Friday, February 28, 2014

Income Inequality Part 2

By Market Authority

This is the Second Part of a multi-part series on Income Inequality. Click here to view the first part:

Today, I’d like to discuss the reasons why creative destruction is rearranging industries at the fastest pace in history. The speed of creative destruction is causing job losses at a rate we’ve never witnessed, and increasing income inequality.

The situation is best described by MIT economists Brynjolfsson and McAfee in their book “Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.” You can buy the book here…

The MIT economists explain how the acceleration of technology is changing the labor force faster than workers can adjust to new jobs. And the speed of this change is starting to rapidly accelerate. The futurist Ray Kurzweil coined a term for the speed of the growth of technology, “the second half of the chessboard.”

Let me explain – there’s a parable about the inventor of the chess board and the rate of exponential growth. The king of the realm enjoys playing chess so much that he summons the inventor in front of his court and grants him one wish. The inventor of the chess board asks that the king take a chess board, put one grain of rice in the first square, and then double the amount of rice in each subsequent square (64 squares in total). When the first half of the chessboard is complete, the inventor owns a football field size of rice. When the second half is complete, the inventor owns a pile of rice the size of Mt Everest. The king opts to behead the inventor rather than paying his reward.

So how does this apply to technology? According to Moore’s Law, the number of transistors on integrated circuits doubles every 2 years. Computers get smarter, and the size needed to house the circuitry becomes smaller. This has been happening since the 1950s, or about 30 two-year cycles. As referenced above, we are only just exiting the first half of the chessboard.

In the 90s, creative destruction caused by new software technology greatly streamlined businesses. Much of the routine paperwork, once handled by humans, was replaced by Microsoft Office. Middle market tasks were replaced by Oracle software. Productivity surged as the number of people and time required to perform administrative tasks was greatly reduced. With increasing productivity came increasing profits and a stock market rally.

In other sectors, manufacturing plants shed labor as humans on assembly lines were replaced by machines. Now, even storage warehouses can employ robots to choose items, pack, and ship. In fact, if you were to order “Rage Against the Machine” from Amazon- a robot with higher intelligence than Johnny-5 from “Short Circuit” will retrieve your book from the Amazon warehouse and place it in the packing queue. Eventually, your UPS deliveryman will be replaced by a drone.

Now here comes the proverbial “second half of the chessboard.” This is where jobs requiring a higher-level of education and skill are reduced, and we are already witnessing it. has disrupted the incomes lawyers traditionally received for drafting LLCs, wills, and divorce papers. Robots are replacing the amount of doctors and nurses required for surgery. Algorithms are executing stock orders. Your travel agent has been replaced by The list goes on and grows everyday, as technology becomes smarter and faster.

So, how does the increasing speed of creative destruction impact income inequality? There is a huge transfer of wealth from people who own capital (and are able to invest in the new technologies) and the labor force. This is why the majority of income gains over the past decade increasingly land in the pockets of the 1%.

There is an interesting chart that reflects this phenomenon.

The red line is Corporate profits and the blue line represents Labor’s share. As technology has increasingly become a larger factor, the amount of profits for corporations has grown, but compensation for labor has decreased. This is why we live in a have- or have not- society.

Technology is rapidly increasing and the productivity and profits that follow are going to the owners of capital, not labor.

And the most frightening part of all this is robots have just entered “the second half of the chessboard,” meaning the rate of income inequality is set to increase.

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Wednesday, February 26, 2014

The Market Tends to Repeat Itself — Should We Care?

By Dr Van Tharp Trading Education & Workshops Institute

“History does not repeat itself, but it does rhyme.” — Generally attributed to Mark Twain, though unconfirmed

An interesting chart is still making its way around the markets and financial press. Commonly known as an analog chart, its function is to compare today’s market action to a past period in hopes that history can provide some guidance as to what we might expect going forward from today.

Are such charts useful? Let’s look at the current chart du jour and then we’ll dig a little deeper:

Market Year Analogs — Like Almost All Market Tools- Useful in the Right Context

Let me jump to my conclusion first, and then we’ll dig into some supporting evidence. I have been watching market analogs for decades and have tried really hard to dismiss them. But I can’t. Mostly, however, I have seen them broadly misused as a technical tool (but then again, so are stochastics, VIX lows, etc.).

Because they are not created or used properly most of the time, analogs can be very misleading. There was a time back in 2003 when a very good analyst went down an analog rabbit hole that had him looking for another scorching drop. While he was looking for that drop to happen, he missed the start of a 5 year bull market.

The current popular analog above comparing today’s market to 1929 is an example of a grossly misleading analog, though it does have some merit, as we shall see.

It’s All About the Scale

The biggest problem with market analogs is that you can use any price scale and any starting point to make two curves seem fit each other. Put a couple of clever people in a room for a day, and they can come up with dozens.

What’s the biggest problem with the current analog? The creator used two independent Y axis scales which misleadingly makes it look like we could be facing a 1929-style crash.

If we look at the same data and put all of it on a consistent scale (indexing both time frames to a starting point of 100), we see a very different picture:

The 1929 time period was MUCH more volatile. On an equal basis this analog is much less compelling.

This doesn’t mean, however, that we have to throw the market analog tool out the window. It means we should use it responsibly and with proper context – just as we should use all technical tools.

Is There a Good Use of Market Analogs?

One of the reasons that I can’t throw out market analogs all together is that some really excellent traders have used them and continue to use them.

In fact the current 1929/2014 chart has been credited back to Tom DeMark, who certainly has plenty of high-powered funds following his work.

Paul Tudor Jones has widely credited market analog studies as a source of inspiration for his famous 1987 crash call (though he certainly also used other tools).

A friend of mine and an extraordinary trader, Peter Brandt made a great call at the beginning of 2012 using recent market analog to call the bull market run in the first four months of the year.

If you think about technical analysis in general, it is based on the premise that market patterns repeat themselves. Those patterns arise because buyers and sellers are subject to human emotions and the psychological biases of auction markets. It is easy to verify that some patterns happen again and again. Are market analog charts really so different?

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Monday, February 24, 2014

Investing in Biotechnology Earnings Growth

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Biotechnology was full of success stories in 2013. And some of those stories just got more exciting in February as the Nasdaq Biotech Index (IBB - Trend Report) rallied 13% off the lows. My FTM Portfolio also surged higher on the back of names like Pharmacyclics (PCYC - Trend Report), Medivation (MDVN - Trend Report), and Alnylam (ALNY - Trend Report).

But Alexion Pharmaceuticals (ALXN - Trend Report) was one of the heavy lifters of that IBB performance since it comprises nearly 5% of that index. ALXN shares rallied 17% this month to hit an all-time closing high of $181.52 after a strong quarterly report in late January that first vaulted the stock over 20% in one day from the low $130s to over $160.

What was all the excitement about that had this biotech superstar making a $50 (nearly 40%) move in under 3 weeks? Sales and taxes, of course.

Blockbuster Drug

Alexion's revenues jumped 38% to approximately $442 million in the final quarter of 2013 -- beating the consensus by over $10 million -- driven by strong sales of their key drug Soliris, which is the only treatment available for paroxysmal nocturnal hemoglobinuria (PNH).

PNH is a rare genetic blood disorder characterized by the onset of severe hemolytic anemia, chronic fatigue and intermittent episodes of dark colored urine, known as hemoglobinuria. Because of the life-saving benefits for these patients that only come from Soliris, major insurance companies support one of the highest price tags of any drug treatment at roughly $440,000.

This may seem unfair to some minds, but Alexion was founded in 1992 and it's been a long and bumpy road to profitability. If biotech companies don't have visibility on potential financial outcomes, they cannot invest the billions in laboratory and clinical R&D necessary to discover specialized drug therapies that are both effective and safe in treating rare diseases that may only afflict a few thousand people.

In 2011, the FDA cleared Soliris for treating children and adults suffering from atypical hemolytic uremic syndrome (aHUS), an ultra-rare genetic disorder. In Nov 2011, a similar approval for the drug was granted in the EU. Japanese approval for the aHUS indication came in Sep 2013.

Zacks Investment Research reports while Alexion is testing Soliris and a number of other compounds in a variety of different disease indications, the drug recorded sales of $1.55 billion in 2013, up 37%.

Irish Tax Haven

Besides raising guidance on sales of Soliris to $2 billion for 2014, the company detailed plans for exceptional corporate tax savings as they develop operations in Ireland. This reworking of Alexion’s tax structure was largely unexpected by analysts who were modeling a tax rate for 2014 coming into the quarter of 23% compared with the new 11% revealed last month.

The company informed investors in their last conference call that effective from 2014, its Irish units are holding certain intellectual property rights to Soliris and other compounds. Obviously the company stands to benefit greatly from lower tax rates thus aiding its long-term growth prospects.

But the move also makes sense for a global pharma company providing disease treatment around the world to centralize operations in tax-friendly region with a strong pool of biopharma workers.

Alexion also stated that it intends to utilize its net operating loss (NOL) balance (approximately $9 million at the end of 2013) as well as tax credits ($190 million at the end of 2013) to offset its taxable profits.

These measures are reflected in the company s adjusted tax rate projections of 11%-12% for 2014, 13%-14% in 2015, and 16%-18% in 2018. The move to invest heavily in Ireland is indicative of management's efforts to increase shareholder value.

Analyst Reactions

Following these announcements in late January, Wall Street analysts began revising their models for Connecticut-based ALXN.

Stifel Nicolaus raised their earnings estimates and price target to $207 from $138 citing that the FY14 bottom-line guidance provided the first glimpse of longer-term earnings leverage associated with the completion of the offshore operational realignment that would "optimize" the company's longer-term tax rate structure, generating more than $20 per share in incremental upside.

Both Canaccord Genuity and Brean Capital analysts were out immediately after the company report on January 30 and raised their outlooks and price targets to $200. On February 7, the stock began making the move up from $155 and on Feb 10, Deutsche Bank sealed the deal with their PT bump from $125 to $205.

With consensus projections for EPS of $4.76 in 2015, here's what the growth trajectory looks like for Alexion based solely on Soliris.

ALXN Pipeline and Valuation

But those estimates could accelerate even higher in the coming years as the company develops its drug pipeline. Stifel analysts also noted that they expect an improving catalyst calendar and an expanding/diversified pipeline to further support additional multiple expansion for ALXN shares.

Alexion currently has several candidates in clinical development focusing on different areas. Alexion expects to launch seven products in the 2014-2018 time frame. And the company inked a deal with the privately held Moderna Therapeutics in January for the discovery and development of messenger ribo nucleic acid (mRNA) therapeutics to treat patients suffering from rare diseases.

Most developmental biopharma companies face regulatory risk as they run the FDA gauntlet. But William Blair analysts explain the extra challenges for Alexion.

Because the company targets "ultraorphan" markets with its drug therapies, where the diseases are often poorly characterized and few alternative therapeutic options exist, they face FDA approval pathways that are not always well-defined, and any regulatory setbacks with investigational compounds in Alexion's pipeline could pressure the shares.

Alexion's trailing 12-month price-to-sales multiple is 20X, compared to its peer group multiple of 9.4. With a $35.3 billion market cap, the stock is trading over 17.5 X 2014 sales estimates, above its peer group multiple of 9X. On a P/E basis, ALXN is trading at just over 50X this year's earnings estimates of $3.50.

Apparently the analysts are quite comfortable with this valuation for a biopharma company with a blockbuster drug, an expanding pipeline, and the loopholes of the Irish.

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Tuesday, February 18, 2014

Investing in Shipping Earnings Growth

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I’m a big fan anything that could be viewed as a “Leading indicator.” Something that can give me an inside edge that the rest of the market doesn’t have. I know this goes against that whole efficient market thesis but I never liked that thing anyway. Here at Zacks our entire life centers around a ranking system we see as a leading indicator. And rightfully so I believe. 26% average annual return for our Zacks Rank #1 (Strong Buy) stocks versus the market’s average just under 10%. The proof is in the pudding.

Now when I get to combine that edge with another leading indicator like the Baltic Dry Index and then put technical analysis on top of that, I feel like I’m fishing with dynamite. The Baltic Dry Index calculates the cost to ship raw materials in bulk around the world. Basically it’s a daily pulse of the market for shipping and shows us how much dry bulk shippers are getting paid to do business. As a result, it is a leading indicator for the industry.

Quick scrub on our website and you’ll find a host of Zacks Rank #1 (Strong Buy) stocks in the dry bulk shipping industry. Today I picked Paragon Shipping (PRGN) as our Bull of the Day. Look at how the Baltic Dry Index has increased since the beginning of 2013. From a low near 700 the index tripled before coming down early this year. PRGN stock has moved in a similar direction, gaining momentum as price rose from $3 to over $7.

Given the cyclical nature of the BDI, I think we will see another big spike once the weather warms up and shipping kicks up again. This should prove bullish for the stock. Also, take a look at the price and consensus chart. Earnings revisions to the upside recently have helped add momentum. If revisions are right, 2014 could be a banner year for Paragon.

If you look at the technical chart of Paragon Shipping (PRGN) you see there was a big drop recently. Was there horrible news? A CEO scandal? Earnings miss? Nope. They priced a previously announced stock offering down at $6.25 when the stock was trading above $7. This is the greatest thing that could happen to someone bullish on the stock looking for a chance to get it. If you like it above $7, you have to love it down here.

This $6.50-ish price we are at here provides a good entry point given where buying has occurred in the past. This level has been good support several times since it broke below it in September 2013. Usually I would not recommend buying this stock given the technicals. The drop in price due to the announcement serves as a Roger Mathis-sized asterix. Here it throws the chart off a bit. Pulled the stock well below the 25x5 SMA and forced the stochastics into oversold territory. But you should never look a gift horse in the mouth. The story is there, the fundamentals are solid, and the price is right.

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Friday, February 14, 2014

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Wednesday, February 12, 2014

Top Trading Mistakes People Make in the Market

By Dr Van Tharp Trading Education Institute and Workshops

My goal for 2014 is to write a book about beliefs and trading because everything boils down to beliefs (and of course, that statement is also a belief). Knowing that, I was very intrigued when I saw a Forbes website piece on the top mistakes even supposedly savvy investors make. What’s interesting about these types of articles is their general vagueness: no one ever clearly defines a mistake or states any of their assumptions when they describe mistakes.

I decided to go through the Forbes list of top 10 mistakes and discuss some of the underlying beliefs for each and then share my own list for the top 10 mistakes.

The Forbes List

In this list, I will repeat each mistake from the article with a short explanation. Then I’ll restate the mistake in a more useful form. The revised form will still be their definition of a mistake, but just in a format that most people may find more meaningful.

1) Forgetting value. The assumption here is that value investing is one of the most important types of investing and then if forgotten, of course, it becomes a significant event. However, you could probably say other versions with different assumptions such as “forgetting what the market is doing” or “not paying attention to reward versus risk.” I actually think those beliefs are more important. So perhaps a better version of this mistake would be — Forgetting some core value that drives your trading.

2) Getting too big for your britches. This is an interesting mistake because it is actually a metaphor. The author seems to mean not knowing how to handle an account that has grown too fast. I don’t really think this is a mistake at all because if you had been thinking in terms of R-multiples and percentage risk because sudden changes in your account size should not matter. Let me rephrase this mistake as — Not risking a constant percentage in each trade (which helps you meet your objectives).

3) Putting too many eggs in one basket. Again, this is an interesting metaphor to describe an investing mistake but when the author explains the meaning (putting too much money into one stock), the metaphor doesn’t fit really well anymore. I would certainly agree that an improper position sizing strategy (or lack of one) is a huge mistake. So rephrasing this becomes — Risking too much and not understanding the implications of position sizing strategies.

4) Thinking you are special. So what does this mean? Well according to the author of the piece, this occurs when someone thinks that the common judgmental heuristics that people have in their decision making doesn’t apply to them. But wouldn’t a better way to say this be? — Not understanding that you are the most important factor in your trading.

5) Chasing yield. Here’s another rather unspecific statement. You could easily create a great investment strategy based upon yield, however, if you realized the assumptions you were making and were able to test it. So my rephrasing of this one would be - Understand your strategy (system) and how it works in different market types.

6) Letting the tax tail wag the dog. Oh, the power of language and the desire of author to be colorful. I’ve known people whose investment strategy was totally controlled by the capital loss limitation. So their rule might sound like, “Don’t lose more than $3,000." And then other people might not sell a huge position that’s gone up 20 fold because they wanted to avoid the capital gains tax implications. So this one boils down to — Not having sound objectives and being influenced by such things as taxes.

7) Changing horses midstream. What does that mean? Well, according to the author it really means that your emotions caused you to change your plans. So wouldn’t the mistake be - Emotional decision making?

8) Buying all at once. The author tried to explain this by saying that if you are going to buy 1,500 shares, just buy 500 shares at first and see how it does. To me this suggests that the author doesn’t really understand entry methods, good objectives, and effective position sizing strategies. So how about rephrasing it as —Not understanding entries and the correct amount to risk for your trade.

9) Not minding the market. The author really seems to mean that buying and holding positions without paying attention to what is happening in the economy and market is a mistake. So my version of this mistake is simply — Buy and hold.

10) Trading the news instead of the stock. So this one probably reflects the author’s bias that investors need to understand the fundamentals of a stock or perhaps the technicals. Of the mistakes in the article, however, this one is probably the vaguest of all. I’ll rephrase this mistake as — Not trading your strategy under the conditions in which it works.

So do I agree with any of the mistakes on the list? Based upon how the author phrased the mistakes, the answer is no. Based upon how I rephrased the mistakes, however, I would agree all are mistakes but that only 4, 5, 7, and 10 are on my list of top ten mistakes that traders make.

But now, based upon my many years as a trading coach, let’s look at my version of the top ten mistakes.

Van’s Top Ten Mistakes that Investors/Traders Make

First let me define a mistake. A mistake occurs when you don’t follow your written rules. This of course assumes you have written rules and leads us to the first and biggest mistake that most traders make:

1) The biggest mistake of all is — Not having any written rules because then everything you do is a mistake.

2) Not understanding that trading is 100% beliefs and psychology. This belief makes you the most important factor in your trading and it is similar to my revision of mistake four on the Forbes list.

3) Not understanding that trading is a business. Additionally, trading takes as much training to perform well as does any professional field. So the mistake I see often is people treating trading as if it were a hobby. Approaching trading as a business means 1) clearing out your psychological issues; 2) developing a handbook to guide your trading; 3) developing at least three strategies that cover at least three major market types; and 4) improving your trading efficiency so that it is at least 95% (no more than one mistake per 20 trades). It’s not an accident that these are the steps and goals for people in my Super Trader program.

4) Not having sound objectives. Objectives require that you know yourself and what you want. Defining your objectives is at least 50% of the process of developing a system that fits you.

5) Not understanding market types. There are at least six different market types: up, sideways, and down under quiet or volatile conditions. It’s very easy to design a Holy Grail system to fit any single market type but it’s insane to assume that one system will work well in all market types. This mistake is pretty similar to the way I have rephrased the Forbes article mistakes 5 and 10.

6) Not monitoring your mistakes and not understanding their impact. You need to monitor your efficiency so that you make less than 1 mistake in 20 trades to maintain 95% efficiency or better. While this mistake sounds a little like number one, it more specifically applies to following your written rules. Repeating the same mistake over and over again is a great definition of self-sabotage. So you must be aware of when you are doing this and do whatever you can to make sure that you are minimizing the impact of mistakes.

7) Not being aware. You are generally controlled by your thoughts and emotions. There are many ways to prevent this, but they all require you to be aware of when it happens. Being controlled by your thoughts and emotions and then being aware of it only after the fact (or perhaps never) is a huge mistake. This is similar to mistake #7 on the Forbes list.

8) Not understanding that it is through your position sizing strategies that you meet your objectives. You should be spending most of your time strategizing about how to use position sizing strategies to meet your objectives, which assumes that you have objectives. Many people make this mistake and it can have a huge impact. And it’s probably my version of mistake three on the Forbes list.

9) Needing to be right instead of understanding the impact of reward to risk. A trading system that generates 7 straight -1R losses followed by a +10R win illustrates one of my core teachings. You have only been right 12.5% of the time, but you have suddenly have a net +3R. And if you were risking 1% per trade, you are now up 3%.

10) Not understanding that trading is a statistical process with probabilities and distributions. If you understand this then you can measure your likelihood of success in the future and develop plans that will help you meet your objectives. That’s what I call sound trading.

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Monday, February 10, 2014

Investing in Solar Power Earnings Growth

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Although the solar power industry took a bit of a breather in the fourth quarter of 2013, it now appears that the sector is back on track. Strength has been seen in many names to start the year, and there is plenty of reason to believe that more gains can be had in this corner of the market in 2014 as well.

While there are a number of solid names in this segment, one that you have probably overlooked until now is Canadian Solar (CSIQ - Trend Report). While the name ‘Canadian Solar’ might sound like a bit of an oxymoron, investors should definitely be paying attention to this solar company which could be the cream of the crop for investors this year.

CSIQ in Focus

Canadian Solar is a leading vertically-integrated solar module producer that has operations around the globe, but focuses in on North America, Europe, and Asia. Much of the company’s manufacturing capacity is located in China, though it does have a plant in the Ontario province of Canada as well.

The firm has a definite tilt towards European operations, as this segment accounts for about 50% of total revenues. While this was a bit of an issue in years past, European is turning around and CSIQ is looking to clean up in this market once again.

Beyond Europe, the company is also making a name for itself in Asian markets, and particularly in the fast-growing Japanese solar space. This is a very important market—given Japan’s desire to replace nuclear power—and since Canadian Solar is now the top foreign solar company in Japan, the firm looks to have a bright future in this key country.

We have already seen strength in many of these markets, as the company’s latest earnings report—although it missed our consensus estimate by one cent-- saw net revenues that were up nearly 29% (qoq), while gross margins hit 20.4%, a huge increase from the previous quarter which was at just 12.8%, suggesting a huge uptick in some of the firm’s key metrics.

So, thanks to this strong position in Japan, a more robust European market, and strong margins and revenue numbers, things are looking quite good for CSIQ. In fact, the company has seen strong estimate revision activity as of late, and it is looking for amazing growth rates well into the future as well.

CSIQ Estimates in Focus

With a recent analyst revision, CSIQ is expected to see year-over-year earnings growth of over 166% for this quarter. And for the full year, growth of over 125% is expected for the company, and over 300% growth for the following year as well.

Clearly, Canadian Solar has come a long way in a very short time period, as the company was actually posting a huge loss last year, but is now projected to see profits approaching $0.84/share for the year. And best of all, even with this great rate of growth and impressive turnaround, CSIQ is still trading at a forward PE below 12, suggesting it is an incredible value.

Bottom Line

Given these factors, it shouldn’t be too surprising to note that Canadian Solar has earned itself a top Zacks Rank #1 (Strong Buy), meaning we are looking for outperformance from this name this quarter as well. And with a fantastic industry rank for solar power, currently the industry is in the top ten industries out of more than 250, it is pretty clear that solar power is poised for more gains in 2014 too.

So, with this broad based strength in solar and hopes for more solar demand in 2014, it is undeniable that solar power companies should be on your radar this year. And given the rebound and strong growth in some of CSIQ’s key markets, along with its increase in solar module shipments and surging gross margin, it should be easy to see why CSIQ is a top pick in this surging segment of the market.

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Friday, February 07, 2014

Investing in Russia after the Sochi Olympic Games?

Can Winter Olympics Give Russia ETFs a Boost? By Zacks Investment Research

Russia was once a hot FDI destination but the country has lost its appeal as a valuable investment proposition over the years, thanks mainly to its slowing growth rate. The country is now growing at a rate of just 1.5% (or less) a year, a considerable decrease from 4.3% snapped two years ago. However meager the growth was in 2013, it mainly came from domestic consumption. Investment was too dull to mention.

Russia is a commodity rich country with a focus on oil, natural gas and nickel. Its all-important energy sector contributes one fourth of its GDP and more than half of its total exports. Since 2013 was not rewarding for commodities , Russia’s sharp downturn in growth becomes self-explanatory.

Reduced Growth Outlook

Last month, Russia’s economy ministry slashed 2013-2015 GDP outlook to reflect sluggish corporate investment and listless growth in consumer demand. Growth outlook now remains 1.4% for 2013 (down from 1.8%), 2.5% for 2014 (down from 3.0%) and 2.8% for 2015 (down from 3.1%). The rates are really too modest to dip a toe in Russian Equities.

To add to this, the poor demography and complicated legal framework are crippling the nation’s long-term growth potential thus prompting foreign investors to flee the country. Also, better-than-expected U.S. labor data hinted at a possibility that the pace of the QE tapering might ratchet up in the course of 2014 posing another round of threat to emerging market.

Amid such a backdrop, as investors grow more uncertain over the health and near term future of Russia, many are taking a closer look at one of the pillars of the BRIC nations thanks mainly to two big global events – Winter Olympics 2014 and World Cup Football 2018.

Can Investment Turn Around?

Reportedly Russia is spending $50 billion to prepare for the 2014 Sochi Olympics that will run from 7–23 February, much higher than the previous estimate of $12 billion. Russian Railways invested $8.7 billion in linking the coastal and mountain Olympic villages by rail and road.

The event will definitely give a thrust to Russia’s tourism. The country’s state-owned lender Vnesheconombank issued $7.5 billion worth loans to investors monitoring construction projects for the visitors expected flock to the south resort town this February.

If this was not enough, Russia should see a wave of spending thanks to another big event – World Cup Football – coming up in 2018. In short, the nation should see in spike in infrastructural investment in the coming period.

Though the World Bank also trimmed 2013 growth forecast from 1.8% forecasted in September to 1.3% in the December last year, the bank expects growth to speed up in 2014. Growth is estimated at 2.2% for 2014 and 2.7% for 2015. The bank also anticipates that “investment activities will slowly pick up, as the destocking cycle comes to an end and consumption growth will level out”.

Investors should also note that unlike many prominent emerging nations, Russia runs a current account surplus. Its unemployment levels also remain low. Its currency ruble has shown more resilience to the greenback compared to other emerging markets, while any spike in oil price will likely give a big-time boost to the Russian economy.

ETF Impact

The Russian ETFs like Market Vectors Russia ETF (RSX) and SPDR S&P Russia (RBL) added a respective 0.17% and 0.86% in the final quarter of the year, in line with the broader emerging market fund iShares MSCI Emerging Markets ETF’s (EEM) gain of 0.55%.

Although there are some other products in the Russian market, investors seeking the biggest and most liquid option in the Russia ETF world, look no further than the oldest option – RSX. Thus, for investors looking to ride out the upcoming event, we have detailed RSX below.

RSX in Focus

The product trades about 3.6 million shares a day and holds $1.14 billion in assets, suggesting tight bid/ask spreads for investors. The fund charges 62 bps in fees. The fund invests its asset base in a portfolio of 48 securities and appears to be concentrated in the top 10 holdings, which constitute 59.1% of the total asset base.

In terms of sector exposure, energy dominates, making up nearly two-fifths of the total portfolio. It is closely followed by the materials sector, which accounts for about 15 of the total. RSX slumped by 5.9% in 2013.

Technical indicators also show some signs of hope. The relative strength Index for RSX is presently 42.68, almost near the oversold territory which indicates that the fund might bounce back in the near term. Its short-term moving averages also are above the long-term average this giving another bullish signal for the near future.

Bottom Line

Russia desperately needs some policy reforms to encourage companies to invest more generously in the coming period and cash in on the other global event post Olympics. These upcoming events will undoubtedly be real tests for the nation and it isn’t irrational to assume that Russia will leave no stone unturned to prove itself on the world stage. Also, while the long-term outlook continues to be bleak as of now, investors can only hope to gain out of this oil-rich nation in the near term.

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Wednesday, February 05, 2014

Three Interesting and Very Useful Market Graphics

By Dr Van Tharp Trading Education & Workshop Institute

“A picture is worth a thousand words.” — Early 20th Century U.S., Multiple Attributions

Long-suffering readers of these articles know that I have a real soft-spot for cool graphics. Today’s charts may not have that big of a cool factor (see this link for examples of really cool charts), but today’s graphics are definitely interesting, timely and useful.

First, A Market Check

The tenor of the market has certainly changed since last Wednesday. As of right now (Monday evening 1/27), the S&P 500 has gone back to test the Bernanke/tapering announcement low (12/18) on a reversal bar that launched the markets to new highs. The following chart does not count as one of our three cool ones today, but then again, it’s still pretty useful:

A break of the key support level shown in the graphic above (which may or may not have happened since this article was penned on Monday evening) would be bad news for the bulls. As of Monday’s low, this pullback has dropped the S&P by 4.2%. A full blown correction is still a far ways off (10% off of the highs would take us down to 1,665.76 on the cash index chart above and would almost reach the October 2013 lows).

Those Three Other Charts

Apple reported 4th quarter 2013 earnings on Monday along with a bunch of additional data. While the quarter’s global iPhone sales, iPad sales and total corporate revenues were at all-time highs, they missed analysts’ estimates and Apple sold off more than 8% in aftermarket trading.

The bigger story, though, is that Apple's growth story has been slipping and will continue to slow. Take a look at the daunting year-over-year line on this graph from Business Insider:

Here’s the practically inevitable conclusion: from an investor’s perspective, I believe that Apple is destined to be the next Microsoft. By this I mean that the company will soon become a world dominating cash cow that has no way to significantly grow their revenues in their existing markets. Massive innovation and market share gains are giving way to modest upgrades and serious doubts on gaining further market penetration. The next big rumored things out of Cupertino; a TV, payment gateway, and a watch(!?!) elicit few “oohs” and even fewer “ahhs”…

The next chart from is interesting both for its scope and usefulness.

First of all, let’s realize that Russell Investments put together this handy chart so that they could encourage investment advisors to steer clients toward their wheelhouse — small cap stocks. With that said, the chart does give us four pieces of useful data for a broad range of investment assets: the minimum and maximum returns for any given year during the data period covered (grey bar); a typical 12-month range for the asset (blue bar), the average for the asset class (vertical white bar) and lastly the 2013 calendar year return for the asset.

For me, the most useful way to use this chart is to look at the current year’s returns and compare them to the typical range. Regression toward the mean is inevitable, though it may take more than a year to realize. If you’d like to see the verbiage that the folks at Russell Investments provide to help investment advisors help their clients you can view the full page here.

Our last chart today is from Balyasny Asset Management’s third quarter 2013 letter to investors via the Zero Hedge blog. It shows the firm’s amount of assets under management (light blue) and how much purchasing power the firm has used (dark blue):

In the letter, the hedge fund says that they are allocated at a 1 to 5 ratio — more than double the allocation from the 2007-2008 bubble years! It doesn’t take a rocket scientist to figure out how much the market needs to drop in order to wipe out all assets levered-up at 5x! Caveat emptor, indeed.

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Monday, February 03, 2014

Investing in Industrial Equipment Earnings Growth

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Newport Corporation (NEWP - Trend Report) bills itself as a "Global Leader in the Management of Light" which is a heavy way of saying they are in the business of Optics, Photonics and Lasers. A recent big beat and increase to guidance has helped make this stock a Zacks Rank #1 (Strong Buy) and it is the Bull of the Day.

Shine Your Light

One of the best things you can do to a financial portfolio is to be sure you are diversified. A sign in at the Chicago Mercantile Exchange denotes that sentiment by saying "Risk Not Thy Whole Wad" and this is an idea that is not lost on Newport.

Revenues from the products NEWP sells are spread pretty evenly over 5 large industries. They are Scientific Research, Life and Health Sciences, Microelectronics, Industrial, Defense & Security. None of those five segments accounts for more than 24% of total revenue.

The idea of diversification does not stop at it clients, it’s also prevalent in the geographies it serves. While the US accounts for the majority of sales (40%), Europe clocks in at 27% and the Pacific Rim also accounts for 26% of sales.

Company Description

Newport Corporation and its subsidiaries provide technology products and systems for scientific research, microelectronics, defense/security, life and health sciences, and industrial markets worldwide. Newport Corporation sells its products and services to original equipment manufacturers, end-user customers, and capital equipment customers through direct sales organizations, a network of independent distributors, and sales representatives, as well as through product catalogs and Websites. Newport Corporation was founded in 1938 and is headquartered in Irvine, California.

6 Beats and 1 Miss

Over the last seven quarters NEWL has seen 6 beats and 1 miss of the Zacks Consensus Estimate. The most recent quarter reported on 10/30/13 was an impressive one. The company posted earnings per share of $0.26, roughly $0.18 or 225% more than the Zacks Consensus Estimate of $0.08. That is a big beat. The stock moved higher by 7.9% in the session follow the report.

I guess investors might be used to some spectacular beats though. Just look at the positive earnings surprises over the previous four other beats. +41%, +65%, +66%. +44% -- respectively. That tells me that the analysts are having a hard time keeping up the story.

NEWP Estimates

Looking that the 2013 Zacks Consensus Estimate, I see a number that is all over the place. Maybe that is more evidence of the analysts having trouble with the underlying fundamentals of the business. In April of 2013, the Zacks Consensus Estimate stood at $0.98 and dropped by nearly 50% to $0.48 in August. But by October the number had moved higher to $0.56 and is now at $0.83.

The 2014 Zacks Consensus Estimate has also seen some volatility. The number was holding steady at $1.23 early in the year and hit $1.08 in June, only to bounce to $1.20 in July and then back to $0.99 by October. Since then the number has moved up to $1.12 and is now at $1.16. It seems the estimates are moving in the right direction.

Not So Short of Interest

Lately I have been keying in on stocks that could see a big short squeeze. That is not the case with NEWP, but it’s worth noting that the actual number of shares shorted continues to decline. This is not to say that the shorts are smarter than the longs, but as the stock has moved higher, there has not been much of a "line drawn in the sand"


The valuation for NEWP is pretty solid no matter what metric you look at. The trailing and forward PE's are right in line with the industry averages of 20x and 15x respectively. The price to book multiple of 2.3x is well below the industry average of 4.7x. This is also the case for the price to sales multiple of 1.3x vs the 6x industry average.

Those numbers are nice, but when I look at the projected revenue growth for NEWP of 11%, I see it’s more than double the 5% industry average. Earnings growth, well that is even more impressive. NEWP is expected to see almost 40% earnings growth in 2014 compared to 27% for the rest of the industry. All this adds up to a stock that is fairly priced against the rest of the industry but should see much more revenue and earnings growth than its peers.

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