Alan's Finance Blog

Avoid the Dead Money Strategy

Dear Sovereign Investor,

Give me a few minutes and I can change the way you look at investing.

In the pursuit of profits in the stock market, investors always seem to want to get in on the “the next Microsoft” or “the next Wal-Mart.” Instead, they often end up buying Microsoft and Wal-Mart and other big names after the magic is gone.

They can’t see what’s happening tomorrow, so they stick to what worked yesterday – and hope the fire reignites.

It’s largely a dead-money strategy, because once a company reaches a certain stage, the growth that made it famous is gone. It essentially becomes a utility racking up cash and spitting it back out as dividends. But the share price barely budges.

That’s not necessarily bad if you’re an income investor. But it’s not good if you are seeking the fast growth that made companies like Microsoft and Wal-Mart stand apart.

To profit from those kinds of companies, you need to have an advantage, an indicator that puts you onto the right path.

The Path to the Hottest Long-Term Trends

Everyone prognosticating the future ultimately claims that their crystal ball is cracked.

Mine is not.

I can tell you with 100% accuracy that demand for milk, dairy and soy is on the rise among the emerging-world’s new consumers. I can assure you without doubt that beer, palm oil and plastic consumption shadows rising wealth. I know with certainty that people who move from poverty onto the lowest rungs of the middle class spend their first additional discretionary dollars on protein such as chicken, fish and pork.

Best of all, it’s easy to profit from these assurances.

Just about any trend you can think of – from the 1950s fascination with hula-hoops to rising demand for better hygiene products among the new consumer class – follows what’s known as an S-curve, named for the shape of the letter.

It is as perfect an indicator as you will find – a divining rod of profits that can’t help but lead you to the hottest, long-term trends.

Take a look at the chart below. The red line depicts the curve we care about …

This particular S-curve shows how sales per capita rises alongside GDP – in essence, a depiction of consumer spending going up as a country’s economy expands. But I’ve thrown a few notes onto the chart to show you what’s really important about the S-curve.

Notice the three zones – Warm-up, Hot Zone, Cool-down. And notice there’s a take-off point and a point of saturation.

To explain how all of these pieces come together, consider the history of Wal-Mart. It perfectly exemplifies the S-curve and how you can use it to create real wealth in your portfolio.

Wal-Mart began in the 1960s as a tiny, Arkansas retailer with a novel idea – bring big-box stores with discounted prices to small-town America, where the retailing culture of the day insisted big stores couldn’t survive because local populations were too small.

Yet Wal-Mart proved the know-it-alls wrong and began to open additional stores with great success. The retailer was in its warm-up zone.

The company hit its take-off point when it launched its initial public offering in 1970 … and for the next 29 years Wal-Mart was in the hot zone. The shares – at a split-adjusted price of just $0.008 – rose more than 864,000%, ultimately topping out at $69.69 on Dec. 28, 1999.

It was on that day that Wal-Mart hit its saturation point.

Ever since then, the stock has been dead money, orbiting within a narrow band around the $50 mark. The business is fine. It kicks off huge cash flow that will fund ever-larger dividend payments. But the growth that makes investors long for “the next Wal-Mart” is long gone.

There’s Money to be Made
Everywhere on the S-Curve

It’s easy with hindsight to pick on Wal-Mart. But the fact is, had you been an active investor in the 1970s, the 1980s, or even the 1990s, you would have known (depending on what decade you were in) that retailing was either taking off in America or had become a huge part of the American consumer/cultural landscape. And you could have made big profits owning retailers like Wal-Mart that were obviously winning.

Heck, even if you’d waited until the summer of 1998 to finally get onboard the Wal-Mart story you would have still more than doubled your money.

Anywhere between take-off and saturation profits await.

When you know the trends of the day, those are the S-curves that will generate the huge profits of tomorrow. Find the key companies that are playing a big role in those trends (and they’re not hard to find), and then invest with an eye towards patience.

Wal-Mart’s hot-zone run, after all, was not a smooth, uninterrupted 45-degree ascent from left to right. It was choppy. At one point Wal-Mart’s shares fell more than 50%.

But those who held on, resolute in their belief that the American consumer trend was still strong … those people turned a modest investment into generational wealth.

The same opportunities are out there right now, in stocks markets around the world where the new consumer class is taking off. All you have to do is follow the S-curve, and it will lead you unerringly to profits.

Until next time, keep a global view …

Jeff D. Opdyke
Editor, Emerging Market Strategist

The Greatest Complacency of the 21st Century

Many of our readers know intuitively that their neighbors and friends have become complacent about the world around them, but they don’t know how to prove it.

Today, I’ll show you two ways to do just that.

The key is that rising equity prices usually lead to an increase in stock market optimism, while falling prices generate stock market pessimism.

That alone is no justification for bearish or bullish strategies — until it reaches an extreme.

So the questions are: How do you measure this optimism or pessimism? And how do you know when it’s at an extreme level?

Right now, I’d like to focus on two measures in particular …

Mutual Fund Cash Levels

The average cash allocation of mutual fund managers is one of the most important sentiment indicators available — and for good reason: Forty percent of all U.S. stocks are held by mutual funds. So their buying and selling can easily move the market.

What’s especially remarkable is that fund managers are as prone to the herding instinct as any other group, which leads to an interesting pattern in their investment behavior:

Mutual fund managers almost invariably hold relatively high cash levels near market bottoms, and relatively low cash levels in the vicinity of important market tops.

Go back to March 2000, for example, near the top of the tech stock bubble. Precisely when they should have been taking profits off the table, mutual fund managers loaded up with stocks and ran their average cash levels down to 3.7 percent. For them and their shareholders, it was a disaster. For astute investors, however, it was a blatant and very TIMELY sell signal!

But now look:

Mutual fund cash levels are even lower than they were in March of 2000!

In fact, according to the Investment Company Institute, mutual fund cash levels are currently at an extremely low 3.5 percent. They have been that low just twice before:

• First, in the summer of 2007, at the climax of the 2003-2007 cyclical bull market.
• Second, in March/April 2010 right before the flash crash of May 6, which marked the beginning of a 17 percent market correction.

What’s most remarkable is that, as you can see in the chart below, cash levels have been very low for more than a year. This tells us that the only thing driving the market higher is the Fed, and we don’t doubt their ability to continue their money pumping. But the history of this indicator suggests that the next vicious bear market may be lurking around the corner.

Another indicator I closely follow is …

Investors Intelligence Advisor Sentiment

Investment newsletter editors play an important role in influencing and driving investor sentiment; and Investors Intelligence has developed a relatively reliable sentiment indicator to track them.

Here, too, a pattern is clear:

Compared to mutual fund editors, newsletter writers seem to be more flexible, adapting more rapidly to changing market conditions. So when they’re overly bullish as a group, it often has only short- to medium-term bearish implications.

But still, long stretches of extreme bullish sentiment as measured by this indicator has often marked major tops.

As you can see in the second panel on the chart below a high degree of bullishness has been persistent for nearly four months. And the trigger line for a bearish signal — more than 55 percent bulls — has been broken.

This is another clear warning sign that a larger correction is overdue. Moreover, despite the stock market correction of the past few weeks, bullish sentiment has prevailed. That’s very unusual, and I think it’s another confirmation of the bearish signal!

Indeed, we see little or no angst even in the wake of ominous news coming out of Japan, North Africa, and the Middle East!

That’s complacency par excellence — historically a sign of an imminent stock market top.

If you are looking to profit from falling stock markets, I’d say that a decline in the Nasdaq 100 is the most probable. So you might consider ProShares Short QQQ ETF (PSQ) in the $33-$34 range. This inverse ETF is designed to rise 1 percent for every 1 percent drop in the NASDAQ-100 Index.

Best wishes,

Claus

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com

Six Ways to Brazil

Anyone familiar with international investing knows about Brazil. It’s hard to ignore the fifth largest country in the world by geography and population, the South American commodities powerhouse, and the largest economy in Latin America!

Over the past five years, Brazil’s largest ETF (EWZ) has posted a better than 200 percent cumulative return, while the S&P 500 is just shy of breaking even. Brazil puts the ‘B’ in the BRIC emerging market economies, and there’s a good reason why …

As the global economy falters, emerging markets like Brazil have been enjoying a steady rise in capital inflows and new opportunities. Global infrastructure has driven down the cost of doing business in South America compared to New York City. Although the ride will not always be smooth, Brazil still looks much more attractive compared to any broad-based U.S. investment.

Brazil: The Crown Jewel of
The Southern Hemisphere

Brazil is the economic jewel of the Southern Hemisphere. With a mixture of agricultural, mining, manufacturing, and service sectors, Brazil is one of the more diversified emerging markets.

Brazil dominates Latin America with its rich natural resources. It accounts for most of the world’s soybean trade and nearly 80 percent of global orange juice production. Brazil is also one of the few Western hemisphere countries that is energy independent — thanks to ethanol, abundant oil reserves, and hydroelectric power.

But Brazil isn’t satisfied with its inherited resources. Instead, the Brazilian economy is improving nearly every year …

U.S.-backed General Motors (GM) just opened up a $100 million facility in São Caetano do Sul. It’s one of five global product development sites the car maker runs. GM sees the growth potential of the Brazilian auto market and the cheaper skilled labor force Brazil offers.

The famous Christ the Redeemer statue has been overlooking this Brazilian harbor for nearly 80 years and is now overlooking a bustling economy.

But GM isn’t alone …

Fiat, Volkswagen, and Ford are investing in Brazilian engineering and design capacity. That’s because Brazil is expanding its infrastructure. With the expansion, forests are being cleared, roads are being built, and cars are being sold to an employable population.

And with each new mile of road being laid, another car is driven by a happy employee on their way to work in the new Brazil. So it’s no surprise that as the U.S. auto market shrank in 2009, vehicle sales in Brazil grew 11 percent.

There are six ways to gain access into Brazil’s burgeoning economy using easy-to-buy ETFs:

Play #1—
Ride the Large-Caps
In Brazil (EWZ)

Large-cap stocks represent the largest companies by market capitalization — and Brazil has some great large-cap stocks. The cream of the crop can be found in iShares MSCI Brazil ETF (EWZ).

In two weeks, EWZ will celebrate its tenth anniversary as Brazil’s first ETF. Introduced on July 14, 2000, it has gathered more assets than any other non-U.S. single-country ETF. It currently has more than $9 billion under management.

iShares Brazil holds notable large-cap banks, such as Banco Bradesco Sa Brad and Itau Unibanco, and steel manufacturing giant, Gerdau SA. In addition, EWZ invests in Brazilian energy behemoths OGX Petroleo and Petroleo Brasileiro.

These companies give you a wide swath of the Brazilian economy and keep you away from smaller, sometimes more volatile companies.

Play #2—
Hitch Your Portfolio to
Brazilian Mid-Caps (BRAZ)

The Global X Brazil Mid Cap ETF (BRAZ) just started trading last week. It’s the first ETF to target the mid-cap companies of Brazil and offers access to the country’s internal growth.

Bruno del Ama, CEO of Global X Funds says …

“Such companies are currently sparsely represented in existing exchange traded fund options, yet are poised to benefit the most from the country’s solid macro fundamentals.”

The reason you might pick mid-caps over the large-caps is the internal play on Brazilian growth. Whereas large-caps tend to have more ties to the global economy, mid-caps are more focused on internal consumption. And BRAZ is a great way to buy Brazil, with less exposure to the global economy.

To tap into the Brazil’s internal consumer growth, consider BRAZ or BRF.

Play #3—
Hook onto Small-Caps
In Brazil (BRF)

Brazilian small-caps have exploded over the past couple of years. While the rest of the global market has endured everything from panic selling, flash crashes, and central bank-inspired bubbles, Brazil’s smaller companies have enjoyed a relatively steady, substantial climb up the chart.

The easiest way to tap into Brazil’s small-cap growth is with Market Vectors Brazil Small-Cap ETF (BRF). Like BRAZ, BRF is more of a play on the internal growth in Brazil.

More than 30 percent of BRF’s holdings are in the consumer sector and less than 1 percent is in energy. Not only is BRF unlike EWZ from a market cap perspective, but the sector composition is also vastly different.

Play #4—
Buy Brazilian
Infrastructure (BRXX)

Brazil is investing heavily in the infrastructure needed to support its internal growth.

If anything, Brazil is known for its voracious appetite for internal growth, almost to the exclusion of anything else. While the environment sometimes plays second fiddle to economic concerns, you should still consider the purest way to buy into that internal development …

Launched in February, EGS INDXX Brazil Infrastructure ETF (BRXX) tracks 30 stocks involved in the development and maintenance of Brazil’s physical infrastructure.

Play #5—
Go Super-Long
Brazil (UBR)

Do you like everything you see about Brazil but want to improve your return with every uptick of Brazil’s market? Then ProShares Ultra MSCI Brazil (UBR) is the ETF for you.

UBR “seeks daily investment results, before fees and expenses, that correspond to 200 percent of the daily performance of the MSCI Brazil Index.” So to go super-long Brazil, consider UBR.

Play #6—
Brazilian Defensive
Play (BZQ)

As I mentioned earlier, the upward path for Brazil will not always be a smooth one. In fact, since it is still classified as an emerging market, I expect its markets will undergo numerous bear markets while still maintaining long-term growth.

And when those inevitable setbacks come along, you can exploit the opportunity with ProShares UltraShort MSCI Brazil (BZQ).

BZQ is a 200 percent inverse ETF, which means when the Brazil index goes down 1 percent, this fund should go up 2 percent. It’s a leveraged fund so it’s a great way to play the short-term downside moves, but longer-term performance will be a function of the volatility.

What’s Next for Brazil …

You might be thinking that with six different ETFs to choose from, there would be no need for any more.

Well, just like there are more than six ETFs for the U.S., there will likely be more that invest in Brazil. In fact Global X, the company behind BRAZ, has already made plans to introduce a family of Brazil sector funds.

So there you have it. Six ways to invest in Brazil today and more in the pipeline. Good luck!

Best wishes,

Ron

Add Energy Income with an MLP ETN

You’re probably having a tough time these days if you live off the interest from your investment portfolio. For example, according to Bankrate.com, money market accounts are now yielding a paltry 0.76 percent (nationally).

There is no big mystery why this is happening …

Ever since the banking system started blowing up back in 2008, Ben Bernanke and his Federal Reserve have kept short-term interest rates at historic lows. That’s great for bankers, terrible for savers.

Many investors are watching their income slide.

These low rates have income-investors looking for new sources of steady interest and dividends. The alternatives are few. And I’m concerned that some people are so desperate that they’re risking their principal in ways they don’t even realize!

The truth is that there is usually a direct relationship between risk and reward …

• If near-absolute safety is what you want, you can get it from Treasury bills and bank savings accounts, but the interest rate will be very low.

• If you must have more yield, it’s possible — as long as you’re willing to take on more risk.

In other words, there are no free lunches. The best you can do is find a happy medium somewhere on the risk-reward scale.

Today I’m going to tell you about an income investment that I think is a good balance — especially right now in this low-interest rate environment.

Master Limited Partnerships:
Energy Income

You might have heard about master limited partnerships (MLPs). They throw off nice income and have growth potential, too.

MLPs own energy pipelines and storage facilities.

MLPs do this by concentrating on the storage and transportation of energy products. After all, no matter how cheap or expensive oil may be, it still needs to get to you. And the tank farms and pipeline companies are paid well for their services.

My Money and Markets colleague, Nilus Mattive, wrote a terrific column back in 2008 about the MLP market. It’s a good introduction to the topic.

You can, as Nilus says, invest directly in individual MLP issues. I know many people do this very successfully. There are some drawbacks, though …

For one, the tax advantages of MLPs can create some paperwork headaches. You’ll receive “K-1″ forms from each partnership. Many people find the IRS requirements aggravating when it comes time to do their tax returns.

Owning MLPs can complicate your tax return.

You can also face potential tax problems if you hold these partnerships inside an IRA or other retirement accounts. So be sure to consult a tax advisor before you put a MLP in one of these accounts.

As with individual stocks, it’s often better to diversify by holding a broad portfolio of MLPs. Of course this also multiplies the paperwork problem. So wouldn’t it be nice if you could get a whole package of MLP issues in one convenient package?

Well, now you can!

MLP ETNs:
Good Things in Nice Packages

Several exchange-traded notes, or ETNs, now track major MLP sector indexes. They give you exposure to MLP investments in a convenient package with just one trade. They also greatly streamline the income tax reporting.

Sounds great but there are some drawbacks. As I’ve written before, the ETN structure is riskier than it looks. That’s because you don’t really own the MLPs that make up the index your ETN tries to follow. What you own is a bond, issued by a bank, whose return is tied to the index.

This is called “counterparty risk.”

If your ETN sponsor should go belly-up, you could lose part or even all of your investment. Is this a big danger? No, but the possibility is real. Think about Bear Stearns and Lehman Brothers.

Whether the risk is worth taking is a personal decision for you. If you are prudently diversified and pay attention to your investments, then the counterparty risk might be acceptable.

Currently there are three ETNs to choose from that specialize in the MLP sector. You may want to consider these for the income-generating part of your portfolio.

• JPMorgan Alerian MLP Index ETN (AMJ)

• UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI)

• Credit Suisse Cushing 30 MLP Index ETN (MLPN)

All three of these ETNs have an attractive yield and good assortment of MLP issues. One big difference among them is that MLPN uses an equal-weighting methodology while the other two are weighted by market capitalization. This means MLPN is somewhat more diversified.

Best wishes,

Ron

Why you will absolutely fail in trading if you don’t master this

There are many misconceptions about money management. Most think it means trading with stops, but that is only a small part of it. Below is a short part of the complimentary report I’ve found called “How to Safely Double Your Profits in 2009 Trading ETFs.” This little tip alone could save your trading account.

Why use risk controls?

Every trader/investor must guard himself against drawdowns, which refers to the percentage drop in his account size after one losing trade or consecutive losing trades. For example, imagine that after losing a few trades in a row, your $20,000 account is reduced to $12,000; that would be a drawdown of 8,000/20,000 = 40%. If I were to ask some new traders, “In order to be back up to $20,000, what percentage return do you need to generate?” Many would answer, “Since I lost 40%, I have to make back 40%!” This couldn’t be more wrong! Note that after losing 40%, the trader now starts with a lower base, i.e. to undo the $8,000 loss, the return he needs to generate is 8,000/12,000 = 66.6%! That is why I share free training videos on my website to help dispel some of the myths of trading.

The more severe the drawdown, the harder it becomes to undo the damage, as shown in the numbers below.

Drawdown % %Required to get back to break even
10%                  11.1%
20%                  25%
30%                  42.8%
40%                  66.6%
50%                  100%
60%                  150%
70%                  233.3%
80%                  400%
90%                  900%

That is why all professional money managers only risk 1-2% per trade. It’s because no matter how good your trading system is at some point it is a statistical fact you will have 10 losers in a row. Based on risking only 1-2% per trade this is only a 10-20% drawdown and easily recovered. 99% of the hype trading and investing courses in existence don’t say or do this. They say risk 5-10% per trade. It is wrong and will cause you serious financial pain if you follow their advice.

Many of them also use arbitrary stop loss advice. For example, they say, “Place your stop at $100.10 because that is on the other side of a major support or resistance, trend line, MA, etc.”

This makes your risk based on the size of the stop. That is also wrong because the risk can be too large and it’s not the same risk on each trade.

Others reverse this and say risk only 2% total period and let that determine your stop. This is also wrong and will hurt you because it is important to have the correct technical stop.

The answer is to do both. Use a percentage and technical stop together. It works like this. Let’s say the technical stop is $100.10, but based on your entry price that is a 3% risk. Since your plan calls for a 2% risk you simply lower the number of shares you are trading. This lets you stay within your 2% risk and have the correct technical stop. This is exactly what most professional money mangers do.

Some say that this will lower their profits because of trading fewer shares. So what! Study the numbers above again. You know the old quote, “More risk equals more reward.” Well it’s not always true. Sometimes more risk equals more risk! If you lose your money you have no chance to make a profit. Even losing 50% is disastrous because you would then need to make 100% to get back to even.

Like Warren Buffet says, there are only two rules in investing. Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.

I’d like to add a third rule. Correct money management and position sizing must be mastered to ensure your long term success.

The good news is that it is easy to have correct money management and position sizing. I just explained how to use a combo of a % stop and a technical stop. If you want more of an explanation please visit the free video area on this website and click on the “Why have risk controls” video.

The system of entries, stops and profits taking is only half of your key to success. The other half is money management. If you get this part wrong you will lose your account every time regardless of how good your system is.

Click here for a newsletter on how to safely average 6% per month trading Exchange-Traded Funds.

http://www.etftrendtrading.com/cmd.php?af=1115334

Thanks, and good luck!

PS- In order to access these powerful FREE videos you must first opt in for the complimentary report.