After Monday’s and Tuesday’s frightening downdrafts, many investors are panicking.
While he has a plan for his readers to stay calm and make a comeback, Shah had words of warning during his latest Varney & Co.appearance… “Enjoy this rally while it lasts.”
Despite the recent rally, Shah told Fox Business viewers that we’re not out of the woods yet. Find out how fragile he thinks the market is – and what you need to do to protect yourself – in the video below.
It’s no surprise that U.S. stocks have dropped into a free-fall mode.
I’ve been warning about the risks that stock, bond and other financial-asset prices face for some time.
Now that it’s happening, though, you need to understand these two things.
Exactly what’s happening…
And what you can do about it – both to blunt your losses… and to make money.
In fact, while other investors are panicking – and see gloom and doom – I see opportunity.
This morning’s market plunge underscores my long-held mantra: “There’s always a place to make money… always.”
Today I’m going to show you a couple ways to put that mantra to work – so you can cash in…
Forgetting About the Fed
The big, big picture that too many investors lost sight of was that the U.S. Federal Reserve‘s “zero-interest-rate policy” (ZIRP) and massive quantitative-easing (QE) moves didn’t stimulate economic growth.
And it didn’t work when the European Union (EU), Japan and China tried this strategy for themselves.
What all that easy liquidity did do was lift asset prices – which, in the case of the Fed, was also an articulated policy goal.
In the Fed’s “wealth-effect” scenario, consumers would feel better about the economy’s prospects (and their own) by watching stock prices rise.
Aided by the Fed’s cheap-money tailwind, U.S. companies over the last six years helped their own cause with $2.7 trillion of stock buybacks. That boosted Corporate America‘s all-important earnings-per-share (EPS) metric (since the same earnings total is apportioned across a lower number of shares).
That additional boost of corporations buying their shares at ever-increasing prices and better earnings metrics made stocks look better and better to the untrained eye. And that created a “virtuous momentum” market where stocks were pushed to increasingly higher “highs.”
While other countries were following the Fed’s lead, China not only lowered interest rates but embarked on a debt-fueled stimulus tear – including runaway infrastructure spending.
According to McKinsey Global Institute research, China’s total public-and-private debt burden skyrocketed from less than $7 trillion in 2007 to more than $28 trillion by mid-2014.
Despite this, China’s GDP growth rate has been slipping badly.
For a couple reasons …
First, there were low interest rates that have been diverting investment capital and savings into capital markets – chasing stocks and increasingly lower-yielding fixed-income securities. Then there was China’s stimulus efforts to boost infrastructure, manufacturing and exports.
These two factors led to overproduction and the stockpiling of commodities. And they brought us to the point we’re at today.
That’s a big, big picture I just painted, of course. But beneath that, mechanical realities were signaling trouble.
The price of oil has been sliding. When the price of the most important commodity in the world skids precipitously, it’s not just because America’s new record production of 10 million barrels a day is tipping the supply side of the equation.
And it’s not that other producer countries desperate for revenue (which is another indication of trouble) are pumping furiously.
The price of oil – that critical bellwether – is crashing because global demand hasn’t been rising as much as before… because global growth is slowing.
That’s been a flashing light.
Then there’s Greece. It’s been a great 28-century run, but the “Hellenic Republic” is probably on its last legs. That’s another warning sign – not just about Greece, but about the burden of debt in general.
There’s no way Greece can pay the more than $350 billion it owes, and that’s just in bailout loans.
There’s no way Japan can repay its government’s $11 trillion in debt, which will be three times Japan’s GDP by 2030.
The United States is no slouch in the debt department either. Globally, debt burdens have been climbing higher.
And that takes us back for a moment to the big, big picture: By slashing interest rates, central banks are engaged in a scheme to cut the financing costs of the rising debt loads of each of their respective governments.
The only escape route out of everyone’s debilitating debt spiral is for economic growth to accelerate (that’s, of course, what everyone had hoped low interest rates would accomplish). Accelerating growth would boost the tax revenue needed to help pay down debt. And it would also fuel inflation, which reduces the cost of the debt.
That’s why central banks want inflation. But there is no inflation – which is another crystal-clear signal of trouble.
Then there’s China. The saying used to be, “When the United States sneezes, the world catches a cold.”
That’s now true of China. And China is sneezing, hacking, loading up on NyQuil and taking three days off work.
Beijingtried to push stock markets higher by cheerleading them on through party papers and TV shows.
Millions of new brokerages accounts have been opened since the end of 2014, and Chinese “speculators” have been lavished with margin to buy into the nation’s hot stocks.
The central planners had hoped to get China’s debt-ridden corporations – especially the state-owned and controlled entities – to be able to issue new equity to new stock investors. The goal: To offload balance-sheet debt onto stock-market “plungers” – a Wall Street euphemism for market players that make big-and-reckless bets.
Beijing’s plan didn’t work. When Chinese stocks crashed, that was another giant warning light signaling trouble ahead.
There’s just no good news left to lift stocks higher. There’s no market leadership from any industry, other than the brief momentum runs made by some tech darlings and a bunch of hot biotech companies that are promising next-century solutions to yesterday’s problems.
And there’s even another challenge looming: The Fed says it’s leaning toward raising interest rates.
How to Run the Table
All these signals were flashing yellow, then bright red in the past few weeks.
We caught them all in my Short-Side Fortunes trading service and are very short and very, very happy, because we are short China, oil, Europe and all the U.S. stock indices.
I’m looking for an oversold bounce at some point, but if we get one on thin volume, it will be a chance to just load up for the next downdraft.
There’s nothing holding markets up anymore. It’s truly frightening.
Central banks have shot their ammo. Their bazookas are smoking… and empty.
What the markets need now is a good, long flushing-out. Not that I want to see that, even though we are short, but that’s what they need to squeeze out excesses built into artificially inflated stock-and-bond prices.
It’s not too late to capitalize on this opportunity… to hedge against further downside moves, or to make money if stocks fall more – as I believe they will.
Because puts are now so expensive, the best way to hedge and the best way to profit from any further selling would be to buy “inverse” exchange-traded funds (ETFs) like ProShares Short Dow30 (NYSE Arca: DOG), or ProShares Short QQQ (NYSE Arca: PSQ).
We own both in myShort-Side Fortunes service, and they provide great short exposure to the big U.S. indices.
As sure as this sell-off was clearly signaled, there will be signals when we’re near the bottom.
We’ll continue to follow stocks down.
And we’ll be there for you when they’re ready to rebound.
Peer-to-peer lending, or P2P as it’s known, is a juggernaut financial-services Disruptor.
But thanks to its supercharged growth, P2P lending has attracted the attention of regulators and other financial-market overseers. They’re scrutinizing this new form of lending from multiple angles – fearing it may be too disruptive for its own good.
The U.S. Treasury Department, the Consumer Financial Protection Bureau, financial services regulators, bank and finance company lobbyists and, most recently, the U.S. Court of Appeals for the Second Circuit are weighing in on P2P lending.
There’s a lot at stake here…
For borrowers in love with lending platforms that give them access to money that would otherwise be hard – even impossible – to get.
For private lenders who loan money to borrowers at above-average rates.
And for the owners of sites that match lenders and borrowers for a fee, including investors in publicly traded ventures like LendingClub Corp. (NYSE: LC).
There’s even more at stake for the stock market and the economic health of the country.
The issues aren’t complicated, but tackling them will be.
As we’ve said before, P2P lending is one of the biggest new developments in the world of finance.
But you don’t want to take a wrong step.
Here’s what you need to know to avoid getting caught on the wrong side of the tracks if this Disruptor train gets derailed…
When Banks Aren’t Banks
While Disruptors can upend the status quo in any industry, not every disruptive business model plays out as their creators plan.
That’s especially true when the industry being disrupted – in this case, financial services – is one the most powerful sectors in the world.
Banks and formerly successful consumer-finance companies weren’t initially concerned about P2P lending when the new lending barbarians, led by Prosper Marketplace Inc., opened up in 2006.
Of course, 2006 led into 2007, which was the beginning of the end for a lot of banks and consumer finance companies.
While traditional lenders struggled to stay open during the credit crisis and through the Great Recession, P2P lenders honed their business models and extended their reach globally.
Today, P2P lenders are a growing threat to banks and consumer finance companies trying to reestablish themselves. The traditional lenders have unleashed their lobbyists to undermine P2P lenders before they get much bigger than they already are.
According to research from Morgan Stanley (NYSE: MS), marketplace lenders – that’s what P2P lenders are calling themselves now – are expected to account for more than 8% of consumer-unsecured loans and 16% of small-business lending by 2020.
Here’s the knock on marketplace lenders by their more traditional competitors.
Marketplace lenders are non-banks that don’t directly issue loans, that don’t keep any credit risk on their books after they match up borrowers and lenders, that use small Federal Deposit Insurance Corp. (FDIC)-insured specialty banks to facilitate their banking services but don’t pay into the FDIC safety-net fund, that don’t have lots of assets or capital, that add leverage to the economy, and that generally act as banks but don’t have the regulatory burdens of banks.
Constituents and lobbyists are bombarding legislators, asking them to look into these issues. And, in turn, those legislators are prodding regulators and the Treasury Department to step up their game.
On July 16, the Treasury Department issued 14 questions for public comment. The preliminary information-gathering inquiry on marketplace lenders and lending practices asked market participants for comments on:
The different models used by marketplace lenders and how these models may raise different regulatory concerns.
The role electronic data plays in marketplace lending and the risks associated with its use.
Whether marketplace lenders are tailoring their business models to meet the needs of diverse consumers.
Whether marketplace lending expands access to credit to underserved markets.
The marketing techniques utilized by marketplace lenders.
The process marketplace lenders use to analyze the creditworthiness of borrowers.
The relationship between marketplace lenders and traditional depository institutions.
The processes marketplace lenders use to manage certain client operations, including loan servicing, fraud prevention and collections.
The role the government could play in effecting positive change in the marketplace lending industry.
Whether marketplace lenders should be subject to risk retention rules.
The harms that marketplace lending may pose to consumers.
Factors that investors should consider when making investment decisions.
The secondary market for loan assets originated in the peer-to-peer marketplace.
And whether there are other key issues that policymakers should monitor.
The Consumer Financial Protection Bureau (CFPB) is looking into the marketplace for consumer loans and what protections borrowers have.
Even the U.S. Securities and Exchange Commission is looking into P2P lending. Both in the funding process and when loans are purchased from sites and packaged, securities are created. That’s the SEC’s beat.
The real threat P2P lending poses is to the economy, which is only now coming into focus thanks to lobbying efforts to bring it to everyone’s attention.
The truth is, this financial services Disruptor could upend the economy and should be closely scrutinized.
The Economy Problem
There are three fundamental and alarming problems with the P2P lending model.
First, lending sites aren’t banks. Instead of relying on a stable deposit base against which loans can be made, marketplace lenders originally relied on peer-to-peer (meaning person-to-person) matching, where a private lender agreed to fund a borrower’s loan request and each paid a transaction fee to the platform provider.
There’s very little P2P anymore. Institutional investors such as hedge funds, private equity shops, insurance companies and even bank subsidiaries are raising short-term funds in the capital markets to buy up huge quantities of platform-generated loans. Regulators worry about their ability to roll over their short-term borrowings to continue to fund consumer loans if capital markets experience anything akin to 2008, when they ceased up entirely.
Second, most consumer loans are unsecured loans made to individuals who are consolidating higher-interest loans. Any prolonged economic slump would devastate the ability of borrowers to keep up with debt-service payments. And because there’s no recourse on unsecured loans, it’s easy for borrowers to simply default.
The effect of cascading defaults on marketplace loans would cause lenders to cut off funding, further choking consumers who, under present growth rates for marketplace lenders, are increasingly likely to turn to these non-bank or even “shadow bank” lenders.
Third, without access to bank loans, because they’re being shunned for marketplace loans that have different credit-profiling techniques, consumer spending could come to a standstill and squeeze the entire economy.
These are legitimate concerns that are only now being addressed.
Whether or not the Treasury, SEC, CFPB or other regulators apply heat to marketplace lenders and their Disruptor model, P2P lenders may be disrupted sooner rather than later by the U.S. Supreme Court.
The U.S. Court of Appeals for the Second Circuit recently overturned a lower court’s ruling that allowed “appointees” of banks to charge high rates in any state regardless of where the appointee itself was located. The Court of Appeals overturned that ruling in Madden v. Midland Funding LLC, saying essentially that any issuer of a loan that isn’t a national bank has to abide by each state’s usury laws.
Marketplace lenders use small banks to facilitate the actual loan-making process, and those small specialty banks have been bypassing state usury laws.
Midland Funding is trying to take the decision of the Appeals Court to the Supreme Court to get it reversed. If there is no reversal of the Appeals Court’s ruling, the marketplace lending business model itself will be seriously disrupted.
Investors in LendingClub Corp. who aren’t aware of the Appeals Court’s ruling may be wondering why the shares they hold have dropped 30% since the beginning of June. Now they know.
The slippery slope that the great P2P Disruptor model is facing should give investors pause. Until there’s more clarity on the profitability of marketplace lending going forward, venturing into a marketplace lender like LendingClub should be done gingerly – at best.
For investors ponying up funds as private lenders on platform sites, a good look at the direction of the economy is mandatory. Making loans in good times doesn’t count for anything if hard times befall borrowers who can easily default.
For my money, the great Disruptor of financial services is being given a run for its money, and I’m anxious to see how this Disruptor might get disrupted itself.
[Editor’s Note: We encourage you all to “like” and “follow” Shah on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then bank some sky-high profits.]
In a market stuffed with price-shifting financial “Disruptors,” the proliferation of “activist investors” is a front-and-center catalyst we’re going to follow and cash in on.
We’re addressing activist investors today because one of the biggest noisemaking players in the biz is back in the news with his latest move.
I’m talking about Bill Ackman, the billionaire hedge fund manager who runs Pershing Square Capital Management LP. With $20 billion in assets under management, Pershing Square is an activist investor in publicly traded companies. And it was a top-performing fund last year.
Ackman’s latest target is Mondelez International Inc. (Nasdaq: MDLZ), a packaged-food giant and spin-off from Kraft Foods Group Co. with a $76 billion market value.
Unlike most spin-offs – which, as a group, tend to be market-beaters – Mondelez has frustrated analysts and investors by underperforming. Although the stock has accelerated a bit of late, the fact is that since the 2012 breakup, Mondelez shares are up only 20% – versus 50% for the Standard & Poor’s 500.
Companies like this are prime targets for activists like Ackman, former corporate raider Carl Icahn, Nelson Peltz or the late Kirk Kerkorian.
Investors of this ilk take big stakes in moribund or cash-rich companies and lean on management to make changes – pushing the “C-suite” execs to slash costs, boost buybacks or launch or raise dividends.
Investor activism is increasing.
That makes it a Disruptor that’s capable of generating meaningful wealth.
But you have to pick the “right” activist stock.
As I’ll show you today…
Activists Show You the Money
A 2012 study by London-based research firm Activist Insight found that mean annual net return of more 40 activist-focused hedge funds outperformed the MSCI World Index in the years following the 2008 global credit crisis.
In fact, activist investing was the top-performing strategy among hedge funds in 2013. Firms using that strategy generated average gains of 16.6% – nearly double the 9.5% average return of other hedge-fund players.
Remember, those are just averages. If you pick the “right” activist target, you can generate extreme profits. As I know myself.
Back in July 2013, for instance, I went on record and recommended Apple Inc. (Nasdaq: AAPL) at a point when many investors were writing off the iDevice King as a company whose best days were behind it.
I knew better.
Just weeks after my public recommendation, Icahn launched an activist campaign against Apple, using social media tools like Twitter and “open letters” to CEO Tim Cook as his “weapons” of choice.
The cash-rich Apple ended up enacting a dividend program and launched into aggressive buyback mode. It also generated stunning results with iPhone launches and a long-term commitment to an “ecosystem” strategy that will keep the company on a growth path for a long time to come.
From a split-adjusted recommendation price of $60.10 a share, Apple’s stock soared as high as $134.54, for a peak gain of 124%.
That’s a great result for any stock – but especially for the mega-cap shares of the most valuable company in the world.
And this story underscores the massive profit potential that comes with choosing the “right” activist stock.
Mondelezmay not be a “right” stock. Sometimes the best trades are the ones you don’t make.
A Mouthful of Trouble
Ackman’s Pershing Square grabbed a 7.5% interest in Mondelez, worth $5.5 billion.
That’s a really big target to take down and digest. And the challenges facing Mondelez are also serve up some food for thought…
Although the company owns some great brands – like Oreo cookies, Trident gum and Cadbury chocolate – and has a big position in developing markets, Mondelez was supposed to be a high-growth proposition. It just hasn’t played out that way.
Consumer tastes have been changing. Given Mondelez’s product lineup of biscuits, cookies, crackers, salted snacks, chocolates, gums and candies, powdered beverages and coffee, I’m not convinced the firm is focused on growth areas.
The results bear this out. Mondelez’s categories saw growth slow from 6% in 2012 to less than 4% in 2013 to a wheezing 2% last year. In its most recent earnings report, per-share earnings fell 30.6% on a 9% drop in revenue.
So I’m not inclined to piggyback on “Ackman the Disruptor” on this one.
The principal reason is that I don’t believe you can make enough money on this trade for the risk you’ll be taking. I’m not convinced that if a buyer for Mondelez emerges the buyout price will represent enough of a premium over the stock’s current market price (which happens to be pretty close to its high) to make it worth my while.
It’s different for Ackman because he bought lower, used a ton of leverage thanks to options and forward contracts and stands to make a great return if the stock goes up between 10% and 20%.
A 20% return would be a great result for a short-term trade. But there’s no guarantee that will happen. Add in the attendant risk of the stock slipping back if no buyer emerges – or the fact that I might have to tie up my capital and hold onto the position for a long time, while additional value is created by Ackman and management – and you can see why a follow-on Mondelez trade isn’t for me.
But if you want to take a shot at this, here’s how I would play it.
I’d buy the stock here at around $46.25, and I’d buy the December $46 puts for about $2.45.
That way I can participate on the upside if a buyer comes in and be mostly covered on the downside if the stock falls back from now until the puts expire in December.
If a 20% premium bid for the company were to emerge here, the stock would go to $55.50.
The position I created would cost $48.70 – $46.25 for the stock plus the $2.45 per share for the puts. So I’d make $6.80 per share, or 13.95%, on my position.
Of course, the stock could go higher and I’d make more.
But it could go down, too.
If the stock falls, I’m covered and my loss would be limited to the difference between the price I paid for the stock – $46.25 – and the “protection” I get by owning puts with a strike price of $46. That amounts to a 25-cent-per-share loss, plus the cost of those puts of $2.45, for a total possible loss of $2.70 per share.
Risking $2.70 to make an unknown profit – but maybe $6.80 or more per share – isn’t my idea of a good piggyback play on account of the unknowns and what I can do with my capital elsewhere.
There are lots of Disruptor plays – many with activist investors – that are a lot better than the way this trade sets up.
The beauty of all those Disruptor opportunities is I’ll be telling you about them right here.
My colleague Michael Robinson – director of Venture Capital and Technology Investing here at Money Morning – also discusses disruptors often.
The ones he shares with his readers, of course, are mostly in Silicon Valley.
And just recently, he uncovered another tech market in Silicon Valley- and it offers windfall profit plays that dwarf those you can find in the Nasdaq and the NYSE. This “other” tech market is a playground of the rich – and it’s inhabited by the top venture capitalists, private-equity players and so-called “high net worth” investors.
That’s why Michael put together this short presentation to help explain this exciting new venture capital “partnership” to you all.
Shah says the “new economy” is here – and you can already see the space growing between the winners and losers.
Walt Disney Co. (NYSE: DIS), Tesla Motors Inc. (Nasdaq: TSLA) and Fitbit Inc. (NYSE: FIT) are taking it on the chin. And Netflix Inc. (Nasdaq: NFLX), Uber and Airbnb are on the rise.
In other words, a new order is in town.
During his latest sit-down with Making Money host Charles Payne, Shah reveals which companies are crumbling and which are crucial for your nest egg. To see Shah’s latest appearance on Fox Business, just watch the video below.
Back in early 1982, I was a clerk for a big market maker on the floor of the Chicago Board of Options Exchange (CBOE). A year later, I had a seat on the exchange, was a market maker and was running a hedge fund.
My first day of trading – for my account – was a disaster.
There was a “fast market” in FedEx Corp. (NYSE: FDX), which means the pit was crowded with traders yelling and screaming, buying and selling options based on an unexpectedly positive earnings report that had just come out. I rushed into the crowd and amassed a position.
I walked back to my booth on the floor, right next to the Salomon Brothers booth, where Norman – the investment bank’s head trader, and without a doubt the smartest guy on the floor – asked what I’d done. I told him I got “long” a bunch of calls.
Norman quickly shot back: “What’s your exit?”
Of course, I hadn’t given that a second’s thought. I was too excited about getting into the position.
Just a few minutes later, a news story said the earlier earnings report was wrong – and that FedEx had actually lost money that quarter.
I lost $30,000 in a Chicago minute.
It took me a week to make that money back, but that’s how I “earned” the first of five trading rules that are the key to getting rich.
These aren’t made-up rules. I earned and learned them from experiences just like this one.
And today I’m going to share these five rules with you…
Five Steps to Riches
One reason most investors fail to become wealthy is that they don’t understand the single most important premise of investing.
It’s not the buying – the getting into trades or investments – that makes you money.
It’s selling to cut losses, selling to ring the cash register or selling because you’re buying a jet with your winnings that matters.
Maximizing your wealth is about managing your positions – it’s about trade management after you’ve put on your positions.
Here are the five rules I always follow that will guide you.
Rule No. 1: At First, You’re a Trader
Every time you put on a new position, it’s a trade – just a trade. You’re not an investor… yet.
If you think about it, that make a lot of sense. To become a wealthy investor, you have to start by putting on trades. If you manage your trades correctly – if they have the upside potential and you manage that potential correctly – your winning trades can grow into fabulously profitable investments.
It’s about duration. Not all trades evolve into investments. Some are losers… it happens. Some are just beautiful opportunities that net tons of money when you close them out.
So, think like a trader until your trades become investments. Then, think like an investor.
Rule No. 2: It’s a “Binary” World
If you’re like me, you engage in tons of analysis and preparation before you put on a new trade. But once you do – whether we’re talking long or short, in stocks, bonds, options or futures – one of two things is going to happen. Either the position goes in the direction you predicted. Or it goes against you.
If you adopt that simple “binary” mindset – understanding there are only two possible outcomes to think about – you’ll be comfortable making more trades. After everything you’ve done to analyze the opportunity, you’ll understand that the bottom line is the price either goes up or goes down.
If your trade-management strategy prepares you for either scenario, you’ll make a lot more money: With a trade-management plan, you won’t be hung up on being proved “right” immediately, even though being right – and right away – is the Holy Grail all traders seek.
Rule No. 3: Know Your “Pain Point”
Depending on your personal parameters – meaning how much capital you have, how much you feel you can lose on any one position and in your overall portfolio – you need to ask yourself a single question: How much can I afford to lose without becoming upset?
None of us likes to lose anything. But trading is a business, and businesses sometimes have to endure losses. (In fact, there’s an old maxim that says, if you’re not suffering any losses at all, then you’re probably not taking enough risk.)
The business of trading requires that you take small losses. At the end of the day, it’s not about how much you make – that always takes care of itself if you follow good trade-management rules – it’s about not letting losses distract you from growing your business. Know your “pain point” and make that your bailing-out point.
Rule No. 4: Understand Your Plan Before You Put in a Trade
Having a trade-management plan in place – meaning you intend to take certain actions at specific price levels – is the essence of successful trading and investing. The beauty of creating that plan is that, in order to pick the spots where you’ll take action, you must already have completed the analysis that led to those decisions.
No matter what your trade does – no matter which direction it heads – you’ll have a game plan detailing what you intend to do.
Rule No. 5: Cut Your Losses Short and Let Your Winners Run
It’s a simple rule, but few follow it. In fact, most individual investors do the exact opposite: They hang onto their losers, and let those losses mount in the vain hope the trades will turn around. And they take profits too quickly – then watch angrily as the trade they exited grows more and more profitable.
These mistakes harken back to rules 3 and 4: Such investors don’t know their pain threshold – and don’t have a plan.
When you get to your “pain point,” cut your losses short. Once you’re out, you’ll be able to reassess with a clear head.
Letting your winners run demands a plan. And that plan to manage winners should have short-, medium- and long-term outlooks. The short-term outlook is what’s happening to your position right out of the gate. What’s the position doing relative to your expectations, to your “pain point” and perhaps to peer investments?
The medium term is what you expect for the trade after you’ve traversed the short-term holding period. This is where a lot of individual investors lose their way. They panic because they’re afraid they’ll lose what they’ve gained over a short run and bail out. Or perhaps the trade seems to lose steam after generating a big short-term profit, so they bail out – only to find it was merely taking a breather and consolidating before it runs for new highs.
The long term is where your “trade” turns into an “investment.” You have to navigate that transition and then manage the position going forward.
In an upcoming column, I’ll expand on this trade-management planning strategy by showing you how to get ready for a trade.
I’ll use real examples and charts. And I’ll explain how to “find” levels to get in at and get out at, where to put your stop-loss orders, and when, where and how to raise or lower them.
And I’ll periodically bring you more of these strategy sessions – putting you on the path to wealth.
P.S. I hope you’re all liking and following me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and bank some market-smoking profits.
Investors have had a lot to process in recent weeks. In fact, after dominating the headlines for weeks, the Greek Debt Crisis got knocked aside by a deal and then a “flash crash” in gold and an elevator shaft-like plunge in Chinesestocks.
And that’s not all. There’s oil, which has fallen back again after rallying a bit earlier in the year. There are worries about if and when the U.S. Federal Reserve will boost interest rates. Then there’s the U.S. bull market in stocks, which celebrated its sixth birthday back in early March – and a tech sector that has pundits whispering about “bubbles” and “dot-bomb” implosions.
So for today’s issue of Wall Street Insights & Indictments, I decided to do something a little different. I sat down with Money Map Press Executive Editor William Patalon III to analyze those challenges, to recommend the best spots for profit and to highlight the strategies we believe will help you make money – and keep what you make.
Here’s an edited transcript of our talk…
Bill Patalon: Shah, we’re looking at a very challenging environment right now, with Greece, China and the array of gold/oil/commodities all in precarious spots – coupled with a U.S. stock market that’s still near record highs. You’ve also expressed concerns about the global bond market.
Is there a unifying thread here? Is there one catalyst – or, to borrow from your investing strategy, a particular “Disruptor” – that could put this into motion by tipping this over?
Shah Gilani: There is a unifying thread, Bill, but it’s more of a common denominator.
I’m talking about debt.
Debt doesn’t have to be a “Disruptor” – as we define Disruptors [the event catalysts, market triggers or other “agent-of-change” forces that create the biggest profit opportunities].
In fact, there’s a good place for debt in capital structuring. But when indebtedness becomes so large, when debt service diverts productive capital into an unproductive negative-loop spiral, we get to where we are today – facing anemic global growth and jumping from crisis to crisis.
We know what happens when households, companies, countries become over-indebted to the point where they can’t service their interest-and-repayment obligations: The paths to bankruptcy, implosion and insolvency are well-worn. Countries don’t usually default – it happens, but not often.
The problem now is: Because of the amounts owed by some countries, without the growth they need to service their debts, which in truth they are only extending and pretending to pay down, the “negative feedback loop” accelerates and they spiral into insolvency.
BP: As you’ve said to me, that’s playing out in more places that investors and other folks realize.
SG: That’s right.
Greece is only the tip of the iceberg. There are plenty of other “technically insolvent” countries getting sucked into the death spiral. Japan is the biggest of them all. But the United States isn’t immune, either. The only thing the U.S. has that other massively indebted countries don’t have is a consumer culture combined with an entrepreneurial spirit – meaning true animal spirits – to arrest and reverse the decline we’re facing.
That said, the way the country’s gone under President BarackObama, spreading the welfare state – robbing from taxpayers to give to tens of millions of citizens and, worse, more tens of millions of illegal aliens who don’t pay income and other taxes – to buy their votes, we’re buying the one-way ticket we fear most, the ride through the endless dark tunnel to poverty.
BP: You’ve talked about several threats here. And you’ve addressed these – and several others – and in the talks that you and I have on an almost daily basis. Is there one or more of these threats that, in your view, warrant more of a focus than others? Is there one thing – one threat or one event or one developing story – that investors should focus on above all others?
SG: No, there’s not one single thing to focus on. Unfortunately, it’s just not that simple. The case could be made that debt is the single most important “developed” story. But debt is the product of other failures. When it comes to investing and making money, the group of things that have to be focused on – with debt in the background – are Disruptors.
We talk about Disruptors here all the time. Some are “Black Swans” – totally unforeseen and having a major impact – while others are “telegraphed” changes that we can see coming at us from a great distance away.
BP: As you’ve so often explained to us, Disruptors are just what the term conveys – catalysts that bring about change. In finance and economics. In technology. And in society, for instance. They’ve always been around, and they’ve always resulted in big, big market impacts.
SG: You listen well (laughing). Disruptors have always been around. And the impact is massive: Those who’ve played them – and played them correctly – have made insane profits.
There’s a difference, now, however. The one-world, world-without-borders theme is happening. If you’re talking about capital movement, we’re not 100% to that point, yet, but we’re really close to being there and keep getting closer all the time.
The fact is that capital knows no boundaries – though it still encounters “speed bumps” – even road blocks – in places like China and Russia and India, and to a lesser degree in Brazil. So capital movement – investors chasing opportunities and fleeing unfriendly investment climates and trends – creates the biggest Disruptors all investors have to be on top of. The only way to be on top of giant capital waves moving in and out of assets, asset classes and countries is to understand where root Disruptors are sprouting.
That’s where the moneymaking and money-losing battles will be played out.
BP: We’re starting to see a number of instances where pundits are saying that today’s Nasdaq reminds them of the “dot-com” bubble of 1997-2000, or the sell-off in China looks just like the Great Crash of 1929. They’re clearly drawing on that old axiom that counsels us to heed the lessons of history. When you scan the capital markets right now – across asset classes, business sectors and geographic markets – does the current climate remind you of any other period as a professional investor? Is there anything to learn from the past? Or are those pundits “reaching?”
SG: The current climate – meaning today’s landscape… today’s big global picture – is unlike any that’s preceded it in history. There are vignettes within the big picture that are reminiscent of past periods, but they are only instructive in terms of how they meld into the bigger picture today.
BP: Give us an example.
SG: Okay, for instance, aspects of corporate growth and power today are reminiscent of the Age of the Robber Barons and their ascendancy after the CivilWar. New structures were being created – trusts with “interlocking boards” and stock pools – and capital was being funneled from public investors, enticed by the prospect of becoming rich as railroads. Canals were tightening up the country by bringing people and goods closer together. And meatpacking, sugar refining, copper and ore mining, steel production and, of course, oil were looked at as get-rich movements that the public could get in on.
Then, as today, the public didn’t understand that the powers at the top – the robber barons and their lieutenants – weren’t interested in the public, only the use of the public’s money to further their personal interests and wealth creation. A lot of so-called investors got burned by the games the barons were playing. Those games are still alive and well – long after trust-busting laws tried to level the investing playing field. So that actually is a case of history repeating itself. If you know your history, you know there were big losers in the game and plenty of opportunities to make money on their downfall and on the changing landscape. We’re there again.
Only this time around it won’t be a Sherman Antitrust Act that leads to changes – it will be Disruptors.
BP: Because I’ve had the opportunity to work with you for so long here at Money Map Press, I’m thoroughly familiar with your achievements and core beliefs. And one of your mantras – one that you underscored to me very early on – is: “There’s always a place to make money. It may be on the long side, or it may be on the short side. But there’s always a place to make money – always.”
That opportunistic mindset – that willingness… and ability… to find ways to make money on stocks and assets that are rising in price or falling in price – is why you offer both a “long” service here (Capital Wave Forecast) as well as a “short” service (Short-Side Fortunes).
Generally speaking, what do you see as the most promising “area” (be it a sector, asset class or geographic market) for “long” investments? You’ve talked about the lending market, the U.S. dollar and the U.S. economy as areas of opportunity in recent months. Given the current backdrop, what do you like now?
SG: There are areas to be getting into right now. And there are different opportunities that are emerging – or that we’re predicting will emerge – as Disruptors break old markets and businesses and create new ones.
Right now, on a purely “given the current environment” approach, good-yielding defensive stocks (meaning dividend yields of at least 4% to 5%) – like tobacco stocks, like AT&T Inc. (NYSE: T) and like telecoms – are the place to be. The U.S. Federal Reservewill raise rates: There’s not much debate on that, it’s just a matter of when. But, policymakers won’t raise rates much and won’t keep raising them: The economy can’t stand a disruption like that when it’s barely healed.
So if we get a small rate hike and dividend-yielding stocks take a little hit, that’s the time to average down and buy more. Amassing a big chunk of big-paying stocks fed by real cash flow – like the telecoms have – is the place to park a lot of capital now. If there are signs of inflation and better GDP growth, then holders of those good-yielding stocks can simply sell “calls” to offset flat or declining prices. And since there’s no need to sell those shares – and because smart investors won’t sell, but will average down, increasing their yield, and because they’ll be selling “calls,” adding to their yield – investors will be able to double the value of those investments in about seven years.
I’m also looking at the U.S. dollar. It’s going higher and is a good investment now. Healthcare stocks are a bright spot, too. I’m also starting to eye some commodities and miners. They have been hit hard and there are great opportunities building there.
BP: You’ve also had a lot to say about oil.
SG: That’s right. I believe oil will be an opportunity, too. Not yet, but the energy patch will come back into favor as soon as the current glut subsides – which I expect it will be a ways off – and if global GDP growth picks up. Now is not the time… I’m too conservative to try and bottom-fish in the black sea of oil.
BP: Great, so we’ve talked about “longs” opportunities here. So perhaps you could answer the same question for “short” profit plays. Over the past few months, you’ve made very detailed, unequivocal and well-constructed arguments for a collapse in bonds, in Europe’s financial sector and for oil-related investments. Is there a “Big Short” looming? Or perhaps several promising areas for trading-oriented shorts?
SG: Bill, as you said in one of your comments a few minutes ago, shorting is more “opportunistic” than long investing. For instance, it’s hard to put on a lot of shorts when the tide is going against you – especially if the bull market gathers itself and stampedes higher.
There’s also the new trading tactic of big players – and smaller trading speculators – to target stocks that have been shorted to the point that 10%, 20%, 25% of the targeted company’s floated shares have been shorted. That’s a target play these days. Especially on big up-move days, traders have been targeting shorts and trying to “gap up” those stocks – hoping to freak out shorts into covering. That’s happening more and more, which makes shorting a tougher game.
All that said, the “squeeze-the-shorts game” is only so effective. If a short candidate is a really good short, the gamers will only squeeze out the weak-link shorts and make the play more compelling at higher prices.
We play that game. It requires patience, and you have to add to your shorts as prices are driven somewhat higher in those squeeze plays. But we’ve made out really well – we’ve had some big winners – because we are patient and average up on our shorts. Greece will become a good short again, in due course, after the euphoria of a deal fades and reality sinks in. We’ve been short China and oil, and they’re working.
I believe the emerging markets could get hit hard from a weakening China and from capital flight. We’ll start putting on some positions there. And, of course, we’re always looking for Disruptors to knock off old, outdated companies who can’t compete with new Disruptors. We love to short those losers.
BP: Given some of the specific uncertainties back dropping the current market, I’ve heard you say that investment management – of short-duration “trades” and of longer term holdings – is crucial. Indeed, I know you say folks need to be conscious of the need to manage their holdings at all times – but you’ve underscored that it’s even more critical now.
SG: There are two sides to successful trading and investing – getting in right and getting out right.
BP: So buying “right” and selling “right.”
SG: Exactly. But getting out gets no love: There’s never much written or offered to individual investors when it comes to trade management and exit strategies. I’ve often thought about writing a book on this very topic – managing your way to profits.
BP: As a follow-on to that, one reader looked at all that’s happening right now and wanted to know: “Is this a bad time to start investing in stocks?” How would you answer that question?
SG: I say – emphatically and loudly – that there’s never a bad time to be in the stock market. And I mean never a bad time. What matters is being on the right side of the market. That’s the important thing – in fact, that’s everything.
You can always make money in the stock market. If you’re long when markets are going up, you’re a winner. If you’re covered on your long positions and short when the market goes down, you’ll be an even bigger winner, because stocks almost always fall faster than they rise. Sure, stocks rise over time, so you should be – you have to be – in the market. But understanding that the market is a two-way street is the key to always being in the market – one way or the other.
The sooner an investor gets into the market and the more they learn about how the game is really played, the sooner they can own the market and their future. Which, by the way, as far as retirement income goes, they won’t have if they don’t work their way into and throughout stock markets.
Besides, it’s fun. How can making money not be fun?
BP: In the years we’ve worked together, there’s one other message that you’ve delivered consistently – that Main Street investors can and should become financially secure… even wealthy. That belief is the why you’re so willing to take on Wall Street… and have been so vocal about the need for reforms that make the markets fair for all. In fact, as I said to you just the other day, your belief system has always reminded me of the newsroom mantra I knew in my old newspaper days – that there’s a need to “comfort the afflicted and afflict the comfortable.” Here’s one other question – one that’s an amalgamation of queries we’ve received from folks here.
If someone came to you and said, “Shah, I want to become wealthy. Tell me what to do.” What six tips would you offer – let’s think of them as a kind of “baker’s half-dozen recipe for wealth.”
Tell us why you believe it’s still possible for any investor to become wealthy and the six steps they need to take to get.
SG: You know me Bill, we’re friends and we talk a lot, so you know how sincere I am about helping retail investors – both first-timers and longtime investing veterans – achieve market success. And by market success, I’m talking about making themselves money.
BP: That’s very true. In fact, I’ve heard you say that investing should be part of every child’s school curriculum.
SG: I’m glad you mentioned that, Bill. It’s insane to me that investing isn’t taught from kindergarten all the way up through high school. For heaven’s sake, what’s the purpose in educating kids so they can get jobs and make money if they’re not taught what to do with the money once they make it?
And there’s no difference whether we’re talking about someone who’s making minimum wage or someone who’s destined to be on salary. This represents a massive chasm in what we teach our kids to prepare them for life. And that needs to change – which, by the way, is something that I’m working on. I’m actively working to change curriculum in schools – to have them teach money management, to make it fun and to make it a game everyone wants to play and win.
BP: Until that happens, you’ve taken it upon yourself to educate investors wherever and whenever possible.
SG: That I have. And much of what I teach is represented by the rules I’m sharing here – the ones you referred to as your “baker’s half-dozen” investing rules.
Saving Is Better Than Spending: You can’t make money if you don’t have the capital to put to work. Besides, if you defer spending – and save and invest now – you’ll have much, much more to spend… later.
You Have to Be in It to Win It: You can’t make money sitting on the sidelines; you have to be in the markets. Whether you’re long, or you’re short, you can’t profit if you aren’t a player.
The Trend Is Your Friend: If stocks are going up, ride them up. If they are going down, ride them down. It’s the big picture that matters. The major trend is more important than finding a needle in a haystack – like finding the one biotech that develops a cure for cancer… good luck with that. With a bet like that, if you’re right you’re a big winner… if you’re wrong you’re a big loser. That’s just far too risky a game for individual investors to play – there are more greedy losers in the world than smart, patient winners. Play the big trend for solid gains… and you’ll be on the side of the winners.
Don’t Be Afraid to Start: You just can’t be so afraid that you never initiate a trade. Too many people are so worried about incurring a loss that they never invest. Losses are inevitable. But you can keep them small by managing your trades. The name of the game that winners play is “I’ll only take so much hurt.” That means get out quickly if a new trade goes against you. Take very small losses on new trades. Which brings us to our next rule…
Always Cut Your Losses, and Let Your Winners Run: For those of you who fear losses (see Rule No. 4), you won’t believe how easy it is to erase a bunch of little losses with even a single good winner. Imagine, then, what it’s like to string together a bunch or winners. Or to have a portfolio of winners because you cut your losers loose, and used the money to “tee up” new trades that have turned out to be all winners. That’s what I call fun.
Ring the Register: Don’t be greedy and expect every one of your winners to grow into long-term blockbuster hits. Not even the great Warren Buffett has only winners. Be happy with big gains. And don’t let your winners turn into losers. Use stop-loss orders to ring the register if your winners start slipping backward. Get out, ring the register and look to get back in if the stock turns around, or look for another trade to put on – because you have to be in it to win it.
BP: Can you share a recommendation or two that your folks should take a look at right now? Besides regularly reading your column, that is.
SG: (laughing)My column is certainly a good place to start. That’s where investors will get good recommendations – including the rationale behind each trade – and will learn about profit-creating market Disruptors. Some of those disruptions will be on the “long” side of the market, and others on the “short” side.
Just as important, readers will learn about trade management and about how the pros play to win.
BP: That’s not a small thing – understanding how the Wall Street pros think and play – is not a small thing. You spent time in the trading pits, on exchange floors and inside top investment banks. But you share those insights with the retail-investing crowd.
So what about some specific recommendations – in addition to those stock types and sectors you mentioned earlier?
SG: The debt issue I mentioned at the start of our talk is big – very big. I’ve been talking about it here for some time. And I think it’s instructive that the arguments I’ve been making – and the analyses I’ve been sharing – are now appearing in such mainstream outlets as Barron’s and The Wall Street Journal.
BP: Respected media outlets.
Not long after I first started talking about this, I put together a detailed research report – one that not only analyzes the problem… but that also identifies the investment opportunity … and it shares specific ways to profit. I would urge investors to take the time to check it out. And if you did read it when it first came out, take the time to look at it again. In fact, you can access it here.
Threats are only threats when you’re not ready for them. When you are prepared, those threats become opportunities. For big profits.
On July 16, I gave you the real story on why oil prices are falling – and a trade to make you some easy money.
Since then, West Texas Intermediate (WTI), the U.S. crude oil benchmark, is down 5%. As of midday yesterday, the October $15 puts on the United States Oil Fund LP ETF (NYSE ARCA: USO) that I recommended buying when they were trading at 50 cents each were up 40%, and trading at 70 cents each.
Here’s what’s happening with oil now – and what to do with your winning USO position…
When Bad News Is Good News
Crude oil is in a bear market – again. It’s down 20% from its most recent highs, set on June 10.
As I showed you back on July 16, oil – being a commodity – mostly trades based on supply and demand. And because there’s been an increasing supply of oil in the face of only a moderate pickup in global demand, oversupply is leading to further price cuts.
Thanks to an explosion of shale oil, the United States is producing 9.7 million barrels of oil a day. That new record, eclipsing the old mark set back in 1970, makes America the third-largest oil producer behind Saudi Arabia and Russia.
Additionally, Saudi Arabia and Iraq are producing at record levels themselves, and Russia is desperate for revenue, which it gets by selling its oil. Then there are prospects that disruptions in crude production in Libya could soon be reversed, and Iran is capable of adding another million barrels a day to global supply, if and when sanctions are lifted.
However you look at it, there’s a lot more oil coming to market in the foreseeable future.
Morgan Stanley (NYSE: MS), whose analysts underestimated the supply of crude coming to market, now says a potential oil crash could be the worst in 45 years.
That’s good news if you’re short oil or short oil-services companies – as we are in my Short-Side Fortunes advisory service.
Or if you followed my recommendation here to buy put options on the U.S. Oil ETF…
As I said, those October $15 puts (USO151016P00015000) I recommended here on July 16 had surged 40%. And with the oil supply rising, there’s room for those puts to go higher – maybe a lot higher.
Here are some options to manage this trade now.
If you think oil will bounce higher from here, sell your puts and grab your big, quick profit.
If you’re bearish on oil like me, I recommend you use a stop-loss to sell the puts if they drop back to 50 cents. That gives oil room to bounce a little from being “oversold” on a technical basis. And it keeps you from losing anything if a bounce turns into a snap-back rally.
I’d hang on and see if oil reverses from yesterday’s pop higher and heads back down. I’d be looking for a big move that sends the put options back up $1, which would mean you’re up 100%.
If the puts get to a $1, we’d know oil prices are slipping and be more comfortable that we’re on the right side of the move and that prices might keep going down.
At a put-option price of $1, I’d sell half the position – locking in 100% there – and hold onto the other half, looking for an additional 50% gain on the remaining puts.
I’d take all my profits there and be very, very, very happy.
If we get the oil-price slide we expect to get, but fear another snap-back rally from there, here’s what to do. After you take your 100% gain on half your position, put down a stop-loss order on your remaining holding to sell if the puts fall back to 75 cents. That way, you make 100% on half your position and 50% on the other half.
I’d be very, very happy with that gain, too.
Of course, oil prices could pop, any time, for any number of reasons- for instance, the Organization of the Petroleum Exporting Countries (OPEC) could agree to production cuts – and your puts could fall quickly. If you’re worried that you’ll lose the profits you have, then any time you’re afraid the trade will go backward on you, sell out and take whatever profit you can.
Because at the end of the day ringing the register with any amount of profit is a good day.
Managing Your Way to Wealth
Murphy’s law tells us that “anything that can go wrong, will go wrong.”
Don’t get caught up in Murphy’s law.
It’s always great to be in a profitable trade. But sitting in profitable trades – especially fast-moving and expiring options trades – requires diligent trade management.
And that means you have to have a plan in place for every trade you make.
If you don’t know how manage your trades, don’t worry, I’ll be talking a lot about such strategies right here.
That’s because I’m going to recommend a lot more trades, like the winner we’re sitting on now. And I want you to become the happiest – and wealthiest – trade-management expert you know.
P.S. I hope you’re all liking and following me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and bank some market-smoking profits.
Google Inc. (Nasdaq: GOOGL) made major headlines Friday when an upbeat “read” of the search giant’s earnings report ignited a 16% surge in the company’s stock price.
That single-session bump added a whopping $65 billion to Google’s market value. And this came just one day after shares of Netflix Inc. (Nasdaq: NFLX) – another tech darling – zoomed 18%.
These two rallies are emblematic of the relentless march we’ve seen in the tech sector during the past year. And that elicited a warning from former Reagan Administration Budget Director David Stockman, an author and columnist who’s as outspoken today as he was during his White House years.
Google’s $65 billion jump was troubling enough. Not only was it a record for one trading session, but the amount of market value Google gained in a single day was greater than the entire $50 billion worth of Caterpillar Inc. (NYSE: CAT) – which the global heavy machinery franchise took a full century to amass.
In a column titled “Take Cover – Wall Street Is Breaking out the Bubblies,” Stockman said that overvaluation is emblematic of the whole tech sector. On Friday, the market value of the “New Tech 16″ was $1.3 trillion – while their net income over the last 12 months was only $21 billion.
“When you take GOOG’s middle-aged profits machine out of the mix, you get something altogether more frisky,” Stockman wrote. “Namely, a collective market cap of $840 billion for the other 15 names in the Morgan Stanley index and LTM [last twelve months] net income of exactly $6.0 billion. That’s a P/E multiple of 140. That’s February 2000 all over again.”
With those words, Stockman is raising the same question that a slew of other pundits are posing: Are we experiencing a ruinous tech bubble?
What I’m telling you here is that all those experts are asking the wrong question – are looking at the market the wrong way.
You see, this is clearly a “momentum” market. And that means you have to make money while you can – while the opportunity is there.
But you also have to be prepared for the day when the music stops.
And today I’m going to show you just how to play the momentum game – without getting disrupted…
Let’s Dissect Tech
What’s happening is that a handful of “momentum stocks” are lifting the major indexes higher, with the Nasdaq Composite Index, home to the hottest of those shares, making new all-time highs on Friday and again on Monday.
Momentum markets – both up and down – are real.
What we’re talking about in this market is the tendency for fast-rising stocks to rise further. Empirical research backs this up. In one study, for instance, researchers found that stocks with strong performance continue to outperform poor performers – with an average excess return of about 1% per month.
That may not sound like much. But take it from me – that’s a meaningful difference.
If academic research isn’t your thing, just look at the stock market, where we’re seeing “momentum” work its power in real time.
Over the last 52 weeks, the 16 stocks in Morgan Stanley’s “New Tech” are up an average of 18.32%, more than double the 7.75% gain of the bellwether Standard & Poor’s 500 Index.
Thirteen of the 16 stocks averaged gains of 32.56% over the past year.
Those 13 are Amazon.com Inc. (Nasdaq: AMZN), Baidu Inc. (Nasdaq ADR: BIDU), Facebook Inc. (Nasdaq: FB), Google, LinkedIn Corp. (NYSE: LNKD), Netflix, Priceline Group Inc. (Nasdaq: PCLN), Qlik Technologies Inc. (Nasdaq: QLIK), Salesforce.com Inc. (Nasdaq: CRM), ServiceNow Inc. (NYSE: NOW), Splunk Inc. (Nasdaq: SPLK), Tesla Motors Inc. (Nasdaq: TSLA) and Workday Inc. (NYSE: WDAY).
The smart way to play the aging – but momentum-fueled – bull market is to keep riding it.
Just because we had a tech wreck before doesn’t mean it will happen again. The hot momentum tech stocks today aren’t nearly as “expensive” as the hot tech stocks of the dot-com bubble of 2000. And the because we’re in a “convergence economy” – where two or more Disruptor-fueled trends mesh in ways that magnify the growth potential – today’s tech market is very different than the dot-com predecessor that still gives us nightmares.
Even so, because of the emotion- and capital-fueled “momentum” effect that I’ve been describing for you here, investors are chasing the hottest performers and driving them higher.
That’s the nature of momentum.
Just as we saw with Google and Netflix, their surging share prices turn the hottest stocks into the hottest stories. That further stokes investment sentiment and draws in buyers who fear being left behind. And that, in turn, extends the rally… which is why momentum begets momentum.
Momentum, when you’re on the right side of it, is good.
So now that we’ve underscored that point, let me show you the key moves to make – now – to extract the maximum possible profit… and to bulletproof yourself against the inevitable downdrafts.
Moves to Make Now
In a market like this one, the one key to profit maximization is making sure that you consistently lift your stop-loss points as the stocks you hold zoom in price. To me, the biggest mistake an investor can make is giving back the profits you’ve reaped on stocks that have had a great momentum run.
That’s why I always have stop-loss orders (or, as I sometimes refer to them, “ring-the-register orders”) in place to make sure that doesn’t happen. I make sure to raise those stop-loss points as my stocks rally and use them to close out backsliding big winners while they’re still at lofty (and highly profitable) levels.
Me personally, I never cry about taking a profit. Even if the stock turns back around and goes higher after I’m out, I’m not unhappy; I rang the cash register.
As the old market adage says, “You’ll never buy at the very bottom, and you’ll never sell at the very top.”
Just make sure you don’t sell out at the bottom after the stocks you hold have been at the very top.
With my strategy, you’ll never commit such a fatal miscue.
Not even if this momentum market collapses.
Indeed, if that happens – and there is a collapse – the tactics I’ve shared here will ensure that you’ll have a pocketful of cash to buy back in… near the very bottom.
P.S. I hope you’re all “liking” and “following” me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and bank some market-smoking profits.
I’ve been trading for very long time. While it’s not rocket science, sometimes it comes close.
Take oil, for example. I can use all kinds of mathematical trading models to trade oil, but I prefer, because it works, to keep my oil trading simple.
Oil is a commodity. That makes it a lot simpler to trade than the stocks of companies.
Commodities mostly trade on supply and demand. It doesn’t get much simpler than that.
We made money in my Short-Side Fortunes investment advisory service when I recommended shorting oil. To me that was an easy call. I saw overproduction in the U.S. shale oil sector adding to global supply, which I knew would result in lower prices.
Since then, oil, as measured by West Texas Intermediate (WTI), dropped from about $100 a barrel to $42 a barrel.
It then bounced off its those, got above $60 where people loaded up as if it was going right back to $100 and hit $63.
Then it started backing off again and is south of $52 today.
Now I’m going to show you how you can make some money here – maybe a lot of money…
When oil tanked people were surprised. When it popped they were surprised. Now that oil is slipping backward – again – people are surprised.
What they didn’t see… what they don’t see… is the supply side of the equation.
Only, it’s not just the supply of oil I’m talking about. The supply of shares of oil companies is weighing on oil too.
I don’t even bother with it in my recent oil trading calculations. Demand is too hard to predict. All I need to know is that the global economy isn’t going gangbusters, so demand for oil is mostly flat – and for the purposes of my oil trading I expect demand to remain flat.
If I see demand changing I’ll adjust my trading. But, to keep my oil analysis simple, to trade simply, I don’t dwell on oil demand.
Supply is all I look at lately.
It wasn’t hard to figure that the globe’s supply of oil was increasing
The United States was becoming a huge producer thanks to massive shale oil exploration, development and production, and the rest of the world’s oil producing countries are in desperate need of revenue.
How simple is that? More supply, and prices will go down.
U.S. producers cut back exploration as fast as they could when prices tanked. It costs money to look for oil and drill wells.
So, the number of “rigs” being leased got cut back week after week after week, and everybody believed that all those drilling rigs shutting down would lead to less supply and higher prices.
And for a while, that’s what happened: Prices began to tick up.
However, oil explorers borrow a lot of money to drill. They need to pump oil and sell it to pay off their loans. So, while the rig count fell on account of the cost of drilling, producing wells kept on producing.
Why would anyone turn off a producing well? They wouldn’t. It’s producing revenue, revenue they need to pay down their loans, for working capital, and something called profit.
Yes, the supply of rigs went down, but dismantling those rigs that weren’t producing oil but costing companies hundreds of millions to employ had nothing to do with dismantling producing rigs.
In other words, the same amount of oil is still being produced. Supply hasn’t changed.
When the price of oil moved up from its lows, and investors and traders thought it was headed right back up, they clamored for the stocks of companies whose value had plummeted.
They believed those stocks were massively undervalued if oil was headed right back up.
Lots of companies, to meet the demand for shares investors were begging for, conducted “follow on” offerings. (A company that has stock outstanding can offer fresh stock to investors in a follow-on offering.) And because investors wanted to grab cheap stock – and because companies wanted to issue more stock and use the proceeds to pay down their higher-cost loan borrowings – it looked like a win-win for everybody.
I didn’t see it that way.
Investors who bought follow-on offerings, which totaled about $15.87 billion worth in the oil patch so far in 2015, watched oil prices decline again and are now sitting on fresh stock they bought near the recent highs.
If you own some oil-related shares that you bought near the recent highs in the price of oil and you’re losing on those shares as they fall along with the price of oil, you’re going to sell at some point. It’s a matter of supply and demand. You have too much supply of shares that are less in demand.
So, share prices are declining again.
Like I said, I keep my oil trading simple.
If you think there’s more supply than demand and that pressure on oil prices will take oil back down to its recent lows, maybe you want to make a simple trade, too.
You can use the United States Oil Fund LP ETF (NYSE ARCA: USO) as a proxy for “oil.”
It’s trading at $17.05. I think it will drop to $15 if WTI drops back to the mid-$40s range. A simple trade would be to buy the October $15 puts (USO151016P00015000) for about 50 cents per contract (that’s actually 50 cents times 100 shares per contract, or $50 per contract).
If USO drops to $15 or lower by the time your put options expire, you’ll make some good money. On the other hand, if oil doesn’t drop and you don’t sell your puts before expiration, you will lose whatever money you invested.
That’s a simple trade to me, based on a simple supply observation.
What do you think?
P.S. I hope you’re all “liking“ and “following“ me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then we’ll bank some sky-high profits.