• SPR Archives
• Commodities Corner
• Sector Watch
• SPR Reports
• About SPR
• Glossary

Trading Lessons

The Smart Profits Report: Issue #349
Tuesday, August 29, 2006

Trading Lessons: Catching The Market Waves for Stress-Free Trades
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research

While it’s easy to remember trades that evoked big emotions - where we snatched victory from the jaws of defeat, or struggled for a win against all the odds - it’s less easy to remember the more mundane winning trades. That’s because they’re so effortless that our mind tends to file them away as boring and uneventful. But just because they’re underrated doesn’t mean they should be underappreciated since they can teach us key trading lessons.

Easy trades happen for a reason - often times when a trading system or strategy gets us into a trade we believe in at the right time. The market then takes care of the rest. It’s just like riding the waves of the ocean: When it’s done right, it’s effortless.

Last week, I talked about the great time I had body surfing at Myrtle Beach recently, and looked at some of the analogies between surfing and trading. We continue this comparison today, focusing on how to apply “wave” logic for easier trading success.

Catching Market Moves the Easy, Low Stress Way

I believe the ease with which I catch a wave has a direct relationship to catching a great, easy trade. The key to the best entry and an easy ride is in the three-step setup. First, I fight my way through the surf to get out to the optimum spot. I then wait for the proper amount of “pull.” Last, I choose a wave that hasn’t already started to break. If I do those three things, then catching the wave is pretty easy.

Getting in on a great trade is very similar. First, I need a workable plan that will help me find the best trade and entry point. Then I need to have the patience to follow it through. That way, I’ve set myself up to catch great, effortless trades more frequently.

Three Trading Lessons from the Waves

When catching waves, one of three things can happen - all of which can be applied to trading and teach us some lessons:

The Wave/Trade Goes Nowhere: The wave pushes me a few feet but I end up where I started. This happens when there’s not enough “pull” or if I have poor timing catching the wave.

• How to React: When this happens, I can either stick with it or I can bail out and go back to wait for another, better wave. Adopt this same philosophy to your trading.

The Wave/Trade Moves My Way Immediately: Obviously, this is the most desirable outcome. I hit the wave just right and ride it into the beach.

• How to React: Same logic applies to trading: Enjoy the ride! I’m not thinking about the last wave that didn’t work out, or the next wave that’s coming. I think our trading activities would be better if we could focus on the trade at hand and not worry about how bad that trade four days ago was, or about whether we would every get a move like this again. Stay focused in the moment to get the most out your trades.

You Catch a Poor Wave/Trade: If I catch wave too late, it can break on top of me and crash me down into the sand. Not pleasant. I’ve also experienced waves that intersect the one I’m riding from a different angle. This is usually generated by the wind. This contorts me and disorients me while slamming me into the sand. Even worse!

• How to React: These are the trades that figuratively knock us into the sand. How do you respond to trades like these? Do you get back up and calmly look for the next trade? Or do you sulk and play the “poor me” game? The most important thing to remember is that we all catch a bad wave or a bad trade. That’s part of the game. It’s how well we respond to those unpleasant episodes will dictate how well we play the trading game - and how much subsequent success we have.

Outside Forces Working Against Your Trading Plan

It’s these outside forces that pose the most interesting problem. In the financial world, your trading plan can get hit by any number of factors. For example, how well prepared are you for an unexpectedly early Fed rate hike? What about really bad or really good news out of Middle East?

Even a good trade can be punished for reasons that are outside of our control and current point of view. Make sure you visualize and prepare for the best and worst-case scenarios for all your trades, and it will help you overcome these events.

That’s it for this week. I hope your next trade is an easy one!

Great Trading,

D.R. Barton, Jr.

Today’s Smart Profits Cribsheet

• If you missed the first part of my message comparing body surfing to stock market trading last week, you can catch it in here: Smart Profits #347: Surfing the Markets: Two Ways To Combat Choppy Waters In The Markets.

• Speaking of waves and water, do you know what the options term “underwater” refers to? If not, find out in our handy Smart Profits Glossary.

Related Articles:

• Trading With Confidence: How You Can Develop More Confidence In Your Trades
• Understanding Option Trading: Cut Your Losses… And Watch Your Gains Run
• Portfolio Diversification: Falling In Love With Investments Can Cost You Millions

The Chart of the Week

The Russell 2000 Index, represented here by the iShares Russell 2000 Index ETF (AMEX: IWM) is in a major volatility contraction. Watch for a breakout to either side of the “triangle” being formed.

Smart Profits Report Archives

Sphere: Related Content

Credit Spreads With Options

The Smart Profits Report: Issue #348
Monday, August 28, 2006

Credit Spreads With Options: How Option Credit Spreads Give You a Better Chance to Win
By Lee Lowell
Advisory Panelist, Mt. Vernon Research

If you think the only way to make money in the markets is to always pick the correct direction of your securities, then I have news for you: Think again.

While it might seem odd that you don’t have to be right on your market call in order to still enjoy a winning trade, hear me out… because today, I’m going to give you one of the best options strategies that relies more on picking where the market won’t go, rather than where it will go.

Say, for example, you enter a regular options trade. Over the course of the trade, you begin to consider where the market won’t get to by the time the option’s expiration date, rather than where it will get to. It’s a natural thought, but there’s actually a big discrepancy between those two approaches - one that can make a world of difference in the future profitability of your options trades, because there’s a unique, invaluable way you can trade options that produce a profit - even if the market moves against you. Let me explain credit spreads with options…

Harness the Increased Probability of Option Credit Spreads

You do it by selling close-to-expiration, out-of-the-money option credit spreads that rely on the time decay factor to yield a profit. Here’s how it works…

When many options traders buy calls, they usually pick a strike price above the current price of the stock or commodity and hope it will get to that price by expiration. Similarly, when they buy puts, they choose options with a strike price below the current price of the stock or commodity, hoping that it will get to that price by expiration.

What they’re doing is buying out-of-the-money (OTM) options that have a low probability of turning a profit.

So what we do is take advantage of that and sell those options to them with a high probability of profit. Simple.

Specifically, here’s what you do:

• If You’re Bullish: You sell an options spread below the current price of the stock or commodity.
• If You’re Bearish: You sell an option spread above the current price of the stock or commodity.

This strategy is called “option credit spreads,” and it’s my favorite way to play the options market.

How You Can Benefit Three Times Over From an Option Credit Spread

The beauty of option credit spreads is that they allow you to profit in three different market scenarios, compared to the regular options buyer who can only profit from one scenario.

• Cushion for Error: When you sell OTM option credit spreads, you gain a large cushion for directional error. This means you can still profit if the market goes up, down or sideways. The object of the option credit spread is to have both strike prices expire worthless so you can keep the option premium you receive upfront, or you can buy the spread back cheaper and lock in an early profit.

• Receive Cash: The mechanics of the option credit spread is to sell the more expensive OTM option and buy a cheaper, further OTM option in one single transaction. Since you’re doing this, you’ll receive a cash credit in your account.

• Limited Risk/Limited Reward: The option credit spread is a limited risk/limited reward type of trade that has a very high probability of profit. The most you can make is the amount of money you receive upfront from the buyer, and the most you can lose is capped and known ahead of time. There’s no possibility of unlimited losses with this kind of trade. The maximum you can lose is the difference between the strike prices, less the amount you collected upfront.

Although it might seem a little unconventional at first, once you see how this little-used strategy works in practice, you’ll find it can be very lucrative. Take a look at this chart of Orange Juice Futures for an example.

How an Option Credit Spread Helped Me Squeeze Profits From the Orange Juice Market

As you can see, the Orange Juice market was looking pretty bullish, following a strong rise from mid-July. I needed an option strategy that would take advantage of my directional outlook, but also protect me from possible downside in what is a volatile market. So here’s the key:

Instead of trying to pick an area higher on the chart where I thought OJ might go to, I picked a lower area that I thought OJ would not penetrate over the course of the option’s life. At the time of the trade on July 14, 2006, OJ Futures were trading around 15,500.

I opted to sell an OTM put option credit spread, selling the 14,000 put option for 300 points and buying the 13,500 put option for 200 as a spread in a single transaction. That gave me a credit of 100 points.

In the OJ market, one point equals $1.50, so I collected $150 ($1.50 x 100 = $150) at the outset of the trade. This is the most I can ever make on the trade, no matter where OJ ends up at expiration. The most I can ever lose is $600. This is calculated by taking the 500-point difference between the strike prices (14,000 - 13,500 = 500) and subtracting the 100-point credit, which gives you 400 points. In dollar terms, this equals $600 (400 x $1.50 = $600).

Since I was bullish on Orange Juice, I had a pretty good idea that it wouldn’t go below 14,000 by expiration - hence the reason I sold the 14,000 put option. As long as it never moved below 14,000, it was a winning trade. As each day passed, the options lost value and moved closer to expiring worthless. Thanks to this time decay, as well as OJ moving higher, I ended up buying back the spread early for 25 points ($37.50) and locked in a profit on August 1, 2006.

Three Chances to Win, With a 75% Chance of Success

With option credit spreads, all you need to do is shift your mindset from trying to figure where the market might go, and instead focus on where you think it won’t go. It’s a very different way of playing the market, but it gives you three winning scenarios for producing consistent, profitable trades. Alternatively, a regular buyer of an OTM spread would not only need the market to go higher, he’d also need it to happen in the time allotted to win on his trade.

In this specific OJ trade, for example, there was a 75% chance of all strikes expiring worthless. That’s high enough for me to take it. But the buyer of the spread only had a 25% chance. I like my odds better.

Good Trading,

Lee Lowell

Today’s Smart Profits Cribsheet

• Generate consistent income… at someone else’s risk. Read my complete guide to trading out-of-the-money options and find out how this reliable strategy can ease the stress of buying regular options. For details, check out Smart Profits #255: “Out of the Money Options: Buyer Beware; Seller Take The Money.”

• But before you get started, make sure you give my quick, six-step checklist for trading options a look. It gives you six great tools you can use for every options trade to increase your chances of coming out on the winning side in Smart Profits #213, Options Trading Tools: Six Key Tools for Trading Options.

Related Articles:

• Spread Trades: Bull vs. Bear
• Reducing Option Risk: Don’t Take Insane Risks When You Have Options
• Hedging & Speculating: How to Enjoy Guaranteed Monthly Income With Options

Smart Profits Report Archives

Sphere: Related Content

Surfing the Markets

The Smart Profits Report: Issue #347
Tuesday, August 22, 2006

Surfing the Markets: Two Ways To Combat Choppy Waters In The Markets
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research

“If you want to know everything about the markets, go to the beach. Push and pull your hands with the waves. Some are bigger waves, some are smaller. But if you try to push the wave out when it’s coming in, it’ll never happen. The market is always right.” - Market Wizard Ed Seykota

I’m a surfing purist. No boards. No sails. No kites. Just me and the waves. That’s right - I’m a body surfer. My friends who use various objects to help them ride the waves look down on body surfing as a simplistic pursuit. Perhaps. But there’s something pure and untainted about it. Just me and the water.

Body surfing is about finding the right wave, then picking the moment to lie down in front of it and letting it rush you to the shore. And the fact is, there are striking similarities between body surfing and trading or surfing the markets - and some truly important lessons that you can use to improve your trading by learning to think like a surfer. Treating the markets as a wave that you can surf is one of the keys to successful trading. Here’s how…

Catch a Wave and You’re Sitting on Top of the World…

There are already several investing techniques that mimic the waves - the Elliott Wave Theory is perhaps the most obvious example.

I’ve had many discussions with a trading colleague of mine about the similarities between surfing and trading the markets. (The only difference between the two of us: He’s a real surfer).

Let’s look at a couple of practical application points for your trading and investing and how you can ride the “market’s waves.”

Why the Ocean Is Like the Market

What do you see when you look at the ocean and the movement of the water? Some see cycles, some see the inevitability of going with the flow (or with the trend). But it’s hard to argue with the power and constancy of motion. Both are always there. If you approach the markets and don’t understand their power, you can easily get swept in the wrong direction.

And just when you think you’ve figured out how things move, you can be sure of one thing - they’ll change again. The markets, like the sand and waves, are in constant motion. You have to adapt to changing conditions. That’s one of the most powerful lessons from the 2000 bubble: The market doesn’t like certainty. Things don’t just keep going up. And as 2003 taught us, they don’t just keep going down, either!

• What You Can Learn: As traders and investors, we have to know what the markets are capable of doing and prepare for worst-case scenarios. This is how we respect the power of the markets. We also have to be prepared for changing conditions at a moment’s notice that can neutralize good strategies, or require a different approach. In doing so, we acknowledge that the markets are in constant motion… that they will always be that way… and we are always prepared.

What You Can Do When the Water Gets Rough

When the waves started to get bigger and stronger last week, most folks headed for the safety of the beach. To some, the waves looked too rough, while for others, those big waves presented the exact opposite scenario. An unexpected treat. At its extremes - when prices have pushed to new highs or lows - some run for safety while others lick their chops at a perfect buying or selling opportunity. Neither reaction is right or wrong; we just need to know what we want to do at those extremes.

• What You Can Learn: Make no mistake: There is big money to be made by “trading at the points of maximum pain or euphoria,” as one top trader puts it. For many, these rough areas are best avoided. But which decision is right for you?

Watch For High & Low Tides When Surfing The Markets

If you like the consistency of routines, then your strategy should be to sit on the sidelines, or switch to “high alert” mode when the market is approaching an extreme price level.

On the other hand, if you handle uncertainty well and manage your risk and emotions with ease, then trading these extremes could present a valuable profit-making opportunity. Spend some time reviewing your reactions to the price extremes that we’ve seen in the past few years. Pinpoint what you’d do differently if you’d known how, when, and where to position yourself when the market probed an area of price extremes, and use that knowledge next time.

Next week, we’ll look at surfing and investment psychology, surfing and (trading) system-building and surfing and trading discipline. Until then, keep looking for that unexpected ride!

Great trading,

D.R. Barton

Today’s Smart Profits Cribsheet

• Turbulent markets call for a clear, comprehensive trading strategy. With the markets still delicately poised and exhibiting higher levels of volatility, find out how to protect yourself in Smart Profits #326: Stock Market Volatility: Three Ways to Combat Volatility’s “Radical” Shift.

• “The trend is your friend.” When you swim with the tide, rather than against it, you’ll find that not only is this a much easier way to trade, but that adhering to this old investment adage could also pay dividends. Check out the Smart Profits Glossary for the exact definition of a “trend,” plus get links to articles telling you how you can use the trend to your advantage.

Related Articles:

• Breakout & Resistance: How to Anticipate and Profit From These Twin Concepts
• Traders vs. Investors: Seven Questions to Reveal If You’re an Options Junkie
• Large-Caps Stocks: How Point Spread Shows Large-Caps Re-establishing Dominance

The Chart of the Week

Research in Motion (Nasdaq: RIMM) is at a very key resistance point. If it can close above $81.65, it should challenge its March highs. If it can’t… look out below!

Smart Profits Report Archives

Sphere: Related Content

Large-Caps Stocks

The Smart Profits Report: Issue #346
Monday, August 21, 2006

Large-Caps Stocks: How Point Spread Shows Large-Caps Re-establishing Dominance
By Jim Stanton
Advisory Panelist, Mt. Vernon Research

Since the bear market ended around October 2002, the small-cap indexes have been the place to be. In May this year, for example, the Russell 2000, S&P 400 (mid-cap index) and S&P 600 (small-cap index) all set record highs. At the same time, the “big boys” failed to follow suit.

But times are changing. Since then, the smaller-cap indexes have lost their luster and the major players are now back in the ballgame. It’s time to get back into large-cap stocks again.

Trust the Technicals: Trend Finally Shows a Large-Cap Stock Resurgence

The chart below shows the point differential (spread) between the S&P 500 and the Russell 2000. As the S&P declined and Russell 2000 advanced, the point spread has gradually dwindled since December 2005. This shows that the Russell 2000 was outperforming its larger counterpart.

That was until April this year, though, when the spread began to stabilize. Then, as the indexes made their push toward the May highs, the S&P 500 took the lead role. Since putting in a low, the spread between the S&P and Russell 2000 broke above its downtrend line in May and has raced upward ever since, making new highs for the year.

Chart Courtesy of Trade Navigator Software

The battle between large-cap stocks and small-caps is a frequent and compelling topic of discussion among economists and commentators, both in print and on television. But despite having said the strength in the small-cap indexes vs. the large-cap indexes was coming to an end and that the large-caps were poised for an imminent resurgence, this is the first valid evidence that I’ve seen to make that call.

That’s the beauty of technical analysis. It brings to mind the old saying, “A picture is worth 1,000 words.” But there are also some good fundamental reasons why the large-caps are the place to be going forward…

Time to “Go Large” Again?

There are three major underlying reasons for the shift to large-cap stocks:

• The Fed has stopped raising interest rates, despite the continuing threat of inflation. This tells me that they also see a slowdown coming and that their main concern now is to avoid a recession.

• With the change in the housing market over the last six to 12 months, it has to affect consumer spending. With house prices in some areas having doubled over the past five years, it gave homeowners a greater sense of financial security and encouraged them to spend more. But today, the correction has taken hold and some house prices are not just cooling off, they’re falling. That results in consumers tightening their purse strings.

• In response to economists arguing that economic growth will slow over the second half of the year, investors are becoming more defensive and conservative. That means they’re shifting toward the bigger, safer companies that can afford to pay a decent dividend, which exceeds the rate on most money market accounts.

This macroeconomic evidence, coupled with the technical analysis showing a fast acceleration in the spread between the S&P 500 and Russell 2000 seems to confirm that the large-cap stocks are now back in favor.

Protect Yourself By Adding Large-Cap Stocks To Your Portfolio

In addition, the September-October period is generally a weak one for the markets - especially at mid-term election time. So to protect yourself, you should take advantage of this trend and look to add some large cap stocks to your portfolio.

In every mid-term election year since 1990, the markets have established a significant low point during the election cycle. So pay close attention. If history repeats itself, you might get a chance to pick up some good, solid stocks at lower prices in the next month or so.

Good Trading,

Jim Stanton

Today’s Smart Profits Cribsheet

• Spotting a shift in trend from bearish action to bullish is key to getting in early and then riding the wave upwards. But you don’t have to fork out all your capital buying individual stocks. There’s an easier and cheaper way, simply by buying index options. Find out how to do it in Smart Profits #215: Index Options: A Billionaire’s Trading Tool Anyone Can Use.

• But how exactly do you spot key technical changes in trend? We’ve got two simple tools that will enable you to do so in Smart Profits #214: Technical Analysis: Two Simple Tools for Spotting a Technical Trend.

Related Articles:

• Trading Index Options: Two Ways To Profit
• E-Minis & ETFs: “Trade” E-Minis With Less Risk Using ETFs
• Double Your Money: The Truth About Making 300% Overnight in Options

Smart Profits Report Archives

Sphere: Related Content

Ethanol’s Government Intervention

The Smart Profits Report: Issue #344
Tuesday, August 15, 2006

Ethanol’s Government Intervention: Why the “High-Growth” Ethanol Business Matters to Investors
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research

“Markets can remain irrational longer than you can remain solvent.”

- John Maynard Keynes

Nothing gets the investment community excited like a fresh round of government subsidies. This is the case with the fervor over ethanol. Ethanol’s government intervention has made this the hottest investment topic since, well, solar energy. (Jimmy Carter, where are you?)

But interestingly, the whole “ethanol as a gasoline replacement” gig is a clever ruse. Far from being an energy panacea, ethanol is merely a politically-correct Band-Aid. A sign of hope in a country that’s scared to death of paying $80 to fill up the family SUV for the foreseeable future.

And when voters get scared, politicians leap into action. Unfortunately, fast government action almost always results in irrational action. And what could be more irrational than stuffing a perfectly good ear of corn into your gas tank?

Now don’t get me wrong: I believe ethanol will continue to be a high-growth business for the foreseeable future. But hang on a second. How can I say in one breath that ethanol is a ruse, but in another say that it’s a high-growth business? Simple. I can explain this seeming contradiction in two words…

Government intervention.

Despite Irrational Government, There’s Money in the Ethanol Business

Governments can remain irrational indefinitely. After all, for many years now, governments have gladly sent our tax dollars to farmers to not plant crops… paid artists to create art that nobody will buy… and paid scientists to study whether overeating causes obesity. So why should we be surprised that the problems with the ethanol-as-fuel story are swept under the rug?

Make no mistake about it, though: There will be tons of money made as the ethanol industry builds out. Just don’t be surprised at the areas where the money is to be made. But before we look at where the money is hiding, let’s first look at ethanol as a business.

Corn - It’s Not Just for Breakfast Anymore

Let’s start by ignoring a few hard facts…

For example, it takes more energy (or at least close to same amount of energy) to turn a pile of corn into a gallon of ethanol than the energy you actually get from the resulting gallon of ethanol. So what if we have to manufacture ethanol at an energy deficit? That’s a small price to pay to get something that’s kind of like gasoline but doesn’t take millions of years of rotting stegosaurus rump to produce. We’re talking convenience here, not economics or thermodynamics.

Another inconvenient fact we need to ignore when talking about ethanol: If we took every kernel of corn produced annually in this country (and we grow an awful lot), mashed them up and made ethanol, we would produce about 12% of our annual gasoline consumption.

12%!

And that’s only if you took every kernel of Orville Redenbacher’s stash, plus all that we eat and feed to our livestock. This means that ethanol from corn is only a small part of an energy solution.

While that doesn’t exactly make the ethanol industry sound very impressive, here’s the thing: Government subsidies and political pet projects tend to prolong irrational exuberance. So ethanol will continue to matter. And it will matter to investors.

Exploit Ethanol Inefficiencies for Corn-Fueled Profits

So what do you do? One good idea is to:

• Look for inefficiencies in the system and exploit them.

And right now it looks like the ethanol distillers (the Johnny-come-latelys to this game) are enjoying the beefy profit margins while the corn farmers (the heroes of our story) are getting squeezed.

But remember… this is going to be a supply-driven business. You can only distill as much corn as you can grow. So a good bet now is that as corn prices go up, distillers’ margins (and hence their burgeoning valuations) will be driven down.

Let’s look at market darling Archer-Daniels-Midland (NYSE: ADM) as a ratio to corn:

It’s no secret that corn prices have risen over the past year. But one look at this chart shows that they haven’t nearly kept pace with the ethanol distillers like ADM.

Looking for a profitable scenario? A good way to do it is by placing your bets on the ratio of ethanol distillers’ share prices compared to how much raw corn futures will decline. This is a longer-term play (several months to a year or so), so be patient. But buying corn futures on dips and selling ADM and other distillers on spikes will most likely pay handsome dividends in the long run.

Good Trading,

D.R. Barton

Today’s Smart Profits Cribsheet

• In last Thursday’s Smart Profits Report, the other Mt. Vernon Research editors offered their take on the ethanol market in a special forum. So in case you missed what they had to say, you can read the Smart Profits Report Ethanol Forum in Part 1 and Ethanol Forum Part 2.

• You now have a great chance to ride the wave of this heavily government-backed industry. To find out much more about the ethanol market, its prospects and how you can profit from it, read our brand new report.

Related Articles:

• Ethanol Investments: Two Ways To Profit from the Shift Towards Ethanol
• The Future of Crude Oil Prices: How a New Saudi Development is Bearish for Oil Prices
• The Best Commodities Website on the Internet

The Chart of the Week

As you can see, Archer-Daniels-Midland (NYSE:ADM) has enjoyed a very impressive run. However, the chart is now showing signs of consolidation with momentum dwindling. Chances are good that the ethanol windfall is already priced into this agricultural giant.

Smart Profits Report Archive

Sphere: Related Content

Warren Buffett’s Investing Strategy

The Smart Profits Report: Issue #343
Monday, August 14, 2006

Warren Buffett’s Investing Strategy: The Master of the “Buy and Hold”
By Karim Rahemtulla
Chairman, Mt. Vernon Research

Just when you thought the notion of long-term “buy and hold” was a dying investment strategy, along with the investors who subscribe to it, we’re reminded that there are still some great long-term investors in the world.

To watch this “buy and hold” strategy in action let’s take a look at Warren Buffett’s investing strategy. When you mention Buffett’s name, it immediately sparks an image of an old (yet energetic) man with an uncanny ability to pick good stocks, and a $44 billion fortune. (Of course, he recently donated $30 billion to the Bill & Melinda Gates Foundation - thought to be the biggest non-governmental donation in modern finance).

While that’s certainly striking, Warren Buffett has another key quality that’s perhaps even more impressive…

How to Invest Without Flinching

As with any investor, Buffett has not only enjoyed his share of winners, he’s also suffered losses. But it’s the way in which he’s responded to those losers that is notable - specifically, his extraordinary ability to withstand a dramatic decline in the share prices of his losing picks without flinching.

Let’s look at one his big holdings, USG Corp for example…

As the dominant manufacturer of drywall, USG was the premier way to play the U.S. housing boom. Warren Buffett realized this and bought shares when they were trading around $20. But throughout the housing boom, USG was mired in Chapter 11 bankruptcy, due to asbestos-related lawsuits.

Time to sell? Nope. Buffet held on - a decision that proved to be an extremely lucrative one, as USG raced up to $121.70 at its peak on April 25 this year. But rather than take the money and run, Warren still held on.

Then came the double whammy…

Would You Buy More Shares After a 157% Loss? Buffett Does.

First, USG announced it had reached a settlement for its asbestos-related problems - a settlement that would cost the company almost $4 billion. But the only way to pay this and emerge from bankruptcy was to initiate a rights offering, which entails raising more money from existing shareholders, and paying it out of the company’s coffers. The second whammy, of course, was a cooling in the housing market. And housing equals less housing-related materials.

Result? USG shares have plunged from the heady heights of $121 to around $47 today. Surely, this is the cue for Buffett to sell? No. While he could have sold at the top, or near to it, he chose not to, and has ridden the stock all the way down.

In fact, rather than heading for the exit, Warren Buffett is actually adding to his position both through the rights offering, as well as the open market - to the tune of tens of millions of dollars.

So what gives? Is Buffett crazy? Or does he see opportunity while others are panicking?

Three Reasons Why Buffett Is Putting His Money Where His Mouth Is

There are three possible answers…

• First, on a macroeconomic level, Warren Buffett could believe that the global construction boom is not over, but merely experiencing a correction. If so, holding a company like USG would prove valuable because it’s oversold to a point where the valuation at 9 times earnings is attractive to him.

• Second, he can’t sell now. If he did, he would spark a huge meltdown in the share price that would actually backfire on him, because it would make it more difficult for him to sell his remaining holdings. Not that he would have lost money if he sold before the rights offering, but as it is, his cost now is probably closer to $30 because of the more expensive shares he just purchased.

• Third, the government is going back and forth about setting up an asbestos trust fund. If that happens, it could reduce USG’s liability and may result in the company actually recouping some of its outlay from the recent settlement. In that case, shares would be worth more in a heartbeat.

Regardless of Warren Buffett’s true intentions, it is important to note that he is now putting his money where his mouth is. After its recent slump, there are signs that USG is oversold and shares are beginning to respond.

Learning From Warren Buffett’s Investing Strategy

So what can you learn from the “Warren Buffett’s Investing Strategy?” In short, waiting for a “sell bell” to ring at the bottom for any particular stock might leave you deaf and poor. Do your research and keep a close eye on developments that could result in a rebound. And with USG, Buffett is sending investors a signal that he thinks the worst is over.

Good Trading,

Karim Rahemtulla

Today’s Smart Profits Cribsheet

• You’ve seen an example of how, despite major moves against his position, Warren Buffett decided to hold his shares anyway. But what if you can’t afford to give a stock much leeway? Knowing when to sell becomes a crucial decision. For a simple strategy on how to avoid absorbing a big loss read Smart Profits #133, Trailing Stops: How to Give Your Options Room to Grow.

• And to minimize the chances of having to take losses on your investments, you need to check out our essential guide in Smart Profits #178, Become a Better Trader: Small Changes You Can Make for Big Profits.

Related Articles:

• Stop Loss: Three Reasons to Get Out of a Trade Before it Hits Your Trailing Stop
• Option Losses: How to Grow Rich From Your Options Losses
• Option Pitfalls: Avoid These Five Options “Red Flags”

Smart Profits Report Archive

Sphere: Related Content

Stock Portfolio Profits

The Smart Profits Report: Issue #345
Thursday, August 14, 2006

Stock Portfolio Profits: Cashing In on Summertime Market Blues with Straddles and Put Options
By Steve McDonald
Advisory Panelist, Mt. Vernon Research

After melting my way through the brutal summer heat, it was certainly refreshing to pack up and head to Canada recently for a couple of investment conferences in Calgary and Toronto, where I was one of the featured speakers. With so many burning issues affecting the investment world these days, it’s no surprise that the turnout was strong.

And far from the doom-and-gloom pessimism that we see in the mainstream media every day, the climate was very much one of “what can I do to protect my stock portfolio profits?” Because despite what you’ve heard, there is a way to fight back against the many factors affecting investment portfolios this summer.

The Summertime Trio That Has Mauled the Market

It doesn’t really matter what the bad news happens to be: All markets hate the uncertainty that it brings. Take the events of the last few months, for example. What is traditionally the quietest period for the stock market quickly became a whirlwind that has left investors’ heads spinning and stock portfolios bathed in red.

• Oil: In the spring, oil prices approached $70 a barrel. The market promptly responded by heading south quickly. Just as quickly, the so-called experts in the media breathlessly ran their worst-case scenarios for $70 oil.

• Geopolitical Concerns: External factors are largely to blame for the uncertainty, with ongoing military battles in Iraq and Afghanistan showing little sign of improvement. Then Israel and Hezbollah added to the mess by engaging in full-blown war. Terrorism is also a persistent concern, with the recent plot to blow up flights from Britain to the U.S. serving as a chilling reminder.

• Inflation: Here in America, rising oil and energy costs ratcheted up the inflation debate, as the Federal Reserve kept tightening monetary policy to combat the situation.

In response to this potent cocktail, the markets have responded by delivering one of the most volatile periods in recent memory, with the heavy gyrations scaring investors into inactivity, or forcing them to the exits completely.

Let’s inject some reality back into the situation…

Bad News Always Gives Way to Stock Market Profits

Despite the market’s initial meltdown in response to $70 oil, oil prices are still hovering above that level. Yet the world hasn’t ended. The markets seem to have shaken the news off and are positive again.

Prior to the last Fed announcement, wild market swings seemed to indicate that the Dow was headed towards 10,500 and below. But the lowest point it reached this summer was around 10,650 and is now headed up again.

Even when Israel and Hezbollah started fighting, many thought this would crush the market again. But while stocks did drop, the ceasefire has smoothed the situation and the stock market has responded positively.

What can we conclude from this? Two things…

• First, no matter how bad the news, the stock markets are resilient and are extremely capable of absorbing every shake up and piece of bad news, and eventually shrugging it off and resuming business as usual. The overriding business of making money.

• Second, for you - the investor - the question is not so much how the markets will react to bad news, but how long it will take for them to neutralize it. More importantly, the lesson is to understand market history and behavior, and how you can use the bad climate to profit within your stock portfolio until that happens.

Here’s how…

Don’t Follow the Herd: Using Straddles and Put Options for a Sliding Market

How many times do you see investors allow their fear of market fluctuations drive their decision-making and flee at the first sign of bad news, often taking a big hit in the process? Don’t become the next victim of the stock market’s inevitable swings and set yourself up for a loss. The investment herd is never right and you’ll likely lose money by blindly following them out the door.

Here’s what you can do instead:

• Buy Put Options: Why wait for the market to start rising again before you can profit? Put options make you money when a security goes down. They’re a much cheaper and safer way of shorting a security, and it’s a great way to capitalize on the downside.

• Enter Straddle Plays: Given that no trend lasts forever, you can “straddle” your position and buy call options and put options at the same time. If the shares sink, your put option makes money for you and you can sell the call option. But if the stock quickly reverses and moves upward again, the opposite happens and you’ll make money from the calls and sell the puts. It’s an excellent hedge in a fluctuating market.

When the stock market moves down, just remember that its ability to absorb bad news is one of the few constants in investing. And you can still come out a winner if you know how to play it.

Good Trading,

Steve McDonald

Today’s Smart Profits Cribsheet

• When you get caught in a down market, there’s no need to panic and rush to sell your positions or sit on the sidelines until the smoke clears. The key to handling this inevitable scenario is developing a “profitable downside bias” - something I wrote about in Smart Profits #311: Investor Sentiment and Market Behavior: Seven Tips for Developing a Profitable Downside Bias.”

• Need a refresher on what “put options” and “straddles” are? Check out the Smart Profits Glossary, it’s here to help!

Related Articles:

• What’s Happening in the Global Markets: The Global “Ripple’s” Headed Our Way
• Stock Market Volatility: Three Ways to Combat Volatility’s “Radical” Shift
• The Stock Market’s Reaction to Good News: Why It’s Best to Sell at the Sound of the Trumpets

Smart Profits Report Archives

Sphere: Related Content

Ethanol Investing, Part 2

Part 2 of The Smart Profits Report Ethanol Forum: Issue #342
Monday, August 14, 2006

Note: Back on May 19, the Smart Profits Report brought you a special Oil Forum, where the editors discussed the state of the market. This time, however, our trading experts give you their take on another hot commodity enjoying plenty of press: ethanol.

In Part 2 of this special edition of the Smart Profits Report, Jim Stanton and Lee Lowell continue what was started by Steve McDonald and Karim Rahemtulla on Friday with more in-depth research into ethanol investing.

Scales Have Finally Tipped in Ethanol’s Favor… Now Let the Government Drive Your Profits
by Jim Stanton, Advisory Panelist, Mt. Vernon Research

In truth, ethanol is nothing new. Back in the early 1980s, I remember checking out a company called American Synfuels. With the 1970s oil crisis still fresh in the memory, the fact that the firm had the ability to produce ethanol from corn was an intriguing idea at the time.

But there was one major problem: It was much more expensive to produce ethanol than regular gasoline. And once crude oil prices softened and traded back at an average of $20 a barrel, the idea simply wasn’t viable. Result? The company went under.

During the Gulf War in 1990 when oil prices shot up to $40 a barrel, the idea of using ethanol fuel bounced back into the headlines again. But again, when oil dropped back below $20 a barrel the following year, those conversations ended quickly.

Fast-forward to today and oil prices are above $70 - a huge jump in price, and one that seems to have finally tipped the scales in ethanol’s favor. While nobody knows for sure where oil prices will be in five years, it’s highly likely that high prices are here to stay - and that bodes very well for ethanol and ethanol investing. Here’s why…

Let the Government Propel Your Ethanol Profits as Fuel Catches Fire

High oil prices and an increased political drive toward alternative fuels are responsible for the current rising ethanol demand. In fact, the Energy Bill of July 2005 requires the annual use of 7.5 billion gallons of ethanol and bio-diesel by 2012. That will approximately double current consumption over the next seven years. Ethanol demand is rising outside the United States, too.

And with the government now involved in a more serious way than ever before, the ethanol business is the new growth industry. For example, June saw two new ethanol producers hit the stock market - Verasun Energy (NYSE: VSE) and Aventine Renewable Energy (NYSE: AVR). Both hit their highs on their first day of trading, but have traded lower since. And despite both companies reporting healthy quarterly earnings recently, this proves that after the initial bout of excitement, investors are still cautious. But it also means that these stocks are now trading at much more reasonable levels.

It will take some time before gas stations install ethanol pumps, but that doesn’t mean the future prospects for the industry aren’t bright. They are. If you’re an experienced commodities trader, the corn market is probably a great way to play this new and growing area. But if not, stick to the companies involved in the production and distribution of ethanol.

Jim Stanton

Look to the Ethanol Futures Market for the Inside Track on This Lucrative Industry
by Lee Lowell, Advisory Panelist, Mt. Vernon Research

Being a commodities trader, I’m always looking out for new trading vehicles that could see huge potential returns. And right now, there’s no question that one of the biggest profit opportunities lies in ethanol becoming an alternative fuel source.

So since my trading area is the futures and futures options markets, I was happy to see the Chicago Mercantile Exchange (CME) launch the trading of ethanol futures contracts.

However, it’s important to note that as much potential as the industry holds, it’s still early and the ethanol boom is not something that will happen overnight. In addition to finding the best companies to invest in, you’re also going to need patience.

As with any new trading product, it will take some time before ethanol becomes a more liquid trading commodity. Right now, there isn’t much volume in this product - but that doesn’t mean it won’t succeed in the future. And when you’re talking about lucrative investment opportunities, the futures and futures options market can give you a great chance to take advantage of such a promising investment like ethanol.

Two Ways to Use Future Options to Profit from Ethanol

There are two other potential ways to use the futures options market to get some exposure to ethanol. Right now, the best means for producing ethanol can come from either sugar or corn. Both these commodities have very liquid markets and trade on the commodities exchanges in New York and Chicago. Since the ethanol boom will take time, I’d look at long-dated call options on either corn or sugar. You can trade options on corn futures stretching as far as the December 2009 expiration period and sugar options stretching as far as the July 2008 expiration period.

As Karim and Jim note here, there are also several publicly-traded companies involved with ethanol production available for you to trade. While these are obviously perfectly viable investments, I prefer to wait for the ethanol futures and options market to come alive before getting involved in the market.

Why? Well, make no mistake… this issue isn’t going away anytime soon. Ethanol will be at the forefront of many investing ideas, and as this particular investment vehicle grows in popularity along with the broader industry, I can assure you it will be a great way to take a long or short-term play in this exciting new fuel alternative.

Lee Lowell

Smart Profits Alert: That’s our whole take on the subject of ethanol investing for now. This is one industry undoubtedly poised for a big future. Savvy investors are already lining up to grab a piece of the investment pie from what promises to be a steadily growing and lucrative market, as the U.S. tries to free itself from the shackles of foreign oil and move toward renewable ethanol.

Good Trading,

The Team at Mt. Vernon Research

Today’s Smart Profits Cribsheet

• Ethanol isn’t the only new investment on the market, check out Smart Profits #340, Investing in The Water Market: Turn Water Investments Into Profits From This Looming Global Crisis.

• You now have an even greater chance to ride the wave of this heavily government-backed industry. To find out much more about the ethanol market, its prospects and how you can profit from it, click this link to read our brand new report.

Related Articles:

• Ethanol Investments: Two Ways To Profit From the Shift Towards Ethanol
• Natural Gas Prices: The Natural Gas Market is Set to LEAP in the Months Ahead
• The Future of Crude Oil Prices: How a New Saudi Development is Bearish for Oil Prices

Ethanol Investing Part 1

Smart Profits Report Archive

Sphere: Related Content

The FOMC Speaks

The Smart Profits Report: Traders’ Tuesday: Issue #341
Tuesday, August 10, 2006

The FOMC Speaks: Will the Fed Pause? Does It Really Matter?
By D.R. Barton, Jr.
Advisory Panelist, Mt. Vernon Research

For the last 17 straight meetings since June 2004, this imposing 12-member committee had decided to hike the Federal Funds Rate by 0.25%. Regular as clockwork. This hoisted the overnight funds rate to a relatively lofty 5.25%.

But for the first time in over two years, there is genuine uncertainty in the air, as the Federal Open Market Committee (FOMC) prepares to announce its latest decision this afternoon.

And based on the language of recent Federal Reserve speeches, the tilting of the Fed Chairman’s eyebrow, and some tea leaf reading, traders rank the possibility of an 18th straight rate hike at only 16%.

Everyone is expecting the Fed pause. Well, almost everyone (more on that later).

The questions are:

• What’s the big deal?
• Why do the equities markets hang on every vote of the FOMC like it’s the Holy Grail of economic forecasting?
• And should it matter to us normal investors and traders?

Let’s tackle these questions and see if any of it should make us change anything we’re doing…

Like It or Not - FOMC Fund Rate Changes Matter

The equation is simple: When the FOMC changes rates, the markets react. This means that, by definition, rate changes matter to us as traders and investors. However, when the FOMC changes a word in their meeting minutes, the markets also react. I’m sure that even if the FOMC switched from cheese Danish to the apple-filled variety, the markets would react.

All of this begs the question: “Are the rate changes and all the rhetoric surrounding them really that significant to the markets?” Well, one would have to admit that the Federal Reserve does have the money to hire a whole lot of smart folks who do a whole bunch of high-level economic analysis.

And while lots of that analysis is quite good, it’s quite a leap of faith to believe that good analysis leads to good policy decisions. Or that those policy decisions (such as whether or not to raise interest rates) reflect the current economic reality. In the end, the FOMC is a political body operating inside a political system.

So while rate changes matter, I take the Federal Reserve’s broader comments on how the U.S. economy is doing with a grain of salt. Actually, make that a whole shaker.

The Big Question: Will We Get a Pause in Rate Hikes?

Since the “Traders’ Tuesday” editions of the Smart Profits Report obviously comes out on Tuesdays, you may or may not see this article before the FOMC makes its announcement. But you can still have some fun with the analysis either way.

The Chicago Board of Trade (CBOT) trades a Fed Funds futures contract on its exchange. The traders of this contract currently give only a 16% chance that the FOMC will raise rates today. While this is a very good barometer of Fed actions, it’s by no means infallible.

But with the odds firmly tilted in favor of a pause in rate hikes, there are two significant pieces of information that keep this from being a “slam dunk”:

First, the rest of the world is moving strongly toward a tightened monetary posture. In the last three weeks alone, the European Central Bank has raised rates (for the fourth time since last December); the Bank of England issued a surprise 0.25% rate hike (the first of the year), and the Bank of Japan made a widely anticipated but extremely significant hike above interest rate neutrality.

Two of the world’s top investment banks, Deutsche Bank and venerable Goldman Sachs, have been vocal and public about their forecast for another 0.25% increase.

In most trading issues, I generally find it hard to go against Goldman. But in this case, I think the Fed will pause because the short-term market ramifications of a “surprise” hike could be really big.

So What Should You Do With Your Positions?

Despite the importance placed on today’s decision, it will really have little long-term effect. After all, the Fed can’t go on tightening forever. However, here are a few prudent actions you can take:

• For Long-Term Positions: Sit tight. If you have a position you intend to hold for months or years, don’t mess with them based on one FOMC decision. If the Fed does hold rates steady for a few months, that should lead to a more conducive longer-term investing environment.

• For Short-Term Positions: Lighten up or sit on the sidelines. I know plenty of folks who have had their trading accounts pounded because they’ve tried to out-guess the Fed or the market’s reaction. Stick with your normal trading plan, and then take a “wait and see” approach. Most strategies for trading big news events like this are little better than 50/50 propositions - poor odds in most traders’ books.

Important Tip: If the Fed leaves interest rates unchanged, but the language of the announcement send the markets down - watch out. Lots of bulls have been waiting for the Fed to ease, and if that doesn’t give the market a nice lift, price action could get ugly to the downside for a while.

Good Trading,

D.R. Barton

Today’s Smart Profits Cribsheet

• This morning, I was a special guest analyst on Canadian Business TV (Report on Business Television - ROBTV). You can view my segment on the Fed Funds rate in its entirety on the RobTV website. Just go to www.robtv.com and scroll down to the 10:40 a.m. time slot in the Business Morning with Jim O’Connell program.

• Is today also “D-Day for the Dollar?” Smart Profits Report editor and technical trading expert Jim Stanton pondered this question right here in Smart Profits #328 one month ago. His analysis showed that today could be a pivotal day for the dollar, because while the Fed gets back to “normal,” it could consequently dent the greenback. For the “how?” and “why?” read Jim’s full analysis in D-Day for the U.S. Dollar: As the Fed Gets Back to “Normal,” Why August 8 is Key.

Related Articles:

• Event-Driven Markets: The ONE Case for Using Short-Term Options
• Investor Sentiment & Market Behavior: Seven Tips For A Profitable Downside Bias
• Principal Protection: How to Defend Your Principal From a 50% “Bomb”

The Chart of the Week

We’ve had our eye on this gap in Microsoft (Nasdaq: MSFT) since it formed in May. I’ve read some bullish research reports lately, including one by good friend and big-thinker Porter Stansberry. Technically, buy on a close above $24.50. Until then, that gap resistance is going to contain all the price action. After the break of 24.50, a 10% pop is very probable.

By the way, I would read Porter’s stuff every month even if he didn’t make stock picks, just because he brings such a fresh perspective to his research. This is one of those “how do they do it for so little money?” type subscriptions. You should check it out here.

Smart Profits Report Archive

Sphere: Related Content

Ethanol Investing

Part 1 of The Smart Profits Report Ethanol Forum: Issue #342
Thursday, August 10, 2006

Note: Back on May 19, the Smart Profits Report brought you a special Oil Forum, where the editors discussed the state of the market. This time, however, our trading experts give you their take on another hot commodity enjoying plenty of press: ethanol.

Is the hype for real in this raw, yet highly promising, industry? Or will it flame out as an expensive fad? Here’s what they had to say, including the best places to put your money today if you want to take advantage. In Part 1 of this special two-part series about ethanol investing, Steve McDonald starts off with information about the growing socio-economic problem that ethanol will help contain and Karim Rahemtulla finishes with a few recommendations that will help you profit.

Ethanol: The Best Solution for a Huge Political and Economic Problem
by Steve McDonald
Advisory Panelist, Mt. Vernon Research

America continues to battle enemy forces on several fronts. Military operations are ongoing in both Iraq and Afghanistan, with nuclear tensions in Iran and North Korea threatening to boil over, too. Fighting between Israel and Hezbollah shows no sign of abating, either.

The war against terrorism vaulted back into the headlines just this morning, with the news that anti-terrorism forces foiled a major plot to blow up as many as 10 flights from Britain to the U.S.

These factors place persistent pressure on the oil market and oil prices. And it’s not surprising that because many are related to the Middle East, crude oil and gasoline prices continue to rise with each new negative development.

What is surprising, however, is that given America’s dependence on Middle East oil, the country has done little to ease the strain. Since the oil embargo of 1974, various U.S. governments have failed to reduce or limit our reliance on the commodity. In fact, under current federal law, it is illegal to explore for oil on either the U.S. Atlantic or Pacific coasts.

America also hasn’t built any new oil refineries since the 1970s - yet gasoline consumption is rising at a 2% rate per year. This week’s surprise shutdown of BP’s main oil pipeline in Alaska has exacerbated the problems and proved that America needs to be more proactive in finding more oil within our borders.

But that’s where ethanol is poised and ready to make up the shortfall in production, and greatly help solve the problems associated with the exploration and development of oil reserves. This is the first time in history that so many forces have moved in the direction of renewable fuels - and ethanol offers the best chance to reduce the amount of crude we need to import to run our economy. Consider the following points that ethanol already has in its favor:

• Ethanol is the alternative to replace the MBTE gasoline additive in vehicles. Both GM and Ford are manufacturing more flex-fuel vehicles that allow cars to operate on regular gasoline or E85 ethanol.

• The Energy Policy Act of 2005 mandates that renewable fuel usage rises from 4 billion today to 7.5 billion by 2012. And because of increasing public pressure for oil alternatives and strong bipartisan support for ethanol in Congress, many believe that this amount could rise.

• Ethanol is a renewable, cleaner alternative to gasoline and can be produced and sold for less than the current price of gasoline.

It’s now a viable alternative to our transportation fuel needs and is the best possible solution for what has become a huge political, social and economic problem.

Steve McDonald

Ethanol is Here to Stay… and Here’s How to Profit
by Karim Rahemtulla, Chairman, Mt. Vernon Research

Ethanol is here to stay - plain and simple. In fact, I believe there are two key reasons why the ethanol industry has a huge future:

The U.S. Government Wants Ethanol to Stay

For the moment, a burgeoning ethanol industry gives the government a boost on a few issues, most of which are politically motivated. A strong move toward ethanol makes the government look like it’s finally pushing hard for fuel independence and away from the country’s “addiction” to oil from the Middle East and South America. That advantage (which is essentially a national security issue) will make ethanol and other bio-fuels attractive for years. And because it greatly aids farmers, it also stimulates economic growth.

The politicians who pull the purse strings in Washington are backing up the rhetoric with action. It started with a huge endorsement from President Bush, who stated that, “Ethanol will replace gasoline consumption. The industry is on the move and America is better off for it.” The government also ordered that ethanol replace MTBE as the current gasoline additive. This is an industry on the move… fast. According to the Renewable Fuels Association, total U.S. ethanol production was 175 million gallons in 1980. But last year, that total had soared 2,130% to 3.9 billion gallons. Ethanol demand this year alone is expected to jump 50%. As a result, the number of U.S. ethanol refining plants is projected to double to around 200 over the next few years.

Oil and Gasoline Prices Are Soaring

News this week that BP has been forced to shut down its Prudhoe Bay oil pipeline in Alaska “indefinitely” (i.e. several months) due to “severe corrosion” has merely added to the strain on an already burdened industry. Accounting for 8% of U.S. production (400,000 barrels per day), this is America’s biggest oilfield and the news has pushed oil and gasoline prices up again.

The equation is simple: As long as oil and gasoline prices remain high, ethanol will continue to increase its presence - and give a huge boost to the amount of funding and incentives available to ethanol companies to get production rolling more vigorously. When produced in mass quantities, ethanol has two benefits over gasoline. First, it can be cheaper to produce, and second, it’s renewable. In response to soaring jet fuel costs, Virgin Atlantic Chairman Sir Richard Branson plans to invest around $400 million to produce ethanol for his airline.

So Where’s The Profit Opportunity?

You could buy pure ethanol plays like Archer-Daniels-Midland (NYSE: ADM), Verasun (NYSE: VSE) or the more speculative Pacific Ethanol (Nasdaq: PEIX), which has dropped sharply recently, but at $17.50 is still too expensive.

But with the industry still raw and volatile, I prefer to take a stealthier and safer investment approach. In the July Xcelerated Profits Report issue, I gave readers a play that benefits from movements in the ethanol market, while also staying diversified and paying a cool 9% dividend. This $5 billion company just reported healthy earnings and a dividend increase. It also owns a big chunk of a private ethanol firm that’s among the top five producers. It paid about $140 million for the stake, which is worth almost $1 billion today. So if ethanol rises, this company makes money. And if it fails, investors will still be in an investment that is not solely reliant on ethanol for its growth and profits.

Karim Rahemtulla

Smart Profits Alert: You’ve heard our half of our take so far. Stay tuned for Part 2 on Monday.

Good Trading,

The Team at Mt. Vernon Research

Today’s Smart Profits Cribsheet

• Ethanol vs. Oil: Which is the best bet for your investment dollar? Mt. Vernon Research Chairman Karim Rahemtulla recently tackled this question as he weighed up both markets. Check it out in Smart Profits #312, Ethanol Investments: Two Ways To Profit From the Shift Towards Ethanol.

• You now have a great chance to ride the wave of this heavily government-backed industry. To find out much more about the ethanol market… its prospects… and how you can profit from it, click this link to read our brand new report.

Related Articles:

• Investing In The Water Market: Turn Water Investments Into Profits From This Looming Global Crisis
• The Best Commodities Website on the Internet
• The Price of Oil: The Smart Profits Report Oil Forum

Ethanol Investing, Part 2

Smart Profits Report Archive

Sphere: Related Content

Next Page »

Hear It From Our Premium Members...

Recent Smart Profits Blog Posts

• Recent Articles

  The Pros Are Preparing For A Drawn-Out Bear Market
  You Don’t Have To Go To Tunisia To Find Solid Stocks… They’re Right Here In The U.S.
  Amid The Gloom, These Commodities Could Offer Some Great Buying Opportunities
  The Best Investment Strategy For A Market Like This… The Truth About Covered Call Investing
  


What Others Have To Say...

"This is the first time I have had a position that paid handsomely while the market was experiencing spasms. I made 97% on my put position. That was sweet. "
 ~Dexter L., Jonesboro, GA

Copyright © 2008 Smart Profits Report 105 W. Monument St. Baltimore, MD 21201

Smart Profits Report Disclaimer: Nothing published by Smart Profits Report should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Smart Profits Report should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.