The Exit Cafe

Accelerate Returns by Controlling Risk

2009-09-24T15:31:00.005-04:00

Accelerate Return-to-Risk Ratios with Higher Betas

Modern portfolio theory is based on the premise that volatility is the best definition of risk. However, like many popular assumptions, that may not be entirely true. This article will demonstrate how increased volatility, as measured by Beta, can be harnessed to provide higher returns without a commensurate increase in risk.

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Instead of Modeling Risk, Why Not Control It?

The volatility investors faced within the equity markets in 2008 and 2009 led me to think about the changes I've seen as an equity trader and manager over many years. The basic principles of investing have remained constant throughout history. Successful investing is all about risk and reward; it always has been and always will be.

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What Retail Tells Us About the Economy and Consumers

2009-09-03T15:49:00.002-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

The month of August was no real shocker to the retail sector. Lower-priced U.S. retailers posted better-than-expected earnings while higher-end stores continues to suffer, indicating that consumers are still wary of spending which will continue to put a damper on the overall health of the U.S. economy.

Overall, retailers reported lower sales, as same-store sales fell an average of 2.9% at the 30 retailers tracked by Thomson Reuters. Although this decline was better than the 3.5% expected by analysts, half of the tracked stores missed analysts' expectations. It appears that consumers are still holding onto their wallets, shopping at discount outfits like the Gap Inc. (GAP) and TJX Co.'s (TJX) TJ Maxx, and only purchasing the essentials.

In fact, wholesale giant, Costco (COST), which is up 32% from a March low of $38.44 to close at $50.65 on Wednesday, reported a decline in same-store sales of 2% and said food and sundries were its best sellers. Additionally, higher-end stores, like the Childrens' Place Retail Store Inc. (PLCE), which was expected to see a boost in sales driven from back-to-school shopping, reported a worse than expected 8% decline in sales and much higher than analysts expections of a decline of 3.3%.

This further supports the notion that consumers are only spending on essentials and trying to perserve their disposable income. As this trend continues, it will be difficult for the economy to show a singnifcant recovery. After all, consumer spending is the bread and butter of the U.S. economy. From an investor's perspective, the SPDR Consumer Staples Select ETF (XLP), which has gained nearly 26% from its March low of $19.41 to close at $24.61 on Wednesday, is a good place to look. Additionally, the SPDR S&P Retail (XRT), which closed at $31.20 on Wednesday, up 71% from its March low of $18.27, is another good way to gain exposure to discounted retailers.

When investing in these equities, one must keep in mind the inherent risks involved. To help mitigate these risks, using an exit strategy is important. According to the latest data from www.SmartStops.net, an upward trend in the mentioned equities could come to an end at the following price levels: COST at $48.47; XLP at $24.21; XRT at $29.92. These price levels change on a daily basis and updated data can be accessed at www.SmartStops.net.

WHY BASE METALS COULD SUSTAIN FAVORABLE UPTREND

2009-08-14T15:57:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

Base metals have witnessed a favorable uptrend and are most likely going to sustain this trend due to an uptick in demand and signs of a global economic recovery.

Most recently, the National Association of Realtors has released data indicating that the housing market could potentially be rebounding indicating that the number of homes being built is increasing. Additionally, the Labor Department has stated that unemployment levels are starting to soften illustrated by the drop in the overall unemployment rate from 9.5% to 9.4% and global demand for base metals is strengthening.

To add to this, the federal government’s “cash for clunkers” program has been a hit with consumers and has driven the demand for new vehicles up which has indirectly driven up the demand for base metals. Lastly, from a manufacturing perspective new orders and production hit their highest levels since the summer of 2007 and a private index measuring U.S. manufacturing activity rose indicating that manufacturing is heading in the right direction.

As long as the global economy continues to grow and recover and employment numbers continue to show some sorts of prosperity, base metals should continue to shine.

The upward trend in base metals can be seen through the following equities:

SPDR S&P Metals & Mining (XME), up 98% after witnessing a March low of $20.81 to close at 41.29 on Monday

iShares Dow Jones US Basic Materials (IYM) closing at $50.78 on Monday, up 79% from a March low of $28.36

PowerShares DB Base Metals (DBB) rebounding nicely from its March close of $10.95 to close at $18.24 on Monday, an increase of 67%

Freeport-McMoRan (FCX), more than doubling from a January low of $22.14 to close at $62.38 on Monday

When investing in equities, investors must keep in mind that inherent risks are involved. To mitigate these risks, utilizing an exit strategy with up-to-date price data is vital. According to the latest data from www.SmartStops.net, the upward trend in the aforementioned equities could potentially come to an end at the following price levels: XME at $37.17; IYM at $47.08; DBB at $17.20; FCX at $56.08. This price levels change on a daily basis and updated data can be found at www.SmartStops.net.

Can Sugar Remain Sweet

2009-08-14T15:56:00.000-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

Over the past few weeks, sugar has been in an upward rally pushing the commodity to a 28-year high, but can this sweetness be sustained or is it all speculation?

From a global supply perspective, sugar is in trouble and many think that the supply shortfall will extend through 2010. India, the world’s second largest sugar producing nation, is witnessing weak monsoon rains, which are the main source for irrigation for the nation’s farmers, resulting in drought-like conditions and damaged sugar cane crop.

In Latin America, Brazil, the world’s largest sugar producing nation, is having the opposite problem where excessive rainfall is hampering harvest and creating problems for sugar crop. To put it into perspective, the International Sugar Organization has stated that global demand will exceed output by as much as 5 million tons in the year through September 2010. This demand will remain intact, if not even increase, as populations in emerging markets continue to increase and demand food.

Opponents of the rally suggest that prices will not be sustained because these sugar producing nation’s will most likely boost production of sugar, due to its current price levels, which inevitably will result in more sugar on the market in future years.

In a nutshell, for the near future, the fundamentals of the sweet commodity look appealing and it appears that supply and demand pressures should enable sugar to sustain its price levels. As for the long-term, only time will tell if production will outpace demand and influence the overall health of the commodity.

Some equities that have rallied as a result of the most recent surge in sugar are the following:

PowerShares Agriculture ETF (DBA), which is composed of sugar, wheat, soybeans and corn, is up 15.6% from a $22.50 close in March to close at $26.02 on Tuesday.

iShares MSCI Brazil Index (EWZ) closed at $59.51 on Tuesday after witnessing a $31.75 low in March, an increase of 87%.

iPath MSCI India Index ETN (INP), more than doubling from a March close of $24.13 to close at $51.00 on Tuesday

Imperial Sugar Company (IPSU), jumping 173% from its March low of $5.15 to close at 14.08 on Tuesday

One thing to keep in mind is that sugar is a commodity and commodities are known to be volatile and come with risks. To help mitigate these risks, an exit strategy is important. According to the latest data from www.SmartStops.net, an upward trend in the previously mentioned equities could potentially come to an end at the following price points: DBA at $25.30; EWZ at $55.50; INP at $49.75; IPSU at $12.78. These price levels change on a daily basis as the markets fluctuate and updated data can be accessed at www.SmartStops.net.

Three Red Flags For REITs

2009-08-14T15:40:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

Over the past week or two, real estate investment trusts (REITs) have been the talk of the Street as many earnings reports beat analyst expectations, injecting even more optimism to a sector that has already been fired up.
As a result of relatively cheap property prices, low interest rates, and the ability to withstand the downfall of the real estate sector, many REITs have faced the threat of bankruptcy head on and beat it by selling stock and taking out additional loans. In addition to this, many prominent economists believe that the recession is coming to an end and consumers are going to start spending once again, making REITs attractive.
Although the entire sector has been in an uptrend since their lows in March when the S&P 500 hit a 12 year low, there are indicators that an uphill battle is still ahead. Unemployment rates are still unstable, as the Labor Department recently reported that initial jobless claims for this past week increased to a seasonally adjusted 558,000, higher than expected. Retail sales surprised economists by posting a decline of 0.1%, when they were expected to increase by 0.7%, marking the first setback following two months of modest gains. Lastly, home sales have been increasing but many believe this has been fueled by tax incentives, the massive surplus of foreclosures and favorable lending rates, three things that probably can’t be sustained.
Until more jobs are created than are lost, which will provide consumers with the income to spend, and businesses outperform Wall Street’s expectations through growth and revenue expansion as opposed to cost-cutting measures, which will drive the demand for office space, REITs are not in the free and clear.
Here are a few equities that illustrate the sector’s uptrend:
The Vanguard REIT Vipers (VNQ), closing at $38.40 on Wednesday, a gain of 82% from its March low of $21.15
SPDR Dow Jones REIT (RWR), rebounding nicely from a March low of $22.97 to close at $42 on Wednesday, an increase of 83%.
When dealing with these REITs, they have the same inherent risks as other equities, therefore, having an exit strategy can help mitigate these risks and preserve returns. According to the latest data from www.SmartStops.net, the price levels at which the upward trend in these equities could be in trouble are at the following: VNQ at $36.19 and RWR at $39.63. Keep in mind that these price levels change on a daily basis and updated data can be found at www.SmartStops.net

U.S.-China Energy Alliance Needed

2009-08-14T15:33:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

As global warming advocates take center stage, governmental administrations preach clean energy reform and clean energy has become an integral part of a nation’s success, an alliance between China and the United States will create an environment where clean energy can thrive.
China and the United States are the world’s two largest producers of carbon emissions and have already adopted various programs to reduce a heavy reliance on crude oil, create new cleaner energy and improve the overall health of the environment. However, a recent study conducted by McKinsey & Company suggests that unless the two work in unison, their efforts to curb the global warming issue could potentially be stalled resulting in neither nation maximizing the its desired end results.
Although both nations, in conjunction with private investors are pursuing electrified vehicles, carbon capture and storage (CCS) and concentrated solar power, these technologies are expensive and need massive infrastructure and research which will make more sense and have amplified effects with the proper scale, standards and technology transfer that can be provided through a partnership between the two nations.
Although the emergence of electrified vehicles and CCS can, and probably will, emerge in both nations, imagine the scale and global impact that it will emerge if both worked simultaneously together. Currently, nearly 80% of oil consumed in the United States and 50% of the oil consumed in China are used to fuel vehicles. If both nations made the switch to electric vehicles, the consumption of oil would take a big hit and the momentum would likely force other nations to compete in the electrified-vehicle industry.
As for CCS, capturing green house gases is expensive and neither nation is pursuing the technology aggressively, however, this could change if both pooled their resources together.
The study also indicates that concentrated solar power may not even have a future if the two nations don’t come together, set common standards, coinvest in projects and R&D and undertake other joint initiatives.
In addition to the obvious advantages that this partnership could potentially have on the environment, from a political aspect it could bring the nation’s closer together and improve overall relations. Working together to make these technologies real will not be an easy thing to do, but will be good for the overall health of the globe.
From an investor’s perspective, some equities that could potentially benefit from the aforementioned partnership are the following:
The PowerShares Global Clean Energy ETF (PBD), which has already rebounded nicely from a March low of $8.73 to close at $16.03 on Thursday, an increase of 84%.
The iShares S&P Global Energy (IXC), up 39% from a March low of $23.11 to close at $32.17 on Thursday.
When investing in energy equities, there are various risks involved and to help mitigate these risks utilizing an exit strategy is important. According to the latest data from www.SmartStops.net, the uptrend in the previously mentioned ETFs could be in trouble at the following price points: PBD at $15.20; IXC at $30.77. These price levels change on a daily basis as the markets fluctuate and updated data can be found at www.SmartStops.net

COULD THE ECONOMIC DOWNTURN FINALLY BE OVER

2009-07-27T16:36:00.000-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

As most agree that there are two major economic indicators that will determine whether or not we are bouncing back from the worst economic downturn since the 1930’s, namely the rate of consumer discretionary spending and unemployment rates. So, how are we faring up?

In regards to consumer discretionary spending, the retail sector seems to be in an upward trend. Most recently, Coca-Cola (KO) announced a 43% increase in quarterly earnings, driven primarily by increases in global demand. Additionally, the Atlanta-based beverage maker has rallied from its March low of $38.75 to close a July 22 close of $49.13, a jump of 27%.

To add to the retail sector’s rally, Starbucks (SBUX) beat analyst quarterly earnings expectations and increased its forecast for cost savings. The Seattle based coffee powerhouse has been meaningfully belt tightening and has done a great job cutting costs through the closing of stores and renegotiating with suppliers. The company’s stock has more than doubled since witnessing a March low of $8.27 to close at $17.39 on July 22.

From a more diverse perspective, the Retail HOLDRs (RTH) ETF has gained 32% since hitting a $61.26 March low to close at $80.64 on July 22. Additionally, the SPDR S&P Retail (XRT) has rallied to a July 22 close of $29.53 from a March low of $18.27, an increase of 62%.

In regards to unemployment numbers, the employed labor force just keeps diminishing. However, it appears that the declines are starting to soften a bit and fewer pink slips are being handed out. So in a nutshell, the retail sector is in an uptrend and unemployment numbers are starting to get a bit better, two indicators that our economy is heading in the right direction.

When considering the aforementioned equities, always remember that they come with risks. To alleviate some of this risk, it is important to implement an exit strategy. According to the latest data from SmartStops.net, the upward trend in the previously mentioned stocks and ETFs will be coming to an end at the following price points: KO at $48.04; SBUX at $15.27; RTH at $78.36; XRT at $26.95. Keep in mind that these triggers change as the markets fluctuate and updated data is available at www.SmartStops.net.

Has The Tech Bubble Burst

2009-07-27T16:31:00.002-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

As two the most tech savvy companies miss Wall Street’s earnings expectations, is the most recent rally in technology coming to an end?

Software giant Microsoft (MSFT) reported quarterly earnings of $0.36/share terribly missing Wall Street’s forecasts as it witnessed its first ever quarter of declining sales of its Windows operating systems. Global demand for the intangible product was deeply hurt by the recession and some think that businesses and individuals are holding off on upgrading systems until Microsoft releases its 7.0 version of the software. Regardless, the stock has been in an uptrend and has bounced back from a $15.15 close in March to a July 23 close of $25.56, a jump of 69%.

To add to the disappointing earnings report, the largest Internet retailer Amazon (AMZN) missed analyst expectations by posting a decline in profits of 10%. Experts suggest that its enticing deals including low-cost products and free shipping promotions have started to eat away at profits. However, it too has been in an upward trend posting a gain of 94% after witnessing a January low of $48.44 to close at $93.87 on July 23.

On the other hand, innovation tycoon Apple (AAPL) continues to outperform analyst expectations as it smashed Wall Street’s expectation, much driven by an increase in demand for its signature iPhone and Mac products. Many say that the surge in demand for the iPhone has been caused by a cut in prices and can’t be sustained. The company’s stock has rebounded nicely, more than doubling from its January low of $78.20 to close at $157.82 on July 23.

The most recent rallies have been caused by cost-cutting measures and not necessarily increases in revenues. One must wonder, can these companies continue to implement lean measures. After all, increases in revenue are probably not likely to occur anytime soon. The Reuters/University of Michigan index of consumer sentiment decreased in July, indicating that consumers are still wary of the health of the economy and will continue to think twice before purchasing that new piece of technology.

When investing in the previously mentioned equities, keep in mind they come with risks. To mitigate these risks, implementing an exit strategy is vital. According to the most recent data from www.SmartStops.net an upward trend in these equities will be coming to an end at the following price points: MSFT at $23.58; AMZN at $ 85.01; AAPL at $146.21. These triggers change as the markets fluctuate and updated data is available at www.SmartStops.net.

IS IT TIME TO PLAY THE FINANCIALS

2009-07-17T16:46:00.001-04:00

By Kevin Grewal, editorial director at www.SmartStops.net

Three of the nation’s largest banks have released second quarter earnings reports and all three have outperformed Wall Street’s expectations. Does this mean that the financial sector has emerged from its woes and is on the verge of prosperity?

Some believe so. Advocates suggest that the sector has already hit rock bottom and really can’t do anything but go up. Signs of strength have also been seen in the ability of some banks to pay back TARP loans and raise capital. Lastly, some investors are saying that banks are relatively cheap, so could possibly be a good buy.

On the other hand, the basic fundamentals of the sector are weak and from a technical perspective the sector does not seem too healthy. As companies continue to implement lean measures, unemployment numbers continue to rise and consumer confidence remains shaky, the sector will remain weak. Additionally, most of the prominent banks believe that consumer credit is still in trouble which will hinder the overall performance of the industry.

If one does consider playing the financials, keep in mind the risk involved with them. To mitigate these risks, an exit strategy utilizing stop losses is key. Take a look at www.SmartStops.net which will give you a trigger indicating that an upward trend in your financial equity might be coming to an end. Keep in mind that these triggers change as the markets fluctuate and updated data is available at www.SmartStops.net.

Here are some banks that have outperformed and have stirred up the question of whether or not to consider financials and their relative SmartStops:

Bank of America (BAC) which reported earnings of $0.33/share outperforming the $0.28/share expected by analysts. The large bank has performed well since seeing a March low of $3.14 to close at $13.17 on July 16, a jump of 319%. The SmartStop is at $11.51.

Goldman Sachs (GS) which reported a 33% increase in earnings and smashed analyst’s expectations by reporting net income of $4.93/share. The largest surviving investment bank is up 165% since witnessing a March low of $59.20 to close on July 16 at $156.84; its SmartStop is set at $142.14

JP Morgan Chase (JPM) who reported second-quarter earnings of $0.28/share, crushing Wall Street’s expectations of $0.04/share. The financial giant’s stock has more than doubled to close at $34.70 on July 16 after hitting a low of $15.90 in March; a SmartStop trigger is set at $33.88

Citigroup (C) surprised many by reporting earnings of $0.49/share and beating Wall Street’s forecast of a loss of $0.37/share for the second quarter. The company’s stock has rebounded nicely to a July 16 close of $3.03, a 197% jump from its March low of $1.02; Citigroup’s SmartStop is set at $2.76.

Why The Base Metal Rally Is Not Sustainable

2009-07-16T13:04:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

The second quarter of the year has turned out to be astonishing for base metals, but can they sustain their gains or will they slowly diminish away?

Stockpiling by the Chinese, stimulus plans, both domestically and internationally, that were heavily concentrated on infrastructure, and a drop in production helped base metals utilize basic both macro and microeconomic principles to enable a rally.

This recent rally is hardly sustainable and is most likely short-lived. The gains that have been seen in aluminum, copper, and other industrial metals have been caused by the phenomenon of reverting back to the mean; after all, the industry was badly battered due to the global economic meltdown.

Both producing and consuming companies around the globe continue to suffer from the economic woes brought on by the global financial crisis. As stated in an earlier article, corporate America is beating Wall Street’s expectations primarily due to cost-cutting factors and not revenue growth and expansion. So until the economy rebounds, corporations start outperforming due to growth and not lean measures and jobs are created, the industrial sector will continue to suffer.

Some equities that have benefited from the most recent “revert back to the mean” are the following:

The PowerShares DB Metals Fund (DBB), up from its March low of $10.95 to close at $15.42 on July 15, an increase of 41%.

Freeport-McMoRan Copper & Gold (FCX), closing at $50.91 on July 15, up 92% from a $26.49 March low.

Southern Copper (PCU), rebounding nicely from a March low of $12.74 to close at $21.83 on July 15, a jump of 71%.

Rio Tinto (RTP) up 52% after witnessing a March low of $91.91 to close at $138.96 on July 15

Alcoa (AA), almost doubling and closing at $10.15 on July 15 after hitting a March low of $5.22.

When investing in the aforementioned equities, one must keep in mind the risks that are involved. To help moderate these risks implementing an exit strategy and identifying when the upward trend is coming to an end is vital.

According to the latest data from www.SmartStops.net, an upward trend in these stocks and
ETFs would be over at the following price levels: DBB at $14.77; FCX at $47.05; PCU at $20.05; RTP at $128.01; AA at $8.97. These levels change daily and updated data is free at www.SmartStops.net.

A Plan for Shy Investors

2009-07-15T18:08:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

The Associated Press has continuously been flooding news channels with indicators that economic woes around the globe may finally be starting to ease and investment opportunities are starting to ignite. However, many wealthy investors are reluctant to jump back into the markets and are remaining on the sidelines. Why?

The underlying answer is FEAR. A recent survey conducted and released by Barclay’s Wealth indicated that 88% of wealthy investors are aware that these opportunities exist, but 68% of them are staying away from them due to fear that the markets will take another dive.
So how does one overcome this fear? It is actually quite simple. Investors should stay diversified, perform due diligence on all of their investments, and have a strategy that they stick to.

In regards to diversification, utilizing exchange traded funds, ETFs, is a good low cost way to diversify. They offer exposure to hard to reach markets and sectors, in addition to offering transparency which enables investors to perform their due diligence.

The key in mitigating risk and overcoming fear is having a good exit strategy. Not only do exit strategies stop the bleeding when the markets take a tumble like the one witnessed last year, but they enable investors to sleep better at night and effectively manage their own portfolios.

The bread and butter behind a good exit strategy is the utilization of stop-losses. Stop-losses minimize portfolio losses, act as a backstop for gains, and can be easily implemented to an existing portfolio by going to www.SmartStops.net. Not only does www.SmartStops.net offer a service which provides investors with triggers on when to get out of a position, but this data is updated daily to reflect market fluctuations.

How To Read Earnings Reports

2009-07-15T18:06:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

Now that the second quarter of the year is over and earnings season is in full force, could the results of publicly traded companies indicate if we are on the road to an economic recovery?

Some believe so. After all, it is corporate America that drives the economic health of our nation and history has indicated that a recovery on Wall Street generally occurs before a recovery on Main Street. On the other hand, it appears that many companies have been implementing lean measures and merely cutting costs to survive as opposed to generating higher revenues and expanding business. At the end of the day, most believe that the two driving forces behind an economic recovery are numbers and consumer confidence.

Let’s take a look at some of the companies that have released earnings and see what they may indicate. Transportation giant CSX Corporation (CSX) beat Wall Street’s expectations, however showed a decline in second-quarter earnings of nearly 20%. This performance primarily came from cost cutting measures and not any increases in revenue. In fact, the nation’s third largest railroad stated that it expects shipping demand to sink by double digits in the upcoming quarter. The company has performed very well since witnessing a March low to gain 56% and close at $32.54 on July 13. In regards to the overall economy, this means that CSX doesn’t expect business to get any busier and suggests that the economy will continue to struggle.

Financial giant Goldman Sachs Group (GS) released earnings and smashed Wall Street’s expectations. The nation’s largest surviving investment bank reported earnings of $4.93/share as compared to the $3.49 anticipated by analysts. This jump in profits can be accounted for by strong trading results, improving markets and an upswing in advisory fees. The company’s stock has more than doubled to a July 13 close of $142.54 from its January low. So what does this mean for the overall health of the economy- the worst of the financial crisis could be behind us and investor confidence may be emerging indicating that the economy could be in rebound mode.

Low cost alternative, Family Dollar Stores (FDO) reported earnings 36% higher than a year ago and 5% better than Wall Street anticipated. The company’s stock has gained 14% from its March low to close at $30.12 on July 13. This is indicative that consumer confidence is still low and consumers are still wary of the future of the economy. The average consumer is still in cost cutting and saving mode, is reluctant to spring an extra dollar if he can avoid it, and is waiting desperately for more jobs to be created and fewer jobs to be slashed.

Diversified healthcare giant Johnson & Johnson (JNJ), up 24% from a March low to close at $57.72 on July 13, beat Wall Street’s expectations as well. However, the company reported a drop in second quarter earnings by 5% to $1.15/share. JNJ stated that the decline in earnings was primarily caused by a drop in demand for their products which resulted in lower revenues. On the positive side, consumer sales were relatively strong indicating that there may be some life left in the economy.

As companies continue to beat Wall Street’s expectations, investor confidence should start to increase and this confidence should trickle down to the consumer. Additionally, as profits continue to remain healthy, corporations will have the ability to hire more employees and expand operations. In a nutshell, it seems like we are heading in the right direction, but we won’t be in the clear until consumers are confident in the economy and start spending a bit more and employers start increasing and not decreasing their work forces.

Keep in mind, if you want to play the earnings game, that they come with risks. An excellent way to mitigate these risks is to have and implement an exit strategy. According to the latest data from www.SmartStops.net here are the price levels where the uptrend of these stocks would be over: CSX at $29.36; GS at $140.67; FDO at $28.74; JNJ at $54.62. These levels change daily and updated data is free at www.SmartStops.net.

Gold Losing Its Luster

2009-07-15T17:58:00.003-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

As second quarter earnings reports continue to beat Wall Street expectations and encouraging economic news floods the Associated Press, the economy seems to be on then mend and gold seems to be losing its luster.

Four factors are behind the brighter market outlook.

Earnings Reports- Chipmaker Intel (INTC) reported better than expected earnings on Tuesday afternoon on an increase in sales revenues suggesting that consumer are spending more on personal computers than what analysts had expected. Additionally, it bumped up its third-quarter revenue forecasts to a range higher than what technology analysts anticipated. So what does this mean? As we all know, consumer spending is one of the major driving forces behind an economic recovery and this “bottoming out” in the personal computer industry could potentially be the start of an upward trend in consumer spending. INTC has seen a nice rally from its March low of $12.08 to close at $16.83 on July 14, a jump of 39%.

Not only are better-than-expected earnings reports logging gains in U.S. markets, but have trickled down to global markets as well.

Retail Sales- In the month of June, retail sales increased by 0.6% marking a second consecutive increase for the sector. Most experts agree that this surge in the retail sector was primarily driven by the hikes in energy prices and gasoline, but other retail sectors saw healthy gains as well. Similar to the earnings report argument, this tend indicates that consumers are starting to let go of the tight grip they have on their wallets and spending a bit extra. The Retail HOLDRs (RTH) has seen a nice rebound of nearly 26% after witnessing a March low to close at $77.19 on July 14.

Consumer Prices- Consumer prices rose by 0.7% in June marking its biggest one month gain in nearly a year, however, most experts think that this was a bump in the road and inflation really isn’t much of a concern. To further support this notion, prices are actually down by 1.4% in June compared to a year ago. Inflation is becoming less of a worry because the recession is keeping a lid on wage pressures.

Industrial Production- Granted industrial production continues to suffer, but companies are cutting back production at lower rates than expected. In June, production at America’s factories, mines and utilities fell by 0.4%, smaller than the 0.6% decline that was anticipated and a far cry from the 1.2% contraction seen the month prior. The Industrials Select Sector SPDR (XLI) has gained nearly 40% from its March low to close at $21.56 on July 14.

These four factors have painted a much shinier outlook for the future of the global economy. As a result, the demand for gold and other bullion as started to taper off and slowly diminish. Holdings in the SPDR Gold Trust (GLD), the largest ETF backed by bullion, have fallen to 1,094.54 metric tons. Additionally, India’s gold purchases in the six months to June 30 have plunged to 63.8 metric tons, less than half of the 139 tons the emerging nation purchased a year earlier.

In a nutshell, as long as corporate America continues to outperform Wall Street, making equity attractive, consumer confidence continues to climb and inflationary worries are nipped in the bud, demand for gold and other bullion will continue to diminish.

When investing in the aforementioned equities, one must keep in mind the risks that are involved. To help moderate these risks implementing an exit strategy and identifying when the upward trend is coming to an end is vital. According to the latest data from SmartStops.net, an upward trend in these stocks and ETFs would be over at the following price levels: INTC at $15.91; RTH at $74.30; XLI at $20.70. These levels change daily and updated data is free at www.SmartStops.net.

Why Mutual Funds Need To Feel Threatened

2009-07-15T17:57:00.001-04:00

By Kevin Grewal, Editorial Director at www.SmartStops.net

The exchange traded fund (ETF) world has emerged with full force and continues to put pressure on the mutual fund industry.

ETFs are so attractive because they have opened up a new panorama of investment opportunities for all types of investors. They enable investors to grab broad exposure to stock markets of different countries, emerging markets, sectors and styles as well as fixed income and commodity indices with relative ease on a real-time basis and at a much lower cost than other forms of investing. They can be traded intraday while enabling investors to remain diversified and have full transparency. Additionally, they are so versatile that they can be bought on margin, are lendable, can be bought and sold at market, limit or as stop orders. They don’t have any sales loads and carry expense ratios in the range of 0.05% to 1.60%.

ETFs have a unique daily creation and redemption process which enables them to keep their market price in line with its underlying Net Asset Value. They can only be redeemed “in-kind” which is beneficial because it doesn’t create a taxable event.

Just to get an idea of how the ETF world has emerged here is a brief landscape of the industry. There are over 1,677 global ETFs with over 3,000 listings from 90 providers on 43 exchanges around the globe. Additionally there have been 109 new ETFs that have came to market this year and plans to launch an additional 756 new ETFs are in the making.

So why should mutual funds feel threatened? A study done by New-York based research and consulting firm Novarica indicates the following predictions for the investment industry:

· The number of mutual funds will decline from 8,022 in 2008 to 4,237 in 2015 with assets declining from $9.0 trillion to $6.75 trillion over the same period
· The number of ETFs is expected to increase to 2,618 by 2015, with assets more than doubling to $1.15 trillion
· The number of actively managed ETFs will increase to 325 by 2015, currently there are ahandful of them offered by ProShares and Grail Advisors.

To add to these predictions mutual funds have continuously been seeing outflows of assets while ETFs have been witnessing an inflow of assets. Additionally, as investors become more educated about the markets and the plethora of investment tools at their disposal, ETFs will continue to grow and remain attractive. Lastly, ETFs are finally starting to make their way into the 401(k) world, which will just be icing on the cake.

To conclude, as investors become more active in managing their portfolios and seek ways to protect themselves from market downfalls and cut risks, the underlying characteristics of ETFs will continue to enable them to grow.

A good way to cut risk out of one’s portfolio is to have an exit strategy. The way to implement an exit strategy with a portfolio of ETFs is to utilize stop-losses, which can be easily implemented by going to www.SmartStops.net. Not only does www.SmartStops.net offer a service which provides investors with triggers on when an upward trend of an ETF is coming to an end, but it is updated daily to reflect market fluctuations.

Are Commodities Nearing Bubble Territory?

2009-06-16T12:20:00.003-04:00

By Kevin Grewal, Contributing Analyst at www.smartstops.net

As risk appetite is slowly on the rise, the U.S. dollar remains weak, optimistic economic news floods the associated press and fears of inflation have hovered over both Wall Street and Main Street, commodity prices have soared to their highest levels for the year. The question at hand is can they sustain these price levels or has a new bubble formed?

Commodities including soy beans, oil, copper and wheat have all hit highs over the past few months, with some making moves as high as 5% on a daily basis. The iShares S&P GSCI Commodity-Indexed Trust (GSG) has rose a whopping 41% from a February low of $22.09 to close at $31.25 on June 10. Black gold has soared nearly 70%, which is illustrated by the jump in the US Oil Fund (USO), which closed at $38.97 on June 10 from a February low of $22.86. Lastly, the increases in metals can be represented by the PowerShares DB Base Metals (DBB), which is up 44% from its February low of $10.95 to $15.78 on June 10.

Advocates of a commodity bubble claim that prices have soared due to the recent commodity buying spree that China has been on; China has been stockpiling a range of commodities from crude oil and copper to soy beans. Unfortunately, this buying spree can’t be sustained and will eventually taper off. On the other hand, if inflationary fears continue to linger, the U.S. dollar continues to remain weak and investors remain optimistic about a global economic recovery, commodities do have the potential to remain relatively strong.

Regardless of whether or not commodities are in a bubble, investing in the aforementioned equities involves risk and you need to protect yourself with an exit strategy. According to the latest data from SmartStops.net, here are the price levels where the uptrend of the previously mentioned indices would be over: GSG at $28.86; USO at $35.18; DBB at $14.29. These levels change daily and updated data is free at www.SmartStops.net.

Coal Stocks Heating Up

2009-05-18T10:36:00.011-04:00

By Chuck Lebeau

There have been many market segments that have rallied substantially over the last two months but as might be expected it is the tech stocks and banking stocks that have received the most attention. The quiet rally in more mundane areas like coal has mostly gone unnoticed. Perhaps we can borrow a miner’s helmet lamp and shine some light on these stocks.

In just eleven market days Foundation Coal Holdings (FCL) leaped from $14.65 to a May high of $31.54.

Peabody Energy (BTU) has see-sawed its way from a March low of $20.17 to a May high of $34.15.

James River Coal Company (JRCC) has crept from a March low of $8.85 to a May high of $24.00 for an impressive gain of 171%. And the leader of the pack, Patriot Coal Corp (PCX), has recovered from a March low of $2.76 to a May high of $10.28. That represents a quiet gain of 272%. And representing the general strength in the coal stocks, the Market Vectors Coal ETF (KOL), has climbed from a March low of $10.88 to a May high of $23.20.

Prudent investors may want to avoid excessive risk in these stocks and a new service, at www.SmartStops.net can help. Like the proverbial “canary in a coal mine” SmartStops can alert you when the stocks are getting into trouble. According to the most recent SmartStops data the critical levels to watch are: FCL if it drops to $19.10, BTU if it drops to $28.40, JRCC if it drops to $16.72, PCX if it drops to $6.40 and KOL if it drops to $18.31.

Note: SmartStop alert prices change daily. For up to date daily alerts visit www.SmartStops.net

Avoiding “whipsaws” in the banking stocks

2009-04-27T12:41:00.001-04:00

By Chuck LeBeau

Watching the bank stocks this week was like watching a yo-yo. After six weeks of impressive gains, during which we saw Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C) gain 238%, 106% and 255% respectively, we started the week with big declines. For example Bank of America lost 24% of its value on Monday. This alarming loss was followed by a Tuesday rally of 9% , a Wednesday loss of almost 6% and a Thursday rally of almost 7%. Many other banking stocks were equally as athletic.

While volatile markets such as these are the most challenging environment for setting protective stops, they can also be the most rewarding if you manage to hold on and avoid the dreaded “whipsaw”. So how does one determine the optimal stop price; one that will provide adequate protection while limiting the chances of being whipsawed? Two key factors to consider are the current trading range for a stock and the strength and direction of its current trend. We want to place our stop just outside the current trading range, so that it would only be triggered as the result of “abnormal” price weakness. We also need to take into account the direction and strength of the current trend. The logic is to adjust the stops further away from prices in a strong uptrend, were the opportunity cost of whipsaw may be high, thus giving the stock more room to run.

For a sideways or downward moving stock, where the opportunity cost of a whipsaw is lower, we want to tighten the stop to better protect our capital. Following this strategy, Monday’s trailing stops would have been set unusually low as the financial stocks were coming off a strong but volatile uptrend. As the week progressed, we would begin tightening our stops as the uptrend ended and the stock’s primary direction became unclear. This process may sound complicated but there are helpful services such as SmartStops.net that incorporate this logic in the stops they calculate and publish. And in fact, the SmartStops for BAC, WSF and C were all set quite low on Monday and successfully avoided any whipsaw.

In spite of banking stocks and many other stocks posting earnings this week that were well above estimates, the market remains uncomfortable with the recent gains and continues to be subject to severe corrections. Investors would be well advised to protect recent gains with trailing stops while hoping that any of the anticipated corrections prove to be short lived. Caution continues to be the order of the day.

Note: SmartStop alert prices change daily. For up to date daily alerts visit www.SmartStops.net.

Strategies of Portfolio Protection

2009-03-30T13:31:00.003-04:00

SmartStops commentary: Below are some ideas for using ETFs to hedge a portfolio. The list of ETFs that go short is worth saving.

Investment Portfolio Protection

Strategies of Portfolio Protection

http://knol.google.com/k/samuel-gap/investment-portfolio-protection/7x625mtk3b8m/11#

These days the question of how to protect the investment portfolio becomes essential and central.

Most of us have lost some (or big) money as result of the Subprime crisis. Since this crisis crossed borders and sectors most of the individuals’ and corporations’ investment portfolios had to suffer. Even cases of sophisticated and wise investors could not show positive returns on the portfolios as the market trends and physiology around the world were negative. In such days the question of how to protect the investment portfolio becomes essential and central. Obviously the ultimate way to protect the portfolio is to sell it and hold cash only – however this is only a theoretical solution since investors expect some returns on their money and selling the entire portfolio can also cause huge transaction costs.

Portfolio Protection – Introduction

In the last decades the financial markets evolved to enable professional investors to protect their investments by short and hedge position. The simple way of protection is by purchasing PUT options or Future contracts betting the decrease of a specific company, sector or market. These instruments are costly as they reflect the option and time price in the option price. These instruments also require the investor not only to bet on the direction of the share or market (increase or decrease) but also to bet the timeframe since options and contracts expire at a certain date. Another instrument which requires high expertise is short selling of specific shares covered by stock lending arrangement. The latter enables the investor to sell shares that he does not own and buy later buyback the shares at a lower price (in case the bet succeeds and the share price falls). This short selling requires complicated procedures and high sophistication and usually cannot be performed by an ordinary individual. Therefore, the next step of the market evolvement was of professional fund managers to offer the public many types of mutual funds, hedge funds or private fund that manage short positions on specific markets or sectors. Recently, some fund managers also offer equity traded funds which aim at inverse exposure to specific sectors or indexes. These ETFs are simple and quick way to protect a portfolio and the transaction (buy/sell) is handled like any other listed share in the market.

Thus, an interesting protection structure which investor may choose is to hold shares and funds of markets and sectors he believes will perform well (“to go long”) and to purchase short ETFs or funds in markets or sectors what he believes will underperform (“to go short”).

Such a structure will enable you to be more balanced on your entire portfolio if markets will continue falling crossing all sectors and markets (in such case your short funds will make some gains), but will still allow you to bet on specific markets and sectors you believe will rise or fall. When buying short ETFs important to notice that some of them are leveraged and volatile promising the investor “twice the inverse daily return of the index”.

ETFs Short Funds:

Below are some examples of “bear market” (short position) ETFs traded in the US markets-

UltraShort SmallCap600 ProShares (US symbol: SDD) which goal is to “correspond to twice the inverse of the daily performance of the S&P SmallCap 600 index”. http://finance.yahoo.com/q?s=sdd

Short Russell2000 (US symbol: RWM) which goal is to “correspond to the inverse of the daily performance of the Russell 2000 index”. http://finance.yahoo.com/q?s=rwm

UltraShort Industrials ProShares (US symbol: SIJ) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Industrials index”. http://finance.yahoo.com/q?s=sij

UltraShort Consumer Services ProShares (US symbol: SCC) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Consumer Services index”. http://finance.yahoo.com/q?s=scc

UltraShort MSCI Emerging Mrkts ProShares (US symbol: EEV) which goal is to “correspond to twice the inverse of the daily performance of the MSCI Emerging Markets index”. http://finance.yahoo.com/q?s=eev

UltraShort FTSE/Xinhua China 25 Proshare (US Symbol: FXP) which goal is to “correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 index”. http://finance.yahoo.com/q?s=fxp

UltraShort Financials ProShares (US Symbol: SKF) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Financials index”. http://finance.yahoo.com/q?s=skf

UltraShort Oil & Gas ProShares (US Symbol: DUG) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index”. http://finance.yahoo.com/q?s=dug

UltraShort Technology ProShares (US Symbol: REW) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Technology index”. http://finance.yahoo.com/q?s=rew

UltraShort MSCI Japan Proshares (US Symbol: EWV) which goal is to “correspond to twice the inverse of the daily performance of the MSCI Japan index”. http://finance.yahoo.com/q?s=ewv

UltraShort Utilities ProShares (US Symbol: SDP) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Utilities index”. http://finance.yahoo.com/q?s=sdp

UltraShort Semiconductor ProShares (US Symbol: SSG) which goal is to “correspond to twice the inverse of the daily performance of the Dow Jones U.S. Semiconductor index”. http://finance.yahoo.com/q?s=ssg

Disclaimer:

The information contained in this article and from any communication related to this article is for information purposes only. The author does not hold itself out as providing any legal, financial or other advice, and is not authorized to do so. The author also does not make any recommendation or endorsement as to any investment, advisor or other service or product or to any material submitted by third parties or linked to this article. In addition, the article does not offer any advice regarding the nature, potential value or suitability of any particular investment, security or investment strategy. The material in this article does not constitute advice and you should not rely on any material in this article to make (or refrain from making) any decision or take (or refrain from making) any action.

Stupid Investment of the Week

2009-03-11T09:36:00.002-04:00

Stupid Investment of the Week

Commentary: Find a stop-loss point before you go any further with stocks

By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) -- Maybe you're investing because you believe that stocks are "on sale," or perhaps it's because you believe in the long-term prospects for recovery. Perhaps you hold stocks that have been good to you in the past, or which you've been in so long that you don't want to go through the headache of calculating your capital gains.

Or you could be trading for a quick profit, or following the discipline of dollar-cost averaging.

Whatever the reason, if you haven't come up with a stop-loss point -- either a real trigger to get out of an investment if it falls too far or an emotional point where you would sell -- you're making the Stupid Investment of the Week.
Stupid Investment of the Week typically highlights conditions and characteristics that make a security less than ideal for average consumers, focusing on one example to showcase common pitfalls.
This week, however, the trait under review belongs to the investor and not the investment. Specifically it's about people who buy or hold a stock in a trader's market without having a concrete exit strategy.
"The hardest thing investors have to do is to determine when they can make money in this kind of market, and when they have to preserve capital, because those things are often at odds with each other," said Richard Geist, head of the Institute on the Psychology of Investing.
He added: "You are looking at something saying 'It's a bargain,' or feeling like it can't go down much further from here, and yet you are also looking at your portfolio and wondering how much of a loss you can take if you are wrong."

Set limits

There are plenty of stop-loss strategies, typically involving a standing order to sell shares if they fall to a specific level. That said, rigid stop-loss programs typically are wrong for casual investors, as they can trigger losses again and again, especially in a volatile market.
So while many investors who follow trading systems will always set a stop-loss at, say, 8% or 10% down from their buying point, an average investor could find themselves with a slew of investments all delivering a quick loss and never reaching the longer-term prospects that are behind the holding.
"A trader or someone with a system basically is using stop-losses to avoid being wrong," said Ken Shreve, markets desk anchor for Investor's Business Daily. "Someone who buys and holds blue-chips, they're trying not to be concerned with the short-term losses, figuring that they will get paid off over time."
But, he added, "At some point, however, those losses start to add up and the math is not on your side. The problem with riding things down is that a 50% loss in a stock requires a 100% move back up. ... The math is the best argument for basically setting a selling point, one where you avoid losses or protect your gains."
For long-term investors, finding a selling point may not mean setting a stop-loss order at a specific price per share. Instead, it may be an emotional price, one where the investor says they are willing to gamble with some of their winnings, but they are not going to allow a long-time winner to morph into a long-time loser.
Unlike the person with a trading strategy, who takes proceeds from a stop-loss trade and puts it toward the next investment that meets their buying profile, a long-term buy-and-holder is looking more to create their reason to get out the door, without regard to the next investment. They are more concerned about protecting what they have than finding a faster horse at the track.
Consider General Motors (GM) , which was trading 12 months ago north of $26 per share. At that price, there were still plenty of long-term believers, employees and former workers with huge slugs of stock in their retirement plan and more. While the market was waking up to the problems that have led to the company calling for a federal bailout to avoid bankruptcy, the long-term, 'I-have-faith-in-America, it's-too-important-to-fail' crowd was hanging on, and their accounts were being slaughtered for it.

Avoid the worst

Likewise, the financial services industry spent the late 1990s and early 2000s rewarding investors many times over, and yet a long-term holder who simply figured "things couldn't get much worse" basically has watched decades of gains evaporate.
Behavioral finance experts say that investors tend to go through a progression that includes some measure of denial about just how bad things can get. When they wake up to horrendous losses, they are looking at account balances so low that they may ride things out until the bitter end.
Instead, Geist noted, they should have a mental selling point, one where they say they will allow that long-term winner to shrink back to maybe double the initial investment or all the way to break-even, but that when it reaches those scary levels it gets sold in order to avoid the possible bitter end.
This "emotional stop-loss" is just as important as the actual trade; effectively, it is like setting your limit at the casino and saying "this is the point beyond which I need to stop gambling."
And while some of the issue is based on emotions -- the point where you start losing sleep at night based on the shrinking value of your biggest holdings or your entire portfolio -- some of the decision will also be based on your needs and plans.
"The more stress people are under, the worse their decisions tend to become," Geist said. "So if you are holding something today and you know there is a point where enough is enough -- where you just can't take more loss or you just have to acknowledge that whatever had you buying or holding the stock just isn't working right now -- that point becomes your emotional stop-loss. If you know it in advance -- and setting it is the hard part -- it will protect you from letting things get worse while you try to figure out if you should hang on or not."

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers. www.marketwatch.com
Article: http://preview.tinyurl.com/aqvtd5

Avoiding Black Swans

2009-02-26T15:19:00.000-05:00

This Article written by Chuck LeBeau was originally published in Trading Markets and has been since re-posted in many websites

It is a great article and it demonstrate the absolute need of having a valid exit strategy.

A very comprehensive study of the Dow Jones Industrials caught my eye recently and I want to share some thoughts and conclusions based on the data in the study. The data I will be referring to is from a study encompassing more than 100 years of daily data on the Dow Jones Industrial Average. (Black Swans and Market Timing: How Not To Generate Alpha, by Javier Estrada, International Graduate School of Management, Barcelona, Spain) The data presented in this study begins on December 31, 1899 and ends on December 31, 2006. In total the study encompasses 29,190 trading days. I have highlighted the data about the worst days because it is usually ignored.

1) A $100 investment at the beginning of 1900 turned into $25,746 by the end 2006, and delivered a mean annual compound return of 5.3%.

2) Missing the best 10 days reduced the terminal wealth by 65% to $9,008, and the mean annual compound return one percentage point to 4.3%. But avoiding the worst 10 days increased the terminal wealth by 206% to $78,781, and the mean annual compound return by more than one percentage point to 6.4%.

3) Missing the best 20 days reduced the terminal wealth by 83.2% to $4,313, and the mean annual compound return to 3.6%. But avoiding the worst 20 days increased the terminal wealth by 531.5% to $162,588, and the mean annual compound return to 7.2%.

4) Missing the best 100 days reduced the terminal wealth by 99.7% to just $83 ($17 less than the initial capital invested), and reduced the mean annual compound return to −0.2%. But avoiding the worst 100 days increased the terminal wealth by a staggering 43,396.8% to $11,198,734, and more than doubled the mean annual compound return to 11.5%.

The author of this study concludes that these outlier days in either direction (the Black Swans) are so rare that it would be impossible for market timers to capture or avoid them.
I strongly disagree.

First let’s look at what it is we want to do with market timing. Do we want to capture the positive Black Swans or simply avoid the negative Black Swans? It would seem obvious that we would want to do both but if we had to choose only one course of action it is clear that we can derive the most benefit from avoiding the negative Black Swans so let’s start with that. Let’s see if we can avoid big declines using market timing.

As director of quantitative analytics at SmartStops.net I recently directed a ten-year study of the stocks in the S&P 500 Index. The study was intended to measure the various peak-to-valley drawdowns of each of the 500 stocks. Any drawdown of 15% or more was identified and measured. Since this article is focused on big drawdowns (the Black Swans) we will only look at peak-to-valley declines of 60% or more. Here is the data:
1) Of the 500 stocks 267 of them had experienced a drawdown of 60% or more.
2) 175 of them had experienced a drawdown of 70% or more.
3) 105 of them had experienced a drawdown of 80% or more
4) And 51 of them had experienced a drawdown of 90% or more.
5) The average of the largest drawdown of the 500 stocks was 61.67%

Those numbers might seem high at first glance but they are actually understated by quite a bit. The drawdown study ended in May of 2008 and we all know that the market has gone down a great deal since the study so the magnitude of the drawdowns would be even greater if the same study were conducted today. Also, as in any long-term study of a group of stocks, the results are skewed by “survivorship bias”. There were a lot of stocks that might have been in the S&P 500 ten years ago but for one reason or another they are no longer in the current index. Some of those stocks have declined to zero and are not included in the study.

Having looked at the nature of the problem let’s get back to the task at hand. Can market timing help us to avoid these drawdowns? Yes, it definitely can. A logical application of trailing stops would have avoided most of the big declines. Here are the results using the SmartStops trailing exits that are available for free on our web site.

1) Of the 500 stocks only 4 of them had declines of 60% or more.
2) There were no stocks that had declines of 70%, 80% or 90%.
3) The average of the largest drawdown of the 500 stocks was 22.58%

Now I must admit that I think that our SmartStops trailing exits are more sophisticated and effective than most trailing exits because the SmartStops are adjusted daily for trend direction and changes in volatility. However any serious effort at limiting the drawdowns with conventional trailing stops would certainly have had a very positive effect in reducing the magnitude of these declines. As the quoted Black Swan study clearly shows the avoidance of big declines improves performance very significantly. Here is a reminder of how that works:

1) It takes a gain of 150% to recover from a 60% decline.
2) It takes a gain of 333% to recover from a 70% decline.
3) It takes a gain of 500% to recover from an 80% decline.
4) It takes a gain of 900% to recover from a 90% decline.
5) It takes a government bailout to recover from any decline greater than 90%

Skeptics of market timing usually argue that efforts to avoid big down moves will result in missing the biggest up moves. However[The Discount code is SG2FREE30]I have never seen a study that shows any evidence to support that preposterous assumption. If you limit your losses and are willing to enter on strength you will not miss any major up trends. With a little planning and effort you can capture the Black Swans on the up side and avoid the Black Swans on the down side.

Chuck LeBeau is director of quantitative analytics at SmartStops.net and co-author of Computer Analysis of the Futures Markets (McGraw-Hill). For more of Chuck's commentary, visit www.smartstops.net

Trading Market http://preview.tinyurl.com/beadqz

Quote of the day

2009-02-26T15:12:00.001-05:00

“The highest form of ignorance is when you reject something you don't know anything about.”

Wayne Dyer (b1940)

Trading Messages From Mars

2009-02-25T12:07:00.000-05:00

Chuck LeBeau Wisdom

"This excerpt is from Chuck LeBeau. Chuck happens to be one of the pioneers in the field of trading systems. His wisdom should be absorbed by all"
Michael Covel

Michael Covel is the Author of The Complete TurtleTrader & the bestseller Trend Following
Covel Is also the Director of the New Documentary Film Broke: The New American Dream

"[This] happens to be a true story, which contains a very valuable trading lesson that has influenced my trading for many years now. We thought the story might make an interesting topic...Here is the story: Back in the late 1960s I was a young commodity broker at E. F. Hutton and Company. Our office was a brand new high-tech office (for its time) which was considered the "flagship office" for E. F. Hutton. In this office about thirty brokers and as many clients shared one very large boardroom and there were no private offices. The brokers had elegant and expensive desks and the clients had a comfortable seating area in the front of the office where they could hang out and watch the tapes and monitor our state of the art commodity "clacker board". Sitting at my desk near the front of the boardroom I could read my Wall Street Journal and keep track of the commodity markets without looking at the board. By just listening to the rhythm and tempo of the mechanical clicks as the prices changed I could easily tell when anything important was going on because the tempo of the clicks would increase noticeably. Just in front of my desk were a half dozen comfortable sofas facing a high mahogany paneled wall with the tapes and the "clacker board". A gallery of traders, mostly retired "old timers" who were trading real commodities like grains and pork bellies, lounged around on the sofas plotting their charts and talking about life and the markets. They typically arrived early to get a good seat in their usual spot and then spent the day trading, exchanging commentaries and offering unsolicited advice to one another on any subject. For the most part they were a very sociable group who would take coffee breaks together and greeted each other on a first name basis. These traders enjoyed the elegant atmosphere and treated our well-appointed boardroom as their private men's club. (Were you aware that women were not allowed to trade commodities back in those days? My how times have changed!) However, one of these "old timers" kept to himself and was not interested in becoming a member of the friendly and often boisterous social circle. He usually sat quietly by himself intently watching the price changes on the commodity board and holding an old glass Coca-Cola bottle up near his ear. The vintage shaped Coke bottle had been emptied many years before and now contained only a 12-inch tube of bent and broken radio antennae which extended awkwardly out of the top of the bottle. Keep in mind that in the 1960s no one had yet heard of cell phones so the purpose of this Coke bottle was a real mystery to everyone. When the trader would talk to the bottle from time to time all the heads would turn and the traders nearby would try to listen to the conversation. But the trader spoke very softly and no one was able to eavesdrop on his conversations with the bottle. The traders knew that the fellow with the coke bottle was a client of mine and eventually a representative of the group came to me and explained that they were extremely puzzled about this guy and his Coke bottle and asked me if I knew what was going on. I didn't know the purpose or meaning of the Coke bottle but I was as curious as anyone was and I promised I would find out. The next time the client came back to my desk I promptly placed his order and then politely asked him about the Coke bottle. With a serious expression and no embarrassment he explained to me that the Coke bottle was an inter-planetary communication device that had been given to him by aliens. He said that the aliens were very interested in our commodity markets and they often gave him trading advice from their various observation points on other planets. He said that he had just had a message from Mars and they were buying soybeans so he had also purchased soybeans. After revealing his unique trading methodology he returned to his seat and resumed his whispered conversations with the Coke bottle. As soon as I revealed my discovery of the meaning of the Coke bottle to the other traders, all attention was immediately focused on the Coke bottle trader and the soybean market. The soybean market proceeded to go the wrong way and the trade from Mars was eventually closed out at a loss. The other traders were had no sympathy and were quick to begin ridiculing the the trader and poke fun at his beliefs. The next trade however turned out to be a big winner and the Coke bottle trader went from sofa to sofa telling his story and pointing to the clacker board while waiving his Coke bottle and bragging about the profitability of his most recent message from outer space. Because he was making money now his previous critics had to endure his bragging about his success on the current winning trade. As time went on and a few winning and losing trades later a clear pattern of behavior began to emerge. The Coke bottle trader was ridiculed unmercifully on his losing trades but was able to get his revenge and the last laugh during the winning trades. This trader might have been a little bit crazy but he wasn't stupid. He soon learned that his only defense against ridicule was to hold on to winning trades as long as possible and to quickly get out of his losses. As long as he was sitting on his sofa with a winning trade no one could tell him he was crazy and make cruel jokes about his messages from Mars. In fact while he was winning he was quick to wander around the room and ridicule the methods of the other traders who were not making as much money as he was. He displayed the profits in his trading account as hard evidence of the validity of his methods and offered copies of his statements as irrefutable proof that he was getting valuable advice from his alien contacts. Who could argue when his advice from other planets was obviously working? As a young broker this experience and the first hand observation of the Coke bottle trader who suddenly became profitable gave me my first important lesson about the importance of exits. I knew the entry signals had nothing at all to do with his success. His batting average was not any better than that of any other trader. However, this crazy old trader seemed to be able to make money consistently while other traders with more "sanity" and more valid entry methods were losing. Before long I was able to recognize that this man had become a successful trader simply by his efforts to avoid ridicule. He knew that he was vulnerable during his losing trades so he closed them out very promptly. His winning trades became his shield against the ridicule of the other traders and he kept his winners much longer than before his unorthodox methods were revealed. In the many years since this experience I have encountered many claims of success for entry methods that probably have even less validity than the Coke bottle messages. I have learned to look only briefly at the entries of winning traders and to examine their exit strategies very carefully. I am very fortunate that more than thirty years ago I learned from the Coke bottle trader that success in trading depends on our exits and not our entries."

Chuck LeBeau

A great Article...

2009-02-24T15:09:00.000-05:00

By John Waggoner, USA Today

One definition of madness is doing the same thing over and over, and expecting different results. If you have tried to snatch up a cheap stock in the past six months or so, you're probably questioning your sanity. Cheap stocks just keep getting cheaper.

For people who like bargains, stocks remain tempting. Many stocks are lower now than they were a decade ago. Before you decide to dive in again, however, make sure you have an exit strategy. You'll save yourself some money and, sooner or later, you might lose that twitch.

For many years, selling a stock was considered something that was Not Done, like bringing a clown to a funeral. After all, stocks always went up. Patience was the only answer to a stock tumble.

These days, however, those who hesitate are often lost. Say you bought 100 shares of Bank of America on Dec. 31 at $14.08. Price: $1,408.

You could have argued that Bank of America, the nation's third-largest bank holding company, was a cheap stock. It had already fallen 63% since Oct. 1. And it sold for 2.3 times its estimated 2010 earnings. (The price-earnings ratio, or P-E, measures how cheap a company's stock is relative to its earnings. The higher the P-E, the pricier the stock. Bank stocks typically sell for lower P-Es than most other stocks, but 2.3 is still inexpensive.)
Cheap or not, BAC wasn't a great buy. By Thursday, BAC closed at $3.93 a share, meaning you have lost $1,015, or 72%. In short, you've suffered a devastating loss: To get back even after losing 72%, you have to gain about 270%.

Ideally, you'd like to sell before taking such a huge loss. But how do you decide when to sell a stock?

Dan Chung, chief investment officer for the Alger funds, has a few general rules about selling. If the company produces a startling earnings disappointment, for example, you should consider selling, he says. You might also consider selling if you think another stock has better potential.

But you should also set a limit on how much you are prepared to lose the moment you buy a stock. One way to make sure you stick to that limit is to use a stop-loss order, which tells your broker to ditch the stock if it falls to a specific price.

You can put in a new stop-loss order every day, using a day order, or you can specify that your stop-loss will be good until you cancel it. (These orders don't last for all eternity; depending on your broker, they may last only six months or so.)

The next question: Where should you set your stop-loss order? In most cases, setting the stop at a 10% loss makes sense. You'll have to earn 11% to get back even, but an 11% loss is not a fatal error. Had you set a 10% stop on your Bank of America investment, for example, you'd be out about $141, plus commissions, rather than $1,015.

A stop-loss might not help in all circumstances. If your stock is down 10% when the Standard & Poor's 500 is down 15%, for example, it's holding up reasonably well. Some highly volatile (and low-priced) stocks will move up and down 10% pretty frequently. And, inevitably, you'll have some stocks that fall 10% and promptly rebound.

"Basically, we're talking about controlling risk," says Chuck LeBeau, director of analytics for SmartStops.net, a website that tells you when to sell. When you buy a stock, LeBeau says, you can't control how much it will go up. But you can limit your losses by using a stop-loss order.

SmartStops.net uses proprietary formulas, based on a stock's general direction and its volatility, to determine when to sell. The stop recommendations change every day. You can monitor a portfolio of three stocks or exchange traded funds for free, or get five stop recommendations a day for free.

If you're thinking of selling a mutual fund, which is typically a longer-term holding, then you need to examine the fund's record against other, similar funds over time. By and large, if a fund has lagged behind its peers for the past one, three and five years, it's time to ditch it. The chart shows five funds with assets of more than $1 billion that fit the sell criteria.

One place to get further guidance: The website FundAlarm, which is aimed at telling you when to send your fund to Palookaville.

Many investors have been burned enough by this market to sit on the sidelines for a while. If you're brave, or even mildly mad, be sure to have a sell point in mind the moment you buy.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is jwaggoner@usatoday.com.

full link to the article
http://www.usatoday.com/money/perfi/columnist/waggon/2009-02-19-investing-stock-stop-loss_N.htm

So Much for Buy-and-Hold Advice

2009-02-17T14:54:00.000-05:00

So Much for Buy-and-Hold Advice
You bet on stocks. You diversified. You lost a bundle. Should you get out? Experts disagree.

SmartStops comment: In this day and age diversification offers very little protection and can even make things worse. You need protection on a stock by stock basis using SmartStops.

Excerpts: They were reassured that stocks have the best long-run returns, so they plowed their savings into the market—only to watch in dismay as government bonds outperformed stocks over an entire decade. Moreover, investors were lectured again and again on the wisdom of diversifying their portfolios internationally. So they did. But foreign markets have done even worse than their U.S. counterparts lately. The most exasperating example is Japan, whose key stock market index is now back to where it was in 1981.
What many investors have failed to realize is that "the long run" can sometimes be very, very long. So says London Business School economist Elroy Dimson, co-author with his LBS colleagues Paul Marsh and Mike Staunton of the 2002 book Triumph of the Optimists, which challenged work by University of Pennsylvania Wharton School professor Jeremy Siegel, author of Stocks for the Long Run. The climb back into the black after a fall can take even longer outside the U.S., says Dimson. In Italy, he says, stocks failed to keep up with inflation over a 73-year period through 1978.
But even in the absence of such a doomsday scenario, international diversification doesn't always lower the volatility of returns—because in major crises, stocks fall in every market. Thus, in 2008 global diversification isn't protecting investors from the financial crisis that originated in the U.S. In sum, two pillars of investment advice—buy stocks and go global—have proved to be weak reeds lately. No wonder pundits such as Jim Cramer, the CNBC stockpicker, are sounding off about "how the best way to invest is not to buy a bunch of stocks and just sit on them."

Link to full article:

Retirement accounts have lost $2 trillion

2008-10-18T18:21:00.000-04:00

Retirement accounts have lost $2 trillion
By JULIE HIRSCHFELD DAVIS, AP

SmartStops comment: Elderly investors can no longer rely on Buy and Hold in today’s volatile markets. It may take too many years for the prices to recover. Investment portfolios need the protection that SmartStops can help to provide.

Excerpts: WASHINGTON -Americans' retirement plans have lost as much as $2 trillion in the past 15 months, Congress' top budget analyst estimated Tuesday.
The upheaval that has engulfed the financial industry and sent the stock market plummeting is devastating workers' savings, forcing people to hold off on major purchases and consider delaying their retirement, said Peter Orszag, the head of the Congressional Budget Office.

More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30 said they worry they will have to work longer because the value of their retirement savings has declined.

A new AARP study found that because of the economic downturn, one in five workers 45 and older has stopped putting money into a 401(k), IRA or other retirement savings account during the past year, and nearly one in four has increased the number of hours he works.

Link to full article:

Dividend Cuts Hit $22.5 Billion in 3rd Quarter

2008-10-06T14:32:00.000-04:00

Dividend Cuts Hit $22.5 Billion in 3rd Quarter
Standard & Poors press release

SmartStops comment: Investors in high dividend stocks often believe that they can ride the market up and down with little concern over declines in the stock prices .(As brokers used to joke in down markets- the yields are simply going up.) But what if the dividends that help protect the stock prices start getting cut? Based on the current news in this article, even dividend investors might benefit from the protection provided by SmartStops.

Excerpt from article: New York, October 3, 2008 - Standard & Poor’s, the world’s leading index provider, announced today that 138 of the approximately 7,000 publicly owned companies that report dividend information to Standard & Poor’s Dividend Record decreased their dividend during the third quarter of 2008, representing a 557% increase from the 21 issues that decreased their dividend during the third quarter of 2007. Reported dividend increases fell 21.2% to 346 from 439 reported in the third quarter of 2007.
“It was the worst September for dividends since we started keeping dividend records in 1956,” says Howard Silverblatt, Senior Index Analyst at Standard & Poor’s. “During the second quarter, companies were nervous and cautious. The third quarter, however, saw many companies deciding to take action, and that action took $22.5 billion out of the pockets of investors.”

Link to article:

Fannie, Freddie: The biggest losers

2008-09-07T15:32:00.000-04:00

Fannie, Freddie: The biggest losers

Investors in Fannie Mae and Freddie Mac face massive losses when trading opens Monday.
By Colin Barr, senior writer, Fortune

SmartStops comment: Only a few months ago these stocks were considered safe investments that were widely owned by banks and conservative institutions. Now FNM and FRE are close to worthless. (SmartStops would have had you out in the mid $20s on June 9th.) If you think that you own quality stocks that are so safe that you don’t need protection then you are clearly mistaken. Even the preferred shareholders are in trouble. Look at the list of supposedly knowledgeable investors and financial institutions that could have saved fortunes by simply using SmartStops.

Excerpts: NEW YORK (Fortune) -- Big investors in Fannie Mae and Freddie Mac face a brutal Monday. Shares in the mortgage giants, which have already lost 90% of their value over the past year, are likely to plunge anew in the wake of the government's announcement Sunday that it is taking control of the companies and ending the payment of common and preferred dividends.
The prospect of a virtual wipeout of existing Fannie and Freddie preferred shares could lead to declines Monday in the shares of regional banks and major insurers that hold the shares. Among the holders of Fannie and Freddie preferred issues are Genworth Financial (GNW, Fortune 500) and MetLife (MET, Fortune 500).
The government intervention comes just over a month after Legg Mason's Miller reported a sizeable purchase of Freddie shares. Miller came to fame with a 15-year run of beating the S&P 500. But that streak ended in 2006, and since then his Legg Mason Value Trust has lagged far behind the market.
Miller's run of poor results hasn't made him any less aggressive, however. He has owned Freddie shares for some time but has been doubling down on the company as its shares plunged over the past year. Legg Mason owned 15 million shares at the end of 2007, when Freddie stock was fetching $34 a share in the market. He then boosted that figure to 50 million in the first quarter, as shares dropped into the teens in the wake of the collapse of Bear Stearns, and 80 million at July 31, when the price was below $10.
If the outlook for Freddie shares - which closed Friday at $5.10 but traded as low as $3.50 in the after-hours session when news of the Treasury plan began to circulate - is bleak, one ray of hope comes from the March collapse of Bear Stearns. Those shares were to be sold to J.P. Morgan Chase at $2 apiece in a Fed-brokered rescue of Bear, but the shares traded sharply above that level for a week, until the deal was renegotiated at $10.

Link to article:

WHEN TO SELL

2008-09-07T14:48:00.000-04:00

When To Sell Stock: Here's The Best Tool For Knowing When To Unload Your Investment by Alexander Green, Chairman, Investment U.

SmartStops comment: Another excellent article from Alexander Green, the Oxford Club’s Chairman of “Investment U”. However we would disagree on a couple of points. The article suggests a 25% trailing stop but our SmartStops formulas have been proven to work much better.
(See our comparison study)

Also the article says: “Under no circumstances should you lower your stop.” As you have observed our stops are frequently moved further away as volatility increases so that they are not triggered by random price action. That is one of the important pieces of logic that makes our SmartStops so much more effective than a simple 25% trailing stop.

Excerpts: Anyone can buy a stock. The art of investing is knowing when to sell stock.
There are a number of theories about when to cash in your chips. But most of them are misguided. And some are completely wrongheaded.
For example, any analyst who urges you to sell a stock because the market is about to tank is immediately discredited, in my view. While there are certainly many bear markets and bull markets ahead of us, no one - and I mean that literally - has ever demonstrated any proficiency at warning investors in advance.
If there is truth to any of the great maxims of Wall Street it's this one: cut your losses and let your profits run. Selling a rising stock, by definition, is not letting your profits run.
There is, however, one sell discipline that forces you to do just that. It's called a trailing stop. And if you're not using one to protect your stock positions, you should be.
A trailing stop is simply a stop-loss order set a certain percentage below the market - and then adjusted as the price rises.
Traders, who are short-term oriented, will always want to run their sell stops closer than long-term investors. But even a short-term trader shouldn't run his stops too close to the market. Why? Because no stock moves up in a straight line. And you don't want to get knocked out of a winning stock while its just going through its normal fluctuations.
There is plenty of research to back up the idea of running trailing stops, incidentally.

Link to article:

The Best Way to Lose Everything

2008-08-24T16:05:00.000-04:00

The Best Way to Lose Everything
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club

SmartStops comment: Excellent article and great example of the pitfalls of over confidence and lack of diversification. Reminds me of the well known hedge fund manager (he wrote a book) who was proud of the fact that he never used stops. He has now gone completely broke twice in the last few years losing all of his investor’s money and many millions besides.

This true story is intended to point out that there is often the assumption that good traders don’t need stops. Actually they need disciplined stops more than the bad traders. Unfortunately the bad traders are doomed to go broke quickly whether they use stops or not. Meanwhile the good traders will survive and be around for a long time. The good traders will be making many trades through all sorts of unusual and risky market conditions. They all know that sooner or later they will be glad they used stops.

Excerpts: Back when I was still managing money 10 years ago, I had a client who transferred in a rather sizable account. There was only one problem. Over 90% of his net worth was tied up in a single stock, Ericsson. He refused to use a trailing stop or sell a share of it or even to use a position sizing strategy.
I warned him it was crazy to have his entire financial future riding on one stock, especially since he was retired. "That's what everybody keeps telling me," he said. "But the stock keeps going up. I'm glad I ignored them all."
I congratulated him that the stock had appreciated so nicely. But I reminded him there might come a time when it didn't do so well. But he was stubborn. He wouldn't part with a share. Furthermore, he grew weary of having the same conversation. He transferred his account out again.
You may already know how this story ends. From a high of over $105 in March 2000, Ericsson took a breathtaking dive. It traded at less than $5 two years later. This is the kind of mistake - especially when you're already retired - from which recovery is simply not possible. However, I sometimes see other investors making similar mistakes.
Everything we do - asset allocation, trailing stops, position-sizing and stock selection - is done with an eye to not only maximizing returns but also limiting risk.

Link to article:

High Beta Stocks: Do They Offer Higher Returns?

2008-08-24T15:57:00.000-04:00

High Beta Stocks: Do They Offer Higher Returns?
By Roger Nusbaum

SmartStops comment: This article points out that going after higher returns by taking on added risk is not necessarily a good idea. It also points out that the holding period for many “fad stocks” should be limited to only “a couple of years give or take.” We agree. Here is an alternative idea: In order to get higher returns you might occasionally consider taking on a few “fad stocks” with a high Beta and then use SmartStops to limit the risk. Now that sounds like the best of both worlds.

Excerpts: A high-beta stock is likely to have its day in the sun, but eventually it will start to rain. Pick any internet stock from the bubble. Chances are it gave ten years', or more, worth of appreciation from 1998-1999. The person who sold his net stock on Dec 31, 1999 and never went back had a different experience than someone who held on to internet stocks too long. This is true for every stock market fad. Success with the next fad will not come from holding forever; it will come from holding for a couple of years, give or take.
When I write about beta I use the word volatility, not risk. Increasing risk is really not something people want to do. They may want to increase volatility to capture a general rise in the market, but there is never a good time to absorb an 80% hit to one of your stocks.

Link to article:

Fannie and Freddie Bring Credit Crisis to Defcon One

2008-08-18T13:23:00.000-04:00

Fannie and Freddie Bring Credit Crisis to Defcon One
By Mike Swanson Wall Street Window

SmartStops comment: This article will definitely get your attention.

Just for the record:

Re Freddie Mac - FRE traded as low as $3.89 on Friday, July 11. Our SmartStops exit was at $22.64 on June 9.

Re Fannie Mae - FNM traded as low as $6.68 on July 11. Our SmartStops exit was at $24.39 on June 9.

When you read this article you will understand why you need SmartStops.net protection right now.

Excerpts: We are at a critical point in the economic history of the United States. I know of no other way to put it. The events of last week were of a character that we've never seen before. On Friday mortgage lender IndyMac Bancorp became the second largest federally insured financial company to fail after it got hit by a bank run. The Federal Deposit Insurance Corporation took it over. That news may be a big story, but is totally overshadowed right now by the teetering collapse of Fannie Mae and Freddie Mac. Both are in danger of going under and the Bush administration, Federal Reserve, and Treasury Department are now meeting on a daily basis to figure out what to do.
There is no news that would be worse than the collapse of these two institutions and such an event if it happens will have ramifications for the economy and stock market for years to come. Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Odds are that if you own a mutual fund or annuity that you indirectly own a security backed by one of these two institutions. The two of them combined own half of America's twelve trillion in outstanding mortgages and their failure would be the implosion of the entire financial system.
Others have warned about what a collapse of Freddie and Fannie would mean. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system. By insuring over half of the mortgages in the country they are too big to fail. This is serious situation folks. We've never seen anything like it before.

Link to article:

Financial Crisis Is Expected To Bring More Big Shocks

2008-08-18T13:17:00.000-04:00

Financial Crisis Is Expected To Bring More Big Shocks
Monday August 18, 10:17 am ET CNBC

SmartStops comment: As might be expected in an uncertain market environment there have been plenty of “gloom and doom” articles lately. Here is another one to add to the collection. Whether you agree with the gloomy outlook or not, these articles should certainly prompt you to seek the portfolio protection being offered by SmartStops.net.

Excerpts: The year-old financial crisis is not only far from over but could actually get much worse, bringing more big shocks to the US economy and stock market, a host of experts said Monday.
Among the predictions: the failure of some of the country's biggest financial institutions, the collapse of 1,000 banks and a possible government bailout of mortgage giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News).
Meanwhile, billionaire investor Wilbur Ross told "Squawk Box" that a thousand banks could fail before the financial crisis is over.
"Not very big ones necessarily," he said. "But a thousand banks is going to be a lot." And the impact on the credit crunch could be severe, he added.
"Each dollar of bank equity that gets lost takes out about 12 or 13 dollars of loans so there's a tremendous magnifier effect of small changes in bank equity."
His comments were echoed by Morgan Stanley co-President Walid Chammah, who told a German newspaper that the financial crisis will probably not end until next year or even 2010.
"We will likely see more insolvencies among small U.S. regional banks that have focused on mortgage business," Chammah said. .
And a Barron's article over the weekend said the U.S. Treasury is growing increasingly likely to recapitalize Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime.
The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses.

Link to article:

Investment Strategy: The Exit Strategy That Nets Big Winners And Reduces Risk

2008-07-31T20:28:00.000-04:00

Investment Strategy: The Exit Strategy That Nets Big Winners And Reduces Risk
By Marc Lichtenfeld

SmartStops comment: Pulitzer Prize winning philosopher Will Durant once observed, “The trouble with most people is that they think with their hopes or fears or wishes rather than with their minds.”
That insightful observation seems to be particularly true of most investors. This helpful investment article by a Senior Analyst at Mt. Vernon Research offers some suggestions on how to lock in bigger profits after your stock doubles. What do you do if it doesn’t double? Use SmartStops of course.

Excerpt: Learning From The DotCom Boom To DotCom Bust
At first, the stock began to slide. Then, when the dot com demon ravaged the sector, the stock plummeted. Eventually, it became worthless and the company closed its doors.
After that, I vowed that if one of my stocks ever doubles, I'll either sell half and get my original investment back, or put a stop at that 100% mark, ensuring that I won't lose money.
And let me tell you, this investment strategy works. Plain and simple. Not only does it help you grab big gains at the time, but it also helps you capture even larger gains. That's because when you're not worried about losing money, you're more inclined to let your winners run. Fear is no longer a controlling emotion.
And that's the key to having a successful investment strategy: Limiting your losses and letting your winners run. Sounds simple, I know. But you'd be surprised how many people let fear and greed control their decision-making process.

Link to article:

Survey: CEO Candor On the (Steep) Decline

2008-07-31T20:23:00.000-04:00

Survey: CEO Candor On the (Steep) Decline
By Jessica Stillman

SmartStops comment: If you think you can rely on candid information from corporate CEOs to help you decide when to sell, forget it.

Excerpt: The Find: Top U.S. CEOs issued 21 percent more confusing and misleading statements last year than they did in 2006 — and 85 percent more than they did just five years ago.
The Source: The 2007 Rittenhouse Rankings survey. The Takeaway: Rittenhouse Rankings Inc. compiles an annual CEO Candor benchmark survey of 100 Fortune 500 companies, and this year’s results show those at the top of America’s biggest companies are increasingly unable to give a straightforward explanation of what’s going on at their companies.

Link to article:

We've moved from a world of risk to a world of uncertainty

2008-07-31T20:19:00.000-04:00

We've moved from a world of risk to a world of uncertainty
Thomas Homer-Dixon

SmartStops comment: It is becoming increasingly difficult to recognize risk and protect against it. SmartStops can help.

Excerpt: “So the rules of the game have now changed. Our global financial system has become so complex and opaque that we've moved from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities by using the best evidence at hand to estimate the probability of a particular outcome. But in a world of uncertainty, we can't estimate probabilities, because we don't have any clear basis for making such a judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we're fundamentally ignorant of our own ignorance. We're surrounded by unknown unknowns.”

Link to article:

How to Stay Ahead of a Bear Market

2008-07-18T17:53:00.000-04:00

How to Stay Ahead of a Bear Market
By Jeff Greenblatt | TradingMarkets.com

SmartStops comment: This article is primarily for knowledgeable technicians. The author is very heavy into using Fibonacci levels, moving averages and support and resistance to detect turning points in the markets. If you’re not interested in technical analysis then just read our excerpts which are not technical. SmartStops was intended to simplify the exit side of investing so that complicated technical analysis is not required.

Excerpts: I was watching financial news on TV the other day, and the general theme from the money managers being interviewed was to invest in stocks for the long term. One person even dared to suggest that had you invested in the stock market in August of 1929, while you may have had to wait 16 years, you ultimately would have been ahead of the game. This person may have forgotten about an event called World War II, and there's a chance that some of the people who invested in 1929 might not have been around to see the market recover.

That may seem like an extreme example, but it does raise an interesting issue. If Wall Street wants us to be invested all the time, what happens if our time frame is not in sync with the market? What if you had invested in the Dow on October 11, 2007? As of Monday, the close of the second quarter, you were down 20%. This is just not acceptable. Not only is it not acceptable, it's also unnecessary. This article will show you not only how to recognize a change in trend but also how to take advantage of it.

Link to article:

Fannie and Freddie Bring Credit Crisis to Defcon One

2008-07-15T20:12:00.000-04:00

Fannie and Freddie Bring Credit Crisis to Defcon One
By Mike Swanson Wall Street Window

SmartStops comment: This article will definitely get your attention.

Just for the record:

Re Freddie Mac - FRE traded as low as $3.89 on Friday, July 11. Our SmartStops exit was at $22.64 on June 9.

Re Fannie Mae - FNM traded as low as $6.68 on July 11. Our SmartStops exit was at $24.39 on June 9.

When you read this article you will understand why you need SmartStops.net protection right now.

Excerpts: We are at a critical point in the economic history of the United States. I know of no other way to put it. The events of last week were of a character that we've never seen before. On Friday mortgage lender IndyMac Bancorp became the second largest federally insured financial company to fail after it got hit by a bank run. The Federal Deposit Insurance Corporation took it over. That news may be a big story, but is totally overshadowed right now by the teetering collapse of Fannie Mae and Freddie Mac. Both are in danger of going under and the Bush administration, Federal Reserve, and Treasury Department are now meeting on a daily basis to figure out what to do.

There is no news that would be worse than the collapse of these two institutions and such an event if it happens will have ramifications for the economy and stock market for years to come. Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Odds are that if you own a mutual fund or annuity that you indirectly own a security backed by one of these two institutions. The two of them combined own half of America's twelve trillion in outstanding mortgages and their failure would be the implosion of the entire financial system.

Others have warned about what a collapse of Freddie and Fannie would mean. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system. By insuring over half of the mortgages in the country they are too big to fail. This is serious situation folks. We've never seen anything like it before.

Link to article:

Is Wall Street Full of Bull?

2008-07-05T14:19:00.000-04:00

Is Wall Street ‘Full of Bull’?
A well-respected analyst for 32 years, Stephen McClellan describes how analysts’ advice is biased and misleading for individual investors
Book review by Ben Steverman

SmartStops comment: This article is a Business Week magazine review of Stephen McClellans brilliant new book Full of Bull. Be sure to read this informative and well written review which will help you understand why being a self-directed investor can be a big advantage. You will also appreciate how SmartStops helps you to time your selling and protect your capital while the highly paid Wall Street analysts can’t seem to help you at all. Your comments about the article and the book are welcome. Post them here on our Blog.

Excerpts: “ In his new book, Full of Bull: Do What Wall Street Does, Not What It Says, to Make Money in the Market (FT Press, 2007, $22.99), McClellan, admits that price targets are "fiction," and buy/sell/hold ratings aren't taken seriously by professional investors. Analysts spend perhaps only 20% of their time on research and the rest on marketing and other tasks, he says. They create sophisticated computer programs to track a company's earnings, revenue, and cash flow in close detail. But the results are "not accurate at all," he says. In fact, analysts often miss big trends and have a terrible record as stock pickers.
Research isn't written for retail investors, but for institutions. Those institutions, including mutual funds and hedge funds, have far too much influence over an analyst's research, McClellan says. Companies and executives are also too good at manipulating analysts.
Even more blatant biases were exposed as part of the 2002-03 investigation by the New York State Attorney General and securities regulators, which led to the Global Settlement of Conflicts of Interest Between Research & Investment Banking that required 10 of the nation's top investment banks to pay $1.4 billion in penalties and restitution to harmed investors, including money for investor education and independent research.”

Link to article:

The Market's Quiet Crash

2008-07-05T14:07:00.000-04:00

O'Brien: The markets' quiet crash
By Chris O’Brien Mercury News Staff Columnist

SmartStops comment: In our recent Beta test process we received a surprising number of complaints that we were publishing too many exit signals. Our Beta testers were skeptical of our new service and assumed that our methodology might be overly protective of their portfolios. Unfortunately most of them decided that our exits needed to be ignored because they saw nothing alarming in the markets at the time and they were comfortably attuned to a Buy and Hold mentality. How helpful were our exits? Pick any stock and look at where the SmartStops exits were triggered and calculate how much money might have been saved. As you can see SmartStops was not just crying “wolf”. These were very real and very accurate warnings of what was about to happen.

Excerpts from article: The stock markets are tanking. While you were staring slack-jawed at the "Price Reduced!" sign on your neighbors' house, the three major stock market indexes decided to jump off a cliff. Since the start of 2008, the markets' tailspin has analysts reaching for some historic comparisons. And unfortunately, the one they're using is the Great Depression.
Yes, that Great Depression. Hoovervilles. FDR. Got your attention now?
Perhaps the most surprising thing, though, is how little people around here are talking about this swoon. In some ways, it may actually be a healthy sign that we have become a little less obsessed with our stock options and portfolios. Or maybe it's just a sign that following the dot-com bust, many of us shifted our easy money fantasies to the value of our homes, pinning our hopes for a luxurious retirement on the rapid rise in housing prices.
We're still busy grieving the end of that convenient fantasy. But in the meantime, the stock markets have sneaked up and delivered a painful sucker punch while we weren't looking. Just consider some of the historic comparisons being made:
• The Dow Jones industrial average was down for the quarter ending June 30, marking the first time it had experienced three consecutive quarters of declines since 1978.
• The S&P dropped 8.6 percent in June, its worst June since 1930, and its worst month since September 2002.
The hardest hit, of course are those near retirement, who are being forced to recalculate their portfolios and budgets.

Link to full article:

Buy and Hold Stocks: Why This Investing Strategy Is Dangerous

2008-06-10T19:21:00.000-04:00

Buy and Hold Stocks: Why This Investing Strategy Is Dangerous for Your Portfolio by Mark Skousen, Chairman, Investment U

SmartStops comment: A brief and very well written article about the hazards of Buy and Hold even if it’s a famous well known company. Some very interesting charts are used to illustrate the point.

Excerpt: The Strange Case of Three "Solid Growth" Buy and Hold Stocks
In The Money Game, Goodman identifies "three sisters of solid growth" - companies that "everyone" on Wall Street agreed were so "solid" for the long term that you could buy and take delivery of their stock certificates, deposit them in a safe deposit box, and your heirs would be wealthy beyond their dreams by simply holding on for dear life.

What were these stocks? Goodman named:
• International Business Machines (NYSE: IBM)
• Xerox (NYSE: XRX), and
• Polaroid
Here's what happened to these three "sure-fire" winners over the last couple of decades…

What's the lesson? There's no such thing as a "buy and hold" stock. You must be eternally vigilant on the fundamental outlook of your favorite investments… especially in today's three "golden growth" stocks:

Link To Full Article

Merrill Tries to Temper Pollyannas

2008-06-07T14:39:00.000-04:00

Merrill Tries to Temper the Pollyannas in Its Ranks
May 15, 2008Market Place By JENNY ANDERSON and VIKAS BAJAJ

SmartStop’s comment: It’s good to finally see a major Wall Street firm paying some attention to the importance of giving investors helpful “sell” advice. We hope this is the beginning of a new trend that will help focus investor attention on the importance of knowing when to sell.

Excerpts: Sometimes Wall Street seems a bit like the make-believe Lake Wobegon: Most stocks are above average, and it is always a good time to buy.At least that is the impression you might get from stock analysts who recommend where you should put your money. Even in bad times, the Street’s army of analysts rarely shout “sell.” In fact, they rarely utter the S word at all.

But Merrill Lynch, the nation’s largest brokerage firm, unveiled a new system on Tuesday for rating stocks that suggests Wall Street finally may be mustering up its courage to say “sell” more often. Starting in June, Merrill will require that its analysts assign “underperform” ratings to 1 out of every 5 stocks they cover. About 12 percent fall into that category now.

Today, after the Nasdaq bust and the outbreak of the deepest financial crisis since the Depression, only about 5 percent of all stock recommendations on Wall Street advise investors to sell, according to Bloomberg. That is up from less than 2 percent back in the heady days of the dot-com boom.
The bank analyzed stock performance over a decade and determined that from 1997 through 2007, on average, 37 percent of stocks in the MSCI world index and 40 percent of stocks in the Standard and Poor’s 500-stock index declined each year. The bank covers about 75 percent of the stocks in those indexes.

Link to full article:

No Sign of Sell on Wall Street

2008-06-06T12:11:00.000-04:00

No Sign of `Sell' on Wall Street as Analysts Say: `Buy,' `Hold'
By Yalman Onaran and Christine Harper

SmartStops comment: Every self-directed investor needs to understand that research analysts are reluctant to ever publish an outright “sell” recommendation. To do so would risk alienating the corporate executives that provide the data and insight that good analysts need for their research. The hedge funds and institutions speak the same language as the analysts and know that in most cases a downgrade to “hold” really means “sell”.

Excerpt: Anybody who followed the advice of Wall Street's top-ranked analysts, none of whom would say ``sell'' for a single company in the securities industry this year, is reckoning with subprime-like losses.
Research analysts were unreliable guides during the collapse of the subprime mortgage market. They failed to foresee about $66 billion of writedowns that led to the unprecedented departures of CEOs from Zurich-based UBS and New York-based Merrill and Citigroup in less than six months.
Only 7 percent of analysts' recommendations have been sell this year, down from 11 percent in 2003, data compiled by Bloomberg show.

Link to full article: