Friday, January 31, 2014

Investments in the Chinese New Year of the Horse

ETFs to Watch in the Chinese New Year by Zacks Investment Research

The Chinese market has seen a rocky start to January thanks to concerns about slowing manufacturing activity and a shaky financial sector. These financial concerns really were starting to panic markets, as investors were worried about a possible default for a ‘riskless’ investment product.

The Product

The product in question -- 2010 China Credit-Credit Equals Gold #1 Collective Trust Product -- which promised a 10% return annually, far better than the 3% earned on bank deposits, was seen as likely to default on its payments worth $492 million.

The trust product, issued by China Credit Trust, was sold through different branches of ICBC to around 700 of the bank's high net worth clients (HNI).

The money raised by the trust was loaned to Shanxi Zhenfu Energy Group, an unlisted coal mining company. However, Zhenfu never obtained key licenses for its operations as its owner was detained in 2012. Subsequently, the coal mining company declared bankruptcy, causing China Credit Trust to declare that it might default on its payments for this product.

Default Avoided

The default fear that was looming large over the Chinese economy over the last few days has been temporarily averted. China’s (and the world's) largest bank by assets, Industrial and Commercial Bank of China (ICBC), recently declared that an unidentified third party has stepped in to avoid the default.

A mysterious third party acquired the shares of the coal mining company from Zhenfu to avoid default on the WMP. Investors will, however, receive only the principal amount and will have to forego the final interest payment.

Market experts were thinking that the Chinese central bank might after all allow this WMP to default. The default would have jolted investors of their complacency, making them more aware of the pitfalls of investing in alternative financial products for more returns.

Blame it on the Shadow

It is China's shadow banking sector that takes most of the blame for the debacle. The shadow banking market works outside the regulated financial market. This system permits banks and finance companies to lend money to businesses and others at high interest rates.

The lenders of the shadow banking system, which themselves borrow from regulated banks, have made a whole bunch of questionable loans that could default.

Is China Doing Anything About This?

In order to curb financial risk, China is seeking tighter controls on the shadow banking system and has issued new regulations to limit growth on unregulated loans (see China ETF Investing 101).

Though China is taking steps, the pace of default on trust loans points to a rather gloomy picture. Market data suggest that there are more than 100 billion yuan ($16.5 billion) in mining-related trust loans, which are expected to mature this year. While this amount is just for the mining sector, there are trust loans outstanding for other sectors as well.

Moreover, increasing defaults in the shadow banking sector might scare investors away from risky investments. This might lead to a credit crunch in the Chinese economy as money is pulled off the table. Authorities even while clamping down on the system will not want to put a grinding stop to its liberalizing efforts.

ETF Impact

Beyond the concerns over the health of the Chinese Financial sector, the slowdown in manufacturing and service activities is also one of the factors plaguing China. Many Chinese ETFs have plunged in the double digits since the start of January.

Popular large cap ETFs -- iShares China Large-Cap ETF (FXI), iShares MSCI China ETF (MCHI), FTSE China (HK Listed) Index Fund (FCHI) , China All-Cap ETF (YAO), and SPDR S&P China ETF (GXC) -- are the worst hit this year, falling more than 9% each since the start of the year.

During the past one week Golden Dragon Halter USX China Portfolio (PGJ), iShares MSCI Hong Kong Small-Cap ETF (EWHS) and iShares MSCI Hong Kong ETF (EWH) were the top three losers, plunging around 7.6%, 6.5%, and 5.9%, respectively.

Though the major large cap ETFs were the worst hit last week, the A-Shares market held up better. The trio of db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR), PowerShares China A-Share Portfolio (CHNA) and Market Vectors China ETF (PEK) reported flat to slightly positive gains (read: Inside the Struggling China A-Shares ETFs)

Bottom Line

Though China looks to have averted a high profile default ahead of their New Year, a wave of defaults by trusts would weaken the confidence of the people in the shadow banking system. The overall credit condition within the economy might be affected and a likely spike in interest rates might not be avoided, suggesting that the Year of the Horse might also be rough for China ETFs.

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Wednesday, January 29, 2014

Income Inequality and Wealth Distribution

Income Inequality Part 1 by Market Authority

In the next few days, I’ll be addressing the hot-button issue among economists of income inequality. I will try to provide an understanding of…

1. The origins of income inequality and creative destruction.

2. How technology is disrupting the workforce.

3. How Bernanke and QE exacerbated the problem.

4. A solution using available technology to build human capital and combat income inequality.

Today, we’re going to discuss the origins of income inequality.

To start off, I want you to take a trip down memory lane. Perhaps to the days of your youth, if you grew up in the US between the 1950s-1970s. Imagine yourself walking down Main St in the town you were raised. If it resembles anything like my hometown, you probably have a community savings bank, a diner, a five and dime, a local bakery, and a grocer. Most likely there isn’t a Starbucks (unless you’re in downtown Seattle), and I doubt your idyllic small town has anything resembling Walmart. People had jobs, businesses were easier to start, and the American Dream was alive and thriving.

Life started to change in the 1980s. Your grocer was replaced by a 7-11, your community savings bank became Bank of America, and your five and dime is now Walmart.

Why did this happen?

Profit-seeking investors began to create franchises that could deliver goods at a cheaper cost and still be profitable. This is how capitalism works, through a mechanism known as “creative destruction.” Coined by Austrian economist Joseph Schumpeter in 1942, entrepreneurs disrupt existing businesses causing short-term distress in labor until those workers can be re-trained for other types of work.

I know that may sound confusing so let me give you an example of creative destruction at work.

Sam Walton founded Walmart in 1962 in Bentonville, Arkansas. It was originally a small 5 and 10. Walmart now has 8500 stores in 15 countries and sells nearly $300bln in goods per year.

As Sam Walton began expanding the 5 and 10 business, he was able to leverage his growing distribution for better prices from suppliers. This allowed Walmart to move into new markets and offer consumers better prices. The existing businesses in those towns, mostly run by Mom and Pop’s, unable to compete were forced to shut down. As Walmart grew, sources of goods became cheaper and it became even easier to move into new markets, thereby causing rapid expansion in the 80s and 90s.

You can see this process in the rise in real wages of the 1% and upper incomes since 1980…

You can clearly see how all this creative destruction has only helped those at the very top. The Mom and Pop’s who previously ran their own 5 and 10′s are now working at the checkout counter at the local Walmart.

Although you probably paid more for your household goods shopping at a 5 and 10, but the money you spent stayed local. Your local profits from the 5 and 10 would be reinvested in your community either through direct spending by the business owners or through their taxes. In Walmart’s case, the revenues are funneled back to Arkansas and then distributed to WMT executives and equity holders. The next time you see a picture of one of Sam Walton’s offspring in Forbes, think of him as an amalgam of the 10′s of thousands of Mom and Pop’s they absorbed over the years.

Creative destruction is not only limited to retail. It has occurred in just about every industry in the past 30 years. There are positive and negative consequences. Goods may become cheaper, but wages have also risen slowly in order to compete with cheaper labor elsewhere or better technology.

Auto plants moved to Mexico or call centers moved to India - jobs have been leaving the US and (for the most part) not coming back. Technology and a “flat world” has accelerated this process.

But that doesn’t mean jobs aren’t being created in other sectors. The problem in the US is that workers don’t have the skills needed to fill the available jobs.

Every month, the BLS releases Janet Yellen’s favorite indicator - the Job Openings and Labor Turnover Survey (better knowns as JOLTS). As you can see in the chart below, available jobs have been rebounding since the recession and are at levels not seen since 2005…

The issue is that there’s been a huge shift in where these opportunities are available. While manufacturing and brick and mortar retail (Best Buy, Borders, etc) look like dying sectors, industries such as natural gas fracking, healthcare, and web development have plenty of openings.

This is due to the accelerating pace of creative destruction, especially as technology is disrupting existing business models at a faster pace than we’ve ever seen.

Next article, I’ll go over the reasons why creative destruction is occurring at a pace we’ve never witnessed.

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Monday, January 27, 2014

Investing in Consumer Goods Earnings Growth

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Best Buy (BBY - Trend Report) did another face plant because it can't compete with Amazon (AMZN - Trend Report) "show-rooming" trends, the "little big box" from Texas that does things differently bounced hard off of a breakout level in the low $60's.

What does Conn's (CONN - Trend Report) do that's so different from the other big box electronic and appliance retailers?

3 Big Things About the Lil Big Box

1) The Conn's earnings growth story is not tethered to just big screen TVs and refrigerators. With their HomePlus concept, this "everything for the home" retailer carries everything from high- margin furniture and bedding to lawnmowers and vacuum cleaners.

2) The 75-year old company built a solid reputation throughout Texas on customer service, even before it pioneered consumer credit financing in the 1960's.

While critics talk about their credit offerings as "predatory" because they help lower income people buy durable home goods, the facts are that the company takes risks it wants to get paid on.

In other words, they build relationships with customers who seem more than likely to pay their bills and continue to be repeat customers. To put some hard numbers on this, the average FICO score for Conn's credit customers is 600 and their average monthly balance is $1600.

These are not exactly "predatory" numbers in a world of cell phone carriers that make you sign 2-year contracts where you pay for that new $600 smartphone 3-4 times over.

3) The Conn's growth story has been busting out of Texas for years and the plans to go national with 200+ stores this decade could put other big boxes on notice, if not out of business.

Conn's has been expanding west into Arizona and New Mexico, north into Oklahoma, and east into Louisiana. And the earnings growth trends of this expansion have kept the stock a Zacks #1 Rank most of the past two years. New distribution centers in Denver and Charlotte mean Colorado and the Carolinas are their next targets.

While Amazon and Walmart offer hefty competition in the durable goods arena now, when you think about how people shop and buy for their gadgets and their home necessities, they will continue to go to places where they get good and trusted advice and where they really believe they are getting the best deal, even if that revolves around the finance offering.

A Big Shareholder Adds

Speaking of Louisiana, one of the biggest investors in CONN shares is the century-old Villere family of funds from New Orleans. They added to their 7% stake this month after the company reported another strong quarter of "comps" (same store sales) that proved the critics wrong.

While this purchase tied them with Fidelity for largest single shareholder, what makes the Villere family unique is that they are "on the ground" in Louisiana Conn's stores. They know the business and they understand the marketing mechanics of durable goods first hand.

This institutional action convinced me to add to my stake in CONN shares last week in the mid-$60s. I doubled my position for the Zacks FTM portfolio and I hope to ride these shares into another great quarterly report in March.

My bet is that these shares should trade at a minimum of 20X forward earnings estimates of $4 per share. This simple math guides a lot of my growth stock picks for FTM.

But you don't have to listen to me. Just to give you a rough idea of what kind of stock-pickers the Villere are, their biggest position is in 3D Systems (DDD). Sounds incredibly speculative and risky, right?

Well, I thought I "discovered" 3D Systems for Zacks followers when I bought it at $16 in January 2012. Truth is, the Valliere boys were buying it as early as 2006 and their average cost is much lower, even as they have added 130,000 shares in Q3.

Now you know why I follow quantitative stock-pickers who's work gels with the Zacks Rank.

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Friday, January 24, 2014

2014 Stock Market Surprises

By Zacks Investment Research

While we probably will not see any surprises bigger than the one we saw in 2013, with the S&P 500 being up close to 30%, there are sure to be unforeseen events in 2014. I am not sure anyone saw 30% coming with the headwinds we faced at the beginning of the year when we went through a tax hike, a sequestration that dragged on GDP, arguing about the fiscal cliff and risking default on our debt service, possible war in the Middle East and finally a government shutdown. One would think after reading all that, the stock market would not have been so kind all year long. However, we never even saw a full-blown correction of 10% or more, but that will happen at some point. So, while 2013 was pretty much a smooth ride there are bound to be some surprises in the new year that are not priced into share prices already.

Tapering Happens Too Quickly

When the Fed decided to slightly trim back its QE3 program by $10 billion a month, I called that the market was ready and would not sell-off and I said the $10 billion figure was more symbolic than anything else. I still believe the Fed wanted to taper slightly to see how markets reacted. The reaction was one of jubilation as all major indexes were up more than 1% that day which is bullish as it meant market participants took the news to mean the Fed thought the economy was strong enough to handle it. But unemployment also fell more than expected to 7% and GDP growth was raised to 4.2%. Might this give the Fed the ammunition it needs to really begin tapering in a meaningful way? I believe it could. I also believe a large taper is not priced into the market and any surprise from the Fed could cause the market to correct steeply.

Fed Tightening: A Good Idea

A full tapering probably will not occur until the trend in economic data continues on its upward trajectory. You can probably expect the same, data-dependent decision to continue under the new Fed chair Janet Yellen. While it is true, earnings growth is due more to cost-cutting measures by large companies, this year could surprise people. After strong gains at the start of a recovery, it is absolutely normal for earnings growth to move sideways for a while until the 2nd half of the recovery begins. I believe 2014 should be the start of the 2nd half of the recovery while consumer and business demand for goods and services finally picks up and sales become a greater factor in driving profits. The period could be characterized as the dawn of a new business cycle. Personally, I think we are in the same cycle we have been in since 2009, it just sometimes can seem so volatile that it appears we have gone through 3 or 4 cycles. I expect GDP and earnings growth to pick up the pace i n 2014 and with them, share prices. I would be surprised to see another 29% from the S&P 500, but we should see a nicely positive year.

Too Much Happiness

You would be hard-pressed to find a deluge of positive economic news coming out of the media, but with recent strong data coming in on GDP growth, earnings growth, housing, and unemployment, some pundits and analysts are getting ready for their New Year’s Eve parties and happily ringing in 2014 as the “Year of the Boom.” A quick Google search seems to indicate that there are more bulls right now than bears and some of those bulls are downright giddy. This begs the question: Are we in a stage of Euphoria? Euphoria is a bad, bad thing for stocks because it means everyone is getting in on the action, driving up share prices way past what their valuations suggest, and eventually there is no one left to buy and nowhere for prices to go but down. However, I do not see Euphoria yet. First of all, the media is an important component of Euphoria. When the headlines start getting bullish, be careful. Also, valuations are about where they should be and should continue to look better as the economic recovery continues. Additionally, there is too much cash on the sidelines right now, trillions in fact. Bear markets usually do not occur when this is the case.

Geopolitical Concerns

As with any year, 2014 could be the year of some major conflict. Think back to when Russia invaded Georgia or any time Israel gets involved with anyone of its neighbors, this usually sends the stock market down for some period of time. This year we could potentially see problems coming out of South Africa. Their currency is in deep decline, they have growing budget and trade deficits and slowing growth. It is very possible the rating agencies could downgrade South Africa causing foreign money to flee, which would then in turn cause a full-blown financial crisis that could spread to other emerging markets.

The Eurozone Problems

Europe will not be without its problems either. Yes, it has come out of recession led by the UK, which has had sustained economic growth since they ended QE. The real problem in Europe might be the European Union itself. It looks like many parties hostile to the EU itself may gain control in Parliament. The UK Independence Party, the National Front in France, Alternative for Deutschland in Germany, and the Freedom Party in Holland could form a majority. They can throw out the budget block legislation and veto appointments. Due to this, the EU could find itself in a constitutional crisis.

Putting it All Together

Almost every calendar year brings with it shocks that could temporarily cause the market to correct or even reach full-blown bear market territory. Some things are just unforeseeable. But even with the problems that could arise, I’m still very optimistic for 2014. Growth should pick up, which in turn should help earnings, unemployment and stocks prices. We have too many tail winds for 2014 not to be another good year in the economy and stock market. Yes, there will probably be surprises along the way and we could see that correction that never came in 2013, but our economy is strong enough to handle some relatively small events. Remember, investing is always going to be two steps forward and one step back. We took a few steps forward in 2013 so expect more volatility but ultimately, when it’s all said and done, we should be ringing in a happy new year next year as well.

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Tuesday, January 21, 2014

Investing in Financial Asset Management Earnings Growth

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Investment Management and Financial Advisory industry is expected to report strong results for Q4 2013. Now may be a good time to consider a Zacks Rank # 1 (Strong Buy) from this top rated industry.

About the Company

Lazard Ltd. (LAZ - Trend Report) is a leading global financial advisory and asset management firm with more than $175 billion in AUM. It operates from 40 cities across 26 countries in North America, Europe, Asia, Australia, Central and South America.

The firm provides advice on mergers and acquisitions (M&A), strategic matters, restructuring and capital structure, capital raising and corporate finance, as well as asset management services.

Excellent Third Quarter Results

Lazard reported it Q3 results on October 24, 2013. Adjusted earnings for the quarter came in at $0.46 per share, handily beating the Zacks Consensus Estimate of $0.35 per share and significantly up from $0.26 per share earned in the same quarter last year.

Excellent results were driven by strong top-line performance, thanks mainly to increase in financial advisory as well as asset management revenues.

AUM increased 10.0% year over year to $176.5 billion. The rise was a result of considerable market appreciation and net inflows of $1.7 billion in the quarter.

The financial position remained strong with about $688.4 million in cash and cash equivalents as of the end of the quarter.

Positive Earnings Estimates Revisions and Rank/Recommendation Upgrade

Lazard has been witnessing rising earnings estimates ahead of the fourth quarter results. The Zacks Consensus Estimate for 2013 and 2014 are $1.79 per share and $2.49 per share respectively, up from $1.77 per share and $2.44 per share, 60 days ago. LAZ has delivered positive earnings surprise in three out of last four quarters, with an average quarterly surprise of 36%.

As a result of positive earnings momentum, LAZ earned a Zacks Rank #1 (Strong Buy) and an “Outperform” recommendation earlier this month.

Return of Capital to Shareholders

The company has an excellent record of returning cash to shareholders. During the first three quarters of 2013, the company returned $294 million of capital to shareholders through dividends and share repurchases.

Subsequently on December 10, 2013, Lazard announced a special dividend of $0.25 per share on its Class A common stock.

The Bottom Line

Investment Management industry is expected to report excellent earnings for the fourth quarter thanks mainly to higher asset inflows and equity prices. In fact, the industry is currently ranked 15 out of 265 (top 6%). The financial advisory business has also been doing very well.

LAZ’s top Zacks rank coupled with top industry rank indicates strong chances of outperformance in the coming months.

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Wednesday, January 15, 2014

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Monday, January 13, 2014

Investing in DNA Gene Technology

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AFFX's preliminary revenue guidance for the fourth quarter came in ahead of expectations, sending the earnings estimates higher and the stock back to Zacks Rank #1 (Strong Buy) on January 8, 2014.

About the Company

Headquartered in Santa Clara, California, Affymetrix (AFFX - Trend Report) is a leading provider of microarray-based products and services to the global research community. The company utilizes its DNA chip technology in areas of gene expression, analysis, and clinical application to help treat infectious diseases, cancer, and other ailments.

Affymetrix has 1,100 employees globally and has a sales and distribution network across U.S., Latin America, Europe and Asia.

Excellent Fourth Quarter Preliminary Results and Third Quarter Results

AFFX announced its preliminary revenue for the fourth quarter of 2013, on January 7, 2014. The company expects total revenue of approximately $91 million (including a one-time licensing payment of $5.3 million) for the quarter and total revenue of approximately $329 million for the fiscal year.

Quarterly sales reflect a 7.8% increase from the year-ago level of $84.4 million. Further, both the quarterly and annual estimates were ahead of Zacks Consensus Estimates of $85 million and $322 million, respectively.

Earlier on October 30, 2013, the company reported its third quarter results. Non-GAAP net income was $0.05 per share, compared to a net loss of $0.03 per share, for the same quarter of 2012. The results handily beat the Zacks Consensus Estimate of $0.2 per share. Revenues rose 0.9% to $80.4 million, ahead of the Zacks Consensus Estimate of $79 million.

Positive Earnings Estimates Revisions

As a result of much better than expected operating/preliminary results, analysts have revised their earnings estimates for the company in the past few weeks.

Zacks Consensus Estimates for the current quarter and the current year now stand at $0.06 per share and $0.14 per share respectively, up from $0.04 per share and $0.11 per share, 60 days ago.

The Bottom Line

AFFX is a Zacks Rank #1 (Strong Buy) stock. The company also earned a (longer-term) Zacks recommendation of “Outperform”, based on its improved prospects. The stock was earlier featured as the “Bull of the Day’ on August 30, 2013. It is up almost 70% since then. However since the turnaround story appears to be working great, the stock still looks posed for further upside.

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Friday, January 10, 2014

Investing in Marijuana Earnings Growth

Getting High On Pot Stocks by Zacks Investment Research

Are you stressed out and need a release? Boss got you singing the blues? Well if you are in Colorado, you roll a fat one and as the kids say "chillax."

I am not sure what "chillax" means, but it appears to be a combination of chill out and relax. Seems to me they want to do the same thing twice as hard, which just gives me faith in our collective futures.

With all the stories of legalized weed, I decided to take a look at this topic a little more closely. I first took a look at to learn about this green plant and what it can do. Then I saw some tweets about something call "kush" selling for $400 an ounce and I nearly fell back into the couch and dreamed of easy money.

I mean, $400 an ounce, 16 ounces in a pound, it sounds like I don't need to dream of being Walter White anymore... more like Fritz Haber.

The Green Rush

The gold rush sent tons of people west with the promise of riches hoping that they would "pan out." Today, a similar rush, just of the green variety has people moving west looking to "pot out."

But there are some road blocks in place that are preventing us regular people from just setting up shop in CO or WA. Maybe it would just be easier to buy stock in a company that is already doing that! DUDE!

Recently I have been watching Growlife and how it has gotten so high lately. Then I saw that it’s a penny stock, and doesn't have a Zacks Rank, so I cannot pass this joint to the left hand side.

Medbox (MDBX) is another player in this green space. They have a little different take on the business as they have a machine that dispenses medication to individuals based on biometric identification (fingerprints).

Dude! What a great idea! I mean I don't even have to converse with another human when I am going to get my fix! But seriously, the firm is just selling the machines and not the green, so this is an example of buying the bullet makers and not the army in time of war.

MDBX does not have a Zacks Rank either. I am seeing a trend here.

I Could Ramble On and On and On

I kept looking for a stock that fits this new green space. But the more I looked, the more I found penny stocks that have ripped higher. None of which had a Zacks Rank.

What does that mean for me? Well that means I cannot recommend a good pot stock. I can only sit back and watch as these stocks fire up as the green rush gets underway. What will change my mind and get on bong... I mean on board, is if some analysts pick up coverage of the sector. Then, with earnings estimates, the stock would become eligible for a Zacks Rank.


Pot stocks are hot, but investors may get burned if they are not careful. The Zacks Rank will help you find the stocks that are seeing earnings estimate revisions, and that insight can help you stick with a higher flyer and prevent you from coming down from a big high too. As much as I want to recommend one or more of these stocks, I cannot, but if there are any analysts willing to do a deep dive into the jungle of pot stocks, I am sure you will have an instant following!

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Wednesday, January 08, 2014

2014 Stock Market Forecast Outlook Prediction

Will We See the January Effect in 2014? By Market Authority

After some Fed-induced volatility in early December, the rest of the month provided a jolly Santa Clause rally for stock holders. The S&P 500 gained 2.4% for December, enough for its 4th straight monthly advance. Christmas brought even more joy if you bought the dip mid-December and held through New Year’s

However, since the ball dropped on New Year’s Eve, the market has been dealing with a hangover – starting the New Year off with 3 consecutive negative closes. A 4th consecutive day of losses to start the year hasn’t occurred since 1991. Typically, the January Effect causes stocks to start the year off strongly.

The January Effect is a seasonal anomaly whereby the market prices increase more than any other month. First observed in 1942 by investment banker Sidney Wachtel, this theory holds that investors sell stocks into year end for tax purposes and then reinvest the capital at the start of the year. Another reason given is the payment of year-end bonuses in January, which can be invested into stocks.

However, I would argue that the mechanism doesn’t matter as much as the perception. Investors believe that stocks tend to trade higher in January, therefore they opt to hold (instead of selling). The reduction of sellers in the market (while keeping buyers constant) causes higher prices. So even if people aren’t moving their bonus $ into the stock market, the idea that the market goes higher in January becomes a self-fulfilling prophesy.

And in the last few months, this market has taken every possible reason to rally and ran with it.

A Prediction for the Next Five Years By Dr Van Tharp Trading Education Institute

I don’t usually like to make predictions because they have little to do with successful trading. However, I have said for some years that we have been in a secular bear market since 2000. This generally means that while stock prices can go up and even set new highs, PE ratios will generally go down. And new highs are not likely to be true new highs when you take inflation into account — especially real inflation. For example, I tend to doubt the market is truly higher today than it was in 2000 when you take the current rate of inflation into account, much less the decline in the value of the dollar over the past 14 years.

The government claims that the economy is growing when the GDP is greater than inflation. They decide that inflation is only 1-2% so they can show the economy is growing. But when you calculate the CPI the way it was calculated in 1980, then inflation is more like 10%. calculates the real rate of inflation based upon the old method and contrasts that with the current government rate “lie” (i.e., so they can make the economy look better and not have to make huge payments to government programs indexed to inflation). Using the old calculation for CPI, shows the economy has been in a RECESSION since 2000 with just one quarter of 2003 yielding positive growth.

Our debt grows by a trillion dollars each year and our government is not willing to take the measures (ever!) to get us out of the situation. Consequently, the US dollar is in big trouble. Soon, it will no longer be the world’s reserve currency. Further, it wouldn’t surprise me if in the next 2-10 years, the US dollar totally collapses, along with the Yen and the Euro which are not in any better shape. Such events would totally alter the money game that we discuss in depth at the Peak Performance 202 workshop.

People who change their level of consciousness, however, will be able to find great opportunities and thrive during this upcoming massive change. People who do not change their level of consciousness will likely be consumed by fear and panic. Hopefully, most of our newsletter readers and clients will be those who see massive opportunities in the change. That’s one of our major goals at the Van Tharp Institute — to help you transform by becoming happier, raising your level of consciousness (at least out of fear and greed) and becoming more successful as a result.

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Tuesday, January 07, 2014

The Biggest Problem on Being a Profitable Options Trader

The Biggest Enemy of Newbie Options Traders by Market Authority

Many inexperienced options traders believe that if they buy an option with a later expiration date, they can afford to sit and wait for the position to move in their favor.

The reality of holding longer-dated options is this - Time is not your friend. If you believe that buying options 3 months, 6 months, or 1 year until expiration is a viable strategy- you need to, in the immortal words of rapper Ice Cube, “check yo self before you wreck yo self…”

Ice Cube says, “Don’t buy longer-dated unhedged options, go for the drive-by!”

A better strategy is to trade for the “drive-by”, quick hit trade. Don’t sit on naked (unhedged) puts or calls. Buying naked puts or calls is merely adding leverage to your portfolio, and there are many factors working against you while you’re holding them. The opportunity to add leverage to your portfolio is costly, and you’re losing $ every day you hold them.

This is a chart of how your options lose value on a daily basis…

You can see how you lose $ everyday and you lose the most amount closer to expiration. Even options 3 months out shows rapid decay.

Remember this when you purchase an option – someone on the other side is selling that contract to you. And this someone is typically a market maker that can not only calculate 3rd derivatives in his head, but also has hand-held software that can give Gary Kasparov a run for his money in chess. You may win here or there, but in the long run, you will lose all your money. That’s a fact, jack.

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Monday, January 06, 2014

2014 Stock Market Outlook

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2014 Stock Market Outlook by Zacks Investment Research

No matter how you slice it, 2013 was a terrific year for stock investors. The +32% return for the S&P 500 was the third best showing since 1970. However, this success breeds two very different responses from investors as they look out at the new year.

1) Elation that the good times will continue.


2) Fear that it has been too good and now we are due for a fall.

In this article I will review the investment landscape for the year ahead. This will include a target price for the S&P 500 along with some potential pitfalls.

Historically Speaking

The statistics below should tell you a clear story that there is no benefit or harm the year following a big rally year like we had in 2013. Simply it states that each year is unique and will move up or down based upon the factors going on at that time.

So What Are the Unique Factors in 2014?

The economic picture continues to improve as GDP growth is accelerating from the previous Muddle Through pace of just 1-2% growth. So right now there is no threat of a recession, which is Public Enemy #1 for stocks.

The main issue at this stage revolves around valuation. Those who point to a historical average PE of 15 say the market is fully valued at this time given expected S&P 500 earnings per share of $120 this year.

This is a short-sighted view. First, that 15 average PE concept goes back too far in time when investors did not properly appreciate the risk/reward relationship of stocks versus bonds. Since then 16-17 PE has been more the norm.

Second, a maturing bull market will always have higher valuations than average. That is the difference between fair value and fully valued.

Third, valuation is also about the attractiveness of stocks versus other investment alternatives. Cash continues to be trash with ultra-low interest rates. Bond funds are losing money as rates go higher. Real estate has stalled out (also thanks to higher rates). Gold is going nowhere. And please let's not waste our time talking about bitcoins.

Add it all up and this points to another year of gains for stocks.

2014 Prediction & Potential Pitfalls

The S&P is up 53% the past two years and +177% since March 2009. Thus, the easy money has been made and we should not expect such robust returns in 2014.

More likely stocks will provide a more modest gain of +8 to 10%. That would create a target range of 2000 to 2040 on the S&P, which is a fully valued market around 17 times current year earnings estimates.

What would prevent this from happening?

Three hazards are out there:

1) Recession: Above I shared with you that the economic landscape is actually improving. However, the average expansion period between recessions lasts for 63 months. If that held true here we would see the next recession starting in the 2nd half of 2014.

Gladly this does not happen like clockwork. Each expansion is unique and this one seems to have plenty of life left in it. Yet, if the next contraction does start to appear, then the route to profits is by shorting the market.

2) Treasury Bond Rates: There is a historical relationship between Treasury bonds and the stock market. And that would be an Earnings Yield that is 3% above the Treasury 10 year rate. Right now that rate is 3% + 3% premium for stocks = 6% Earnings Yield. This implies a PE of 16.7 is fair value for stocks.

I believe stocks will do fine if rates float up to around 3.5%. Above that and it will start to call into question their relative value versus bonds, which could spark a correction.

3) Volatility: The gains in 2013 came all too easily. Each correction was shallow and short lived. I suspect we will see a bit more volatility in 2014 and those that spend too much effort timing the market will likely get chopped to pieces. Likely it will prove best to just stay the course with the best long positions and don't sweat the temporary downturns that come our way.

What to Do Next?

If you have been predicting the ups and downs of the market well over the last few years, then stick with the strategies that are working for you. However, if your record has been a bit spotty and if you would like some help in charting a course to better results, I have something for you to consider.

We here at Zacks have done exceptionally well at calling the market direction. And then applying the Zacks Rank to give our members a steady parade of winning recommendations.

Right now we have many outstanding portfolio recommendation services, including Whisper Trader, Home Run Investor, Options Trader, Value Investor, my personal Reitmeister Trading Alert and more. In fact, seven portfolios have substantially beaten 2013's very robust S&P 500.

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