic.
The 200-Day Moving Average
The world of technical and statistical analysis of stocks and options is massive and complex. There are many folks who study much more than I and have dozens of computer algorithms running in unison trying to figure out the market’s next move. It does not have to be that difficult.
Yesterday on CNBC, I must have heard the word “moving average” mentioned at least 20 times in a matter of two hours. Specifically, experts were referring to the 200-day exponential moving average (EMA) of several stocks, but one, Apple, was very popular.
Apple was the stock du jour and was on everyone’s radar because it fell below the 200-day moving average of about $316. Once this happened, the stock quickly dropped another $5, stabilized and closed right at $315.32 (the 200 EMA is $315.88, according to freestockcharts.com).
There are two major moving averages that traders use to determine if a stock or index is in a bullish or bearish trend. The Read more
America’s New Inflation Hedge is Real Estate
Tuesday, 14 June 2011
I guess you could call me a “grassroots” investor when it comes to my longer-term ideas. I look out my window, talk to friends and read the back pages of just about every local publication I can get my hands on. I want to find out what’s really happening out there, to find trends that could explode onto the national scene.
Most of the headlines of tomorrow are being hidden by the big headlines of today. They are often talked about in local papers, but can be hard to spot if you don’t look beyond Page 1.
I want to share with you an idea that’s a little unconventional… at least when it comes to inflation. Let me give you a little background.
America’s Struggle Against Inflation
The average American has little or no defense against inflation. For most of us, our home is the ONLY asset we have that keeps up with inflation and thus gives us some protection. You need to own hard assets like real estate and/or precious metals if you want to keep up!
For most Americans, the dream of owning a home is NOT getting any closer.
Impossible loan requirements make mortgages hard to come by. This is exacerbated by the fact that many have had their credit bruised in the recession. Many were perhaps even forced to change jobs or go to work for themselves, which also makes it harder to obtain financing.
If you couple that with the fact that most Americans are still scared to buy anyway, you have a housing market that is ripe for the savvy investor to step in and find deals.
Five to seven years from now, when the economy has stabilized and these issues disappear off of people’s credit reports, you will have a much healthier housing market out there.
If you have the means, you can profit in these tough times!
U.S. Real Estate: Housing, Housing Everywhere, but Not That Much for Rent
There is no doubt that the regular housing market is still suffering and banks are keeping their hands in their pockets when it comes to offering mortgages to prospective homebuyers.
Fannie Mae is the only agency that is helping buyers with less-than-stellar credit and less than 20% to put down on a home. You can expect lending to remain tight and housing to continue to struggle.
But rents are a different story altogether…
Rent rates are up and have been for some time now. In fact, according to the Bureau of Labor Statistics, primary residence rent rates are up over 1.3% over the past year. In this same period the average home value dropped about 5%.
I have been noticing this trend for some time now and finally the mass media seems to be catching on.
After looking at investments in Dallas, I wrote about rental property a year ago. I also warned of a Read more
It’s Not Just Citi That Was Hacked… More Online Security Breaches
Friday, 10 June 2011
Some of you may remember this Smart Investing Daily article from early February. In it I detailed the online security breach of the Nasdaq’s computer systems by hackers. I wasn’t concerned about just your personal data being stolen, but even worse, hackers taking control of the marketplace itself.
Recently, there was a online security breach at Citigroup (C:NYSE). Hundreds of thousands of customers’ very private and valuable data was accessed. Citi has about 21 million credit-card accounts, but they say only a limited number were affected.
According to the Financial Times who broke the story, Citi hasn’t said much else on the matter.
I feel like no one gets the enormity of the situation! I am talking about billions of dollars of our money, our credit and personal data at risk. There could even be a meltdown of the way we do business.
Imagine having all of your information wiped out… Tax documents, emails, financial statements, personal documents and medical records, your bank accounts…
Things are getting dangerous out there. Your personal information is more at risk now than at any other time in history. And it’s all because of one thing…
The Cloud
The cloud is like a huge public computer and hard drive. It’s a network that offers users access to different types of software that they might not have on their personal computers. The cloud can also store and control personal data, and that’s what we’re concerned about.
All this positive hype about the cloud should have us extremely concerned about the real privacy of our personal information. Having your personal information stored on a shared server is inviting trouble, no matter how secure it claims to be. But this trend is growing… Now that we are gravitating toward an era of “unchecked information and storage overload,” is our information safe at all? Are you comfortable having your life in the cloud?
I myself have been a victim of fraud and have been noticing an increasing number of major security breaches during the past couple months that NO ONE seems to be talking about. It scares me to death that we seem to be ignoring this specter.
In fact, Apple (AAPL:NASDAQ) just launched its new iCloud service. Take a look at this video of the new Apple iCloud server farm in Maiden, N.C.
(Sign up for Smart Investing Daily and let me and fellow editor Sara Nunnally simplify the market for you with our easy-to-understand articles.)
Online Security Breaches Everywhere
What is even more disturbing is that the Citi information leak pales in comparison to the serious data hacking that has occurred in the past three months:
Sony
One you might be familiar with is Sony’s PlayStation network. You may think of PlayStation as just a video game, but it has become so much more. This evolution made the network very attractive to hackers. A group of hackers named LulzSec even forced Sony to take its PlayStation network offline for a month after their attack compromised 77 million users’ data. Then LulzSec hacked them again (Sony Pictures this time)! They were basically able to download over 1,000,000 people’s personal information (Sony says much less), including passwords, email addresses, home addresses, dates of birth.
They also gained control of administrative passwords, privileges and 3.5 million music coupons.
Michaels Crafts
This story didn’t get much attention, but hackers were able to capture customers’ credit card and pin info at the arts & crafts stores across 20 states. It was hard to find out just how many accounts were affected. Unfortunately, thieves and hackers may remain dormant for a while before committing fraudulent acts with the data they have stolen.
Epsilon
Even third-party companies that have access to our data aren’t immune. Epsilon is the world’s largest permission-based email company that works with thousands of companies around the world. In April millions of Read more
Are SPX Options Signaling a Market Rally?
| Written by Jared Levy, Editor, Smart Investing Daily | |
| Tuesday, 07 June 2011 11:18 | |
| Options give an experienced trader the ability to make money in any market — no matter which way it’s headed. But did you know they can also act as a warning signal or a buy signal? Options can tell you when the market is about to go haywire, and they can also tell you when the market (or a stock) is ready for a rally.
To understand how, we need to take a step back for a second and look at exactly what an option is and what its price represents. An option is a contract that gives an investor the right to buy or sell a stock at a certain price (called a “strike price”) by a certain date. These investments give traders a lot of flexibility that stock investors don’t have. Most investors who buy stocks can only make money if share prices climb. Options investors can make money if the stock moves in either direction by investing in the right kind of option. Traders buy “call” options when they think the underlying stock is going to rise in price. If you think Exxon Mobil’s (XOM:NYSE) share price is going to climb from $80 to $85, you might want to buy call options. Call options increase in value when a stock’s share price climbs. Traders buy “put” options when they think the underlying stock is going to fall in price. If you think Exxon Mobil’s share price is going to fall from $80 to $75, you might want to buy put options. Put options increase in value when a stock’s share price falls. This last bit is how options traders make money when the market is falling. Now that we have a basic understanding of what options are, let’s talk about how options are priced. The Five Components That Influence an Option’s PriceStock Price — Obviously the price of the underlying asset (stock, index, ETF, etc.) will have an effect on the price of an option. Time Till Expiration – All options have an expiration date. The longer an option has until its expiration, the more expensive it is. You’re basically paying for more time for the underlying stock to move. The amount of time until an option expires will have a direct effect on the price. Dividends – Believe it or not, dividends also influence option value. Dividends lower the price of calls and raise the price of puts. (When you buy an option, all the dividend math is already figured in.) Interest — Interest rates have a fairly minor effect on most options, but they do influence option prices. Higher interest rates will increase call values and lower put values. Volatility — If there is a high demand for an option or if a stock is extremely erratic, “implied” volatility will be higher and the option more expensive and vice versa. Here’s what that means:
When the Natural Order Is DisturbedThe fact is that most of the investment community and media know little or nothing about options. They say the Volatility Index (VIX) is telling us whether the market is overbought or oversold or if investors are scared or confident. The truth is that the VIX alone can’t even come close to predicting these things without considering other factors. There is an innate balance and relationship between a stock and its options as well as the puts and calls themselves. What I am about to show you is what we professionals use to spot impending danger or safe opportunities. When there is a severe disparity between different options volatility, professional traders can use it to their advantage. One of the simplest uses is to gauge real market sentiment. (Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Sara Nunnally simplify the stock market for you with our easy-to-understand investment articles.) Meet “SKEW”Without turning this into a math lesson or boring you all to death, I’ll keep this simple and straight forward. Look at the chart below. This is an options chain, or a list of all the different options you can buy on a specific stock or ETF. This options chain is for the S&P 500 Index. You will see two options highlighted. One is a put (highlighted in red) and the other is a Read more |
The Next Market Bubble Is Forming and No One Sees It
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| Written by Jared Levy, Editor, Smart Investing Daily | |
| Friday, 03 June 2011 10:33 | |
| The mass media is obsessed with bubbles. They see market bubbles everywhere, like in crude oil, soft commodities or China… Granted, there are some serious issues with all three, especially with China and its consumption of the other two.
According to a report from a colleague of mine, there could be something happening with regard to China and its crude oil that could have a larger impact than what mainstream media has us concerned about. Follow this link to read more about China’s secret oil “colony.” But the mainstream hasn’t seen the market bubble I want to talk about today. Remember the Dot-Com Era?I know I do. Specifically I remember the summer of 2000, which was the beginning of the end for many dot-com companies. One experience punctuated the end of the decade for me (and it wasn’t the Y2K scare). At the time I was an options market maker. It was our job to create liquidity for the options markets. When the public was selling options, we were buying them and vice versa. A friend of mine was going on vacation for the month of June and asked me to trade a couple positions he had in Broadcom (BRCM:NASDAQ). Back then BRCM was a high-flying (and fast dropping) IPO. I was excited and scared at the same time. I remember he said one thing to me before he left: “make sure no matter what happens that you are long gamma!” That was a bold statement to make. It meant that this stock was going to be very volatile and you better be on your toes. That summer, BRCM rallied over 140%, to a high of about $185 — By February of 2001, it Read more |