Bailout: “Hey Buddy… Can You Spare $2,300?”
September 30, 2008
The Smart Profits Report
Thursday, September 30, 2008: Issue #562
by Karim Rahemtulla, Investment Director, Smart Profits Report
How can you tell when a politician is lying?
Simple… he’s moving his lips!
In the wake of Congress’s failure to approve the much-ballyhooed $700 billion Wall Street bailout package on Monday, the world’s markets reacted by losing more than $1 trillion in market value.
Was it really necessary? The answer is, “Yes… but not really.” Let me explain…
A Bailout Dreamed Up By Buffoons
Let’s first examine the question of what a bailout really is.
A bailout is when there is no hope for return or for recovery of monies put forth. So is this plan really a bailout? Is losing trillions of dollars of market value from homes, the stock market, wages, and savings a better option than buying up lousy debt that may have some chance of recovering value in the future?
Apparently, for the sake of political expediency, the answer is “yes.”
If the U.S. Congress was really working on a financial bailout, then the market deserved to sell off - and deserves to sell off again. That might sound callous, but Congress is apparently being run by a group of ostriches and/or by those who never went to business school, or even worked in a business.
Moreover, it’s apparent that political gain is much more important than the livelihood of “average Americans,” who they are claiming to protect.
For example:
- A car dealer in Utah will not make his payroll this week…
- Retailers who finance their Christmas lines cannot find adequate financing…
- Seniors who count on their portfolios to finance their retirement are out of luck, making negative returns in Treasuries, or risk losing everything in the market…
- Large businesses are laying people off left and right.
There are hundreds of other examples like this. And the lack of credit is greatly exacerbating the slowing economy’s fate.
But the Washington rhetoric remains the same…
Bailout Rhetoric Shows Hollow Words From The House
As the mess continues, those in Congress and the media are happy to promote this plan as a “bailout,” thus stoking the frenzy of millions of Americans who have lost faith in the system and the government.
I heard a Congressman from Texas yesterday talking about how he didn’t want to saddle his grandkids with this debt - which amounts to an extra $2,300 and may be recouped over time.
But I bet he spends more than that in a week, throwing luncheons for his lobbyist friends. In his world, though, that’s different, because he sees a definite return on his outlay in the form of some type of future kickback.
Here’s the problem: Unless a politician sees personal gain, he’s not going to vote for something. That much is now crystal clear thanks to the bailout. And before you write to me, I realize that this is a broad generalization. There are some honest politicians out there. Heck, there may even be a couple who understand the difference between a bailout and stabilization package!
So am I angry? Not at all…
Bailout vs. No Bailout Equates To Stabilization vs. No Stabilization
I am dumbfounded. Those same naysayers who were clamoring “no bailout” will soon be clamoring for extended unemployment benefits. Either that, or they’ll wonder why they’re working an extra five years before they retire because of that “Depression Of 2009.”
I wasn’t alive during the Great Depression, but I know many who were. They still horde things today remembering how scarce everything was - even if you could afford it.
So let’s weigh the potential outcome. Yes, it’s quite simplistic, but it makes the point…
|
FINANCIAL STABILIZATION PACKAGE |
NO STABILIZATION PACKAGE |
|
We pay an extra $2,300 |
We don’t pay an extra $2,300. But… |
|
|
Unemployment shoots to 7% to 10% |
|
|
Americans retire at 70, instead of 65 or earlier |
|
|
Home prices plunge another 30% |
|
|
The stock market falls 30% or more |
|
|
Government Treasuries and CDs pay 2% or less |
The list could go on. And all those who boldly said “no” to the stabilization package get to say at the end of it is, “Yeah, but we sure showed ‘em!”
I believe a stabilization package will pass - and soon. And personally, I’m willing to take on an extra $2,300 (which may or may not be paid back) versus an alternative that I know I don’t want.
But I guess there is a reason why Congress only has a 9% approval rating. They just don’t get it.
Karim
Related Articles at: www.smartprofitsreport.com:
How To Handle The Stock Market’s Current Turmoil
The Best Stocks To Invest In During Bear Markets
Sphere: Related Content“Sector Watch”: Forget Washington’s Hot Air… Here’s How To Profit From Wind
September 29, 2008
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
At the moment, one hour can seem like a long time when it comes to financial news and stock market activity.
So two weeks is almost an eternity in comparison!
Since I last wrote to you on September 15, I hardly have to tell you about the current state of the U.S. financial system and punch-drunk behavior of the stock market as a result.
My column two weeks ago came just one day after Lehman Brothers declared bankruptcy, sending the financial markets into a vicious tailspin.
It would have been remiss for a column called “Sector Watch” to not take a look at the most critical sector at the time - the financials. So I highlighted the Financial Select Sector SPDR (AMEX: XLF).
These Two Financials Are Outperforming Their Crushed Competitors
According to the system I’ve developed for my 1-2-3 Trader service, the stock had to go up to at least $24.40 - despite the sector’s woes. With that in mind, I stated that investors would have a good, low-risk buying opportunity under $20.
As the problems mounted, including the troubles at the world’s largest insurance company, American International Group (NYSE: AIG), XLF did indeed trade below $18 on Thursday, September 18.
Then, thanks to talk of a federal bailout and Bank of America’s (NYSE: BAC) quick buyout of Merrill Lynch (NYSE: MER), the financial sector staged a sharp reversal later that day. On Friday, September 19, XLF reached a high of $24.50 before selling off again.
At this point, there’s no way to tell if another big bank or investment house will go the way of Lehman Brothers. And in the latest twist, Congress today rejected the $700 billion bailout plan - which hardly helps restore confidence.
So as I mentioned in my last article, if you’re brave enough to play the financial sector, stick with the companies that have performed well. The two I mentioned last time were BB&T Corp (NYSE: BBT) and US Bancorp (NYSE: USB), both of which have made new highs for the year over the last two weeks.
Let’s switch focus to one of the market’s other big sectors - energy.
What A Difference A Year Makes… Tough Times For Two Of Alternative Energy’s Biggest Players
With the steady climb of oil prices over the past few years, it’s become apparent that higher prices are here to stay.
As a result, the market has spawned dozens of new alternative energy stocks - and subsequently, ETFs devoted to the sector.
However, with alternative energy technology developing rapidly and sub-sectors like wind, solar, geothermal, bio-fuels, and bio-mass all springing into the headlines, it can be tough to know which stocks or ETFs an investor should play.
Fortunately, ETFs give you broad exposure and diversity to certain markets, with less risk than owning individual stocks.
For example, the two most widely followed alternative energy ETFs are the PowerShares WilderHill Clean Energy ETF (AMEX: PBW), which is mostly made up of American companies, and the Market Vectors Global Alternative Energy ETF Trust (NYSE:GEX), which gives you international exposure to some of the largest companies dealing in wind power.
In 2007, these ETFs turned in outstanding performances, chalking up gains of 62% and 50% respectively. And GEX may have done even better, due to the fact that it did not begin trading until May 2007.
In 2008, however, the funds haven’t been able to sustain that performance. As of September 26, PBW is down about 40% for the year, while GEX has lost 25%.
“Springing” Back To PBW
Back in the spring (March 24, to be exact), I highlighted the performance of PBW in my “Sector Watch” piece. At the time, the stock was trading around $21 and had recently tested its January lows. With the chart pattern still bearish, I said it represented a good short-selling opportunity.
Before it rebounded last week, PBW had traded below $15. But as long as oil prices remain high, ETFs like PBW should come back into favor. Moreover, after the beating they’ve taken this year, they look like good value.
That said, I don’t like trying to pick bottoms, so let’s take a look at the daily chart of PBW for more clues…
As you can see, the downtrend line drawn from the highs last December currently sits at $18.95. As time goes by, this number will go lower, but a couple of closing prices above this downtrend line will signal a change in trend - and that the stock is probably worth buying.
Profits From Thin Air
Between PBW and GEX, though, I actually prefer GEX, due to its higher exposure to the wind power segment. This fast-growing area is gaining some serious momentum and greater investment, thanks to the publicity that T. Boone Pickens is bringing. Pickens is a very smart businessman, who is investing billions towards the largest “wind farm” in the U.S. And you can see why he’s on board…
Wind power is the second largest source of new power generation in the U.S., surpassed only by natural gas.
- In 2007, wind provided enough power to satisfy the residential electricity needs of 150 million people.
- Capacity increased by a record-breaking 20,000 megawatts, which puts the world total at 94,100 megawatts.
- According to the U.S. Department of Energy, since 1980, the cost of producing wind power has declined by as much as 90%.
- Electricity from new wind power projects will be cheaper than electricity from new conventional power plants by 2010.
If you’re a fan of wind power, there is a relatively new ETF that deals strictly with the field. It’s called First Trust ISE Global Wind Energy (NYSE: FAN) and it began trading in June 2008.
Having hit a high of $31.50 in June, FAN has sold off, along with the other alternative energy ETFs. Earlier this month, it traded as low as $20, so let’s take a look at the chart to see what the next move might be…
With only a few months of data to go on, projecting the stock’s next move is a little trickier, but we have enough information to draw a regression channel from the June highs. The upper band of the channel is currently around $24.15 and a couple of closes above that level should lead to higher prices for the stock. We’ll keep an eye on this one, as wind power continues to gain traction.
That’s all for this edition. I invite you to join me here again in two weeks.
Jim
Sphere: Related ContentThe Technology Sector Could Be A Diamond In A Rough Market
September 25, 2008
The Smart Profits Report
Thursday, September 25, 2008: Issue #561
by Paul Moore, Technology Specialist, Smart Profits Report
Amid all the current negativity surrounding the stock market, let’s turn our attention away from the financial sector for a moment and give a verdict on technology.
Right off the bat, let’s toss out this question: Is the outlook for technology shares really that bleak?
If it is, then the results from companies that reported their quarterly financial results ending in August do not reflect the negativity. In fact, shares of large-cap technology companies reporting in September reflect a positive bias, while the negative returns for the PowerShares QQQ Trust(Nasdaq: QQQQ) - the ETF that represents the Nasdaq index - reflects a negative bias.
You don’t need to be a rocket scientist to interpret this: Investors are overly negative, and when concerns are quelled, stocks respond positively.
Profit Growth Of These Four Technology Bellwethers Bodes Well For The Sector
In my last column, I focused on technology as well, and highlighted that on six occasions over the past 10 years, the QQQQ has chalked up a positive return over the last four months of the year.
In addition to that positive historical data, technology has also done well by way of Adobe Systems (Nasdaq: ADBE), Oracle (Nasdaq: ORCL), Red Hat Inc (NYSE: RHT), and FactSet Research Systems (NYSE: FDS) all of which posted earnings growth, despite pressure on the top-line. This is an indication that technology could be one of the sectors to show earnings growth, even though corporate and international technology consumers are strained.
|
COMPANY |
MARKET CAP |
EXPECTED EPS |
REPORTED PRIOR EPS |
YEAR EPS |
YEAR-OVER-YEAR EPS GROWTH |
STOCK REACTION |
|
Adobe Systems (ADBE) |
$21.3 billion |
$0.50 |
$0.46 |
$0.45 |
11.1% |
4.1% |
|
Oracle (ORCL) |
$106.7 billion |
$0.27 |
$0.29 |
$0.16 |
68.8% |
14% |
|
Red Hat (RHT) |
$3.2 billion |
$0.18 |
$0.20 |
$0.17 |
5.9% |
- 6.4% |
|
FactSet Research (FDS) |
$2.6 billion |
$0.64 |
$0.67 |
$0.60 |
6.7% |
1.1% |
|
|
|
|
|
|
AVERAGE |
3.2% |
|
PowerShares QQQ Trust (QQQQ) |
|
|
|
|
- 1% |
Want another example that investor and analyst expectations are lower than fundamentals warrant? Just take a look at the performance of General Electric (NYSE: GE) today.
Technology Could Be The Light At The End Of The Dark 2008 Tunnel?
This technology company announced this morning that it’s reducing its earnings guidance from the consensus $0.53 per share to a range between $0.43 and $0.48. It’s also suspending its share buyback program.
Logic would suggest that the stock would decline after news like this. But negative news is resulting in positive stock moves - and GE shares bounced higher by 4% today after trading down 5% in this morning’s pre-market trade.
So what’s my verdict? I continue to believe that technology shares will exhibit a positive bias into the end of the year, as the stability provided by enterprise licensing deals and long-term maintenance contracts should prevent extreme volatility in earnings. Moreover, cash-rich balance sheets should allow management teams to make strategic acquisitions and (General Electric aside) accelerate share buyback programs.
Paul Moore
Related Articles:
The Best Sector To Invest Your Money In Until The End Of The Year
The Best Stocks To Invest In During Bear Markets
Sphere: Related ContentBig Bailout: What The Fed’s Decision Means For Stocks - And For You - And How To Profit From It Anyway
September 23, 2008
The Smart Profits Report
Tuesday, September 23, 2008: Issue #560
by Marc Lichtenfeld, Senior Analyst & Healthcare Specialist, Smart Profits Report
The bailout made it official: Other than the week of September 11, 2001, last week was the most memorable of my career.
By the time the closing bell rang on Friday, investors were exhausted after an astonishing week of crazy activity, as the stock market swung from enormous losses, due to the fallout of the Lehman Brothers bankruptcy and AIG mess, to equally remarkable rallies amid talk of a massive government bailout plan.
Like many others, I knew I’d need the weekend to digest and make sense of everything that happened. The only reprieve I got was taking my 7-year old son to his first baseball game. He even got a ball from Florida Marlins manager Fredi Gonzalez, which made the night as unforgettable as the week.
By Saturday morning, though, it was back to the news - and unfortunately not the sports section. After reading countless reports, columns and opinions, here are my two cents (euro cents, by the way, since they’re worth more than U.S. cents - and will continue to be for some time)…
A Big Bailout And A Ban
So the U.S. government is set to give Wall Street a bailout to the tune of $700 billion. Additionally, the Securities and Exchange Commission (SEC) issued a ban on the short selling of 799 stocks until October 2.
My immediate reaction to both the bailout and the ban was outright anger. I don’t like government interfering with free markets. And in this case, I felt that those who took on too much risk would not feel the full impact of their actions if “Big Brother” came riding to the rescue. Not to mention the chance of others making similar mistakes in the future if they think taxpayers will bail them out if they get into hot water.
With regard to short sellers, they actually play an important role in the market. Here are just two…
- Hedge funds and institutions short stocks in order to offset their long positions and cut risk. But with no short selling allowed, they must find other ways of doing this - which could include selling their long positions altogether.
- When markets are at a bottom, shorts provide demand by buying shares to offset or close out short positions. If not, there’s a chance that the market could see very low volume as fears rise.
But as I learned more about the bailout and what was going on in general, I think Treasury Secretary Henry Paulson had no choice. Here’s why…
This Bailout Is An Imperative Intervention
We were (and still could be) facing a complete meltdown of our financial system. If this issue was just about stocks, I’d say let ‘em crash. I’m a firm believer that equities should be allowed to find their own level without any artificial interference.
But this is about much more than the stock market. We had a major money market fund that plummeted to less than $1. Remember… these kinds of funds are supposed to be safe investments, where people park their cash.
So when word got out that the fund was under a buck, a run on the fund began, just like the run on the banks during the Great Depression. Had this situation been allowed to continue unfettered, the ripple effect throughout the system would have been devastating.
At one point, 3-month Treasuries were trading at a negative yield. This means investors were so panicked that they would lose so much of their capital, they were willing to invest in Treasury bills, where they were guaranteed to only lose a little bit.
Think about what that says - and about how close to the precipice we were. So what now?
They’ve Got The “Short” End Of The Stick… But They’re Some Of The Smartest Guys In Town
I have a lot of issues with the way the bailout will be handled, but again, I sincerely believe we were looking at a collapse of the system. Something had to be done.
What we didn’t need, however, was the ban on shorting financial stocks. Blaming the short sellers for the latest problems reminds me of when the perma-bulls cried about day traders during the dot com collapse. Investors have just as much a right to short a stock as they do to buy it.
And think about this: Short sellers are very often the ones who expose bad companies masquerading as good ones. For example, how much more money would have been pumped into Enron if it weren’t for people like Jim Chanos, a famous short seller who unearthed the problems at the company?
And what if investors had listened to David Einhorn of Greenlight Capital, who was shorting Lehman Brothers over a year ago?
Because they go so strongly against the grain, shorts tend to conduct very thorough research. And like it or not, they’re a hugely valuable part of the system. In fact, whenever I research a stock, I always take the shorts’ arguments into account.
So I’m glad the Feds did something. They had to. However, it’s not without consequences. The $700 billion necessary for this rescue package isn’t exactly sitting around in the basement of the U.S. Treasury, just waiting to be spent.
No… the government will have to issue yet more debt to cover the cost of this program - something that will make the U.S. dollar even less valuable, and will eventually drive up interest rates.
Stocks Prepare To Hit The Bear Trail
Higher interest rates and lower confidence in the market means one thing for stocks: Bear mode.
However, over the long haul, I suspect we will eventually enjoy a bull market again. Be prepared, though… I believe that day may be a few years away.
So what should you do? Withdraw all your money and stash it under the mattress? Take shelter in an underground bunker until the dust settles?
Absolutely not. Despite the doom and gloom we’re hearing, you can get some respite…
The Best Medicine For The Economy’s Ills
Next time you hear someone on television ramble on about what a mess the U.S. economy and stock market is in, I want you to ask yourself this question: “Okay… but that doesn’t mean the whole country is going down the toilet. So what sectors can still enjoy success, despite the economic sickness?”
The clue is in the question with the word “sickness.”
No matter what happens in the economy, people will still need to go to the doctor, take their medicines, and have life-saving procedures.
So while the economy may be sick, people will unfortunately still get sick, too - whether it’s a virus, broken bone, cancer, heart disease, diabetes, or a myriad of other ailments.
And whether they’re spending their own money, their insurer’s, or the government’s, they’ll buy therapies to treat their conditions, no matter what the S&P 500 is doing.
It’s just one of the reasons why I’m so optimistic about the healthcare sector - and why I expect it to outperform - especially in this market.
The thing is, good research and science will continue to be funded, as there’s always big money to be made from blockbuster drugs (unless, of course, the government nationalizes our healthcare system, too).
And as our resident healthcare expert, a difficult economic climate could actually make my job easier, as some companies will have a harder time raising capital. That’s why it’s worth repeating that companies with sound science should be able get the funds they need to conduct their research. On the other hand, those firms whose science is a bit more speculative may not.
Don’t get me wrong… there are few slam-dunks in the healthcare sector. You really need to know what you’re doing when you invest in it, and I actually pass on more than 90% of the companies that I research.
But think about it… if the field is whittled down a bit, that should mean I’ll have to sift through fewer losers to find my potential winners.
Hoping your longs go up and your shorts go down (the latter of which I admit might be difficult, given the government’s ban on short selling!)
Marc Lichtenfeld
Managing Editor’s Note: Marc is way too modest to talk himself up here… so I’ll do it for him! You may be interested to learn that he’s the Director of Research for his very own “institutional-style” healthcare investing service called Access. Based on his proprietary F.I.R.S.T. methodology and drawing on his experience at some of America’s most respected, high-end research firms, Marc’s mission is to hunt down the best small-cap biotech and healthcare stocks on the market today - and position you in them before they surge higher. And as of Monday’s close, Access was up 14.1%, compared with a 9.3% loss for the S&P 500 and a 0.9% for the S&P Healthcare Index. And the catalysts are in place for more gains with his current picks.
Give our VIP Services Team a call today and ask them for more details on Access - they’d be glad to fill you in: 888.570.9830 (within the U.S.) or 410.454.0498 (from overseas).
Related Articles at: www.smartprofitsreport.com:
The Healthcare Sector: Recession-Proof Your Portfolio With This Robust Sector
Healthcare Investments: 5 Steps to Investing in Healthcare During a Bad Economy
Sphere: Related ContentThe Commodity Sector’s “Big Four” Say “Sayonara” To The Selloff… Here’s The Next Action
September 22, 2008
Monday, September 22, 2008
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Oil… natural gas… gold… and silver.
When it comes to the commodities world, these four markets are the main drivers of the sector’s activity. And since they’re also the biggest movers at the moment and attract the most investor interest and media attention, we’re going to focus on them.
As I mentioned here two weeks ago, many commodities have endured big selloffs after achieving multi-year and/or record highs. Not only that, these selloffs have happened quickly, with commodities appearing to get caught up in some of the stock market’s current mayhem too.
This is an important point, as many believe that Wall Street firms roiled by the credit crisis have contributed heavily to the liquidating phase in the commodities markets.
So let’s take a closer look, starting with oil…
A $57,500 Move In Two Months
In our last column, crude oil futures were trading around $106 a barrel – and headed south.
That southerly trend then continued, with the price dropping to a low point of $90.50 a barrel. It was the lowest price since February and the first time since April that oil has traded below $100. But oil has rallied a again and the price currently sits around $121 after a record one-day spike of $16 today.
Based on the oil point multiplier, the top-to-bottom move from oil’s all-time high near $148 a barrel in mid July to its recent low of $90.50 equates to an equity move of $57.50 a barrel – or $57,500.
For a bigger chart click here.
With the possibility of Wall Street receiving a massive government bailout, totaling some $700 billion, it will be interesting to see how the oil market performs from here. We may have seen a market bottom for the near future.
Let’s mosey on over to the energy market’s other big player…
Natural Gas Takes A Breather… And Prepares For Launch?
In my previous column, natural gas was in the middle of a rather brutal downside pounding. The slump was so intense that the market had given up all the gains it had made in 2008.
Following the massive 6,800-point loss it’s suffered since hitting a high back in early July, it looked as if the market was going to take a breather and digest the move.
For a bigger chart click here.
And over the past two weeks, that’s exactly what has happened, as the price has consolidated its trading range around the $7.500 mark. As I noted in the just-released October issue of the Xcelerated Profits Report, (where I issued a specific recommendation on the natural gas market), this could be an area of great value for natural gas – and a possible launchpad for the next move higher. Keep your eye on this one.
Moving to metals…
Metals Set To Continue On Their Upward Track
As usual, gold and silver are still taking their cues from the oil and U.S. dollar markets. While they follow the oil market directionally, they move to the inverse of the dollar.
With the walloping that the stock market received early last week, these metals once again became the safe havens that many investors seek out when they’re craving some stability.
After a relentless selloff over the past month-and-a-half, we may have finally seen the bottom in gold and silver now. In addition, with the oil market rediscovering some strength and the dollar getting hit again, they’ve both seen some decent spikes over the past week.
For example, gold has rallied $150 an ounce from its low point – as you can see on the chart.
For a bigger chart click here.
Although silver has performed much weaker, it’s still managed to tack on a nice gain of $3 an ounce. That’s a dollar move of $15,000 for each market on one futures contract.
For a bigger chart click here.
There’s a possibility we could continue to see sustained upside moves in these markets for now.
Juicing Up
Lastly, I just want to give you a quick update on the orange juice market. Although this commodity doesn’t garner much volume or attention, it still gets noticed every summer when the hurricane season rolls into South Florida.
Since a good portion of oranges are harvested in Florida, we can usually expect a decent amount of interest in orange juice trading during the August-October periods.
Even though we’ve had a few hurricanes sweep through Florida this season, none of them caused any damage to the orange trees. If you look at the daily chart (the first one) and monthly chart (the second one) below, you can see the downward momentum in orange juice futures, as there is no reason to be buying.
For a bigger chart click here.
And the monthly chart shows how orange juice futures have come down since the beginning of 2007.
For a bigger chart click here.
That’s all for this edition.
Lee Lowell
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And in the current rocky stock market climate, this is exactly the sort of guide you need to have by your side to navigate the market’s minefield. In it, Alex discusses his extremely successful (and logical) investment philosophy that has proven to work in all market conditions, plus the techniques that have produced profits time and time again.
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Sphere: Related ContentEastern Europe Proves That High Growth And High Income Are Still Possible
September 18, 2008
The Smart Profits Report
Thursday, September 18, 2008: Issue #559
by Nick Lanyi, Guest Columnist, The Street Authority
Managing Editor’s Note: In today’s issue, I’d like to welcome back Nick Lanyi from The Street Authority. You may have read Nick’s columns here before - and if so, you’ll know that he’s an expert at digging up the best high-yielding international stocks. And with major stock markets tumbling across the world this week, there’s no better time to focus on this often overlooked, but flourishing European region. Over to Nick…
Martin Denholm, Managing Editor, Smart Profits Report
Eastern Europe: History… Culture… And Superb Investment Yields
Eastern Europe has grabbed its fair share of international headlines recently.
Unfortunately, due to Russia’s invasion of Georgia, many of them have come for the wrong reasons.
If you look past the mainstream doom-and-gloom, though, what you’ll find is a region full of much brighter opportunities for savvy investors. And as the difficulties in Georgia get pushed into the past, the world’s focus will once again shift away.
But that’s normal - Eastern Europe is usually overlooked by the developed world anyway. Here’s how to separate yourself from the crowd and become a smarter investor…
The Prestigious Jewels In Eastern Europe’s Crown
Eastern Europe has long intrigued sophisticated travelers (and investors).
Take the region’s crown jewels, for example:
- Prague, capital of the Czech Republic, whose history spans 1,100 years and is home to some of the most famous and expensive art in the world.
- In Poland, Warsaw, which was razed to the ground in World War II, arose from the rubble and now boasts one of the tallest cityscapes in Europe.
- In Bulgaria, you can view charming Alpine summits in the Balkan Mountains, to the picturesque Black Sea shore. And its capital city, Sofia, is home to one of the most striking Orthodox cathedrals in the world.
Free From The Soviet Stranglehold, Eastern Europe Finally Flashes Its True Potential
While under Soviet control, Eastern Europe’s considerable potential was left untapped. Stifled by the inefficient Communist state, the region lay economically dormant.
But when the Berlin Wall fell in 1989, it sparked hope. Still, in a region with thousands of years of memories, progress can be a little slow. A full fifteen years passed between the release of the Soviet chokehold on Eastern Europe and Poland’s entry into the European Union.
Once that happened, however, many of Poland’s neighbors followed suit. Bulgaria and Romania joined the federation last year and Slovenia held the international body’s rotating presidency until the end of June.
Today, it seems the Eastern European slumber is over for good. The region is awake and its residents are serious about catching up to the West. Eastern Europe is growing ever more vibrant and the best part for us is that it offers a remarkable - if still widely overlooked - investment opportunity.
In short, serious investors simply can’t afford to overlook these countries any longer. After all, they can bring strong returns to your portfolio - and not only that, put hefty double-digit dividends in your pocket along the way, too.
Sizzling GDP Growth
One quick way to gauge the region’s potential is from its GDP growth. As the old adage goes, “A rising tide usually lifts all boats.” And Eastern Europe’s tide is certainly living up to that.
At 10.3%, the GDP growth in Latvia rivals China. And at least eight other Eastern European countries exceed the world’s average 5.2% annual GDP growth rate. By contrast, the U.S. economy lags by several percentage points.
As you can see on the chart below, these favorable economies have fueled the absolutely sizzling market performance in Eastern Europe for the past five years. The Czech Republic market has surged 232.6% in U.S. dollar terms over that time, while Poland’s market enjoyed an outstanding 217.3% jump. And Latvia, even with its stellar GDP growth, was a relative underperformer, having increased “only” 90.8% for Stateside investors.
And the S&P 500? It notched a mere 29.1% advance over the same period.
USA vs. Eastern Europe
Clearly, if you’re concentrating your investments on U.S. companies, you cannot reasonably expect to mirror Eastern Europe’s triple-digit returns. The U.S. simply doesn’t have the growth to power that sort of market performance.
Even if you exclude all other factors, U.S. growth is limited by the current inertia of the world’s largest economy. By contrast, it’s easier for a smaller, underdeveloped country to grow - and maintain a relatively high growth rate for years - than it is for a large, mature economy like the U.S.
And current forecasts show that trend is likely to continue over the long-term. Across Eastern Europe, GDP growth is greater than 5%, while it’s less than 2% in the U.S.
Take a look at the 2008 GDP growth forecasts…
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These projections certainly look less than rosy for the U.S., but there is a glimmer of hope. Why? Because growth in Eastern Europe is expected to continue, even as we struggle in the States. That means you still have time to profit from Eastern Europe’s good fortune.
Eastern Europe Wants Your Investment… And Is Prepared To Pay You To Get It
And in addition to strong economic growth, the dividend payouts from the region’s companies are far higher than we see in the U.S.
- Take Estonia, for example, which has an average dividend yield of 5.1% - more than twice the S&P 500.
- Elsewhere, Poland boasts a 4.5% average dividend yield, while Czech Republic’s average is 4.4%.
The bottom line is this: Eastern Europe wants to attract international capital - and is willing and able to pay for it, as it seeks to finance its continued expansion
Some folks shy away from investing in Eastern Europe, due to the sometimes complicated, time-consuming and expensive nature. But it doesn’t have to be any of those things. We’ve found an exchange-traded fund that does all the legwork in bringing these companies to you.
In fact, I added shares of an ETF focused on this profitable and promising region to my “Ultra High-Yield” Portfolio in July. It’s not only positioned in a high-growth market and poised to deliver double-digit gains, it’s also paid an astonishing 25.2% in dividends and short-term capital gains (long-term gain distributions juice the return even further).
The fund’s 44 companies are the crème de la crème of Russia and Eastern Europe, with each region representing half the portfolio. I’d like to offer this same recommendation to you that I did my High Yield International newsletter subscribers - and I’d like to you to get on board, too by giving you the name of this ETF.
Until next time…
Nick Lanyi
Related Articles at: www.smartprofitsreport.com:
How To Box Clever Against A Hostile Market And Score “Knockout” Yields Of 21.5%
Capture 13% Dividend Yields in this Ultra-Safe Foreign Country
Investing In The Fear Effect: How To Buy Bargain Stocks When There’s Blood In The Streets
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September 16, 2008
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Financials Are Out. Let’s Go Drill For Oil Instead…
September 16, 2008
The Smart Profits Report #558
by Martin Denholm, Managing Editor, Smart Profits Report
You know what?
I’m done with the financial sector for now. For the past 48 hours or so, everyone (except perhaps folks in parts of deepest, darkest Peru) seems to have pontificated ad nauseum about the woes within the sector.
It’s a lazy television producer’s dream. You can’t turn on a news or business channel without hearing the “Latest On Lehman,” as the tube revels in yet another panic-inducing story that can run endlessly.
Sure, people want to know the details - after all, this is one of the biggest financial meltdowns in history - but just how much is enough? And how much sense can you get from the television anyway?
Stock markets around the world are tumbling, following the bankruptcy of Lehman Brothers (NYSE: LEH), just six months after Bear Stearns folded. The recent collapse of two of America’s other major companies - Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) in the housing sector - has added to the worry that Uncle Sam is having an increasingly tough time writing checks.
Not even Bank of America’s (NYSE: BAC) purchase of Merrill Lynch (NYSE: MER) has alleviated fears much, and the next card to fall could be American International Group (NYSE: AIG), whose shares plummeted 35% today on bankruptcy fears and a cut to its credit rating. In addition, Washington Mutual (NYSE: WM) just reported that it’s added $4.5 billion in loan loss provisions for the current quarter. Shares are now at an 18-year low - down almost 100% from a year ago. And Moody’s just reduced the company’s bonds to “junk” status. But sliding somewhat under the radar today is another important issue…
Can We Drill For Crude Oil Or Not?
While the financial world frets, lawmakers in Congress are mulling over a vote on a wide-ranging new energy package - one that contains a controversial measure.
With a moratorium on offshore drilling set to expire on September 30, Democrats have proposed lifting it - a move that could pave the way for offshore crude oil drilling on the U.S. coastline.
“Democrats?” I hear you say. Yes, in a U-turn from their original opposition to the idea, Democrats now suggest repealing the ban on offshore drilling, in place since 1981, as long as it’s part of a wider energy plan.
Having initially stated that offshore drilling wouldn’t have enough of a positive impact on U.S. gasoline prices, the Dems’ new proposal would give coastal states the option of drilling between 50 and 100 miles off their coastline. Any areas more than 100 miles from the coast would be totally open to drilling.
The vote comes at a good time, too…
Preserve The Environment, Or Pay $4 For Gas?
While crude oil prices have declined dramatically from the record high of $147.27 a barrel on July 11 (the current price is around $91), consumers still aren’t seeing much relief at the gas pump. Not yet anyway.
Yes, average prices have slipped back under the $4 a gallon level, but the devastating aftermath of Hurricane Ike last weekend has crippled many refineries in the Gulf of Mexico and pushed the price back up.
According to AAA, the national average is $3.84 - up almost 5% from last week - as the massive hurricane swept through the region and forced the closure of 14 refineries in Texas and Louisiana, or 20% of U.S. refining capacity. That took 3.7 million barrels of production offline - and both companies and experts in the region say it could be up to two weeks before normal operations resume.
That could push gas prices back to the $3.90 a gallon level - and public sentiment towards offshore drilling over the long-term has shifted in favor of exploration, in order to break America’s dependence on foreign oil resources, alleviate some of the pressure at the pump, and provide a safety net from attacks to oil supplies in the Middle East and Africa.
Florida is one such state in favor…
Florida To Get Its Drills Out?
Florida’s main tourist attractions are well-documented: Theme parks.
But the state is also home to other attractions, such as a wide array of wildlife. For as long as the offshore drilling ban has remained in effect, residents have argued that drilling would pose a threat to the state’s lucrative coastline attractions.
But with gas prices having hit $4 a gallon, times are a changin’. And in a state that has now become the focal point of election campaigns, it’s a crucial issue. That’s where John McCain could pick up some support, since 6 in 10 Floridians support his pro-offshore drilling stance (a stance he made crystal clear in his speech at the recent Republican Convention, declaring, “We’ll drill new wells offshore and we’ll drill them now”), according to a Mason-Dixon Polling and Research survey.
Many agree with Florida’s Lieutenant Governor, Jeff Kottkamp (a Republican), who says he and his fellow leaders in the state can drill offshore, while also preserving its natural beauty, thanks to newer, safer technology.
Quoted in the International Herald Tribune (IHT), executive director of the Florida Petroleum Council, David Mica, says natural gas could hold more promise than crude oil. That’s because existing wells that were restricted because of the offshore drilling ban could be explored “in less than two years in an environmentally friendly sensitive way,” due to modern technological advances.
Aside from the environmental issues, there is also a deeper reason for wanting to drill: National security. With foreign oil an increasingly unstable resource, due to Middle East tensions and Russia’s recently renewed aggression, the need for alternative energy sources is unfortunately heightened, even if it means slightly comprising the environment.
You can see why: Almost two-thirds of America’s 21 million barrels of oil usage per day is imported from the Gulf, Africa, and Latin America.
But is offshore drilling the “cure all” for America’s oil needs?
Massive Drilling For Crude Oil Could Have Little Impact
Nevertheless, the U.S. still gobbles up one-quarter of the world’s oil production, yet only possesses 3% of the world’s oil reserves, so drilling might not be enough. In addition, it may not have the quick and positive impact on gas prices that many expect.
While many politicians are obviously keen to pander to voters’ wishes at this time of year, some Republicans believe the Democrat plan is a crafty way of promoting offshore drilling, but one that doesn’t actually boost domestic production very much.
Quoted in Reuters, Republican Roy Blunt of Missouri is one such dissenter, saying it “removes the financial incentive for coastal states to team up with the federal government to break our dependence on foreign oil and bring prices down at the pump.”
Others say that some states will be reluctant to participate if there is no revenue sharing plan, while only allowing firms to drill 50 miles from the shore means they can’t take advantage of oil located in the outer-continental shelf.
In addition, the IHT notes that government analysis has shown that a widespread offshore drilling program “would result in a price reduction of perhaps two-tenths of one cent 18 years after drilling begins.”
This issue is a longer-term concern - but one well worth watching in the runup to Election Day on November 4.
Best regards,
Martin Denholm
Today’s Smart Profits Notes:
- Royal Dutch Shell Plc (NYSE: RDS) is enduring a tough time at the hands of Nigerian militants from the Movement for the Emancipation of the Niger Delta (MEND). At 10:10 PM on Monday, the group decided to step up their drive for recognition when they destroyed a portion of the Bonny Light crude system pipeline with explosives. They have officially declared an “oil war” and claim that they will continue targeting installations in the region.
- In the U.S., Exxon Mobil Corp. (NYSE: XOM) will contribute $5 million to the areas ravaged by Hurricane Ike. While Exxon does have interests of its own in the area, including a giant refinery in Baytown, along with other facilities up and down the Gulf Coast, its donation will go to communities by way of the American Red Cross, United Way, Salvation Army and a state relief fund.
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Alternative Energy Sources Are Growing Fast
Commodities Continue Their Late Summer Swoon
Sphere: Related ContentIf You Invest In Financial Stocks… Here’s What You Need To Do
September 15, 2008
Sector Watch: Lehman Lays An Egg… And The World Chokes On It: How To Invest In Financials From Here
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Lehman Brothers (NYSE: LEH) has a lot to answer for…
No sooner had I wrapped up this edition of “Sector Watch” than the company declared bankruptcy, thus forcing me into a swift re-write! So much for my plan to go fishing yesterday…
Anyway, with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) getting bailed out last week, Lehman’s bankruptcy comes at the same time as Washington Mutual (NYSE: WM) and insurance giant American International (NYSE: AIG) teeter on the edge of bankruptcy, too.
So now is the time to take a look at the latest carnage unfolding within the financial sector…
If You’re Investing In Financial Stocks… Here’s What You Need To Do
Despite the recent woes in the financial sector, it actually wasn’t faring too badly. Since the markets bottomed out on July 15, some banks have performed very well. Like BB&T Corp (NYSE: BBT), for example - up a whopping 82% - and US Bancorp (NYSE: USB), which has risen 64%.
Aside from the obvious major problems in both the bank and brokerage sectors, the brokerage stocks, which use more leverage in their businesses, seem to be getting the worst of it. For example, while USB was making a new two-month high last week, Merrill Lynch (NYSE: MER) traded at a 12-year low.
The moral of this story is this: If you’re going to trade the financial sector from the long side, you’d better do your homework and stick with these well-capitalized banks.
On the other hand, you can diversify and lower your risk from the sector through one of its most widely traded ETFs - the Financial Select Sector SPDR (AMEX: XLF)
As you can see below, the stock has remained stuck in a consolidation pattern since late July.
The Offsetting 85
However, this consolidation pattern is a bullish one - and for a good reason.
Because XLF is comprised of more than 85 stocks - mostly including banks, brokers, and insurance companies - when some of them are faring well and some doing poorly, the resulting action is sideways trade.
However, XLF appeared to trigger a daily buy signal off the July 15 lows and unless an alternative upside target is generated, the stock should eventually trade up to at least my minimum target around $24.40.
And that gives investors a good, low-risk opportunity to buy.
That’s because in the wake of the Lehman fallout, the stock will probably trade back down to the bottom of the consolidation pattern in the $19-$20 area. Beware, however…
A Financial World Still Crumbling
If you’re looking to invest in financials in hopes of grabbing some bargains, remember that the sector is still in crisis. Moreover, nobody really knows for sure if other institutions will stumble down the same path to bankruptcy as Bear Stearns and Lehman Brothers.
The best course of action is to wait for the dust to settle and see if XLF can hold the $19 area.
And on a broader scale, the S&P 500’s low for the year is 1,200.44. If the index closes below that level, it should have further to go - in which case, I’d hold off on buying anything until the dust settles.
Commodity Rewind… And Flash Forward
In the last couple of editions of “Sector Watch,” we’ve looked at some of the commodity sectors, including energy and gold, along with their related ETFs.
According to the analysis generated by the trading system I developed for my 1-2-3 Trader service, we noted that they all had bearish daily chart patterns.
And over the past couple of weeks, the US Oil Fund (AMEX: USO), SPDR Gold Trust (AMEX: GLD), and the US Natural Gas Fund (AMEX: UNG) have all made new correction lows.
In fact, USO and GLD have similar chart patterns and they reached my minimum downside objectives over the past week. With UNG, the chart is more complex and it’s hard to tell at this point if the “C” wave (or “3rd wave”) is complete.
Regardless, most of the commodity sectors are now reaching oversold territory and if nothing else, we can probably expect at least a decent rebound to work off the oversold conditions.
USO and GLD are now all set up for daily buy signals, so the risk of being short is increasing.
That also goes for the Powershares Commodity ETF (AMEX: DBC). Let’s take a fresh look at the chart…
We originally highlighted this chart in the August 25 edition of “Sector Watch.” At that time, the stock was trading above $38, and the “C” wave decline was just getting underway. Since then, the stock has made new correction lows and reached my minimum downside objective of $34.60.
So as I said, the same theory as USO and GLD applies here: The chart is set up to trigger a buy signal, so be wary of going short at this point.
We will revisit the commodity ETFs once we see what unfolds from here.
Take care till next time.
Jim
Sphere: Related ContentThe Best Sector To Invest Your Money In Until The End Of The Year
September 11, 2008
The Smart Profits Report#557 -
by Paul Moore, Technology Specialist, Smart Profits Report
Well, we’re about two-thirds of the way through 2008 - a year that could potentially be the worst one for stocks since 2002.
As you may know - and as we’ve mentioned here many times before - the best time to buy is when the investment world is at its most fearful and when the overriding investor sentiment is “panic.”
But what does history tell us? Is it time to camp out in cash-based investments, or look for stock bargains?
The following statistics help paint an interesting picture, which shows that investors could benefit by simply buying one particular market index into the end of the year…
Tech Primed For Another Strong Stretch Run
I’ve reviewed the Nasdaq Composite index’s returns over the past ten years in two different time segments: The first eight months of the year and the last four months of the year.
If history is any guide, it shows that a year-end rally is likely and offers clues as to where investors should look to put their money to work.
As you can see, technology firms are particularly likely to enjoy an end-of-year rally, as corporate IT managers spend any budget dollars set aside for the year to that point, and online advertising and commerce companies benefit from the shift toward online retail and away from traditional retailers.
Let’s break down the numbers…
The End-Of-Year Tech Rally
Right now, the Nasdaq Composite index is down about 11% on the year. But history shows that this trend doesn’t necessarily continue until the end of the year.
As you can see, there have been six instances over the past 10 years where the Nasdaq Composite’s returns over the first eight months of the year were negative.
But on all six occasions, the index promptly rallied into the end of the year. Not only were the returns positive, they were impressive, notching up an average of 14.6%.
This unusual occurrence could be due to several factors…
- The benefit of stocks being oversold
- Optimism about the coming year
- The expectation for outperformance as companies experience budget flush
- Fund managers putting more capital to work in order to aggressively chase year-end performance
Regardless of the cause, a correlation exists. And here’s how you can take advantage…
15% Gains From The Last Four Months
In a post tech bubble economy, by being invested in the sector over the final four months of the year, rather than throughout the entire year, you could outperform the market by 15%.
This may be a short period to draw conclusions from but it represents a solid view of a stable environment for investing in technology stocks.
The years of the bubble, crash, and the first year of recovery misrepresent the growth prospects of the environment we’re in today. And the numbers clearly show that the potential for negative returns are in the early part of the year, when companies have less visibility into financial results, drags on the overall performance.
Therefore, you could outperform the market by buying the index on the first trading day of September and selling at the end of the year. In the post tech bubble/recovery era, this strategy would result in the individual outperforming the market by 15.1%.
Since I wrote about technology stocks coming under pressure from the appreciating dollar, in my last column on August 26 the Nasdaq Composite has dropped 5.7%. This has taken down the stocks to own, as well as those vulnerable to earnings revisions.
Considering the relative stability of technology companies that are independently diversified by not being levered to a single-end market, plus the historical seasonal support, we’re looking for an opportunity to begin to put money to work - and I intend to do just that with my next pick in the October issue of the Xcelerated Profits Report, out next week. For more information, click here.
Best regards,
Paul Moore
P.S. Just a quick reminder that if you’re looking for a great way to cut through the investment fluff and half-truths that are so prevalent on the Internet these days, you need to pick up a copy of Oxford Club Investment Director Alex Green’s new book, The Gone Fishin’ Portfolio.
In it, Alex walks you through his extremely successful investment philosophy and the simple, yet effective, techniques for both making AND keeping the money you make.
Logical and easy-to-read, Alex uses his years of Wall Street money management experience to show you the tried-and-tested investment philosophy that has proven very effective in all market conditions. Click on the following link for more information:
http://www.amazon.com/exec/obidos/ASIN/0470112670/ref=nosim/agora192-20
Today’s Smart Profits Notes
- Dell (Nasdaq: DELL), the proud maker of low-cost, built-to-order PCs, has stumbled upon tougher times recently. The firm is officially exploring plans to sell most, or all, of its manufacturing facilities within the next 18 months - a move that will further distance the company from the concept that first made it famous. Although the executives have attempted to raise profits and cut costs since releasing a less-than-expected second quarter earnings report, their efforts haven’t been good enough. Just today, the firm announced that it’s already sold off two facilities.
- AOL used to be something of a status symbol. Today, though, a string of customer service complaints has tarnished the company’s reputation. On Wednesday, however, AOL launched a new homepage that it hopes will call to previously dissatisfied customers (numbering in the millions) who have left its service. With the new version, AOL users can access outside e-mail accounts and log into their social networking sites, too. More personalization features will also be added over the coming weeks. Speculation on the real goal behind AOL’s advancements is simple: The firm is sprucing up its performance in order to sell the currently floundering business to somebody else.
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When The Going Gets Tough, The Tough Go Fishin’
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