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The Gold Market

July 27, 2007

The Smart Profits Report: Issue #442
Friday, July 27, 2007

The Gold Market: Supply-Demand Issues Set To Send Gold Prices Higher
By Martin Denholm
Managing Editor, Mt. Vernon Research

They say diamonds are a girl’s best friend. For investors right now, I’d change that to the gold market.

Let me kick off with a couple of juicy statistics…

  • Industrial demand for this popular metal hit a record 458 tons in 2006.
  • Investment demand soared 45%
  • Gold supplies fell almost 15% in 2006.

A report from Lear Financial says producers in countries like South Africa are simply unable to keep up with the sizzling demand from Asia and the Middle East. The jewelry industry is a mega global business in both regions, with sales hitting $44 billion last year.

Gold market prices have responded, which is good news for investors. Over the past year, gold prices have shot from a low of $560.75 to $694.20. Over the past 30 days alone, prices have climbed from a low of $641.80 per ounce to $684.40 just a few days ago, within touching distance of that 52-week high.

Of course, over the past few days, most major equity markets have endured a wild ride. But considering gold is a traditional “safe haven” against falling markets and a dropping dollar, as well as rising inflation, you might be wondering why the metal has experienced volatility with the broader market. Don’t be fooled…

Gold Market Is Volatile… But The Trend Remains Pointed Upward

The recent gold price pullback isn’t because the bears are about to start ravaging the gold market. One big reason is that investors are using the opportunity to grab the gold profits they’ve scooped up over the past few months to cover their losses from other areas.

Since the beginning of this year alone, we’ve seen swings of over $80 an ounce up and down for gold. But it’s still trading at almost the same level it was back in January. So what gives? For some clues, I turned to my colleague and former NYMEX floor trader, Lee Lowell, who is the smartest guy I know when it comes to commodities.

Lee says: “If you look past the major gold market volatility, $650 an ounce seems to be the area that gold is gravitating towards, once it’s done making its big moves up and down. Take a look at the daily chart below of the near-month gold futures contract and you can see the wild swings. But the overall slant is bullish. Whenever there’s world turmoil or doubt in the equity markets, investors and hedge funds alike move towards hard, physical assets like gold. I don’t see the gold market plummeting anytime soon as there’s just too much interest on the buy side. There’s a lot of talk of $1,000/oz and we could see it.”

The Gold Market Volatile Gold Prices

And speaking of gold investors, the goalposts are shifting…

Uncharted Territory For Gold

It’s not often you hear the phrase “a gold supply shortage.” But that’s changing now. Having socked away vast gold reserves for decades to diversify their holdings, the world’s central banks are now changing their tune.

Their collective gold stash is dwindling rapidly, causing them to have less control over the gold market. As a result, private investors are jumping in with a vengeance, confident that less central bank control over buying and selling means less price volatility.

In fact, private investors have gobbled up 7,500 ounces of gold over the past five years - and now control more of the supply than central banks, according to CPM Group. That’s huge!

And with gold being a great way to diversify and protect any portfolio, many of these folks are buying gold for the long-term. Not a bad strategy, considering the current geopolitical situation, terrorists on the prowl, and inflation rising.

But there are a couple of other factors giving the gold market a bullish glimmer…

“Man-Made” Inflation And A Droopy Dollar

Over the past few years, several major central banks (the Fed, European Central Bank, Bank of Japan) have cut interest rates sharply. That means there is much more money washing around the market these days.

So in addition to the inflation you hear about every day (oil, energy, food, gasoline), this “man-made” situation has also pushed inflation higher. And gold loves inflation.

Of course, no conversation about gold or the gold market would be complete without mentioning the U.S. dollar. Considering that gold is such a good hedge against the dollar, the two have long had an inverse relationship.

And just recently, gold investors couldn’t have asked for a better boost. The greenback has slumped to record lows against the euro, 26-year lows against the British pound, and a 16-year low and 20-year low against the Australian and New Zealand dollars respectively. And north of the border, the Canadian dollar is fast approaching parity with the dollar.

While this is making U.S. exports cheaper, it’s also cheapening the value of the dollar and making gold more attractive.

Mix this in with a supply shortage and demand spike and you’ve got a recipe for higher prices - especially considering that it takes several years to explore and develop a gold mine, then get a decent amount of gold from it.

While The Gold Market Snoozes, Take Advantage

While the last few days might signal that the gold market is succumbing to the broader market drop, it’s more likely that it’s just taking a breather. But whether it’s just a consolidation or a more marked pullback will ensue, this gives you a good chance to boost your gold market holdings at a lower price before the supply-demand issues and other factors I mentioned above lead it back up again. Let me give you a couple of ideas…

  • streetTRACKS Gold Shares (NYSE: GLD): This ETF gives you direct exposure to the gold market, without actually having to buy any of it yourself. It tracks the performance of gold prices directly, and because it’s an ETF, it trades like a normal stock. On April 20, it hit a 52-week high of $68.73, but the gold selloff over the past few days has resulted in it slipping back almost $3 around $65.45.
  • Market Vectors Gold Miners (AMEX: GDX): Another gold-based ETF, but this one tracks performance of the stocks in the AMEX Gold Miners Index. This came within 2 cents of setting a new 52-week high ($43.32) earlier this week - a bullish sign. But like GLD, it’s slipped back to $39.50. Investing here means you don’t have to spend time looking for individual gold stocks, then increase your risk by buying just one or two - this one tracks the world’s top gold producers in one simple investment. And with gold harder to come by at the moment, these firms should reap the reward of the supply-demand situation.

Have a great weekend,

Martin Denholm

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Today’s Smart Profits Action Center

  • Gold isn’t the only commodity in bull mode… others are soaring, too. Uranium prices are up around 200% over the past 12 months, and lead is close behind, with price inflation topping 160%. But this is merely an extension of their entrenched bull markets. Over the past five years, they’re up 1,270% and 480% respectively.

We should note that the publisher of The Smart Profits Report has a marketing relationship with EverBank, but that’s because we believe its products are among the best available.

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Successful Trading Systems

July 25, 2007

The Smart Profits Report: Issue #441
Wednesday, July 25, 2007

Successful Trading Systems: How To Find The Cornerstones Of Investment Success
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

During one of the trading courses that I teach, we were discussing various successful trading systems and execution platforms. Before long, a heated debate took place regarding the best type of trading strategy and then about the best brokers.

Ultimately, the essence of the debate was this: Just where does the responsibility for a successful trading performance lie? With the investor, the trading system, or the strategy?

Whether you use a specific strategy, trading system, or investment newsletter advice, there are many issues that are critical in finding out what works for you. Here are some of the most common and we’ll see if we can clarify the topics, using the good old “pro and con” format…

Find A Successful Trading System… But Don’t Neglect The Strategy

“If I find a successful trading system that works, then I can be a successful trader.”

  • Pro: Every investor needs a strategy or system to form a framework for their trades. Simply put, without a repeatable way to identify and execute trades, you’re going to find it tough to become a consistent performer.
    But there’s more to it than that. It’s difficult to underestimate the importance of having full confidence in your trading, especially after going through a tough spell. But a solid trading system or strategy gives an investor the confidence to act decisively. In addition, a good system, when executed with discipline can produce good returns, especially when used in the right market conditions.
  • Con: Studies have shown that even when groups of people have worked with proven trading systems, they’ve still not made money with them. But that doesn’t necessarily mean the systems don’t work. It’s because the system or strategy is only one part of the package that makes a successful investor.

Summary: Yes, your trading system is a key foundation for your investment, and you should spend serious time on developing it.

But it’s not the only important element. There are many folks obsessed with system development and never seem to find time to trade (the Internet bulletin boards are full of them!) So you must also develop other parts of your “tradecraft” - your investment psychology, execution skills, adapting to changing markets, etc.

While a trading system can support your trading discipline (as mentioned above), it cannot take the place of developing your trading psychology.

Finding A Trading System For Trending & Sideways Markets

“The best trading systems should work in trending and sideways markets.”

  • Pro: While the markets are volatile and experience many different conditions, studies have actually shown that they trend as little as 20% or 30% of the time. So even the trendiest markets have significant amounts of time when they’re going sideways.
    That means a trading system that works in both trending and sideways markets is truly valuable. Most systems that endeavor to tackle both types of market conditions usually do so by first identifying whether or not the market is in a trend and then picking one trading algorithm or another. Others address the problem by trading less in one type of market or the other.
  • Con: Products that try to “be all things to all people” usually do a mediocre job for everyone. Trying to design a “one size fits all” successful trading system that navigates all market conditions is a difficult proposition that has challenged even the best system designers, and it’s likely to end up giving results that fail to excel in any market condition.

Summary: If you want to optimize your investment success, understanding current market conditions is a key task. That way, you’ll know what types of markets best fit each trading system. It’s a good idea to design different systems that work really well in different market conditions. Then you can switch between trading systems.

Using High Percentage Trading Systems

“Trading systems designed to produce a high winning percentage are best.”

  • Pro: Trading systems that produce higher winning percentages are certainly easier to trade from a psychological perspective. Losing streaks are shorter, and winning steaks are longer. During periods of extended losing streaks, trading systems that only produce a few big winners can seem like “death by a thousand cuts.” And because long losing streaks are less likely, high percentage trading systems can typically use more aggressive position sizing.
  • Con: Almost all trading systems with high winning percentages have low reward-to-risk ratios. So even during times of extended winning streaks, they may only be adding to your wealth slowly. It’s the trading systems with big reward-to-risk ratios that tend to catch the really big trends and provide truly fat returns that can change a good year into an incredible year.

Summary: Really, there is no “best” trading system. You just have to find the one that is “best” for your own situation. So when deciding whether to design a successful trading system based on a high winning percentage, or high reward-to-risk ratio, there are only two factors to keep in mind:

  • Figure out your own personality and investment psychology.
  • Look at the combined expectancy and frequency-of-trade for each system.

For example, if you compare two trading systems on the basis of expected profit per month, quarter, or year, it can be quite an eye-opener. But great theoretical results really won’t matter if you can’t trade that type of system well. So if you’re looking at the results from a long-term trading system that has significant draw-downs, but you’re an anxious or impatient investor who needs plenty of positive reinforcement, that system probably isn’t the right one for you. The trading system has to fit you if you are going to successfully trade it well.

Trading Systems Should Successfully Fit Your Investment Plan

Obviously, trading systems and strategies are important tools, but they’re most useful when you understand their inner workings and how they fit into your investment plan. When you use a trading system that is successful for you and weaves the market conditions into your investment plan, it can be a real thing of beauty.

One attendee at my recent seminar summed up the discussion of where the responsibility for trading performance lies by saying, “It’s the dancer, not the dance floor.”

Great trading,

D. R. Barton, Jr.

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Today’s Smart Profits Action Center

  • Don’t try to design one, perfect, all-encompassing trading system that can win in any kind of market - it’s often an impossible task. Instead find a trading system that successfully meshes with your investment strategy, so it offers the right blend of profit potential and risk mitigation to suit your style. Key questions to consider include: How much investment capital do you have? How much of it you can afford to risk - and potentially lose? What’s more important to you - grabbing short, frequent winners, or waiting for the home run investment?
  • Trading tip: Before every trade, write down the reasons why you’re entering the position. Is it strong fundamentally? Is it strong technically? Is there some event that could move the stock? If the trade works out, you’ll be able to identify the reasons behind your success. If it fails, you can pinpoint your mistakes and see what you can do differently next time. You’ll usually be able to find something.
  • Fast-track your investment success: If you want to invest like a pro, you have to learn from them. The world’s most successful investors all use specific trading systems and strategies that help them generate wealth successfully every single day. And now that they’ve passed on 31 top profit secrets in this exclusive special report, you can find out how to replicate their success. Get more details here…

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The Chart Of The Week

The U.S. dollar has made all-time lows against the euro and is struggling against other global currencies like the British pound and Canadian dollar, as well as the Aussie and New Zealand dollars. The chart below shows the U.S. Dollar Index (which measures the dollar against a broader basket of world currencies) now trading at the 80 level and bumping against 12-year support. A break below 80 should send us directly toward the low from September 1992. But until these two key levels are broken decisively, look for a near-term to intermediate-term bounce in the good ol’ greenback.

US Dollar Index near- to intermediate-term bounce

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Investing In The Stock Market

July 20, 2007

The Smart Profits Report: Issue #440
Friday, July 20, 2007

Investing In The Stock Market: Three Factors That Could Buckle The Bulls
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research

“This has to be the top…” “Oh, this is definitely the bottom right here…” How many times have you heard these immortal words from people who boldly try to predict the market’s next move?

It’s a bad idea. The stock market is a lot smarter than most folks and often leaves bold prognosticators with egg on their faces. But that doesn’t mean that you should just sit idly by and wait for whatever it tosses at you. And in this helium-charged market, it’s more important than ever that you pay close attention to the factors that can move it and how to prepare for a storm…

When investing in the stock market the investment gods are a tough bunch. Just when you think you’ve nailed a winner, they shake you back to reality with a bump. And trying to nail tops and bottoms is very difficult to do - so much so that even the pros have trouble sometimes.

  • Take Elaine Garzarelli, for example, who accurately called the 1987 crash.
  • Or Ralph Accampora, whose prediction that the Dow would reach 7,000 was considered laughable at the time.

Despite calling these major events, they soon found themselves back on the wrong side of the fence for years.

Be Prepared When Investing In The Stock Market

Living in south Florida, I view investing in the stock market in the same way as the hurricanes that sweep in every year. Just because the experts are calling for an active storm season doesn’t mean I should close up shop and live in a dark, cave-like home for the next six months.

The key is to prepare in advance, because after that it’s too late. I ensure that I have food, water, batteries and other supplies to get through an emergency. But until there is more substantial evidence that a hurricane is coming, it’s business as usual.

Right now, it’s business as usual investing in the stock market, but the storm clouds are gathering…

Don’t get carried away with the indexes blazing upwards and setting new highs - this market is getting frothy. Here are a few reasons why…

Three Key “Froth Factors” That Could Swing This Market

  • Sub-Prime Mortgage Fallout: I suspect the sub-prime mortgage situation will come home to roost at some point. The Bear Stearns sub-prime-backed mortgage funds crisis may just be the tip of the iceberg. The firm just reported that, “… preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Structured Credit Strategies Fund as of June 30, 2007.” The news shook the market and some fear that there could be other funds performing just as badly.
  • Housing Slump To Weigh On GDP Growth: On a related note, Fed chairman Ben Bernanke says the real estate downturn has slowed overall GDP growth in recent quarters and “… will likely continue to weigh on economic growth over coming quarters,” due to rising delinquencies foreclosures. The National Association of Homebuilders confidence index (which measures current sales and future sales) is now at a 16-year low, and the Fed just revised its 2007 GDP growth forecast down by 0.25% to a range between 2.25% and 2.5%.
  • Dollar Woes: The euro is trading at a record high versus the dollar ($1.38). The British pound is trading at a 26-year high at $2.04. The Canadian dollar has almost reached parity with its U.S. counterpart at $0.95. The Aussie dollar is at a 16-year high, and the New Zealand dollar has hit a 20-year high against the greenback. With inflation having a greater impact than in America, interest rates will likely rise further while the Fed sits still, so there could yet be more dollar downside.

Bye-Bye, Bull Market?

I suspect we’re in the late stages of the bull market - the longest one since 1926. The Dow hasn’t seen a correction of 10% or more in over four years and it’s overdue.

A good sign of an end to a bull market is when the laggards participate. As you can see from the chart below, technology stocks, which have trailed the S&P 500, have recently begun to close the gap. That tells me that those people investing in the stock market, desperate not to miss the party, are looking for anything that hasn’t gone up significantly and are throwing their money into lower quality names.

Investing in the Stock Market: Tech Stocks

So does that mean you should take profits and move into cash? Not yet. But you should tighten up your stops and keep a close eye on the market’s moves to try and gauge a meaningful shift. People are expecting the pullback to occur at any time - it’s inevitable. And I suspect it won’t take much to move this market the other way. So I’m compiling a list of stocks I’d like to both short and buy at lower prices.

So if the top is near, why not just take profits now? The answer is because investors can move indexes and individual stocks much more than expected, meaning that trends can last longer and go further than you think.

I want to be sure to be able to take advantage of this version of the greater fool theory (which says that when markets and stocks rise to heady heights, you need a “greater fool” to keep the rally going). I don’t have to get out at the very top - I’m just content to let my winners run and start selling once I see solid evidence of a reversal.

As long as you use stops, that you adjust upwards as your stocks climb higher, while investing in the stock market you’ll sleep well at night, knowing your profits are locked in and you’ll still get to participate in additional upside. And when the storm hits, although it won’t be pleasant, you’ll be protected.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

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Today’s Smart Profits Action Center

  • The sub-prime mortgage meltdown has led to 30 companies having to declare bankruptcy. In an appearance before the Senate Banking Committee today, Fed chairman Ben Bernanke predicted “significant financial losses” from the fallout, with some estimates putting the figure between $50 billion and $100 billion.
  • If fear and greed are the two forces that move the stock market, turn to the CBOE Volatility Index (VIX) for clues into which way it could turn. This proven indicator, ranging from 10 to 50, shows the level of fear and complacency (or greed) among investors. A level under 20 indicates high complacency and that the market could be set to peak. Right now, it’s around 15, having slumped almost 2 points when the Bear Stearns revelations sent the market down on Wednesday.
  • Every investor would love to know the secrets that will prepare them for any market climate and allow them to both protect capital and grow wealth. But very few know how to get them. So if you really want to propel yourself ahead of the investment crowd, take a look at this special report that explains the profit techniques America’s richest investors use to make most of their money. All 31 ways to profit are open to you - with one in particular worth as much as 4,001%, and you only have to make one transaction a year. Check it out here.

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The Uptick Rule

July 18, 2007

The Smart Profits Report: Issue #439
Wednesday, July 18, 2007

The Uptick Rule: The Biggest Regulatory Change In A Decade & What It Means For You
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

On July 6, 2007, the biggest change in decade took place in U.S. stock market regulation… and nobody noticed.

So while everyone is wrapped up in the loud noise coming from the market, let’s take a look at how this “quiet” rule change could turn out to have some interesting effects for investors…

Just two days after America celebrated freeing itself from the shackles of the Brits, the SEC got rid of a 73-year old uptick rule that required an “uptick” in the stock price before a stock can be sold short.

Down With The “Uptick”

First things first… an “uptick” is the common name given to Rule 10a-1 under the Securities Exchange Act of 1934. This rule basically allowed short selling, but only following a trade where the price was higher than the previously traded price (called an uptick).

As you can imagine, the uptick rule was the enemy of many investors who tried to short a stock, only to be unable to get a much worse price than desired. It was one of the rules that made stock trading tilted to the favor of the long side.

But now, the SEC has removed the “price test restrictions” (as it says) on short sales and prohibited any other organizations, such as local exchanges, from imposing price tests.

What the Elimination of the Uptick Rule Means for Investors

There are some well-publicized disadvantages to limiting the practice of short selling. For example, blow-off tops occur more frequently in markets where short selling is restricted.

So now that the SEC has ditched the uptick rule, how does this affect the market’s major players? Let’s see…

  • Individual Investors: Longer-term investors, especially those that only go long, will see little change in their activities. But for anyone shorting NYSE or AMEX stocks, the change could have a significant impact on the ease of getting filled in those short sales, since investors will no longer have to wait for an uptick. However, there won’t be much change for Nasdaq stocks, since earlier changes allowed legal workarounds for Nasdaq traders.
  • Institutions & Funds: A common practice for “big money” on Wall Street was to craftily put in a significant amount of buy orders to move a stock to an uptick before then placing their real short sale order. But now that the SEC has eliminated the uptick rule, short selling will now be more efficient for these institutions and funds.

And the end of the uptick may also be affecting the Tick Index…

Tracking The Tick Index

The NYSE Tick Index gives the number of stocks on the NYSE that are trading on an uptick, minus those that are trading on a downtick. This is a broadly watched index, especially among short-term and intermediate-term traders. But since July 6, when the end of the uptick rule went into effect, many commentators have noticed that the maximum tick reading of the day has been depressed.

For example, in the seven days before July 6, the average high Tick of the day was 25% higher than during the seven days after July 6. This has happened despite the market’s upward climb, including the extremely strong move on July 12. In fact, the seven-day moving average that tracks the high Tick of the day is now at its lowest point since the selloff in May 2006. (Thanks to Jason Goepfert for his insights into changes that are affecting the Tick Index).

The bottom line is that investors who use the Tick Index in their analysis need to be aware and wary of the skew that is occurring in the index. Monitor the Tick Index over the next couple of weeks to see if the this trend continues, and adjust your analysis accordingly.

Great trading,

D. R. Barton, Jr.

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Today’s Smart Profits Action Center

  • While “buy low; sell high” is the traditional motto for making money in the stock market, it’s not always the case - not when you’re short selling. When you short a stock, you’re basically selling at a high price, with the intention of buying it back when it moves lower.
  • One of the most famous cases of a short sell that worked perfectly is when George Soros made about $1 billion in a day shorting the British pound in the early 1990s, driving the currency to a disastrous low. No wonder he was subsequently dubbed “The Man Who Broke The Bank of England.”
  • With the stock market blazing to new highs, bearish short sellers are having a tough time making money right now. But when the market inevitably turns back down, there’s a good chance that short sellers will be back in business, shorting stocks that have become overvalued, that have inflated expectations, or which no longer have catalysts that can drive them higher. Investors who hold short positions would lower their risk, since they would rise as the market falls, offsetting losses from long positions. But beware… short selling is one of the most difficult strategies to execute and can leave you on the hook for some big losses if your chosen laggard decides to rise instead.

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The Chart Of The Week

The Dow Industrials made new all-time highs in October of 2006 to much fanfare. But on July 13, the S&P 500 made new all-time highs in a much quieter fashion. And despite significant recent strength, the Nasdaq 100 is still far from its March 2000 highs. Take a look at the chart below and you’ll see that it’s only clawed back 1,200 points since its drop from all-time highs. That’s a 30.8% move. So only 2,800 (237%) left to go then!

Nasdaq 100 clawing it's way back up

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Renewable Energy Resources

July 13, 2007

The Smart Profits Report: Issue #438
Friday, July 13, 2007

Renewable Energy Resources: How To Profit From Rising Oil Prices & A New Boom In Renewable Fuels
By Martin Denholm
Managing Editor, Mt. Vernon Research

This time last year, oil prices were blasting to an all-time high of $78.40 per barrel. And with Americans hitting the beach, it’s happening again. The black stuff is creeping back towards that level.

Crude prices traded as high as $73.80 today - up almost $8 in just the last month. Sure, you can blame the Iraq war. You can blame the oil workers’ strike in Nigeria. You can curse crazy ol’ Hugo Chavez, stirring the pot in Venezuela. But the main reason is much more simple than that. Supply and demand. And if you think it’s bad now, it’s only going to get worse.

While folks get all hot and bothered about oil prices rising again, it’s sparked a fresh debate and rally in renewable energy resources. Yeah, I know… some people scoff at this, saying it takes too long to develop them and is too expensive. But if it helps wean America off its “addiction to oil” from the Middle East and also helps the environment, what’s not to like?

Global Oil Demand Increasing Market Tightness

In February, the International Energy Agency (IEA), an advisor to 26 industrialized countries, said global oil demand would rise by 2% per year between 2006 and 2011. Not quite. The group had the calculators back out this week, making a 10% upward revision to that estimate, and now calls for a 2.2% demand spike per year between 2007 and 2012. That’s an increase from 86.1 million barrels per day (bpd) this year to 95.8 million bpd in 2012.

No wonder oil prices are back in the $70s.

Oh, and if you’re hoping that the 12-nation OPEC oil cartel will save the day, don’t bank on it. The IEA says that OPEC, which supplies 42% of the world’s oil, has overestimated its projection for 40 million bpd day spare capacity in 2009 by 2 million bpd and that spare capacity will shrink “to minimal levels by 2012.”

In addition to supply-demand pressure, factor in potential price-shocking issues like geopolitical strife, war, terrorist attacks and natural disasters, and you’ve got a recipe for higher prices. The OPEC oilmen would hardly cry about that. And don’t expect much help from non-OPEC nations either. The IEA says oil production has slowed there, too.

Not good news, considering that over the next five years, demand from Asia and the Middle East is expected to surge three times faster than in the 30 industrialized nations of the Organization for Economic Cooperation and Development (OECD).

Can we get some help here? And can we profit? The answer is “yes.”

Renewable Energy Resources Set To Conquer… As The Buzz Gets Louder

As technology advances and investments rise, it will become cheaper to develop and sell renewable energy resources and fuels. And sure, it might take some time. But remember, it took two decades for automakers to convert from leaded gasoline to unleaded fuel before the trend became commonplace. But with more investments and better technology, there’s a much harder push for renewable energy resources these days, and it’s catching on faster. If you don’t believe me, just look at what the big boys are doing…

  • In 2006, Microsoft founder Bill Gates pumped millions into Pacific Ethanol (Nasdaq: PEIX) stock, driving the price to almost $27 this time last year. Ethanol itself soared to an all-time high of $3.98 a gallon at the same time, before the hype caught up to the industry and prices slumped 45% to $2.20 today.
    But with corn prices having dropped almost 30% from a 10-year high in February, ethanol may have hit the bottom and momentum is starting to build again. And although ethanol only also accounts for 4% of U.S. gasoline supplies, ignore the folks who sneer at that figure. Instead, consider ethanol as a fuel with plenty of room for growth.
  • Ethanol is expected to suck up almost one-third of America’s corn crop by 2010 - more than double the consumption one year ago. In addition, the Renewable Fuels Association says refineries will pump nearly seven billion gallons of ethanol to consumers this year - two billion more gallons than a year ago. And now that PEIX shares have fallen to $14, it represents a much better investment value.
  • Virgin Group founder Sir Richard Branson has also invested about $400 million in ethanol and is trying to use it to fuel his Virgin Atlantic airline.
  • And Vinod Khosla, the financial muscle behind mega-firms Google, Sun Microsystems and Genentech, is pumping millions of his estimated $1 billion fortune into renewable energy resources, investing in almost 30 companies.

All told, renewable energy resources pulled in $71 billion worth of investment in 2006, 153% more than the $28 billion in 2004, according to the American Council on Renewable Energy. And the boom is reflected in the investment world, with the rapid growth of renewable energy funds and ETFs…

Go “Green” With Renewable Energy ETFs

Gone are the days when “green” investments were nothing more than a good way to lose money in a vain attempt to give the planet a hug. There are several good ways to invest in this fast-growing industry or renewable energy resources.

For example, take a look at the New Alternatives Fund (NALFX) - up 41% over the past year and 25% this year alone which holds Spanish heavyweight energy firm Abengoa. Another option is the Guinness Atkinson Alternative Energy Fund (GAAEX) - up 31% this year. However, the minimum initial investment for both funds is $2,500 and $5,000 respectively, with expense fees tacked on.

So how do you profit from an upward price trend without having to fork out a big initial investment, incur costs, and have little flexibility when it comes to buy/sell decisions?

The answer is exchange-traded funds or ETFs.

  • On the oil side, the Energy Select Sector SPDR (AMEX: XLE), a basket of the biggest oil and oil service companies that includes ExxonMobil, ConocoPhillips, Chevron and Devon Energy.
  • On the alternative fuel side, the Powershares Wilderhill Clean Energy Fund (AMEX: PBW), a basket of stocks geared towards cleaner, renewable energy. This includes Kyocera, Color Kinetics, Echelon Corp, Cree Inc, Cypress Semiconductor and Sunpower Corp.

Because why invest in just one industry when both are performing well?

Renewable Energy ETFs Capitalizing On Rise Of Oil Prices

Today, XLE capitalized on oil’s upward march by hitting a new 52-week high of $73.18. That’s a 22% rise from $60 on March 22. And with oil rising, PBW followed suit, climbing to a fresh high of $22.58 - a 25% spike from $18 over the same period. This is an important trend - these ETFs often rise and fall together, as you can see from the chart below.

Renewable Energy Resource ETFs on the rise

Those 52-week highs are bullish, my friend - and both ETFs are a good way to diversify your portfolio and gain exposure in a cheap, low-risk, efficient and flexible way within the realms of rising crude oil prices and renewable energy resources.

Until next time,

Martin Denholm

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Today’s Smart Profits Action Center

  • The U.S. government is trying to push renewable energy resources and fuels forward. The Senate recently passed a bill that requires ethanol production for vehicles to hit 36 billion gallons by 2022 - up seven-fold over 2006 production. And the country is well on the way, too. Ethanol production is forecast to hit 11.4 billion gallons a year by the end of 2008 - and 73 more ethanol plants are currently under construction, in addition to the existing 110.
  • The bill also mandates automakers to increase fuel efficiency by 40% by 2020 and reduce gasoline consumption by 20% in 10 years. That’s equivalent to more than 32 billion gallons per year.
  • Renewable energy resources account for just 2% of the global electricity supply. But by 2025, it’s set to power half of America’s electricity demand and 40% of its transportation demand, according to the American Council on Renewable Energy. The Xcelerated Profits Report team is currently up 74% on one company (part of the PowerShares Clean Energy Fund) leading the charge. Find out how you can join the team here.

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Trailing Stop Strategies

July 11, 2007

The Smart Profits Report: Issue #437
Wednesday, July 11, 2007

Trailing Stop Strategies: How To Avoid A $190 Million Portfolio Mistake
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

If you lost $190 million trading tech stocks when the dot-com bubble unceremoniously popped back in 2000, would you want your money back?

Of course you would. Who wouldn’t? But while many folks might grab the whisky bottle, chalk up the loss to some poor decision-making, and vow to never make the same mistakes again, one guy has actually asked for his money back because he didn’t use any trailing stop strategies.

Swallowing A $190 Million Loss

Fred DeLuca, billionaire co-founder of the Subway fast-food chain, lost $190 million when the flimsy dot-com house came tumbling down at the turn of the century.

Not much for a guy who Forbes says is worth $1.5 billion, but DeLuca alleged that his UBS brokerage mismanaged his trust money, causing him to lose the money on risky tech stock investments. And he wanted it back. UBS said DeLuca authorized the investments and the losses came because of his aggressive growth strategy at the time.

And this morning’s Wall Street Journal reports that a National Association of Securities Dealers arbitration panel has rejected DeLuca’s claim.

Tough luck for the sandwich man. But for us, a couple of things are clear:

  • First, his aggressive strategy overshadowed basic logic regarding the sector’s risky long-term prospects. Many companies had shaky business models and no profits - and Wall Street fueled the boom with ceaseless hype.
  • Second, the hunt for profits included no exit strategy like using trailing stops, for his portfolio and DeLuca was trying to blame someone else for his losses.

What we can learn from a $190 million mistake? There are a couple of key things that any investor can do to protect and grow a portfolio.

  • Keep your losses small by using an exit strategy such as a trailing stop.
  • Take responsibility for all your investing decisions.

But while these concepts sound simple, they’re tough to consistently execute. Just ask Fred DeLuca. However there are ways to make sure these actions show up in your investing.

Stop That Loss! Trailing Stop Strategies Never Fail

If it seems like we mention the importance of employing trailing stops or stop-losses on all your positions a lot, the reason is simple: This strategy works.

And don’t be fooled by the current market climate. Even as stocks are making more new highs, investor euphoria and complacency are at very high levels. Hardly surprising, considering that the market is in the middle of its longest sustained run (a bull move without any 10% pullbacks) since the 1920s!

So if you don’t think trailing stops are worth it right now, this is exactly the same sentiment that existed when DeLuca lost his $190 million. He (and many others) thought the market could only go in one direction - up. And as a result, he was very aggressive with his capital. But he paid a huge price when the market proved, as it inevitably does, that it goes down as well as up.

The bottom line: Don’t let market euphoria cloud your thinking. Make sure you have exit and trailing stop strategies in place for all your positions.

An Overlooked Characteristic Of Successful Investors: Taking Responsibility

Fred DeLuca is an extremely successful businessman. I’m sure that in the business world, he knows how to take responsibility for his actions, or he would not have achieved the success that he has. But in the investment world, he tried to blame his broker for his $190 million loss. Not a good idea.

My good friend and author, Dr. Van K. Tharp, constantly reminds investors of the key concept of taking full responsibility for their own investing results. And the reasoning is very straightforward. If you blame someone or something else for your trading results, you lose sight of what went wrong in the first place and doom yourself to making the same mistakes again.

The bottom line: Nobody cares more about your money than you! If you lose on an investment, figure out why and take full responsibility for the results, even if you use newsletters or a financial advisor. And don’t forget to implement a few trailing stops strategies for all of your portfolio positions.

Great trading,

D. R. Barton, Jr.

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Today’s Smart Profits Action Center

  • A Trailing Stop is a stop-loss set above or below depending on what the current price is as the price fluctuates. For a long position, a trailing stop would be set below the current price and would rise as the price advances. As long as the price remains above the trailing stop, the position is held; should the price fall and reach the trailing stop, then the stop-loss would be triggered and the position closed. For more helpful tips like this, check out the Smart Profits Glossary.
  • Think $190 million is a big loss? Spare a thought for investors of bonds backed by U.S. sub-prime mortgages. In a report released on Monday, Credit Suisse Group says total losses could hit $52 billion, due to the rapidly increasing number of foreclosures and delinquencies. In fact, first-quarter figures show that borrowers defaulted on sub-prime mortgages at the fastest rate since 2002.

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The Chart Of The Week

The British Pound has made new 20+ year highs versus the dollar. While this is impressive, the manner in which it was done is even more impressive. Notice how the new highs were made in a quiet, defined, almost measured march up through June…

British Pound 20 year high vs. the dollar

This is a very efficient price rise, as you can see by the drop in volatility (as measured by Average True Range) during this period. This bodes well for the pound and poorly for the dollar. Such efficient moves are usually followed by continued strength.

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Global Agriculture

July 11, 2007

The Smart Profits Report: Issue #428
Monday, June 11, 2007

Global Agriculture: Key Factors That Could Spark An Agri-Business Investing Boom
By Mark Whistler
Small-Caps Specialist, Mt. Vernon Research

Time to talk turkey… literally.

In America, most of us are pretty spoiled when it comes to our bellies. We live in a wealthy country where we don’t have to worry about having enough food. In addition to the regular supermarkets and farmer’s markets, we also have specialty stores that offer a plethora of organic and natural foods.

Nothing to be concerned about, right? Not exactly.

While we sit and munch away on our nachos and fruit, there are some global agriculture developments taking place that are posing an increasingly serious risk to our food production.

But as we’ve talked about in previous messages with regard to water and uranium, if there’s one thing a supply-demand crunch brings, it’s profitable investment opportunities. Let’s take a look at the situation…

A Small Number With Big Consequences

On Thursday, political leaders from the world’s most powerful "G8" countries agreed on a deal that pledges "substantial" cuts in greenhouse gas emissions in an effort to arrest the negative effects of climate change. Specifically, it targeted a 50% cut by 2050.

This is just as well, because over the past century, the world’s temperature has risen by 0.74 degrees, according to the United Nations.

While that doesn’t sound like a big deal, it’s enough to trigger some pretty serious events…

  • For example, Greenland’s massive ice cap, covering 624,000 cubic miles and accounting for one-tenth of the world’s fresh water supplies, is melting much faster than expected. Not surprising, considering that winter temperatures on the cap have risen by 9 degrees Fahrenheit over the past 15 years. Over the past 30 years, the cap’s "melt zone" has swelled by 30%. That’s significant, because the more it melts, the faster the ice sheet slides towards the ocean. Considering that Greenland has enough ice to raise sea levels by 23 feet, if it melted completely, major cities like New York and London would flood.

  • According to the United Nations’ "Global Outlook for Ice and Snow" report, if world sea levels were to rise just 3ft, 3in, it could cost $950 billion in damage and expose 145 million people to floods.

  • Right now, however, higher temperatures are causing some crippling droughts in many parts of the world and have lowered crop yields for farmers. In fact, global agriculture of wheat production has slumped to a 25-year low, due in part to climate changes.

So how is the world going to get fed?

Never Mind Feeding The 5,000… How About Feeding 1.3 Billion?

With 1.3 billion mouths to feed, it’s no surprise that China needs its agricultural output to perform at high capacity. But according to the United States Department of Agriculture’s (USDA) recent "Commodity Intelligence Report," the 2006-2007 winter was the second-warmest on record. And now, "the warm temperatures and seasonal dryness has resulted in light to moderate drought in many areas of the country." Droughts are about as friendly as Darth Vader when it comes to producing massive crop yields.

Switching to Europe, the USDA report also stated, "Widespread spring dryness developed over much of Europe, stressing crops." Overall, wheat production in Europe this year is expected to be 2.1 million tons below the 5-year average.

But here’s where the story takes a twist…

According to the United States Census Bureau, there are just over six billion people on the planet right now. And in continents like Africa, there are already millions of people starving. But by 2020, there will be three billion more people in the world. That means we’re essentially going to have to figure out how to boost global agriculture production by 50% over the next 13 years, just to meet the population growth of the world.

That’s a major red flag… but a major red alert for investors, too. You see, what we’re talking about here is a "perfect storm" for higher global agriculture prices.

Let’s dig a bit deeper into the story and take a look at the profit-triggering trends…

Hedging The Harvest: The Global Agriculture Equation

With climate changes contributing to food shortages, it’s only logical that global agriculture prices are going to rise as a result. That could begin to change the approach that many agriculture companies take to commodity hedging. And it’s something that could potentially increase net income at the same time.

For example, let’s take a look at Bunge (NYSE: BG), a worldwide leader in "agri-business" in over 32 countries. The company produces fertilizer, animal feed, oilseeds and grains, consumer food products, and milled wheat and corn for commercial food processors.

As you can see from the company’s 46% year-over-year surge in first-quarter sales, lower supply and higher prices is already beginning to have an impact. Okay, now for the bad news: The company took a massive hit, too. Net income slumped 76% during the quarter.

How is this possible, given the rosy picture I just painted? It’s because the loss actually had little to do with the company’s global agriculture output; it mostly occurred because of pretty ugly unrealized market-to-market losses on hedged commodity inventories in South America.

This basically means that the futures prices of agricultural commodities increased by more than current prices. In other words, farmers sold the actual crops for less than where the futures were trading, because Wall Street has priced in an expected future demand spike for commodities like corn-based ethanol. This turned Bunge’s commodity-hedging strategy into a disaster.

But farmers in South America who actually sell crops don’t operate on the same level as Wall Street, and probably don’t care anyway. We’re talking about farmers who just want to sell their crops, not become futures traders or industry analysts.

And because of this disconnect, Bunge got burned - and it provides a valuable lesson in commodity hedging versus simply trading on the real "cash price" of crops…

Fields Of Gold

When the gold market turned particularly unpredictable a few years ago, many gold companies decided to hedge their production in an attempt to protect themselves against volatile prices.

Over the past few years, though, we’ve seen a shift in the opposite direction, as more producers have begun moving away from hedging. Their reasoning is that futures prices can often be even more erratic than the actual spot price of gold itself.

The same theory applies in the global agriculture sector. And given Bunge’s recent hedging horror show and consequent earnings massacre, agri-businesses might start following the example of gold producers, and hedging less in the coming years.

And, if global agricultural prices do continue to climb, a move away from commodity hedging by agri-businesses could actually bolster bottom lines.

And speaking of the bottom line… as the global population grows, it will result in higher global agricultural demand and higher prices. This, coupled with a possible move away from commodity hedging, could create strong momentum for many agri-business stocks - and investors could reap the rewards in their portfolios.

Good investing,

Mark Whistler

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Today’s Smart Profits Action Center

  • Feeding off the white-hot ethanol industry, the corn market is a perfect example of what can happen to agriculture prices when a trend takes hold. In September 2006, the price per bushel was $2.70. By the end of February, however, it had soared to around $4.60. But as farmers have planted more corn to take advantage, the result is a drop in price to $3.82 today - and some analysts fear the corn glut has sparked shortages in wheat and soybeans.

  • The latest figures from the Food and Agriculture Organization show that global expenditures on imported food will race past $400 billion this year - 5% higher than in 2006. Poorer developing nations face a 9% hike, putting them under increased strain. Driving the gain is an increase in grain imports. And because international freight rates have risen to new highs recently, the import value of commodities is climbing even higher. The bill for grains and vegetable oils is forecast to rise 13% this year from 2006.

  • With the global population rising, the earth getting warmer and droughts crippling many parts of the world, farmers are finding it increasingly difficult to produce enough food. This could be the next big commodity supply-demand crunch - and the Xcelerated Profits Report team is already on the commodities story. The editors have already handed readers gains of 20% and 16% (with 32% downside protection) in water and uranium - two other commodities facing severe supply-demand issues. For more details on how you can profit from the most lucrative economic trends, please follow this link.

Related Articles:

  • Corn Commodity: Cashing In With Sales Up 170% On The Government’s Best-Laid Ethanol Plan
  • The Water Industry: Water Wars Begin On The World’s Most Precious Resource
  • Commodities: How to Create Your Own "Mini Hedge Fund"

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10-Year Treasury Bonds

July 6, 2007

The Smart Profits Report: Issue #436
Friday, July 6, 2007

10-Year Treasury Bonds: Bond Yields March Higher As Fed Shoots Itself In The FootBy Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research

I’m not a big believer in government statistics. There are two reasons why… First, I suspect the numbers can be fudged and finagled. Second, have you ever noticed how many times the economic numbers are constantly being revised? Truth be told, I trust my own eyes more than government figures.

I’ll give you a prime example: The Federal Reserve’s interest rate decisions. I find it pretty laughable that so many very smart people waste time painstakingly analyzing every word, comma and syllable in the Fed’s monetary policy statements.

Now don’t get me wrong… Fed policy is obviously an important factor in the direction of the markets. But markets are powerful beasts and I listen to what they tell me more than the Fed. And 10-year Treasury bonds are telling me something pretty interesting right now…

The Fed Stands Still…

Up to now, the Fed has pretty much indicated that interest rates aren’t going anywhere anytime soon. For a year, the Fed bankers have concerned themselves with inflation in the face of rising oil, food and energy prices, but haven’t seen the need to lift interest rates to offset those pressures.

But as the financial markets have slowly come to terms with the Fed’s stance, Bloomberg wonders, “… if the Fed hasn’t shot itself in the foot by harping on inflation risks, even as actual inflation has decelerated and the housing headwinds refuse to abate.”

And while the Fed stands still, 10-year Treasury bond yields look to be headed higher…

10-Year Treasury Bonds Climb The Hill

Earlier yesterday, the yield on the 10-year Treasury bond climbed back to 5.14% from Tuesday’s 5.04% reading, amid bond investors’ expectations that the Labor Department’s June job report, released tomorrow, will reveal a stout rise in payrolls. This number means the 10-year bond is up about 40 basis points on the year - and just a few weeks ago, the figure hit a five-year high of 5.30%.

But rather than blindly trust what the government spits out at us, let’s talk technical…

Take a look at the following chart, showing the 10-year Treasury bond yield.

10-Year Treasury Bond Cup-&-Handle Pattern

From a technical perspective, the chart of the 10-year Treasury bond yield looks to be carving out a cup-and-handle pattern. No, this has nothing to do with afternoon tea in England… but rather, a pattern where the price of the yield rises, then falls and creates a rounded base, then rises again to form a smaller base near the top.

Once it breaks out of that second base, prices tend to move sharply higher. And we’re currently in the second basing phase. If the pattern completes itself, the yield on the 10-year Treasury bond should rise to at least 6%.

Prepare For Higher Rates

If that happens, Bloomberg may well be correct when it asserts that the Fed might have “shot itself in the foot” with interest rates. If 10-year Treasury bond yields do march higher and the market decides to head lower, that would get my contrarian juices flowing. After all, I trust what I’m seeing with my own eyes more than the government’s data, which will just have to be revised next month anyway.

Stay tuned… we might get some pretty good contrarian moneymaking opportunities from this soon.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

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Today’s Smart Profits Action Center

  • Bond yields aren’t just rising in the U.S. - the trend is global. In the U.K., the equivalent 10-year bond has jumped from 4.75% to 5.5%. Germany’s 10-year bond yield has spiked from 3.90% to 4.70%. And in Japan, where interest rates are at rock-bottom, a long-term government bond is currently yielding 2%. And while you might think this depends largely on what the respective central banks do, don’t forget that higher economic growth is also pushing yields higher, as businesses and governments spend more on expansion and infrastructure improvements.
  • Bond yields aren’t the only thing that’s rising… the investment success rate for the Xcelerated Profits Report keeps climbing, too. The team is already rolling along with a 90% win rate on its recommendations - and just this morning, technical analyst Jim Stanton added to it by cashing out on some call options in a major oil company for a 45% return… in just over two months. To find out how you can bag similar profits for yourself - and win on 80% of your trades… guaranteed - visit this link.

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July 3rd

July 3, 2007

The Smart Profits Report: Issue #435
Tuesday, July 3, 2007

July 3rd: A Great Day To Own Stocks & The Story Behind The Stats
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

The stock market rose again today - and it’s no fluke.

According to the Stock Trader’s Almanac, July 3 is actually a great day to own stocks in the U.S. market. From 1954 until 2004, the stock market (as represented by the S&P 500) made gains on 66.7% of the July thirds. Even more impressively, from 1984 until 2004, the stock market rose on 76.2% of all the July thirds.

So, armed with this data, should you run out and look for calendar dates where there is a statistical tendency for the market to be up (or down)? The answer is: It depends. You have to look at the issues behind the data. Here’s why…

July 3rd… And The Statistics Behind It

You don’t want bet too heavily on data that are on shaky statistical ground. And you really don’t want to invest, based on ideas that have little or not fundamental or theoretical basis for the behavior. Let me show you what I mean by dealing with the statistical issue…

Over a 21-year period (1984-2004), stocks rose on 76.2% of all July 3rds. Sounds great, doesn’t it? But if we analyze at the data, it becomes much less compelling.

For a start, any time someone states a long period of time (like 21 years), it sounds like a long and impressive track record of success. But remember… we’re only looking at one day in each of those years!

And because the stock market is only open five days a week (because of weekends), we’re now really only talking about a tendency that happened on 15 data points spread out of 21 years! So while the statistic might sound interesting, it’s not significant (for clarity, the period between 1954 and 2004 had about 37 tradeable July 3rds, so that becomes more interesting, statistically).

The Beliefs Behind The Statistics

It’s pretty easy to make a case that stocks rising on July 3 makes sense. It’s the day before a major U.S. holiday. But the fact that markets rise because of a general positive attitude among investors is not a new idea, and researchers have already pored through some useful data to show that markets have a general tendency to rise before holidays for this very reason.

So betting on a July 3 rise has some merit in the end. But what about other days that have a higher tendency to go up, based on previous years?

Take October 3, for example. Between 1954 and 2004, stocks rose on October 3 in 70.6% of the cases.

There is no real reason why October 3 should be a great date for stocks. So should you buy large positions for that trading day? Probably not. With no underlying reason to support the data, it would not be prudent to invest based on this one analysis. It was by chance that it was much better than average from 1954 to 2004.

Invest On A Solid Foundation, Not Statistical 50/50s

If you analyze data for hundreds of data points (like days of the year), we would expect a bell-shaped curve in the results. Most of the days would be clustered around a 50/50 chance of the market rising or falling, and the rest would be distributed around that mean (or average value).

However, a few would be distributed pretty far away from that average value just by chance. So while putting statistics and underlying fundamentals together can sometimes give you a useful edge in the markets, just make sure that your investments are first built on a sound foundation.

Great trading,

D. R. Barton, Jr.

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Today’s Smart Profits Action Center

  • Today was another good day for shareholders, extending the successful track record of the July 3 date. The Dow, Nasdaq and S&P 500 tacked on 41.87 points, 12.65 points and 5.44 points respectively at the early close (1:00 PM)
  • In addition to the traditionally positive pre-July 4 mood, investors also took heart today from a better-than-expected factory report and a still-sizzling M&A market. The Commerce Department said U.S. factory orders in May declined by just 0.5%, compared with estimates that called for a 1% drop. Meanwhile, Kraft Foods tabled a $7.2 billion bid to buy French counterpart Groupe Danone and Teck Cominco, a Canadian mining firm, offered C$4.1 billion ($3.8 billion) for its fellow north-of-the-border miner Aur Resources.
  • But beware… while the third quarter has started strongly for stocks, the days following July 4 are usually negative, as volume rises and investors take gains. In addition, the CBOE Volatility Index (^VIX) has risen from a June low of 12.43 to 14.91, indicating that investors are more concerned about the market falling.

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The Chart Of The Week

While the U.S. markets continue to battle below their June highs, emerging markets are still rocking. Represented by the iShares MSCI Emerging Markets ETF (NYSE: EEM) shown in the bottom graph below, you can see that emerging markets are still making new all-time highs. But beware… emerging markets also fall faster than the U.S. indexes…

Emerging markets at all-time highs

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