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Futures Volatility…

And How You Should Play The Moves

The Smart Profits Report: Commodities Corner

Monday, April 28, 2008

by Lee Lowell, Futures Options & Commodities Specialist

If you were expecting the commodities markets to calm down since I wrote to you two weeks ago about crude oil and natural gas, you’d be disappointed. There’s been no let up in futures volatility…

We start with the big hitter - crude oil. As usual, it’s the largest mover and is leading the commodities pack forward. As such a vital part of our everyday lives, since it influences gasoline prices, home energy prices and even food prices, it’s no surprise that it gets the most attention.

Not long seems to go by without oil setting new all-time highs. In our last update, for example, oil futures had just eclipsed a new high over $111.50 per barrel.

But two weeks is a heck of a long time in the oil market - and the price has kept moving. As I write, oil almost touched the $120 per barrel mark - as you can see on this chart.

Until we see a more significant shift in the underlying trend, our stance remains the same: We’ll continue to see large pullbacks, followed by renewed upside momentum.

Regardless of Futures Volatility, Wherever Crude Oil Goes… Natural Gas Follows

Although they rely on very different fundamentals, both crude oil and natural gas continue to move in tandem.

And natural gas has kept pace just as well as oil. Take a look at the chart and you’ll see that the front-month futures contract just cleared the $11.400/mmbtu level after we showed it at the $10.000/mmbtu level just two weeks ago.

That’s a $11,400 move on just one contract. We believe the continued upside momentum is due to large hedge fund activity. It doesn’t look like we’ll see a long-lasting selloff in natural gas any time soon - not with hurricane season heating up in June.

Metal Futures Volatility Head Downward

While oil and natural gas prices continue to hum along relentlessly, two neighbors in the metals market have cooled off over the past two weeks. Specifically, gold has shed about $50 per ounce and silver has shed about $1 per ounce. That equates to $5,000 per futures contract on each commodity. However, this isn’t too surprising, given that they’ve both enjoyed huge increases recently.

Both markets have retraced back down to near-term lows which, which were carved out on April 1. Let’s see if that support can hold or give way to more selling.

The Breakfast Club: Two Forces That Could Drive Coffee And Orange Juice Futures Higher

All the “softs” market (coffee, sugar, cocoa, orange juice & cotton) continue to hold at near-term lows. All except cocoa.

The cotton market is currently sitting right on its 200-day moving average, which is typically a very reliable support level. Let’s see if it can hold here.

Coffee and orange juice both seem to be carving out a bottom here. Coffee is coming up on the Brazilian “frost season,” which will last the next few months. And like the natural gas market, you can always rely on the orange juice market to experience some volatility during the summer hurricane season.

The frost season in Brazil and hurricane season in the United States may are two events that could cause these commodities to find a near-term floor.

Breaking Down The Three Major Grains Movers

Lastly, we’ve seen divergent moves in the three main commodities of the grains market - corn, soybeans and wheat.

Since hitting its peak at over $12.50 per bushel back in March, wheat has given up over $4 per bushel. That’s a $20,000 move on one contract alone. Although it’s not shown on this chart, the price is now making its way lower towards its 200-day moving average line.

On the other hand, corn has found its footing and continues to trade near the top of its recent range - as you can see one this chart.

As for soybeans, the market continues its volatile behavior, jumping both up and down. When volatility like this occurs, it can be tough to get a good handle on its next move. One day it looks bullish, only for the bears to dive back in the next day and knock it back down.

My advice if you want to get involved with these markets is to stick with limited-risk option strategies.

Catch you again here in two weeks.

Lee Lowell

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Who Benefits From Rising Food Prices?

The Smart Profits Report Issue #517
Thursday, April 24, 2008
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report

Food Prices Are Rising And Panic Is Around The Corner

On February 19, I wrote a lighthearted column about inflation at the grocery store, as evidenced by rising chocolate pudding prices. But what a difference two months make. Today, it’s no joke.

If you think filling up your SUV is an inconvenience at $117 oil, you ain’t seen nothing yet if this food situation gets worse.

The World Bank says food prices across the globe have rocketed higher by more than 80% over the past three years - a situation that could plunge 100 million people into poverty.

The price of rice in Asia has tripled over the past year.

Bakers are reporting that flour prices are up as much as 200% for the year.

Global wheat supplies are at the lowest level since World War II and there is a worldwide shortage of rye grains.

So what are the reasons for this increasing food shortage? Rising fuel costs and a weak dollar contribute to the inflation. But two other highly influential causes are…

The global population is steadily increasing, leading to more demand. But at the same time…

… a greater portion of land is being set aside to grow crops for biofuels. While the aim is to increase energy resources and reduce harm to the environment, it means there is less land to grow other key crops, which has led to a shortage and a consequent supply-demand crunch.

I know this all sounds pretty gloomy, which isn’t typically like me. But having seen store shelves in South Florida emptied in less than 24 hours as a hurricane approached, I know what can happen when panic grips consumers. And if people are concerned that they may not be able to afford to feed their families a few months from now - or even worse, that food simply won’t be available - stockpiling will become the national pastime.

High Food Prices + Food Shortage = Media Frenzy

To make matters worse, this is the kind of thing the media drools over. Many outlets have latched onto the food shortage story because of its major public interest and critical nature. And if there is a legitimate crisis in America, the frenzy could begin to feed (pun intended) on itself.

You can be sure that the media, while calling for calm, will run with the story for all it’s worth and ignite it even more. Expect to see television segments featuring panicked shoppers buying 20-pound bags of rice, making you wonder if you should be doing the same.

And if the food shortage never materializes, the media will try to keep you scared and glued to your TV, radio, newspaper and Internet for signs that we’re running out of food.

As investors - and smart ones at that - there are better ways to handle this news. Not by grumbling or stockpiling, but by profiting from the trend.

Three Companies That Could Beat The Growing Food Prices

As an investor, I want to stay away from the big food producers. While food companies like Kellogg (NYSE: K) and Kraft Foods (NYSE: KFT) are typically seen as safety stocks, I’d avoid them. The rising price of raw materials will likely impact their margins and although they will try to pass as much of that to consumers as they can, there’s only so much they can do and it might only partially offset the higher costs.

If the situation gets really bad, I wouldn’t be surprised if the government stepped in and temporarily capped the prices these companies can charge. As much as we like to think we’re a free market society, the minute things get nasty, Big Brother tends to ride to the rescue. Just ask Bear Stearns and JP Morgan.

However, there are companies that could see a big boost in business if the above scenario occurs. Firms like Costco, BJ’s Wholesale (NYSE: BJ) and Wal-Mart usually have lower prices than the typical grocer. The idea of buying in bulk more cheaply will appeal to consumers - especially if they adopt more of a stockpiling mentality. Even if shoppers don’t go crazy and purchase huge bags of grain, the idea of having a few extra boxes of Wheat Thins around may be comforting.

Keep a close eye on this story. I hope I’m wrong, but it could turn out to be the most important issue of 2008.

Marc Lichtenfeld

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How To Play The Financial Sector

Sector Watch: Earnings Season Volatility Creates Profit Opportunities In Financials And Gold

by Jim Stanton, Technical & Quantitative Analyst

It happens four times a year - and I can’t emphasize enough just how much you need to have your wits about you each time it does. More so than any other time of year.

Since I last wrote to you on April 7 with some solid investment opportunities, we’ve seen a slew of quarterly earnings reports from America’s big dogs. And whether you like it or not, many companies have the power to move the entire market with just one news release.

Take General Electric (NYSE: GE), for example. On April 11, the firm announced earnings that were well below expectations. Result? The hyper-sensitive Dow Industrials threw a hissy fit and the index dived more than 250 points. At that point, it looked like the indexes were headed back down to test their January lows.

But the market is a fickle beast…

The Stock Market’s Standout Performer

Then last week, high-profile companies Intel (Nasdaq: INTC) and Google (Nasdaq: GOOG) stepped up to the plate and delivered better than expected earnings. Result? The Dow Industrials and Nasdaq 100 vaulted to new three-month highs.

This kind of volatile behavior can throw many investors for a loop - whether they think it’s fair or not. But rather than bemoan it, it’s much better to harness it - because it can also present some excellent opportunities to profit, especially if you look at the technical side of the market like I do.

For example, having endured a pretty savage beating for most of 2008, the bulls are now back in control - at least over the short-term. That’s because while some of the indexes haven’t quite taken out their February highs yet, all of them are now trading above the 50-day moving averages.

The standout performer of the bunch? The Dow Transportation Index, which is currently sitting at an eight-month high. The S&P 400 (Mid Cap) index has also traded at new recovery highs.

So where to from here?

Watch For This Critical Resistance Level To Gauge The Market’s Next Move

Since January, the stock market has had all the characteristics of a bearish consolidation pattern.

However, with the strength in the Transports, the odds of that being the case have dropped (although it’s still a possibility).

Here are the levels you need to watch for next:

S&P 500:         1,411

Nasdaq 100:    1,928

These levels represent critical resistance areas and if the indexes can close, and then stay above, these levels, the bulls will remain in charge. If the indexes struggle once they reach these resistance areas, a reversal back down becomes possible.

The question is: How do we drill down a bit deeper and profit from this trend?

The Financial Sector Started The Mess And Is Now A Whisker From Critical Resistance

Since the massive financial sector was the catalyst for the market correction that began late in 2007, let’s check out the ETF that represents the sector - the Financial Select Sector SPDR (AMEX: XLF). Let’s turn to the weekly chart…

Having hit a high of $38.15 in May 2007, XLF has traded steadily lower, culminating in price action below $22.50 on March 17 - the day the Federal Reserve and JP Morgan (NYSE: JPM) bailed out Bear Stearns (NYSE: BSC).

Since then, however, it’s traded above that level and is now closing in on a critical resistance level around $27.40.

The highest the stock has come to that level since reaching its March lows is $27.37 on March 24. But the more bullish action hasn’t yet been enough for it to break out of its downtrend regression channel, drawn off the May 2007 highs.

But it’s really close! With the upper channel parked at $27.40, a weekly close above that level should be bullish.

So how about one of the market’s another mega movers?

The Commodities Correction Means An Opportunity In The Metal Market

The U.S. dollar remains mired in a morass of negativity.

However, although it’s still trading relatively close to its lows, it may catch a break because a number of commodities have corrected.

That includes the precious metals, so let’s take a look at the ETF that tracks the price performance of gold - the streetTRACKS Gold Shares (NYSE: GLD).

There’s one dominant color on St. Patrick’s Day: Green. But in the financial market, there was plenty of cheer for all things gold, too.

As the XLF made its lows on March 17, GLD set an all-time high above $100 a share. This isn’t too surprising, given that gold is a great hedge against economic turmoil (and March 17 was full of that!)

But as gold has since lost some of its shine, GLD traded below $87 in April. Yes, it’s rebounded a little since then, but the correction may have further to go. Take a look at the weekly chart of GLD:

GLD has spent the last couple of weeks in consolidating, but is currently trading below its 50-day moving average. This means there may still be some downside left.

Having hit an April low of $86.05, my analysis (using the ESP Profit System) suggests that a move below this level should see GLD decline to at least the $83.20 area. This area also represents a 38% Fibonacci retracement off the June 2006 lows.

Bottom line: If the U.S. Dollar continues to struggle, or if traders decide to liquidate their gold positions for other reasons, the $83 area would be a good level to start accumulating GLD shares.

The Longer-Term Outlook

Longer-term, critical support for GLD comes in around the $73 level. As you can see on the chart, this area not only represents the long-term uptrend line, but also the May 2006 high (this was previous resistance that has turned into support).

There are a number of reasons that could cause GLD to drop to this $73 area. Among them: Some kind of evet that leads to a mass sell off in the gold market… strength for the U.S. dollar… or just a normal correction.

That’s all for this time. Talk to you again in two weeks.

Jim Stanton

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Follow Berkshire Hathaway and Invest In The Financial Sector

Smart Profits Report Issue #515
By Karim Rahemtulla, Investment Director

Pop quiz: Over the past six months, one sector of the market has seen more insider buying than any other. Can you name it? If you think it’s technology, you’d be wrong. Healthcare? Nope… the answer is the financial sector.

Large insider purchases have occurred at some of the following companies:

Wells Fargo (NYSE: WFC) *
Bank of America (NYSE: BAC) *
Wachovia Bank (NYSE: WB)
Fifth Third bank (Nasdaq: FITB)
American Express (NYSE: AXP)
Genworth Financial (NYSE: GNW)
Colonial National Bank (NYSE: CNB)

* Market Purchases by Existing Holders like Warren Buffett’s Berkshire Hathaway.

But for all the strong insider buying, financial shares have endured a beating.

What gives? Insider buying is one of the best market indicators. Always has been. But could all these insiders be wrong? And if they are, the question is: If the guys running these companies can be so wrong, what chance do ordinary investors have? After all, these are the people involved in the day-to-day operations and privy to details that will never be public. Are they just plain stupid? Let’s find out…

Short Versus Long

In the investment world, there are two types of investors:  

Short-term: These guys look to be in and out of a stock in a matter of weeks, sometimes days. They’re looking for trading opportunities, not necessarily value.

Long-term: These investors look past the daily market noise and hype, focusing instead on the next 12-18 months for a return on their capital.

Insiders definitely tend to have a longer-term outlook. Insider buying is historically a very early indicator. For example, insiders cannot buy shares on Monday, knowing there will be good news on Friday, because they can’t trade on material information.

Instead, they buy shares on anticipation and optimism that their company is poised for future success. In addition, insiders can’t sell shares for a good length of time after buying them.

So when it comes to the current financial sector pain, the insiders who bought shares in their own companies are suffering just like regular investors.

However, here’s why you should pay attention to these trends…

Putting Their Money Where Their Mouths Are

More often than not, insider buying is a very accurate indicator - especially when a certain company’s insiders buy shares in a cluster pattern. They’re right more often than they’re wrong - and usually by a very wide margin.

You have to remember that insiders buy thousands of shares with several thousand, sometimes millions, of their own dollars. It’s not just a few hundred bucks here and there.

Ask yourself why anyone would bet the farm like this just to lose it. It may happen occasionally, but rarely when insiders buy with such gusto and such size. Such heavy buying usually signals some serious optimism.

And with the financial sector, there’s another factor at work…

A Unique Opportunity In The Financial Sector

In terms of financial sector shares, many insiders realize that that the current battering gives them a unique opportunity: To buy high quality stocks at very discounted levels.

This is a real “kitchen sink period” for financials - companies want to announce all their ugly losses to the market at once and get the pain over with quickly.

Financial stocks with heavy insider buying look extremely attractive now. They may look even more attractive next week. But I’d say that a year from now, they will look much less attractive from an investing standpoint.

So what’s the best way to follow the insiders?

The All-Important “Insider Window”

The key to following insider trades is timing.

If you’re looking to hop on the bandwagon with these astute folks (and remember, they know more about their companies than anyone else), you want to buy after the insiders buy.

That means you want to buy in a 3-6 month window after the insider buying has taken place. Why? Because insider buying as a forward-looking indicator is usually not confirmed by the market for a period of at least 6-9 months in the future.

You must be patient. Don’t fall into the trap that many ordinary investors do - that is, they do all the hard work by following the trends and buying shares, but then get antsy and sell at a loss within that 6-9 month period because “nothing” happened.

They then watch as the shares begin to move up in “miraculous” fashion.

But it’s not a miracle at all. It was the insider buying indicator working in time-tested fashion: Buy shares when they’re cheap and hold them until they are expensive.

Believe me, insiders also have an uncanny knack for selling at (or near) the top. Right now, they’re not selling in the financial sector; they’re buying like there is no tomorrow. We’ll check back at the end of the year to see if their strategy has worked or not. But you could do a lot worse than buying some financial sector shares now.

Talk to you again soon.

Karim

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Natural Gas Futures and Other Energy Commodity Futures

April Showers Bring… Rampant Commodities:
While Oil And Gas Keep Roaring, The Beans Rack Up A $25,000 Move

by Lee Lowell, Futures Options & Commodities Specialist

The Smart Profits Report: Commodities Corner
Monday, April 14, 2008

Two weeks might not seem like a very long time in the grand scheme of things… but it can feel like a lifetime if you trade the commodity markets.

So trust me… there’s always plenty of news and analysis from the commodities world for me to update you on in this column every two weeks. One thing is for sure: The volatility has certainly not died down. Let’s dive in…

Energy By Name… Energetic By Nature

Without doubt, the current main driver of all the commodities is the energy market. It just doesn’t seem to be slowing down at all.

In our last update, crude oil prices had just thumped back down to $100 a barrel after launching to all-time highs of $111 barrel. But like a prize fighter, the market didn’t stay down very long - and in fact jumped right back up and punched its way even higher, hitting a new record over $112 a barrel.

Expect a continuation of the recent trend - large pullbacks followed by renewed upside momentum.

Natural Gas Moves Along With Crude Oil

Not to be outdone, crude oil’s neighbor - natural gas - has seen equally large moves in the futures contract over the past two weeks.

The front-month contract had just neared the $10.200/mmbtu level when it took a 1000-point hit to the downside. That’s a $10,000 move on just one contract to you and me.

But like oil, you can see that the natural gas market rallied straight back, tacking on 1100 points just as quickly.

Talk about perfect dance partners. It seems that crude oil and natural gas are moving in tandem at the moment. But since these two products trade on very different underlying fundamentals, why now?

The only reason we see for the “tandem-trading” here is due to big hedge fund activity. And with hurricane season set to get underway in June, it doesn’t look like we’ll se a long-lasting natural gas selloff any time soon.

Gold And Silver Futures Stay Consistant

Moving to the metals market, the two main players - gold and silver - have swung up and down over the last two weeks, but are actually at roughly the same price as they were when I last wrote to you.

Check out the gold chart and this silver chart.

That’s good action for the day traders, but doesn’t do much for longer-term positions. However, I do maintain a longer-term bullish bias - but expect to see continued volatility here, too.

The End Of A “Soft Commodities” Selloff

After a relentless six-week selloff, some of the “soft” commodities (coffee, sugar, cocoa, orange juice & cotton) finally seem to have gained some traction and possibly some good support levels.

For example, the cocoa, cotton and sugar markets have all enjoyed a spell of good, bullish activity, bouncing them off of the lows.

Take a look at the action for yourself here:

Cocoa chart
Cotton chart
Sugar chart

On the other hand, the “drinks” markets like coffee and orange juice are still looking for their footing.

Lastly, I must mention the soybean market, which saw a huge move just after I sent my last column to you.

On March 31, the U.S. Department of Agriculture (USDA) issued its latest quarterly planting report and painted a bearish picture for soybeans. As you can see on the chart, it was a body blow that took many of the bulls by surprise. Soybeans got crunched, shedding $2.50 a bushel.

But just as quickly as it went down, it popped right back up. In a matter of days, it had regained all its losses - and then added more. That’s $12,500 per contract on the way down and $12,500 on the way back up. Just goes to show that volatility rules and you just can’t keep a good market down.

Because of volatility like this, if you’re investing in commodities, make sure you stick with limited-risk option strategies in order to grab the most upside, while also protecting yourself from brutal losses. I show you exactly how to do this - and give you specific recommendations on the best commodities plays - in my Triple-Zone Profit Trader commodities investing service. Simply check out my bio page for all the details.

I’ll catch you again in two weeks, Meantime, buckle up! With earnings season adding to already volatile commodities, keep a close eye on developments and make sure you know your entry and exit strategies.

Lee Lowell

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Diversify Your Portfolio With Biotech Stocks

Smart Profits Report Issue #514
By Marc Lichtenfeld, Senior Analyst

Last week, I had the privilege of speaking at the 10th annual Investment U conference in St. Petersburg, Florida. During my presentation, I discussed how investors need to be aware that early-stage biotech stocks trade on emotion as much as fundamentals.

It’s one of the factors that has led the biotech sector to outperform the S&P 500 over the past decade. The numbers prove it. While the S&P 500 has returned a measly 19.8% cumulatively over the past 10 years - and that number roughly doubles if you include dividends - the Amex Biotechnology Index (AMEX: ^BTK) returned 336.3% over the same period. That’s some outperformance!

I talked about how investors should consider diversifying their portfolio to include biotech stocks - and the best ways to do that. And the benefit of doing so speak for themselves…

Related Articles

Healthcare Investments: 5 Steps to Investing in Healthcare During a Bad EconomyThe Healthcare Sector: Recession-Proof Your Portfolio With This Robust SectorVolatile Markets: While Everyone Else Runs In Fear, Here’s Why I’m Jumping In

Over the past 10 years, a $100,000 portfolio invested in the S&P 500 would now be worth about $141,000. However, if just 5% of that portfolio were allocated to biotech stocks, the portfolio would be worth over $156,000. That’s an extra $15,000 in returns from just 5% of the portfolio.

Here’s a quick n’ easy way to get some biotech exposure…

The Best Way To Buy Biotech Stocks

First of all, forget mutual funds. In particular, biotech sector mutual funds have not impressed me over the years, as they tend to be expensive and the performance has been lacking.

These days, ETFs are the dynamic new wave of funds - a subject that my colleague and technical wizard Jim Stanton focuses on here every other Monday in his new “Sector Watch” column - it’s good stuff.

If you want some simple biotech exposure via ETFs, the iShares Nasdaq Biotech Index (Amex:IBB) is an inexpensive way to give your portfolio some biotech diversification, since it tracks the performance of the stocks in the Nasdaq Biotechnology Index.

Two quick points to note, though:

• Biotech stocks tend to drop in the summer, so if you keep the sector on your radar, you may have an opportunity to get in at lower prices.�Â

• While biotech stocks can definitely pay off handsomely, understand that the sector has above average risk, so make sure it doesn’t make up too large a portion of your portfolio.

Before I go, check this out…

A “Spiritual” Approach To Wealth

While I was at the Investment U annual conference, I also got to see Karim Rahemtulla and Lee Lowell make excellent presentations on options. These guys know more about options than anyone I’ve ever met, so you’re in good hands reading their expertise here at Smart Profits Report. Of course, if you want to get specific recommendations from them, I encourage you to sign up for the Xcelerated Profits Report newsletter, or one of their trading services. If you’re interested in the latter, our VIP Services Team would be glad to give you the details. You can give them a call here: 888.570.9830 (inside the U.S.) or: 410.454.0498 (overseas).

It was also great to see Oxford Club Investment Director Alex Green (especially because he carried our golf foursome on his back en route to winning the tournament we had for presenters, Oxford Club staff, and conference attendees). I hadn’t caught up with him since he launched his new free e-letter, Spiritual Wealth and I wanted to tell him how much I enjoy it.

If your e-mail is anything like mine, it’s flooded with a mass of e-letters and newsletters on a regular basis. Sifting through them can be tough, but I always make time to read Spiritual Wealth. It takes a refreshingly different approach - which boils down to this: We all want to see our money grow and become (or stay) rich. But Spiritual Wealth shows you how to live richly. There’s a very big difference - and I encourage you to check it out. I think you’ll find it as enlightening and enjoyable as I do.

Talk to you again soon.

Marc

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Three Investments Ideas

Nine Bankers… One Rate Cut… And Three Investments You Can Make

Smart Profits Issue #513
By Martin Denholm, Managing Editor

For the first time in a year, I’ll be heading back home to England next Sunday (assuming the planes are fit to fly, of course). And what a difference a year makes.

Politically, the country is now “under new management.” After 10 years in charge, Tony Blair finally handed the reins over to his #2, Gordon Brown. Brown is a smart fellow, who served as Britain’s Chancellor (essentially the CFO) under Blair and did a good job keeping the economy robust. But he’s the “anti-Blair” in terms of charisma. The dour Scot’s demeanor matches the British weather perfectly: Grey and dreary.

But there’s one other big difference between then and now…

Brown and his colleagues are currently in full defensive mode regarding the health of the UK economy. This wasn’t the case one year ago. GDP growth was solid and headed higher… the Bank of England (BoE) was hiking interest rates (largely in order to combat rising inflation)… the pound was soaring against the U.S. dollar, making Britain an attractive investment destination… and despite some signs of weakness, the housing market was still pretty sturdy.

But the goalposts have shifted now, forcing the Bank of England into its third interest rate cut since December on Thursday. Let’s take a closer look…

The US And UK: Partners In Monetary Policy

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“The chances that the UK economy will follow a similar path to that of the US now seem sufficiently high to warrant much more aggressive action from the Bank of England, akin to that taken by the Fed.”

So says Michael Hume, Lehman Brothers’ chief European economist, quoted in the Daily Telegraph. Governor Mervyn King and the other eight members of the Bank of England’s Monetary Policy Committee took another step in that direction on Thursday, slicing another 0.25% from the UK base interest rate and taking it down to 5%.

Even in the face of rising inflation (largely due to surging oil prices) that, at 2.5%, is 0.5% higher than the government’s 2% target rate, this signals that the BoE is comfortable with the outlook - and in fact expects it to decline later this year.

Instead, it’s placing more weight on the risks from falling GDP growth, the U.S.-born credit crisis, and the slumping real estate market.

Passing The Buck To The Land Of The Buck

Following his largely successful spell as Chancellor in Tony Blair’s government, Gordon Brown is now the main man. Whether he relishes that brighter spotlight remains to be seen, but some have accused the Prime Minister of being stuck in Chancellor mode.

When he was Chancellor, Brown was known for making rather bold GDP growth forecasts, then having to fight off the skeptics. It was a fight he often won, as his policies resulted in strong growth.

But the times… they are a changin’. Today, Brown is fighting off claims that he’s in denial about the state of the economy. For his part, Brown asserts that it’s not just Britain facing trouble… it’s the whole world, due to the “difficult situation arising from what’s happened in America.”

He’s probably right. But there’s no doubt that having experienced a very similar housing bubble to America, the correction in the British housing market was inevitable, with or without external factors from the US. The latest numbers tell the story…

Britain’s Housing Market Is On A Shaky Foundation

Talk about a shock. The Halifax released another dose of grim figures this week:

• U.K. house prices dropped by 2.5% in March - the biggest monthly fall since September 1992.Â

• For the first-quarter, house prices declined by 1.1%, meaning the average cost of a home is now £191,556 ($377,396).Â

• With house prices now just 1.1% higher than this time last year, that represents the slowest annual growth rate since 1996 (I told you that times had changed!)

So what does Brown say about this? Simply that the government is always “always vigilant.” Hey, thanks! He also puts the fall in context, stating that after a 180% surge in house prices over the past decade and 18% over the past three years, a 2.5% drop is manageable. He also plans to hold a meeting next week with the Council of Mortgage Lenders (CML) to discuss the situation. But they’ve got some bad news for him, too - and this is where the credit crunch plays a big part…

The CML added to the Halifax’s gloomy report by stating that…

• Just 49,000 mortgages were lent to homebuyers during February. That was 3.5% lower than January, 33% lower than February 2007, and the lowest monthly number since 1992.Â

• In the three months to February, mortgage lending to first-time buyers slumped to the lowest level since Q1 1975.

With the credit crisis having crushed the mortgage market and sharply reduced the number of mortgages on offer and banks’ ability to lend to borrowers, these figures are perhaps not that surprising. And the International Monetary Fund (IMF) says it could lead to a £3,000 jump in annual mortgage bills.

Overall, the large housing correction could shave 10% off UK home prices this year, according to the IMF, and with cheaper, fixed-rate mortgages set to expire for about 2.5 million homeowners over the next 18 months, the pain could get worse when coupled with rising consumer price inflation. Many are criticizing Brown and the government for allowing the bubble to expand and pop, rather than managing the situation better.

From Brown To Darling… The Optimism Lives On At No. 11, But Nobody Is Buying It

There must be something in the water at No. 11, Downing Street. With Brown having shuffled next door, Alistair Darling has taken his spot as Chancellor. And despite the problems facing the UK economy, he’s keen to continue the streak of optimistic GDP growth forecasts.

In his annual Budget last month, Darling pegged growth between 1.75% and 2.25% this year, rising to a range of 2.25% to 2.75% in 2009.

By contrast, the IMF places the rate at just 1.6% both this year and next. Not only that, it says the UK housing market is still overvalued by 30% and the country is particularly at risk, because its financial sector makes up a large part of GDP growth.

But Darling says the IMF downgraded the UK economy more than others and cites cause for optimism because the UK is well-placed to handle the shocks, thanks to its “extremely strong” and resilient economy, low unemployment, low government debt and low inflation. I know the government has a good track record of projecting GDP growth, but this is odd, since government borrowing is expected to surge to £45 billion this year and inflation is 0.5% higher than the target rate.

Darling flew out to Washington on Thursday to attend the IMF’s spring meeting with G7 nations, so it should make for interesting conversation!

Still, he should be thankful he’s not meeting with Michael Hume from Lehman Brothers (mentioned a moment ago). He claims that there is now a 35% chance of a “technical recession” (two straight quarters of negative growth) in Britain. The firm also projects an 8% drop in house prices by the end of 2009… has slashed its 2009 GDP growth forecast from 2% to 1.1%… and calls on the BoE to cut interest rates to 4%.

Of course, some trends remain the same as my last trip to England…

Dollar Still Getting A “Pounding”

The dollar-pound exchange rate is still terrible for travelers on this side of the Atlantic. With one greenback currently buying a paltry 50 pence, I don’t want to hear any more Treasury waffle about a “strong dollar policy” as I watch my dollars evaporate.

You can play the long or short side of the pound easily through the CurrencyShares British Pound Trust (NYSE: FXB) - an ETF that tracks the currency’s performance.

Two More Brit Plays

Not interested in currencies? One simple way to play the fortunes of the broader UK economy is through the iShares MSCI United Kingdom Index (NYSE: EWU). Investing in this 12-year old ETF would give you broad exposure to the price appreciation and yield performance of some of the biggest stocks on the London Stock Exchange. For example, it holds a 7% stake in energy giant BP, a 6.6% stake in communications firm Vodafone and a 6.25% stake in HSBC Bank.

And despite the broader UK economic pressures, it’s not all bad. You can always invest directly in the many solid British companies. I don’t know if we’re drowning our sorrows more because of the increased economic woes and consumer price pressures… but if there’s one thing I do know about my fellow citizens, it’s that we like a few bevvies. That’s good news for London-based drinks producer Diageo (NYSE: DEO).

I previously mentioned the company as a possible investment in my December 5, 2007 column when I talked about how the ethanol craze of last year led to a shortage of other crops. As this drove prices for corn, wheat, soybeans and barley higher, it subsequently triggered higher food and drink costs, too.

Diageo is one of the world’s oldest (founded in 1886) and largest drinks firms and is impressively diversified. The company owns major global beer brands like Guinness, Harp, Smithwick’s and Red Stripe… Johnnie Walker, Bell’s, and Bushmills whisky… Smirnoff vodka… Gordon’s and Tanqueray gin… Captain Morgan rum, plus Baileys Irish Cream and Jose Cuervo. It has a presence in around 180 countries - so it’s no wonder that it boasts a 20% profit margin and net income of $2.8 billion.

Although the stock has shed a few bucks since December, it’s still attractive precisely because of that diversification, bloated balance sheet and plenty of repeat business. The company also dishes out a generous $2.07 annual dividend per share (2.4% yield).

And I’m sure I won’t have too much trouble finding one of its products when I hit the homeland next week.

Cheers,

Martin Denholm

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Use This Alternative Investment Strategy

Direct From The Investment Trenches

Smart Profits Report #512
By Marc Lichtenfeld, Senior Analyst

When it comes to financial management, I employ an alternative investment strategy comprised of rock solid discipline. No ifs, ands, or buts. It’s a way of life that has kept me out of sticky situations.

In my Smart Profits Report Issue on March 25 I outlined another five-step alternative investment strategy for you to consider. In the article I outlined how maintaining the discipline that comes from my F.I.R.S.T. research methodology kept me from recommending Accentia Biopharmaceuticals (Nasdaq: ABPI). It was crucial, too. When the company’s new drug didn’t meet its Phase III clinical trial targets, the stock blew up and lost two-thirds of its value.

Rather than following the ‘main-stream’ way of thinking, I adopt this alternative strategy for one simple reason: I’ve learned the hard way through years of investing experience. Like many folks, I made my fair share of mistakes when I first started out. I’ve seen winners become losers, and small losses that I was convinced would bounce back proceed to create nauseating sinkholes in my portfolio.

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Trust me, this is truly hard-fought and “battle-tested” knowledge! So here’s what you can do today in order to stop the same thing happening to you…

An Alternative Investment Strategy With Stops And Puts

Last week, one of the smart investing tips I discussed was the advantages of maintaining a trading log - jotting down some brief notes explaining the reasons for entering and exiting a trade.

It doesn’t matter what your investment strategy is, what philosophy you have, or what your price targets are. By writing down the key elements of each trade, you’ll have a harder time ignoring them when you go to sell (or in many cases, when you choose not to sell).

I’m not suggesting that you adopt an entirely inflexible approach… smart investors have to be able to adjust their thinking. But I know that if I’m changing my exit strategy on a stock, there better be a very compelling reason, other than “I think it’s going higher.” Making notes just serves as a reminder of what got you into a position in the first place and to not dismiss your ideas.

But there are two other excellent ways to maintain your own alternative investment strategy…

1. Set a stop-loss.

2. Buy put options.

If it seems like we mention this a lot here, it’s because we can’t stress enough how important this is, as it removes emotion from the decision to sell a stock. Unless you go in and change the stop (which almost all investors have done), the decision to exit the trade is predetermined.

The thing is… buying stocks is easy. It’s selling them that is the hard part - and it’s what separates the smart investors from the bad ones.

Let me give you a couple of examples…

Another Investment Strategy To Ensure You Bag Profits

To give you another example, staying disciplined helped ensure solid profits for me on a recent gold trade. When I trade for myself, I’ll sell half my position when a stock hits my profit target and let the rest of it run, while maintaining a trailing-stop.

That’s precisely what happened in this gold trade. While I didn’t cash out at the top of the run, I was able to stay calm, safe in the knowledge that I’d already banked some profits and that if further declines occurred, my remaining profits were locked in.

Investing is an incredibly emotional endeavor. When trades go to plan and you bank profits, you feel great. But when you absorb a loss, it can rattle you. I still encounter those feelings or variations in almost every trade I make. But I no longer allow those emotions to control my actions.

Now if I could just lay off the cookies…

Marc

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ETFs Present Solid Investment Opportunities

“Sector Watch”: As Indexes Try To Test February Highs, These Two ETFs Present Solid Investment Opportunities

by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report

Since my last “Sector Watch” column on March 24, the major stock market indexes - Dow Industrials, Nasdaq Composite and S&P 500 - have all rallied and are currently in the process of testing their February highs.

So far, though, only the Nasdaq 100 has actually surpassed its February high. Does this bode well for the market? Some think so. But the truth is: Unless the other indexes follow suit, the market action over the past two months could just be a consolidation pattern (trading range) that will send the indexes lower once it’s complete.

For example, the Dow Industrial Average soared close to 400 points on March 18 and April 1 (last Tuesday). On April 1, both the volume and breadth (the number of advancing and declining stocks) was less impressive than on March 18.

Tellingly, after the market’s big rally last Tuesday, the volume and breadth then declined over the latter part of last week. This means that if the bulls want to get their way, these numbers have to improve on any further rallies, otherwise it becomes increasingly likely that a selloff will resume.

Needless to say, that puts the indexes at a critical decision point and the upcoming market action will hopefully clear up the fog a little bit.

Beware The Short-Covering Bear Rallies

One key element of bear market rallies is that they often feature violent short-covering spells, where those investors who are short on stocks quickly “cover” their short positions at the hint of a rally, thus leading stocks even higher.

Much of the buying we’ve seen since the January lows has featured this kind of short-covering action. On March 18, for example - the day that the Dow Industrials posted its largest gain in five years - the best-performing stocks were the top 50 short-interest stocks in the S&P 500.

That said, the short-interest ratio is at its highest level in over 40 years, which could be the fuel that sends the markets higher.

All Eyes On The February Highs

The most important thing to watch over the near-term are the February highs. The bottom line is this…

The bulls need the Dow, S&P 500, and Nasdaq Composite to close above their February highs on good volume and market breadth.

However, if these indexes rally up to either side of the February highs on unimpressive volume and market breadth, a reversal back down becomes more likely.

In line with the market’s recent mini-rally, many ETF’s are also at, or close to, important resistance levels. I’ve picked out two below that boast the most interesting charts.

The Bullish And Bearish Scenario For The “China 25″

The daily chart below shows the iShares FTSE/Xinhua China 25 Index (NYSE: FXI), which represents 25 of the largest and most liquid Chinese stocks.

As you can see, the stock plunged almost 50% since October 2007 before bottoming out in late March. But it has rallied since then and reached the top of its trading channel around $150 last Friday. However, it was unable to close above it. Here’s the bullish and bearish outlook…

Bullish Scenario: A weekly close above $150.

Bearish Scenario: If it fails to close above $150 and instead retreats back below $131, it will probably test the lows around $120.

A Networking Revival

The other ETF that is worth a look this week is the iShares S&P GSTI Networking (NYSE: IGN), which represents a basket of multi-media networking stocks.

As the chart below suggests, networking stocks have been one of the worst-performing sectors since the beginning of the year. However, since bottoming out on March 17, you can see that the group has risen along with the rest of the stock indexes.

This daily chart has a more bearish look to it than many of the other ETF’s, and is also further away from its February highs than the indexes.

In fact, the stock appears to be tracing out a bearish consolidation pattern (trading range), with the $30 area being the top of the trading range. But note the 90-day moving average (the red line). In this case, it’s a very useful indicator, as it sits at the top of the trading range, just above $30.

The stock has short-term resistance around $29.05, then major resistance in the $30-$31 area. If the stock indexes test either side of their February highs, and then begin selling off, IGN could offer a good short opportunity.

That’s all for this edition. I’ll have more for you in a couple of weeks.

Jim

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Profit Alert: How to Play Small Cap Stocks

Smart Profits Report #511
By Karim Rahemtulla, Investment Director

Small cap stocks is one area you absolutely want to be the first guy in the door, so you can grab the most money.

For months now, I’ve been trying to analyze the current small cap stock market conditions. Often times, I show up early to the party.

But you know what? That just means more profits while the others catch up. Let me give you some examples - and show you the next best place for profiting from small cap stocks…

Jump In Early And Get The Pick Of The Small Cap Stocks Profits

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While every investor dreams about uncovering “the next Microsoft,” investing in it very early, and riding it all the way to the bank for millions, it doesn’t happen often. But many times, it’s not just a case of identifying hot stocks. It’s about spotting hot trends.

For example, in late 2005, we jumped on board a fast-growing technology company called Immersion (Nasdaq: IMMR) - a leader in the “haptics” and force-feedback field. We’ve since mentioned their cutting edge technology many times.

May 2006, I wrote about the increasing shift towards the ethanol industry and the investments within it. I then made a specific recommendation for Xcelerated Profits Report subscribers on a “stealth” ethanol play (in order to reduce our risk in what was, and still is, a young and volatile area), which we cashed out of for a 35% gain.

In October 2006, I sounded the alarm bells about an impending real estate collapse and then followed it up with more advice in June 2007.

We also grabbed 54% gains in August 2007 on the ultimate contrarian play at the time: Downside in the Chinese market (via the iShares FTSE/Xinhua China 25 Index - FXI). Believe me, very few people were calling for a China decline back then - and you should have seen the baffled enquiries I received from some colleagues when I recommended the play!

So how about the current market? What small cap stock opportunities do we have now?

Rookies Sell In Fear… Smart Investors Grab The Small Cap Stocks For A Bargain

While you’ll find many commentators labeling the current crisis as one of liquidity, I look at it differently. I’m adamant that it’s more of a crisis of confidence, not liquidity. After all, while fear and greed are the two primary forces that drive the stock market, if investors don’t have confidence, then there’s a problem.

Here’s what many rookies don’t understand, though: The huge dips that we’ve seen in the market - especially in some of the financial sector stocks - have presented great opportunities to buy, not sell.

Here’s why I take this contrarian stand on financials, housing, China, and the U.S. dollar: Because of my experience and the knowledge that the system is rigged in favor of the opportunistic investor.

And here’s one area with some major moneymaking opportunities…

Five Reasons Why Small Cap Stocks Suffer More Than Others

If you’ve looked at the small cap sector recently, you’ll know that it’s suffered a serious pummeling over the past six months.

By definition, small cap stocks are those with a market cap of less than $2 billion. But many have endured declines between 30% and 60%. This is much worse than their large-cap peers and the major stock indexes. But this isn’t surprising. Here’s why:

1. Small-Cap Stocks Are Less Liquid: When investors stop buying and start selling, small-cap stocks do not have the kind of institutional support to avoid huge price movements, or set a floor under the price. Consider that when a large-cap like Lehman Brothers can fall 40% in a day, only to rise 30% the next, the small cap stock market is exhibiting “normal” volatility.

2. Economic Slowdowns Affect Small Caps Stocks More: By their very nature, small-caps are companies that are just beginning to grow. Any dent in the economy will dent their efforts.

3. SmallCap Stocks Move Higher During Bull Markets: This being the case, it makes small-caps attractive targets to sell on the way down because they have more built-in profits.

4. Small Cap Stock Investors Are The Market’s Biggest Gamblers: They buy on the way up, margin at the top and sell at the bottom.

5. The Small Cap Stock Market Is Awash With Rumors And Crooked Players: This is the nature of the small cap game. When share prices fall, market makers and short-sellers step in and exacerbate it. Consider the Bear Stearns fiasco. If “they” can take the Bear down to $2, they can certainly take Small-Cap Stock XYZ down, too - and with a lot less effort. The market is not efficient… you can bet (or lose) your bottom-dollar on that.

Four Ways To Pick Out Big Opportunities From Small-Cap Stocks

I know… it’s sounds totally backwards and ultra-contrarian. But when small cap stocks collapse en masse - as they are doing right now - it gives you some huge opportunities.

You see, while you can still buy big caps and make money, if you really want to smash the ball out of the park a few times, there are no better bets right now than some select small-cap stocks. Here are four factors to look for when separating the great from the grisly:

1. No Fundamental Change In The Business: While there might be a slight slowdown for a couple of quarters, if the main business model stays intact, this is usually just part of the process. Companies to consider: Healthcare firms and medical device makers.

2. Strong Balance Sheet & Lots Of Cash: Quite simply, not only does this mean a small-cap firm is better-equipped to weather a financial storm, it also means that it will have plenty more opportunities when the economy picks up. Companies to consider: Certain small-cap technology firms.

3. Innovators In The Field: Firms that offer added value to bigger companies competing for market share are a major attraction. Companies to consider: Specialized technology firms and those with patented ideas.

4. Takeover Targets: Small-cap companies that enjoyed healthy sales growth before the crisis and were providing services, technology, or even drug partnerships to bigger players make for tasty takeover targets. Sometimes, it’s cheaper to buy your supplier when the price is right. Companies to consider: Ones that boast strong technology platforms, or medical successes

Pick Up Small-Cap Stocks At A Bargain While You Can

The bottom line is this: While the current crisis is significant, it will be solved given time. However, it’s during that time that you can either take the opportunity to make money, or just temporarily sit on the sidelines and watch.

And yes, it may be stressful at times. But like I said, I often hit the stock market parties early, so I won’t blame you if you watch! That’s because while some opportunities are very exciting, I often take the elevator down a few floors before zipping higher to the penthouse.

And believe me… small-caps are on sale right now. Pick your targets carefully and count on history and the business cycle to guide you to profits in the months and years ahead.

In a market like this, you have to have staying power - and selling into weakness will damage your portfolio. When you feel that queasy feeling that only small-cap investing can produce, dig deeper… it may be time to buy.

Until next time…

Karim

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