Investment Strategy
December 28, 2007
The Smart Profits Report: Issue #484
Friday, December 28, 2007
Investment Strategy: The Exit Strategy That Nets Big Winners And Reduces Risk
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
Ask anyone why they invest and the most obvious response you’re likely to get back is, “Because I want to make money.” After all, that’s why you’re in the game, right?
And if you’ve ever experienced the joy of scoring a two, three, or even a ten-bagger win from a constantly unpredictable stock market, you’ll know there’s nothing quite like it. Watching your $4 stock rise to $40 is not only exhilarating, but it also validates your investment thesis and strategy.
Today, I’m going to send you into the New Year by showing you a simple investment strategy that allows you to reduce your exposure to a volatile market and lock in gains.
How To Make Money With An Investment Strategy
With an ever-increasing number of people investing in the stock market these days, it’s no surprise to see book titles and TV shows called “Mad Money” and “Fast Money.” While the premise is good, virtually no stock goes straight up. That’s why it’s crucial to employ sound risk management strategies (such as selling covered calls and using stop-losses - topics we’ve covered extensively in this column before), so you have the fortitude to ride out the pullbacks that will invariably occur along the way.
In addition to that, sometimes you just have to know when to take the money and run. After all, what’s the point of investing if you don’t have an investment exit strategy?
I’ve got a tried-and-tested method that helped Xcelerated Profits Report subscribers stuff a 99% pre-Christmas profit into their trading accounts two weeks ago. Not only that, they’re still participating in the upside of the stock.
I don’t say this to brag, but because I want to share with you the simple investment strategy that made it happen - and which has proved invaluable to me over the years…
What Would You Do If Your Stock Doubled?
At the height of the dot com boom, I was living in San Francisco - the epicenter for new technologies, new companies and new wealth. I did pretty well investing in companies like Adobe Systems (Nasdaq: ADBE) and Polycom (Nasdaq: PLCM) - firms that escaped the inferno and lived to tell the tale to this day
Back then, I set my sights set on a little San Francisco-based Internet broadcaster called Quokka. The company had an exclusive deal with the 2000 Olympic Games to broadcast various events on the web. I bought the stock for around $7 - and did so purely on the promise of the hype at the time. I didn’t actually think the company had a great business and wondered just how it was going to make money (I didn’t think too many folks would watch Olympic kayaking at dial-up speed).
I merely figured that once the Olympics came around, the media buzz around the company would be such that the stock would rocket higher and I’d get out. I wasn’t trying to be Warren Buffett here; I just wanted to ring the register and get out. My theory was proven correct - and ahead of time, too. The stock started moving well before the Olympics. When it hit $15, I suggested to my wife that we should sell it.
“But what if it keeps going and hits $30 or $40?” she asked. “That would be enough for a down-payment on a house.” I didn’t feel comfortable. “Why don’t we just sell half? That way, we’ll be playing with someone else’s money,” I responded.
Although, I was the investment “expert” in the family, I conceded and held the entire investment. One thing I’ve learned over the years is that no matter the topic, the Mrs. is usually right! Except this time, she wasn’t…
Learning From The DotCom Boom To DotCom Bust
At first, the stock began to slide. Then, when the dot com demon ravaged the sector, the stock plummeted. Eventually, it became worthless and the company closed its doors.
After that, I vowed that if one of my stocks ever doubles, I’ll either sell half and get my original investment back, or put a stop at that 100% mark, ensuring that I won’t lose money.
And let me tell you, this investment strategy works. Plain and simple. Not only does it help you grab big gains at the time, but it also helps you capture even larger gains. That’s because when you’re not worried about losing money, you’re more inclined to let your winners run. Fear is no longer a controlling emotion.
Eliminate Fear & Greed With One Successful Investment Strategy
True to my investment strategy, I suggested selling half the position of my XPR pick BioMarin (Nasdaq: BMRN), meaning we’d take our original investment off the table and play with the house’s money (I didn’t recommend a stop because biotech is very volatile and stops won’t always get you out at your desired price).
When BioMarin finally sealed full FDA approval for a new drug and saw it priced 100% higher than expected, the stock surged 22% on December 14 (from $29.76 to $36.44). Xcelerated Profits Report subscribers were already enjoying healthy gains from the position, considering we got in at $18.29 on July 23. But this move immediately resulted in a 99% gain.
The beauty of doing this investment strategy is that we can now let BioMarin shares continue to rise over the next few years, without agonizing over every down tick. That’s because with no risk to our original investment capital, it’s much easier to ride out any forthcoming storms.
And that’s the key to having a successful investment strategy: Limiting your losses and letting your winners run. Sounds simple, I know. But you’d be surprised how many people let fear and greed control their decision-making process.
But after doubling your money in a particular investment, this simple investment strategy allows you to take risk out of the equation and let your winners run to some spectacular gains. Add it to your investment arsenal in the New Year.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- Will you enjoy investment success in the New Year? You can ensure that the answer to that question is a resounding “yes” by following the profitable recommendations in the Xcelerated Profits Report. In addition to the 99% win on BioMarin in 2007, we’ve also notched up 118% on Immersion, 79% on Color Kinetics when the company was acquired by Royal Philips, plus other gains of 69%, 55% and 45%. And we’re rolling into 2008 with plenty more. Kick off the New Year in style and find out for yourself how to score similar gains for the low subscription price of just $49.50 a year! Click this link to continue for more details.
- BioMarin (Nasdaq: BMRN) isn’t the only recommendation where the Xcelerated Profits Report team has advised taking half the position off the table for outstanding gains. In February, we employed the same investment strategy on fast-growing technology firm Immersion (Nasdaq: IMMR). Having sold two sets of covered calls against the original stock position, we lowered our cost to $6.32. When the firm finally won its drawn-out patent infringement lawsuit against Sony, the stock took off. With 118% gains in the bag, Investment Director Karim Rahemtulla sold half the position. To this day, we’re still riding the second half - with the house’s money - and are up 110%.
- With another New Year just days away, this is time when millions of people start making resolutions to improve their health, finances, or some other kind of self-improvement. Beat them to the punch today and set yourself up for a profitable New Year by brushing up on some of the professional investment strategies that will help you become a richer, more successful investor. We’ve got a ton of them in our Smart Profits Report archives - and they’re available to you for no cost. Check them out here.
Forget About Pipe-Dream Drugs And Someday FDA Approvals… Here’s How A Medical Breakthrough Could Double Your Money In The Next 99 Days
This one is already real… a Silicon Valley company that already has its radically new breakthrough cancer treatment on the market on a global scale. The company has no debt, $200 million cash and more than a half-billion dollars in back orders. Take a look and see if you don’t agree that this stock is one of the year’s most significantly under-valued gems. Find out more now
Related Articles:
- Exit Strategies: Prenuptial Agreements for Options
- Greed & Fear: Gauge The Fear And Greed Factor To Boost Your Investment Success
- Trailing Stop Strategies: How To Avoid A $190 Million Portfolio Mistake
LEAP Options
December 21, 2007
The Smart Profits Report: Issue #483
Friday, December 21, 2007
LEAP Options: The Pro Strategy That Provides Protection And 177% Profits
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
The stock market historically performs pretty well in the runup to the holidays - giving investors the so-called “Santa Claus Rally” that you may have heard the financial media yapping about recently.
The pundits ask each other whether we’ll get one… but none of them seem to have much idea. They just excitedly blurt out “yes,” but don’t actually back it up with any firm evidence. One thing is certain, however: Santa Claus is nowhere to be found this year and the market is not cooperating with investors. In fact, rather than enter the holidays in good spirits, it’s being rather stingy.
We’ve laid out several reasons for the downturn in this column over the past few weeks and given you tips on how to handle it - direct from our team of pros. Today, I’m going to give you another professional way to stay invested, even when others are bailing out, by using LEAP options - a tactic that gives you three great benefits: Time, Protection, and Profits.
When the stock market takes a turn for the worse, most investors hitch up the wagon and pile out of Dodge as fast as they can (with the immortal words of the so-called TV experts ringing in their ears as they go). But I’ve got another solution: Stay invested and preserve your capital. Sounds like an oxymoron, right? It’s not.
For almost a decade now, I’ve beaten the drum for one particular investment strategy that is basically a proxy for owning stocks. It’s powerful. It’s protective. And above all, it’s profitable. Welcome to the world of LEAP options…
LEAP Options - Powerful, Protective And Profitable
Most people still consider options a short-term, speculative tool that is way too risky. Don’t fall for the stereotype - this could not be farther from the truth.
LEAP options are long-term options that expire in one, two, even three years from date of issue. And they give you benefits that most regular stockholders don’t get:
- You get to own a stock at a discount price.
- You get all the upside - even more on a percentage basis.
- You have much less capital at risk.
So how does this work in reality? Glad you asked…
Let’s apply those benefits to the current mess in the financial sector. And I’ll start by going on record: The mess will pass. And if you’re brave enough to invest when “blood is running on Wall Street,” you’ll be amply rewarded in a year or two - just enough time to adopt a LEAP option strategy.
Here’s how it could work…
You’ve Got Two Choices: 51% Or 177%?
Consider a portfolio of five beaten-down financials (you don’t have to look very far to find them these days!) According to my calculations if you were to simply buy 1,000 shares of each, your outlay would be about $225,000, based on current prices.
That’s a lot of dough. So before I go any further, let’s make a few assumptions:
- You don’t have $225,000 to spend on 5,000 financial sector shares.
- Each stock will revisit its 2007 high price before January 2010.
- You employ a 20% stop-loss from current levels.
But here’s how that scenario would work if you ditch the straight stock approach and go for LEAP options instead…
- You Significantly Reduce Your Cost From The Start: A portfolio of at-the-money LEAP options (those whose strike price is closest to the current price of the underlying shares) would cost you about 20% of the amount invested if you wanted to control 1,000 shares of each company. In total, about $45,000.
- You Turn A Great Profit: If you just invested in the stocks outright, the portfolio would be worth about $340,000 at the 2007 highs - a fat profit of $115,000 (51%).
Using A LEAP Options Proxy Portfolio
But using a LEAP options proxy portfolio, the gain would be about $80,000, turning that $45,000 investment into $125,000 - a 177% net profit ($125,000 minus $45,000), but with only $45,000 at risk.
And if you employed a 20% stop-loss on your stock portfolio, the loss on your investment when you actually bought the shares would be more than the actual funds you had at risk for your entire LEAP portfolio.
With the LEAP options portfolio, the most cash you have at risk in a worst-case scenario is still limited to the initial $45,000. But what if the financial sector recovery were to occur quicker than expected?
In this case, your gains could actually be much higher, thanks to the value of money and the amount of time left until expiration.
Even better, my assumption is based on you cashing out at options expiration, not before. But in most cases, the cash-out would occur long before expiration by selling the very same LEAP options that you purchased.
And you’ll walk away with gains that simple stock investors can only dream about.
Karim Rahemtulla
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Today’s Smart Profits Action Center
- That’s the theory, but how about the practice - and the real profits? You got it. How about 133% on Tenet Healthcare January 2010 $5 calls? Or 93% on a bull spread trade on Freeport January 2009 $60 calls and $70 calls? (Read more about this trade in Smart Profits #467, Spread Trading: Lower Your Cost And Hedge Your Risk In One Profitable Bull Spread Trade).These are just a couple of the real-life profits that my LEAPS Trader members have pocketed this year. Find out how you can join them by giving our friendly VIP Trading Services folks a call - they’ll tell you everything you need to know about how to buy quality companies for very low prices and profit from very small moves in the underlying stocks. Make money in the long run with LEAPS Trader. Call 888.570.9830 (inside the U.S.), or 410.454.0498 (from overseas).
- The common denominator with all options strategies is leverage. It’s clear that many of our subscribers are either unaware of this concept completely, or don’t understand how to incorporate it into their investment strategy. Simply put, options offer this leverage investment. After all, if you can control 1,000 shares of a stock for a dollar a share, why pay $50 a share? The problem is trying to figure out which strategy is right for you. Find out more in Smart Profits #382, Leverage Investments: How To Use Options Delta To Vanquish Volatility.
- For all the options terminology definitions you need like “LEAPS” and “bull spread” mentioned above - check out our Smart Profits Glossary.
Related Articles:
- LEAPS Options: Making 30% While Others Make 3% On the SAME Stock
- LEAP Options: The Intel Bargain & A Potential 566% Return
- Time Value: With Options You Need To Be Right On Time
Investment Research
December 19, 2007
The Smart Profits Report: Issue #482
Wednesday, December 19, 2007
Investment Research: How To Avoid Getting Burned By The Analyst & Banker Tag-Team
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
It’s one of the biggest fudge jobs on Wall Street - and you owe it to yourself to know how the game is played, so you don’t become an innocent victim.
I’m talking about basic investment research. Most investors take it for granted and assume the source is credible and trustworthy, because of the big names involved.
But beware the tainted research. Over the past several months, I’ve had conversations with the research directors of several investment “boutiques.” These companies offer a wide variety of services, including investment banking, institutional trading, retail brokerage and investment research.
But it’s not as innocent as it seems. Let me explain…
Banking Drives Investment Research, So Be Careful Who You Listen To
From my conversations, one thing has become alarmingly clear: Despite the Securities and Exchange Commission’s best efforts, the supposed Chinese Wall between research and banking is about as strong as a tin shack in a hurricane.
I was told in no uncertain terms that banking drives investment research. Sure, while analysts are under no obligation to slap “Buy” ratings on stocks, the purpose of initiating coverage on a company is to drive banking revenue.
Think about that. Of course, one could argue that a research house would only want to do banking with a company that has good prospects in order to justify the buy ratings.
Yeah, right. If you believe that, I’ve got some swampland in Florida that I’d like to sell you (I’m serious. My house sits on a wetland preserve and is for sale. Plus, the Florida real estate market is dreadful. But that’s another column).
Let’s see how the game is played…
“Analyst” By Name… But Not Necessarily By Nature
Here’s what happens:
- The retail brokers at these investment research firms call their customers (you could be one of them) to tell them how much their sacred analysts like the stock.
- When Mr. and Mrs. Smith rush out to buy the stock on the brokers’ recommendation, liquidity increases and the stock is more attractive to institutional clients.
- Or, the institutions that may have provided funding to the company can now exit their position thanks to that increased liquidity.
Why so sneaky? One reason is that the business model of investment research has changed. Wall Street firms can no longer make a living simply selling research - hence the focus on investment banking.
Sure, big boys like Merrill Lynch (NYSE: MER) or Goldman Sachs (NYSE: GS) may still generate some revenue from institutions who want access to their investment research, but investment banking is what pays the bills at the large organizations, as well as the smaller outfits.
This doesn’t mean nobody challenges the way this business works. When the dot com sector blew up, there was considerable outrage that analysts didn’t always believe what they published and were simply selling out (to benefit both themselves and their firms).
But trying to get them to be a little more honest is a bit like trying to stop a runaway train. I’m confident that coverage of most stocks today continues to be based on current or potential banking fees.
The question is: Why should you care?
Beware The Investment Research & Banking Bias
Unless you’re getting investment research from a truly independent source - i.e. one with no banking or other financial interests - you could very well be reading a report that is biased due to conflicts of interest.
And if you act on that information… well, the last thing you want to do is base your investment decisions on research that was written not to educate readers about unique investment ideas, but to accommodate investment banking clients and their fat fees.
When I worked in the sell-side analyst world, I received my training from some of the best investment research guys in the business and worked for one of the truly independent firms.
After I left, I had several opportunities to return to the field. But the idea of letting my hard-earned skills whither and decay in order to shill for banking was not my idea of honorable.
Investment Research That’s Independent, Informative & Profitable
That’s why I enjoy writing for you here in the Smart Profits Report and for our premium content, the Xcelerated Profits Report. When I joined the team back in the summer, Investment Director Karim Rahemtulla gave me one simple missive: “Find the most profitable investments and information for our subscribers.” Period. End of discussion.
So next time you’re watching the business news, or reading a story online, keep this in mind: The analysts you see, or whose quotes you read may have the ability to stir the investment herd into a buying or selling action… but it doesn’t mean you have to listen to them. More often than not, it’s a knee-jerk reaction with a short-lived effect.
Bottom line: No matter where you get your investment research and information from, ensure that it’s truly independent and doesn’t use you to achieve financial goals for someone else. If it doesn’t make you money, or protect your wealth, be careful.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- It didn’t take Marc long to find the most profitable investments and information for our subscribers. Last Friday, he instructed Xcelerated Profits Report subscribers to sell half their position in the first company he recommended for a 99% gain. And in the January forecast issue, due out later this week, he gives his prediction for the five hottest biotech areas in 2008 - and the companies set to profit. Get more details here.
- One click to worry-free investment education. The “Information Age” has become so vast today that it’s often a minefield trying to separate the valuable information from the drivel. So give yourself a break and take a look through our extensive Smart Profits Report archives this holiday season. We’ve got no ulterior motives, we answer to nobody, and have filtered out the fluff. What’s more, our 2007 Archives are packed full of some of the best investment education you’ll find anywhere.
- One of the most reliable sources of information comes from watching insider buying trends. Nobody knows more about a company than its own executives and directors (certainly not analysts and media pundits), so pay close attention to what they’re doing. If they’re buying shares, it’s a strong sign of confidence, as they’re hardly likely to toss their money away on a losing stock. On the other hand, if insiders are bailing out of a stock for reasons other than planned sales or profit-taking, they could be fearful of bad news that the broader market doesn’t know about. You find a company’s insider buying information easily on its stock’s Yahoo! Finance page.
Related Articles:
- Contrarian Investing: The Best Investment Strategy You Should Use Today
- How To Effectively Handle Any Broker: Secrets to Getting Started In Options
- The Search for a Good Broker: Five Tip-Offs Your Broker’s A Fraud
Weak U.S. Dollar
December 14, 2007
The Smart Profits Report: Issue #481
Friday, December 14, 2007
The Weak U.S. Dollar: How To Combat The U.S. Dollar’s Demise Through Global ETFs
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Interest rate decisions sure can be entertaining, can’t they?
Of course, that entirely depends on your definition of “entertaining.” Many investors greeted the Fed’s latest interest rate cut with the one-fingered salute. Having hummed along pretty well throughout Tuesday, the stock indexes promptly sold off en masse after the announcement.
Sure, problems like weakening economic growth, a struggling real estate market, a weak U.S. dollar, sluggish retail sales this holiday season, and the biggie - a wholesale credit shortage - heightened the clamor for another interest rate cut. And Fed rhetoric all-but assured the market that it would oblige.
But while all this Fed chopping might jam enough liquidity into the markets to prop them up for a while, it doesn’t bode well for Americans’ standard of living. And it’s creating a much larger worldwide macroeconomic problem that you need to know about in order to protect your wealth and be in the best position to profit…
The Weak U.S. Dollar Threatens National Sovereignty
A few months ago, I told my Xcelerated Profits Report readers that the U.S. “is in the process of badly debasing the dollar” and that the country will continue to lose any sense of “sovereignty” as long as the trend persisted.
Well, it’s happening.
- The Fed cuts have stomped all over the dollar. And I’ve got news for you: The debasing is going to accelerate.
- The euro, British pound, Canadian dollar, the Australian and New Zealand dollars, and the Indian Rupee have all notched up either multi-year or all-time highs against the sad U.S. dollar this year.
- With the dollar rapidly losing value, the U.S. is essentially “on sale.” If you don’t believe me, consider that through the first nine months of 2007, the value of U.S. corporate acquisitions from overseas firms hit $257.4 billion, according to Thomson Financial - the highest since 2000.
Right now, cash is king - and now more than ever you need to adopt a global stance in your portfolio. The money isn’t here anymore; it’s over there.
Global Threat: The Politics Of Fear & Foreign Acquisitions
You may remember that a couple of years ago, everyone in Congress had a fit when Dubai Ports World bid for ownership of a U.S. port. All kinds of fears were raised, both founded and unfounded. But in the end, the politics of fear (and politics in general) prevailed. The offer was allowed under condition that DPW divested U.S. assets. A few months before, the Chinese were also rebuffed in a bid to buy a U.S. oil company.
My, how times have changed. Actually, strike that. How politics have not changed. Today, we face a crisis in the financial markets - but it’s more a crisis of confidence than anything else. The daily whipsawing of the stock market signals that all is not well. Worse still, the government wants to bail out every deadbeat borrower who took pleasure in trying to game the system through the subprime market.
And the Fed? It knows the situation is bad. The Treasury knows it will get worse, too. And the politicians are running scared. How do I know this?
America Is Losing Its Ownership And Control Of Its Destiny
You can see it in the open arms we’re extending to the same Middle Eastern nations that we once repelled. Of course, the argument that selling portions of Citicorp to Abu Dhabi, courting Gaddafi, or playing nice with the Chinese (who pretty much control our future as much as we control theirs) is now in our best interests.
I beg to differ. A rainstorm doesn’t just materialize. First you have a few drops that don’t send people scurrying for cover. But within a few minutes, it rains harder, before the deluge hits. And it’s not until after the storm that the damage is assessed.
Some say that what is happening may not be a global threat to U.S. security. After all, we’re so used to being a nation in debt, what does it matter whom we owe and how much?
But it does matter. Each asset we sell off results in a little bit more ownership over our markets, our currency and control over our destiny. For example:
- The Chinese now control $1.4 trillion U.S. dollars, oil rich states are now buying U.S. assets with the same money that we’re sending over to buy oil.
- Some are concerned that as long as this trend continues, their leverage increases and ours disappears.
- And that could mean American job losses and corporate spending power and influence could weaken, since foreign firms will have more control in the most lucrative sectors like technology.
So what’s the solution?
Combat The Weak U.S. Dollar & Consider Global ETFs
Unfortunately, there is no easy fix. A weak dollar makes our goods and services cheaper and other countries’ products more expensive. That means capital inflows into the U.S. will increase, our exports will increase, and our imports will slow.
You might not see much effect when you buy a few items from the corner store. But you see it at the gas pump. And if you travel, your purchasing power is greatly diminished.
Yes, the dollar will turn back up eventually because the currency market runs in cycles. But the bottom line is that it will remain weak as long as we print more money than we save. So we either reign in consumption or we become a true financial melting pot.
However, there is a simple step you can take to combat the pain until the dollar rebounds: Go global. Take a look at your portfolio’s exposure to foreign markets and currency holdings. Make sure you’re diversified in these areas.
To get you started, you could consider ETF investments like:
- iShares MSCI EAFE Index (AMEX: EFA), which tracks Europe and Asia, excluding Japan.
- iShares MSCI Asia-Pacific ex-Japan (AMEX: EPP)
- iShares MSCI Emerging Markets Index (NYSE: EEM)
Good investing,
Karim Rahemtulla
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Today’s Smart Profits Action Center
- Having already grabbed a 54% win in just less than two months on the iShares FTSE/Xinhua China 25 Index (NYSE: FXI) earlier this year, I’m hitting the foreign investment trail again to kick off 2008. Having recently spent two weeks on a research trip, examining this rapidly growing market and its potentially lucrative investments, the January Xcelerated Profits Report issue will feature my top Indian recommendation. And rest assured, this one is growing fast. Find out how you can get on board today, so you don’t miss out…
- Despite having just crossed back above its 50-day moving average, this chart shows just how far the U.S. dollar has sunk over the past 12 months. A costly war, massive budget deficit, and now a global credit contraction and slowing U.S. economy have combined to demoralize the currency, with the Federal Reserve’s recent interest rate cuts driving more nails into the coffin. For three months, the dollar has traded below the benchmark 80-point level.
- The Fed received more grim news today, with the Labor Department’s announcement that wholesale prices jumped 3.2% in November - the biggest increase in 34 years. So as the Fed cuts rates to inject liquidity into the economy, it now has to contend with a fresh bout of inflation worries. A record 34.8% surge in gasoline prices drove the bulk of the gain. But more worrying was the news that even “core” inflation (which excludes volatile energy and food prices) climbed 0.4% - double what analysts had forecast. The government released the November Consumer Price Index figures early this morning, that showed a 0.8% jump in prices - the biggest montly rise since September 2005. Former Fed Chairman Alan Greenspan said today that the odds of a recession are “clearly rising.”
Related Articles:
- Fed Interest Rates: Depressed Economy, Inflation Fears & A Weak Dollar Present Problems For Fed
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Investing In The Fear Effect
December 12, 2007
The Smart Profits Report: Issue #480
Wednesday, December 12, 2007
Investing In The Fear Effect: How To Buy Bargain Stocks When There’s Blood In The Streets
By Marc Lichtenfeld
Senior Analyst, Mt. Vernon Research
I like to call it “investing in the fear effect.”
As you may know, there are essentially two forces that move the stock market: Fear and greed. And if you truly want to be a successful investor, you need to know how to take full advantage of both of them - in particular, fear.
When everyone else is running away from stocks (or being told to by so-called experts), it can deflate some stocks much more so than necessary. This is often the best time to jump in and grab stock shares at bargain prices.
Here in Florida, a classic example of fear-driven panic made big news last week. It was the equivalent of a “bank run” by local governments throughout the state. Here’s what happened…
The Running Of The Fearful… Florida’s $13 Billion Mass Withdrawl
For local government organizations such as city governments and school districts, Florida’s $30 billion state-run investment pool is a good place to park their money. The fund is a conservative instrument that is similar to a money market fund for individual investors. It pays a higher yield than a traditional checking account yet is expected to be rock-solid safe.
However, the Palm Beach County School District received word from its financial advisors that some of the fund’s mortgage-backed securities had exposure to the subprime mess.
And that’s when the you-know-what hit the fan. Based on the information, the district quickly yanked its half a billion dollars from the fund, not wanting to risk any of the capital.
As you can imagine, this major move triggered a bout of rumors and panic, and as word quickly spread, local governments from across the state were desperately trying to get their cash back. By the time the dust settled, over $13 billion was withdrawn.
Bolt The Door To The Panic Room
The situation became so dire that the state effectively barred the doors and halted withdrawals for a week. It has since allowed withdrawls again, but with restrictions. Luckily, though, the situation has calmed down and the depositors are no longer exiting the fund en masse.
It was a fascinating set of events and proved that it’s not just British banking customers (specifically, the ones with savings in the battered Northern Rock bank), dot com investors, or real estate speculators that are susceptible to fear. In this case, it was seemingly staid government officials who had invested in a conservative vehicle. It shows what the power of panic can do in any financial market.
So what are you going to do? Panic with them? That’s a bad idea. Here’s a better one…
When The Blood Is Running, You Should Be Buying
You’ve heard the saying, “Buy when there’s blood in the streets.” That’s precisely what the best investors do. For example, renowned investor Warren Buffett recently picked up shares of Bank of America (NYSE: BAC) - even as the subprime meltdown still gripped the stock market and financial sector.
But he’s not alone. Our own Investment Director Karim Rahemtulla also made a recent gutsy call in the Xcelerated Profits Report. While everyone was busy dumping their financial sector stocks, Karim instructed subscribers to take advantage and scoop up one financial stock in particular at a deeply discounted price.
And you can see how effective the “blood in the streets” theory is: In just 11 trading days, the position is up around 6%.
Feel The Fear… Snag Some Bargains
As an investor, you not only want to buy good companies, you want to purchase the stocks at the most opportune time. But trying to predict market tops and bottoms is a fool’s game. The climate is just so unpredictable that it’s tough to know exactly when you can call them.
That’s why it’s a good idea to start nibbling in small increments. When you think emotion is at a peak, enter a half or even quarter position. You can always add more as the situation evolves.
Keeping a close track on the street’s emotions, particularly fear, should help you pick up some bargains. Over time, that’s where the real money is made.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- If you pay much attention to the financial news, you’d think the world is collapsing. The media loves to stir up a climate of fear, because it makes for great headlines and soundbytes. But you can trump them at their own game. While millions of investors blindly follow their flawed advice and run for cover like lemmings, you can use it to buy shares in rock-solid companies at bargain-basement prices. Fundamentally sound companies usually rally back once the dust settles - once the same folks who sold off buy their shares back. And if you’re looking for undervalued stocks, pay attention to valuations like the PEG ratio, which measures a stock’s Price-to-Earnings Growth. A number less than 1 means the stock is undervalued.
- When you marry discount buying, strong fundamental and technical analysis, and the professional investment strategies that will lift you above 99% of ordinary investors, you’ll be in the best possible position to take maximum profits. Take a look at how the professional traders at the Xcelerated Profits Report do this for investors. Just today, the team took gains on Wal-Mart (NYSE: WMT), the world’s largest retailer, using a professional, easy-to-execute strategy. This year, they’ve locked in profits of 100%, 79%, 65%, 55% and 45%. For more details, click here to continue.
Related Articles:
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- Greed & Fear: Gauge The Fear And Greed Factor To Boost Your Investment Success
- Bear Market Investing: Don’t Get Burned By Bears… Here’s Your Five-Point Plan
Bull Calendar Spread
December 7, 2007
The Smart Profits Report: Issue #479
Friday, December 7, 2007
The Bull Calendar Spread: How To Use This Trading Strategy To Bag 133% Now Or 4,900% Later
By Karim Rahemtulla
Investment Director, Mt. Vernon Research
Every time I turn on the television and hear some buffoon boldly (and irresponsibly) proclaiming that there’s no way you can make money in this oh-so terrible market, I don’t know whether to just laugh at him, or toss something at the set.
It’s flat out wrong.
As members of my LEAPS investment service found out on Monday, they had an enviable choice to make: Either walk away with triple-digit profits now, or shoot for the moon and go for quadruple-digit profits later using a bull calendar spread - both strategies with little to no risk.
That’s what I call a tough decision - but one that any investor would love to have. And they had it in a market where you supposedly can’t make money. Now, I’m going to show you how to do the same thing…
LEAP Options: Triple-Digit Door #1
On October 8, I instructed my subscribers to buy January 2010 $5 LEAP option calls in Company X for $1.05 (I can’t reveal the name of the company here, out of loyalty to my paying customers because the quadruple-digit part of the play is still active).
The beauty of this play is this: The company had disappointed investors too many times recently, so hardly anybody was paying attention to the recovery story going on at the time. But savvier investors willing to dig a little deeper would have seen company insiders starting to load up on shares a few weeks ago.
Despite this positive activity, shares actually declined. But about a month ago, the company released earnings that revealed the turnaround in progress. Voila! In the four weeks that followed, shares shot up 40%. Yet another example that insider-buying activity is a great indicator of a company’s prospects. After all, who knows a company better than its insiders? Certainly not demanding analysts and the fickle masses on Wall Street.
But the best part is that our options rocketed up 133% over the same four-week period. So a little under two months after we entered the position, subscribers had the chance to bag that profit last Monday and have no more involvement in the play.
But those who wanted the chance to make even more could dive through Door #2, with the potential to make quadruple-digit gains - with just a measly nickel at risk. Here’s how it works…
Feeling Bullish? Then Go For A Bull Calendar Spread
Sticking with the same company, I recommended a Bull Calendar Spread.
This is a little different from a conventional bull spread, where you’d sell an option with a higher strike price and the same expiration date against your existing option (in this case, the January 2010 $5 calls).
With a regular bull spread, our cost would be reduced by the amount we receive from the sale of the option, and the upside would be limited to the spread between the two strike prices. Here’s an example of a conventional bull spread:
- Let’s say you buy Option A - the January 2008 $5 calls for $1.
- Against this position, you sell Option B - the January 2008 $7.50 calls. That means the spread is $2.50 ($7.50 minus $5).
- For selling Option B, you receive a $0.50 premium. So your net cost is $0.50 ($1 minus $0.50).
- Your upside is limited to the spread. So you’re risking $0.50 to make $2.50. Your downside is $0.50 - you cannot lose any more than that.
Bull Calendar Spread: Quadruple-Digit Door #2
In this case, though, we executed a bull spread with a twist - the Bull Calendar Spread - giving us a shot at those quadruple-digit gains. Those who chose not to sell the January 2010 $5 call options for 133% profits did the following:
- Having paid $1.05 for them, the price had climbed to $2.45 - $1.40 in gains (133%) - we could now look at higher strike prices to see what the premiums looked like.
- Instead of looking at the January 2010 $7.50 calls, I looked at the January 2009 $7.50 calls. Lo and behold, they were trading for $1 on the bid. So we sold that option, effectively reducing our net cost to $0.05 (remember, we paid $1.05 for the January 2010 $5 calls) to make the spread of $2.50 ($7.50 minus $5).
- Bottom line: If the underlying shares of Company A close at $7.50 or higher in January 2009, we stand to pocket a few thousand percent. I’m pretty confident that we will. And our risk? A nickel.
Here’s the sweetest part: If the shares don’t close over $7.50 at expiration, but over $5, we will still be hugely profitable, since our cost now is just 5 cents.
And remember, we still have until January 2010 on our initial option. If we sold another option against that, our cost would actually be negative - meaning that we’ll actually be getting paid to make that trade. How do you like them apples, Wall Street!
So it was a simple - and great - choice for my LEAPS Trader subscribers to make. Make 133% now? Make up to 4,900% next year?
Who says there are no free rides on Wall Street?
Karim Rahemtulla
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Today’s Smart Profits Action Center
- If you’d like more information on my LEAPS Trader investment service, simply give our friendly VIP Trading Services team a call. You’ll find out how to buy quality companies for very low prices - and profit from very small moves in the underlying stocks. If you’re in the U.S., it’s a free call that could end up making you some serious money in the long run - just like subscribers have on the play I mentioned above. Here’s the number: 888.570.9830 (or 410.454.0498 if you’re calling from outside the U.S.) I’ll see you on board.
- Get the lowdown on the profit-packed potential of bull spreads by checking out one of my recent messages on how to execute the perfect Bull Spread Trade. Not only does the strategy allow you to lower the price you pay for the stock, it also allows you to hedge your risk. Get all the details…
- But what if you’re not bullish on a stock? Well, there’s a strategy for that, too. It’s called a Bear Spread and you can find out how it works…
- That’s the theory. Now put it all into practice and make some money. Actually, we’ll show you exactly what you need to do for that. Our team of professional traders at the Xcelerated Profits Report has been doing it for many years. And they’re so confident that they’ll dish profits to you - that they guarantee an 80% win rate on your trades, click here to continue for more information…
Related Articles:
- Stock Option LEAPS: Buying LEAPS Or Stocks… What You Should Do
- LEAPS Options: Making 30% While Others Make 3% On the SAME Stock
- Understanding Options Leverage: The Power of Leverage Is Bigger than You Think
Ethanol Fuel
December 5, 2007
The Smart Profits Report: Issue #478
Wednesday, December 5, 2007
Ethanol Fuel: How To Combat Rising Food Prices Due To Ethanol’s Costly Production
By Martin Denholm, Managing Editor, Mt. Vernon Research
Ethanol fuel seemed like such a good idea at the time.
In response to America’s “addiction to oil” (the U.S. spends more than $450 million every day on oil imports and 97% of the transportation system relies on oil) and rapidly increasing prices, it became imperative to beef up alternative energy sources. The U.S. Congress passed the Energy Policy Act of 2005, which called for an 87% jump in renewable fuel usage by 2012, in order to reduce U.S. oil imports 75% by 2025.
Ethanol fuel, derived from corn, immediately leapt to the front of the line, with politicians falling over themselves to offer incentives and promote growth. Because the bill calls for the production of 35 billion gallons of ethanol by 2017 and for ethanol to replace MTBE, the toxic additive in gasoline, the industry kicked into high gear. New plants popped up all over the place and fuel production surged.
As a result, ethanol stocks took off. And as the clamor grew, farmers couldn’t plant corn fast enough. Prices jumped to a record around $4.30 a bushel in June.
Ethanol Fuel Production’s Fall From Grace
Today, however, ethanol fuel has experienced a harsh fall from grace - a Cinderella-to-ugly duckling turnaround. More folks have realized how much it costs to produce ethanol - so costly, in fact, that the industry relies on a 51 cents per gallon federal subsidy. In addition, because ethanol yields one-third less energy than gasoline, you can’t travel as far on a gallon of ethanol as you can on a gallon of gasoline. So you’d need to buy more. Basically, ethanol fuel needs to be cheaper than gasoline to offset its weaker fuel efficiency.
And as this reality has killed the rampant speculation, ethanol stocks have tumbled and corn prices are back under $4 a bushel. But for you and I, the clamor for corn has already resulted in a nasty side effect. And we see it every day…
The key ingredient here is corn.
And just because ethanol fever has cooled doesn’t mean production has stopped entirely. Nor does it mean the speculation won’t kick back up again in future…
America’s Corn Craze Contributes To Higher Food Prices
In fact, the U.S. Department of Agriculture (USDA) says ethanol will suck up 25% of the U.S. corn crop by next year. Demand from the ethanol industry, coupled with demands from an increasing global population (set to grow from 6.5 billion today to 9 billion by 2025), means corn prices have risen - up from around $2.80 a bushel in September 2006 to $3.94 today.
In addition, as farmers have set aside vast areas of land to satisfy ethanol fuel demand, they’ve done so to the detriment of other crops such as wheat and soybeans, sending those prices soaring, due to lower supply. That’s pushed food prices up across the board. The latest USDA figures forecast a 3.5% to 4.5% price increase in all food this year. Eggs, poultry, beef and pork are seeing the biggest increases, due to the animals’ heavy corn diet.
And there might not be much relief in sight. Ethanol plants are still churning away, with new plant construction underway in order to meet the government’s renewable energy targets. That’s going to keep corn demand humming.
So what started as a nice idea - easing America’s dependence on foreign oil and boosting national security through a subsidized ethanol initiative - isn’t really working as planned. We’re still a long way from independence. Oil prices are close to a record, gasoline prices are over $3 a gallon, home energy costs are rising. And food prices are rising, due to the high amount of corn needed to (expensively) produce ethanol and lower crop yields from other foods. So far, the ethanol campaign is leaving Americans’ wallets stretched at the grocery store, in addition to the gas pump and the home.
Ethanol Fuels: Friend Or Foe?
In a grim report released yesterday, the International Food Policy Research Institute said the switch to alternative energy like ethanol fuel and other biofuels is reducing the amount of food available and driving prices higher.
This is a worldwide trend, too:
- In addition, the group stated that global population growth and climate change is also to blame for rising food prices across the world, with global agriculture production set to slump 16% by 2020.
- Output in developing countries could fall by 20%, while Africa could see wheat-growing land disappear completely, because of its heavy dependence on rainfall.
- To compensate, some countries will be forced to import more food. In fact, the Food and Agriculture Organization says global expenditures on imported food will race past $400 billion this year - 5% higher than 2006.
- Poorer developing nations face a 9% hike, putting them under increased strain.
In addition to not easing America’s energy problems, all this supposed environmentally friendlier ethanol might actually be worse for the environment.
Last month, the National Research Council said ethanol production could cause “considerable harm” to water quality and supply. Earlier this year, the Environmental Protection Agency said ethanol use raises ozone levels.
And if you want to drink to ease the strain… well, that’s getting more expensive, too…
As Beer Brewing Prices Skyrocket, Here’s Two Companies To Consider
Having enjoyed a 16% jump in sales in 2006, microbrewers are now feeling the effects of rising grain costs. With fields full of corn, wheat and barley prices have soared. And after years of oversupply, even hops prices are now rising, due to a 30% loss in U.S. hops acreage between 1995 and 2006. Quoted in the Associated Press, Terry Butler, brewmaster of Washington-based Snipes Mountain, says hops prices have jumped more than 100% over last year, while barley has risen 10%-15%.
Tack on advancing fuel and glass costs and you’ve got a recipe for higher retail prices, as these brewers don’t have the same ability as their bigger rivals to hedge against rising costs. So what can you do to combat these rising food and alcohol prices?
You could consider companies like Tyson Foods (NYSE: TSN) and British firm Diageo (NYSE: DEO). Tyson has little choice but to pass on rising food costs to consumers at the store, while Diageo’s strong diversification among both beer and spirits (the firm’s many brands include Smirnoff vodka, Johnnie Walker whisky, Captain Morgan rum, Gordons and Tanqueray gin, Baileys Irish Cream and the ever-popular Guinness) should see it offset higher costs in some brewing areas.
Cheers,
Martin Denholm
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Today’s Smart Profits Action Center
- December corn futures rose 8 cents on Tuesday to end the day at a five-and-a-half month high of $3.94 a bushel - and they are expected to rise again today. While technical buying and an announcement from the USDA that it exported 545,084 metric tons of corn to Mexico drove most of Tuesday’s gains, traders are also betting on further ethanol industry expansion. Proof of this is seen in the March 2008 corn futures, which rose to $4.11 - the highest price since June 21.
- Supply and demand: That’s the driving force behind the world’s major commodities. No shady executives… no giddy analysts… less Wall Street spin. If you know where to look, it can be an extremely lucrative investment area - and the Mt. Vernon Research has one of the best in the business. Having spent six years as a market maker on the floor of the New York Mercantile Exchange (NYMEX) actually setting the prices for commodities, Lee Lowell is now passing on his expertise to lucky subscribers in his Triple-Zone Profits Trader commodities investment service and in his bestselling book, Get Rich With Options: Four Strategies Straight From The Exchange Floor. For more information, click here to continue.
Related Articles:
- Corn Commodity: Cashing In With Sales Up 170% On The Government’s Best-Laid Ethanol Plan
- Global Agriculture: Key Factors That Could Spark An Agri-Business Investing Boom
- Ethanol Production: Turn Waste Into Wealth With The Resource Revolution Poised To Take The Energy World By Storm
Hear It From Our Premium Members...
I sold ½ of the stock per your recommendation, which returned my original investment.
I sold the remaining stock under my regular account on 4/13/2008 for $32.19 and a gain of over $4000.
On May 21, 2008, I sold remaining shares in my IRA account at $39.75 for a gain of over $5,000.
Thanks for your recommendation on this stock."
~R. M. Raga
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