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smartman
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Stock Market & Finance News

on Sun Sep 18, 2016 8:39 am
Gold Miners ETF (GDX) 


The price of gold is up to over $1,300 from it’s price of $1,050 an ounce at the start of the year. And silver has surged 30% from 6-year lows since January.

The demand for both precious metals has increased, with demand in China and India for gold increasing exponentially this year, and silver demand for new installations of solar panels is expected to set a new record in 2016.

Considering that at the beginning of the year these precious metals were showing no signs of snapping out of their multi-year bear market, and that with gold sticking close to $1,050 an ounce with many companies mining at a loss, this year’s gains in the industry are remarkable.

In fact, gold and silver miners in particular have been the best performing sector in 2016. The GDX alone—which holds a basket of 50 miners—is up 140% since mid-January.

If you missed the opportunity to get in on this trend early, or if you did get in early but want to add to your position when the time is right, read on to get specific prices for a second entry into this trend that’s sure to continue.

Miners have seen fundamentals improve significantly. With gold trading at $1,050 an ounce in January, your average producer’s margin slumped to $220 per ounce. Thankfully profit margins only fell by 12% despite the 25% decrease in gold prices since 2013. The industry responded to the slump by cutting costs and restructuring operations—and were assisted by lower fuel prices and helped by the strong dollar—minimizing the impact on margins.

This cost cutting put miners in a great position this year. With gold now trading above $1,300 an ounce, net profit margins have increased from $220 per ounce to over $500. That’s a 127% increase in 8 months.

Our proprietary trend following software, Market Trend Signal, issued BUY signals on all major gold and silver miners between December 2015 and February 2016, at or near their bottoms, enabling investors to get in on the trend early.

The chart below shows how quickly users were able to get in on the trend. The example shows a sustainable BUY signal on GDX on February 1 at $14.33, just nine days after the bottom.

But are these recent gains in the sector—which seem astronomical in such a short time frame—sustainable?

Miners may have gotten a bit ahead of themselves and have already priced-in much higher metal prices than the current price. Therefore, they are due for a pull-back.

However, I do believe that this year’s gains in the industry reflect improvement in profit margins, which isn’t a perfect correlation with stock appreciation, but there is a link and I believe that current valuations will hold, even though it now appears we are in the middle of a technical price correction.

This is where technical analysis comes in handy. In forecasting where the pull-back, which I believe has already started, might end, we can offer investors who missed the first opportunity a second chance to get in on the action.

To identify support on this pullback, we’re going to look at Fibonacci numbers and ratios, and how to use them, to find our support.

While many of our readers may be familiar with the Fibonacci concept, I’ll provide a quick overview of the concept before jumping into our analysis.

StockCharts gives a great introduction to Fibonacci Retracements for reference:

“Fibonacci Retracements are ratios used to identify potential reversal levels. These ratios are found in the Fibonacci sequence. The most popular Fibonacci Retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38% and 61.8 is rounded to 62%. After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback. Fibonacci Retracements can also be applied after a decline to forecast the length of a counter trend bounce. These retracements can be combined with other indicators and price patterns to create an overall strategy.”

To calculate Fibonacci retracement levels the old fashion way, by hand, in order to determine where a pull-back in an uptrend might find support, you take the swing low (lowest intra-day low) that started the uptrend and the swing high (highest intra-day high) you suspect is the temporary top and calculate the difference. You then multiply this difference by the Fibonacci ratios, and then subtract it from the swing high to determine potential support levels.

To determine potential resistance levels on a bounce during a downtrend, you do the opposite. Take the swing high that started the downtrend and the swing low you suspect is the temporary bottom and calculate the difference. You then multiply this difference by the Fibonacci ratios and then add it to the swing low to determine the potential resistance levels.

Of course the easiest way to find Fibonacci support/resistance levels is to use a charting software that already comes equipped with a Fibonacci retracement tool, which most do.

The chart below shows the Fibonacci support levels on GDX using the Market Trend Signal Fibonacci retracement tool.

he 38.2% retracement level on GDX is $24.38, the 50% level is $22.09, and the 61.8% level is $19.81.

How might this be useful for you? Typically, after a strong uptrend like we have seen in gold and silver miners, the minimum pull-back—once a more significant correction begins—would at least drop to the 38.2% level. So investors and traders who missed buying near the bottom would look for the first potential entry on a second chance around $24.38 on GDX.

However, even though the 38.2% level will often provide support and coincide with a bottom allowing the uptrend to resume, more often than not, the 38.2% level will only provide temporary support in the first “leg” of the correction, which will then be followed by sideways action or even a bounce, but that bounce should not exceed the swing high top of the uptrend.

Once the bounce is complete, the correction will resume creating the second “leg” which will complete and find strong support at the 50% or the 61.8% Fibonacci retracement levels ($22.09 and $19.81 on GDX). From this low, the prior uptrend will resume and ultimately take out the previous high that started the correction.

So those looking for a second chance entry might start to scale into a position at the 38.2% Fibonacci level of $24.38 and add to their position if and when the price hits the 50% and 61.8% levels ($22.09 and $19.81).

As discussed earlier in this article, our proprietary software Market Trend Signal, alerted users to the trend in gold and silver stocks at or near their bottoms, giving a sustainable buy signal on GDX at $14.33 allowing investors the opportunity to ride the rise.

Source : markettrendsignal
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Van Ja Pin
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Re: Stock Market & Finance News

on Mon Sep 19, 2016 9:37 am
This Stock Is Primed For A BIG Uptrend

It’s no secret Russia has had a rough few years.

Between the crash in commodities, EU sanctions as a result of the Crimean Crisis and massive government spending, Russia has been mired by its worst recession in the post-Soviet era.

While the emerging market nation is facing challenges, it may also be presenting an opportunity for strategic investors.

Historically, it has been close to impossible for retail investors to access Russian markets, but with the rising popularity of ETFs, investors can now gain diversified exposure to Russia in a single product.

Today, we’ll take a technical trading eye to the Market Vectors Russia ETF (RSX) to see if now is a good time to take a position.

RSX gives investors exposure to publicly traded companies listed in Russia. It holds 49 positions across a variety of sectors.

The RSX reflects the Russian economy’s dependence on energy commodities as evidenced by the ETF’s almost 40% weight to the energy sector, which is more than double the next sector weight in the fund.

As oil bottomed at the beginning of 2016, so too did the RSX. The stock is now up about 40% from its low point at the very beginning of the year, and has reached new highs this month despite a strengthening dollar that has created a drag on oil prices, and thus the Russian economy.

Despite oil prices continuing to struggle, many of the non-energy related stocks in the RSX are doing well this year as many non-energy sectors of the Russian economy are doing alright which is contributing to the overall fund being up for the year.

To understand if now is a good time to take a position, let’s take a step back to look at the last time the RSX hit a bottom.


As you can see in the chart above, RSX took a sharp dive between 2008 and 2009. As soon as it hit it’s low, it began to climb rising to just under $44 a share at the top of the uptrend, a 75% rise.

This was followed by a correction and you can see a support line by drawing a trend line connecting the lows in late 2011, early 2012 and early 2014. As a reminder of our overview of support and resistance levels from last week, a support level is the price that a stock has difficulty falling past within a trading range, and the resistance level is the price that a stock has difficulty advancing past.

In the case of the RSX, you can see that our old support level became a new resistance level in 2015 after the stock price broke through the old support line.

Fast-forward to this month and we can see the start of a breakout above this line that is the new resistance level. This indicates the possibility of a new uptrend and an opportunity to get in early on the new uptrend.

Now, it’s safe to say that this week’s slight breach of our resistance line would be an aggressive entry point, however, it’s also safe to assume that there will be good entry points in the future as the trend continues.

Let’s talk about what this might look like.

Tests of new support and resistance levels give traders the sign to either add to their position or to take a position.

I’d recommend that investors watch for retesting of the new support level which would be a safer entry point if it occurs as it confirms the uptrend that we think is coming.

A retest would look something like this:


For a retest, you’ll want to look for the trend advancing upwards and then coming back down to hit our new support line. The price continuing upward after this makes for a much safer entry point as it confirms the support line and the uptrend, and it ensures that you’re still able to get in on this trend early. The arrow you’re seeing in the chart above represents what we project this trend may look like.

What we’ve discussed today is an aggressive entry and a more moderate entry, and last week we discussed a conservative entry into a trade. Let’s now take a quick look at an exit strategy.

Trend followers typically don’t necessarily try to determine price targets for trade exits. Instead they employ what’s called a trailing stop.

A trailing stop is a stop order that is set at a defined percentage away from a stock’s market price. For a long position, the stop would be set at a percentage below the current market price, and for a short position it would be set above the current price.

Trailing stops are designed to protect your gains by keeping a trade open to continue to profit as long as the price is moving in the right direction, and only stopping the trade if the price of the stock changes direction and hits your specified percentage.

The major benefit of a trailing stop is that it takes the emotion out of the sell decision which helps to protect your profits.

The trick is to set the stop at a percentage that is neither too tight—to avoid the trade being stopped before it’s had a chance run up—nor too wide which may result in leaving too much money on the table.

What’s difficult with a trailing stop is deciding at what percentage to set your stop to, or in other words, deciding what constitutes an acceptable loss. This may be a very different number for aggressive investors compared to conservative ones, and it’s up to you to decide what you’re comfortable with, whether 10, 15 or 25 percent.

You may want to wait for certain technical indicators before setting your stop percentage. For example, you might wait for a few weeks to watch the price trade between the new trading range looking for a breach of the range’s resistance level before setting your percentage. This would require some patience, but you’ll make a more informed decision on your stop percentage.

To sum things up with the RSX, it’s clear that it’s price has begun to breach a resistance line and is likely starting a new uptrend that may see it advance considerably. This breach is an aggressive entry point and more conservative investors may want to wait for a retest of the new support line.

If you do decide to get in on the uptrend now, watch for new breakout entry points to add to your position. If you’re going to hold off, watch for a safer entry point after a retest.

Considering that the Russian economy is still a somewhat risky bet which could cause the RSX to drop considerably, a trailing stop is a good play as it removes the emotion from closing the trade and will protect your profits.


Source : markettrendsignal
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smartman
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Warnings Ahead

on Wed Oct 26, 2016 5:05 pm

The First Two Weeks Of Earnings Season Are In





  • Don’t be fooled by earnings growth in financials and utilities. The underlying risks are growing too.
  • Lower margins are the first indications of a recession being around the corner. Global government and monetary stimulus make it impossible to know if one will be coming sooner or later.
  • Without buybacks earnings would be terrible.




The first two weeks of earnings season have passed and, according to FACTSET, the combined earnings released so far are better than expected but still negative. 23% of the companies in the S&P 500 have reported earnings and their aggregate earnings decline for Q3 2016 is -0.3%.

For now, this beats estimates as a 2% decline was expected, but it marks the sixth consecutive quarter of earnings declines. Apple Inc. (AAPL) and the energy sector will report earnings next week (Exxon and Chevron). The main drag to S&P 500 earnings is expected to come from there as both Apple and energy sector companies are expected to show large declines in earnings.

The sector that leads the earnings growth segment is financials with 7.8%, while utilities is in second with 6.8% earnings growth. When financials lead earnings growth in a slow economy it means asset prices are inflated. As far as utilities are concerned, low input prices enable them to increase their margins.

While these are the sectors with the best earnings growth, don’t rush into buying them as they are strongly influenced by business cycles. The best time to buy financials is the depression period of the business cycle. Financials are one of the motors that drive our economy and therefore they will always be around even if at some moments in time people think every financial company is doomed. 

That is always the best time to buy financials, especially the good, lower risk companies with less leverage and derivatives positions. The chart below clearly shows how the stock price of JPMorgan Chase (NYSE: JPM) is volatile and influenced by business cycles. The company will grow alongside the economy, but for extraordinary returns you should wait for darker skies.

JPMorgan Chase stock price.

Even more so than financials, utilities offer a product that is essential for the economy and for normal day-to-day life. Therefore, they are the certainty of your portfolio. Unfortunately, this certainty and stability has made utilities stocks similar to bonds. As interest rates go up, utilities go down. With the dollar strengthening on the base of expected interest rate increases, utilities have entered into a declining trend.

Utilities ETF (IDU) last 6 months

We’re not saying that utilities are a bad investment, but just that there is also a large risk for that 3% yield IDU offers at the moment.


Revenues

Revenues aren’t usually a hot topic like earnings are, but they are also very important. Revenues have increased by 2.6% in Q3 2016 for the companies that have reported earnings.

Increasing revenues and declining earnings mean only one thing, declining margins. Declining margins mean that companies have difficulties achieving profitable growth. Such a point in the economic cycle indicates a saturated market ready for cleansing.

Market cleansing usually comes along as a result of a recession where the companies that have overstretched themselves with leverage and invested in low profit projects are forced to declare bankruptcy and leave more space for the more conservative players in the market who, once the economy rebounds, strengthen their market position. This doesn’t mean a recession will start tomorrow, but that a recession is close (next 4 years).

Global monetary and government stimulus can make an economic recovery last longer, but the economic laws are inevitable and sooner or later a recession will come along. Lower margins are the first indication. For now, only individual sectors are getting hit, like energy or restaurants where there have been three bankruptcy filings in October, but when the inflection point is reached, all sectors will be affected.

Buybacks

Buybacks have declined by 6.8% year-over-year but still have a big impact on earnings as 20% of S&P 500 companies reduced year-over-year share count by more than 5%. Buybacks have exceeded earnings for 137 companies and in the last four quarters, companies spent more than $580 billion on buybacks.
S&P 500 buybacks in millions

With buybacks being $580 billion in the last year and the S&P 500 market capitalization at $19.6 trillion, it’s easy to calculate the impact on earnings. By adding the $580 billion, or 2.9% back to the market capitalization, S&P 500 earnings would be lower by 2.8%. And this is just from adding the last 4 quarters of buybacks. By adding all the buybacks made in the last 10 years, we would get to a much worse result.

By owning an index like the S&P 500, you own a lot of companies that reinvest available cash flows into their own shares in order to improve their earnings per share. Higher earnings per share mean higher compensations for managers and an impression of higher stock prices. By owning individual stocks in the index, you can decide if you like what a company’s management is doing with your money or not. 

The two companies that did the most buybacks are Apple Inc. (NASDAQ: AAPL) and General Electric (NYSE: GE), but there is a big difference when doing buybacks at a PE ratio of 13.62 for AAPL or at a PE ratio of 21.24 for GE.

Buybacks are just another example of how earnings can be inflated at shareholders’ damage, so be careful when investing and analyze earnings.

Dollar

The dollar is slowly getting stronger on the expectation of a FED rate hike.
Dollar index

In the last three quarters, the S&P 500 enjoyed higher revenues and earnings due to a weaker dollar as the FED hasn’t continued to increase rates after the last hike in December 2015. In any case, a stronger dollar will make it more difficult to show revenue and earnings growth. If we estimate S&P 500 international earnings to be 40% of revenue, an increase of 100 basis points in the dollar index would mean 0.4% decline in revenues. It doesn’t look like much, but currencies are much more volatile than a 100 basis point move.


Conclusion

Earnings are on a good path to mark the sixth consecutive declining quarter despite a weaker dollar and low interest rates. Nobody has a crystal ball to predict what will happen, but the mixed signals described above indicate that the markets are approaching a territory where the risks are higher than the rewards.

Due to monetary stimulus and a high level of liquidity, the impact on stocks isn’t negative so there will be plenty of opportunities for good investment returns. Just be sure to look at the risks before investing in a company to check if they are growing organically or if their increased earnings are only a result of doing large buybacks by issuing debt.

source: Investiv
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gandra
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Re: Stock Market & Finance News

on Sat Oct 29, 2016 10:53 am

The AT&T – Time Warner Deal


On Saturday, October 22, 2016, the two companies announced their merger. It’s a definitive agreement under which AT&T will acquire Time Warner in a stock-and-cash transaction valued at $107.50 per share. Time Warner shareholders will receive $53.75 per share in cash and $53.75 per share in AT&T stock where the stock portion will be subject to a collar such that Time Warner shareholders will receive 1.437 AT&T shares if AT&T’s average stock price is below $37.411 at closing and 1.3 AT&T shares if AT&T’s average stock price is above $41.349 at closing.

Given that the current AT&T price is $36.70, Time Warner shareholders will already get less money than initially announced as $53.75 in cash and 1.437 shares of AT&T at $36.7 adds up to $106.48. If AT&T’s stock price declines further, Time Warner shareholders might get even less.


AT&T’s stock price last 30 days and since acquisition rumors. Source: Yahoo Finance.

On the other hand, risks of a lower payment and regulatory objections keep Time Warner’s stock price at a much lower level than the acquisition price.


Time Warner’s stock price. Source: Yahoo Finance.

At current prices, and if the deal closes as the companies expect before the end of 2017, investors going long Time Warner are looking at a 22.1% return. The risks come from the fact that AT&T’s stock price could decline further, albeit the 5.32% dividend yield and a PE ratio of 15.92 indicate a small possibility for long term future price declines. The biggest risk is that the deal doesn’t go through and Time Warner’s stock price returns to $78 where it was before acquisition rumors started.

So, there is an opportunity for a 22.1% positive return and an 11% decline. With the current S&P 500 earnings yield of 4% as a required market return rate, the above returns imply that the market gives a 40% chance that the deal will go through and a 60% chance that it won’t. If you think the chances are different, you can make the trade on the side you see more probable. But before jumping in and investing, there is more to know about arbitrage.

Arbitrage Insights From Warren Buffett

Warren Buffett, who is considered a long-term investor, sometimes does arbitrage in order to put his cash to the best use. In his 1988 letter to shareholders, in four questions he simply explains what you need to know about merger arbitrage:


  • How likely is it that the promised event will indeed occur?
  • How long will your money be tied up?
  • What chance is there that something still better will transpire – a competing takeover bid, for example? and
  • What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?
  • It all boils down to correctly assessing your required returns and the risks you are willing to take. If you have a lot of cash, a merger arbitrage with a 22.1% yearly return sounds a lot better than just buying the market where the earnings yield is only 4% and there’s a chance of a 20, 30, or even 40% fall in a bear market.


The good news is that if you don’t like the odds of the AT&T – Time Warner deal, there will be plenty of other mergers in the future that you can take part in and where if the deal falls through you would be happy holding the stock for its underlying business or until another merger comes along.

source: Investiv
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gandra
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Oil Bears Should Be Alert To The Possibility Of A Reversal Next Week

on Sat Oct 29, 2016 11:12 am
Regular readers will be aware that I have, for the last few weeks, been generally bearish on the price of oil, and for two main reasons. The strength of the dollar had until recently gone unnoticed in much of the financial media, but it has been a sharp climb and, while the inverse relationship between the dollar and oil is not a perfect, tick for tick thing, a high dollar does put a cap on oil’s upside potential and keeps pressure to the downside. In addition, the main reason for oil’s climb a month or so ago, the potential agreement by OPEC to limit production, is not a reality yet and still faces significant hurdles. That bearish view has worked out well, but there is a good chance that it will change in the next few trading days, as both things that have driven oil down look like changing.


Dollar Index 6 Month Chart

Firstly, there are signs that the dollar’s rise is overdone and that the direction is about to change. In terms of the dollar index, significant resistance has been met just above 99 and, as the chart above shows, upward momentum has ceased over the last few days. That is hardly surprising. The move in the dollar has been driven by the expectation of a Fed hike in interest rates, but that now looks fully priced in. The market can be expected to start to adjust for the, admittedly slight, possibility that the U.S. central bank will once again back away from the tough decision to risk a market selloff, and will further delay that hike.

Secondly, and probably more importantly, the OPEC meeting at which talks of an agreement will take place is at the end of November, and as it approaches a change of tone in the chatter surrounding that meeting looks likely. I have written in the past about the tendency of the OPEC nations to talk their book and that will probably be a factor over the next few weeks. Even if, and maybe especially if, the members see the obstacles to an actual agreement as insurmountable, it will be in all of their interests to keep those opinions to themselves and talk up the chances of a production freeze, or even a cut.

Since the potential deal was announced, OPEC members, and the Saudis in particular, as demonstrated by their last production numbers, have ramped up production to take advantage of the spike in prices. If they see a deal as difficult to achieve or enforce there is every reason to keep a positive spin on the upcoming meeting to continue to take advantage of that. Doubts and dissent such as those recently aired by Iran will be muted, and the market, faced with a seeming determination to reach a deal, will likely react positively.


E-Mini Oil Futures 1 Year Chart

Those two things combined make it likely that oil prices will turn tail at some point soon and climb back towards the $52 top, but I am not prepared to change direction quite yet. There is still strong resistance over $51 in WTI as those levels seem to attract a lot of hedging from U.S. producers, and the knowledge of that alone should keep oil down for at least a few more days. If, as I expect, the dollar does start to correct next week, however, and if we start to hear positive murmurings from OPEC members, that move down will reverse at some point soon.

The message for traders and investors here is to stay alert, and not to get too comfortable with short positions. No move lasts forever, and over the next few days taking profits at the very least, if not actually reversing to long positions looks like the best strategy for now.

source:Oilprice.com
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gandra
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This Forgotten Commodity Has Made Serious Gains

on Sun Oct 30, 2016 7:54 pm
The deep-level, and deeply researched, analysis Sven includes in every issue of Investiv Daily is impressive, but something struck me this week as particularly remarkable about one of his posts so I wanted to take the opportunity to share it with you today.

The article in question was published on September 1, and provides a great analysis on a commodity that I imagine many of you enjoy every morning, coffee.What’s so remarkable about this article is that coffee has gained some serious momentum since then.You can read Sven’s article here. His analysis then was spot on and the news this week confirmed it.

Bloomberg reported this past Tuesday that arabica, the type of coffee bean used by Starbucks, had surged to a 20-month high amid growing global demand and export cuts by Brazil’s largest producer.

Another variety of coffee, robusta, reached its highest level since October 2014 this week on export cuts from Vietnam’s bad weather. Uganda’s coffee exports have also dropped for a third year because of unfavorable weather.The recent string of bad weather has sent bean prices on a steady rise and left many wondering how much the price of their morning latte will go up.

A recent report from the U.S. Department of Agriculture found that, on average, a $0.10 rise in bean prices per pound would send manufacturer prices—and prices at the register at your favorite coffee shop—up by $0.02.

But coffee isn’t like gasoline. Coffee purveyors don’t adjust their prices daily on the fluctuation of the commodity, because unlike gas—which has a small profit margin for the gas station,—coffee is marked up and the fluctuations in the price of beans is already factored in. For a company like Starbucks, there’s a big margin on your $3 cup of coffee.

Both Starbucks (SBUX) and Dunkin' Donuts (DNKN) raised prices on their coffee drinks this past Summer, but neither attributed their increases directly to the rise in bean prices, with Starbucks simply stating that their prices are a continual work in progress, and Dunkin’ pointing to minimum wage increases as the primary reason.However, that doesn’t mean that either company won’t raise their prices in the future precisely because of rising bean prices.

The Climate Institute—an Australian nonprofit research organization—released a report in September that emphasized the threat climate change is posing on coffee farmers globally. The report states that “climate change is projected to cut the global area suitable for coffee production by as much as 50 per cent by 2050.”

The coffee leaders of the world, including Starbucks, are already publicly acknowledging the risks to the world’s coffee supply posed by climate change, and recognize that the supply shortages will not only impact the flavor and aroma of your favorite blend, but will also send prices rising.

And while strategies are being developed to help coffee farmers adapt to changing weather and to help preserve the diversity of the world’s coffee beans, the reality is that temperatures will continue to rise and coffee prices at your favorite shops will rise right along with them.

This is all alarming news for anyone who can’t imagine how they’d manage to wake up in the morning without their favorite cup of joe, but let’s put that anxiety aside and talk about how you can capitalize on the situation as an investor.

Reading about the surging prices of bean deliveries may send some investors running to the futures market. But for a somewhat less aggressive approach, I like the iPath Bloomberg Coffee Subindex Total Return ETN (JO), which has gained 10% since Sven’s article was published on September 1.That’s 10% in just under 2 months.

An ETN is a lot like an ETF in that it tracks an underlying asset—in our case, coffee—has a lower expense ratio than actively managed funds, and is traded on the major exchanges, just like a stock. But while an ETF is more stock-like, an ETN is more like a bond. For more information on ETNs, Investopedia has a great article on them.

Investors may also want to look at the big coffee companies, two of which we’ve already discussed, Starbucks and Dunkin’ Donuts. But while these companies are experiencing greater demand globally, they’re also facing rising goods prices and an uncertain future for coffee bean supply and aren’t the best bet right now, so if you’re seriously thinking about investing in coffee, take a look at JO.

source: Kristina Keene, Investiv
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Yuri
Number of messages : 246
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Date of Entry : 2015-06-28
Year : 32

Re: Stock Market & Finance News

on Sun Apr 02, 2017 11:49 am
Don’t Give Up On Stock Picking. Do It The Right Way.


  • Passively managed funds are extremely dangerous as their positive performance is self-reinforcing due to the huge positive net inflows.
  • But don’t jump to actively managed funds as, on aggregate, they will always underperform the market in the long term because they are the market.
  • The only solution is to invest like a business owner. You can do this by investing yourself or by finding an active manager who has the same principles.


A recent Wall Street Journal article described how BlackRock (NYSE: BLK) is switching to robots from using humans to improve its stock picking for its actively managed funds. BLK’s reasoning is that its stock picking unit lagged in performance and has had many withdrawals that cut assets under management to $275 billion from $317 billion in the last three years despite the S&P 500 surging 27% in the same period. The hope is that robots will perform better at lower cost.

Using robots is yet another indication that individual stock picking skills are currently out of favor. The rise of passive funds has completely overshadowed active funds which continue to see huge outflows.


Passive vs. active fund flows in 2015 and 2016.

In aggregate, actively managed funds have had an extremely bad time in this bull market.

Cumulative inflows into passive and active funds since 2008.

It’s easy to understand the attractiveness of passive funds as the S&P 500 has gone straight up in the last eight years rewarding investors with returns of 219% since March 2009 with extremely low volatility.

There is only one way for the S&P 500.

When an asset class performs so well for a long period of time, many convince themselves that the specific investment is the smartest investment as the only indication of risk is, in this case, more than eight years behind. However, mindlessly investing into something just because it has been going up is a dangerous strategy.

Something that’s very indicative of how investors breathe is this five-minute CNBC video where participants discuss the market. Valuations are never mentioned and, according to the participants in the video, the variables that should or could impact the market are political, technical, tax, or legislative in nature.

Unfortunately, mindless buying will lead to mindless selling when mom and pop investors realize they have been buying hype and start to sell in a panic. As no one will be able to control the outflows, the downside is huge.

Actively Managed Funds

If passively managed funds are so risky, should you switch to actively managed funds? You might be surprised by my answer, but actively managed funds will never beat the market on aggregate because they are the market. When you add fees into the equation, active funds are bound to underperform.

Now, if passive investing is extremely dangerous and mindless while active managers are bound to underperform, what is the best course of action? The answer is: be a business owner, don’t own stocks. Look at the businesses represented by stocks and then buy them at a fair price.

Investing Like A Business Owner

Business owners have a different perspective on their business than people have on stocks. I would guess that most of you know an owner of a farm, family restaurant, or other type of business who is only interested in the cash flows their business provide them every year, and not at all interested in the price of what they own. But I bet they were interested in the price of their business when they bought it or invested in it, and will be interested in the price of it if they ever wish to sell it. In the meantime, their only focus is on how to increase cash flows.

Stock certificates should be treated the same: as parts of a business that are supposed to deliver cash flows in the future. The present value of the future cash flows is the business’s intrinsic value. Those cash flows can be paid out as dividends or reinvested to increase the business’s book value.

Stocks are a way for anyone to be a business owner as you don’t need vast amounts of capital to own part of a business. Additionally, stocks offer liquidity and diversification possibilities. However, the same liquidity and diversification leads investors to trade stocks and look at them as pieces of paper whose value changes every day.

Whenever I have treated my investments as businesses, my returns have been fantastic. When I have tried to buy something just because the price was supposed to go up at some point in the future, my returns haven’t been that great mostly because I took profits too early.

At the moment, I know that a bear market triggered by a U.S. recession or some other shock will significantly lower the value of my portfolio. What I don’t know is when this will happen, though I know that if I’m not invested my opportunity costs are huge. The businesses that I own, their nature, fundamentals, and earnings, are what gives me peace of mind as all of them are extremely undervalued from a longer term perspective. Therefore, whatever happens in the market, I know that in 5 or 10 years from now my returns will be closely correlated to the earnings produced by the businesses I own. I hope I won’t have to wait that long because I plan on selling my holdings as soon as they become overvalued, but if they don’t reach that point in the next 10 years, I’m happy to hold on to them.

Active fund managers don’t have the luxury of waiting a few years for their idea to develop. They are limited by the pressure of short term performance which forces them to take action that doesn’t provide the best long term value, but rather the best possible short term value in order to attract more funds. This lowers their long-term performance as it isn’t investing, but betting. We’ll only know which is the best investment strategy when a full market cycle has passed, but the majority of investors prefer to look at short term performance. This leads to high risks that disregard fundamentals, and panic selling which leads to sharp stock market drops.

My point is that every investor should look at what he or she owns. If your portfolio consists of several mutual funds, blue chip stocks, and a diversified portfolio of bonds, please make sure that you understand the relationship between the business represented by those securities and their current stock price.

Example

Let me give you an example of businesses that clearly describe what I mean.The best example to use for comparing an owner’s business perspective and the market’s perspective is Berkshire Hathaway (NYSE: BRK.A, BRK.B). BRK directly owns many household names and has stakes in large U.S. companies like The Coca-Cola Company (NYSE: KO), American Express (NYSE: AXP), and, recently, Apple (NASDAQ: AAPL).

Part of BRK’s portfolio.

Now, if you’re a business owner, what you’re interested in is that earnings grow but you also know that there will be periods when earnings won’t grow because of economic circumstances or certain losses from parts of the business. If you own a well-diversified portfolio like BRK, you don’t have to worry about the business as the probability of it going bust is minimal.

The market has a completely different perspective on BRK. At certain moments in time, it’s willing to pay huge amounts for owning a part of the company but at other moments, stock prices get so cheap that it looks like nobody wants a piece of the above businesses. In the last 20 years, BRK’s stock has fallen more than 40% on two occasions and has had nine declines larger than 10%.


BRK had two 40% declines and nine 10% declines in the last 20 years.

Do you see a pattern here? The problem is that the sharp declines can’t be predicted while selling after a 10% drop would cost you a lot like it did for those who sold at the beginning of 2016 thinking that a new crash was coming.

Going back to stock picking, if you own a great business like BRK and bought at a great price, you can be sure that you will reach satisfying returns in the long term. If you own a bad business or an overpriced business that doesn’t create long term value, you’ll lose a lot in the short term but also in the long term. Therefore, it’s essential to pick great businesses at good prices as this is the only guarantee of good returns.

The passive investing mania will pass with the next crash and the companies that were bought just because they were in an index will never reach their current values again.

source: Investiv
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