The Baltic Dry Index isn’t a regular stock index like the S&P 500 or the Nasdaq.  It’s actually a composite survey of daily shipping prices around the world.  And although it doesn’t track underlying stocks like most market indices, its movement does affect almost every shipping company’s share price, as it is viewed as a proxy for the overall industry.  As the index has plummeted, it has taken the share prices of most shipping companies with it. This provides new investors a chance to capture some of the most appealing yields that we have ever seen.

The BDI’s Bubble Trouble

In May 2008, the Baltic Dry Index was riding high.  Commodity prices were still on the upswing, and commodity buyers were insensitive to shipping costs.  In preparations for the headaches of tighter port security surrounding the Olympics, Chinese companies had stockpiled raw materials, pushing shipping prices even higher.  And the U.S. subprime crisis appeared to be contained at its borders — meaning the rest of the world’s trade went on unhampered. On May 20, shipping spot prices hit an all-time high.

No one, not even the shipping companies, considered the May highs sustainable.  But few anticipated the perfect storm of downward pressure shipping prices would face over the next few months.  How bad has it been? Rates for Capesize ships — so named because initially their large size prevented them from using the Suez Canal, forcing them to sail around either Cape Horn or the Cape of Good Hope — that were priced at $230,000 a day in late May have fallen to almost $20,000 a day. The Panamax-class shipping rates have seen a similar trend, tumbling from daily rate quotes of $90,000 a day to about $12,800.

The BDI has fallen more than 90% since its high on May 20, 2008.

There are a number of valid reasons why the Baltic Dry Index should be off its highs. In addition to being grossly overheated just a few months ago, the U.S. subprime mortgage problem blossomed into a full-blown financial crisis and has undoubtedly weighed on economies outside the U.S.  When world economies slow down, the demand for shipping also slows.  And the speculative bubble in the commodities market also has burst, making commodities buyers more price-sensitive when it comes to shipping.

Short-Term Problems, Near-Term Solutions

Many of the short-term pressures weighing on shipping prices are already showing signs of abating:

* Easing Credit Worries: The worldwide credit crisis that has made it harder for small companies and consumers to borrow money, has also made it harder for dry bulk buyers to get their cargos loaded onto ships. Now, the credit freeze has begun to thaw. Bank-to-bank lending has resumed. Governments around the globe have put up hundreds of billions of dollars to back the world’s banking system, and letters of credit appear to be navigating their way through the system again.

* Stabilizing Demand: In an effort to reduce pollution, China shut down hundreds of construction sites, coal-fired power plants, cement factories and chemical manufacturers a month before the Olympics and throughout the games. While this was only a temporary measure, the drop-off in shipping demand made an already nervous sector panic.  But the temporary fits and starts from the Beijing Olympics are now long behind us.  The Olympic cutbacks were not a real measure of demand any more than the pre-Olympic build up was, and these anomalies are now being seen for what they were.

* Short-Term Feuds and Still-Strong Growth: A tiff between China’s steel companies and Brazilian iron ore suppliers, which has resulted in limited shipments of ore between the two countries, had wreaked havoc on the index. This situation has cooled, with Brazilians backing down from the price hikes they were demanding. Bottom line: China will need iron ore and other materials to build out that growth. Brazil and other international suppliers with sell it, then ships will move it.

Generous Yields at Unprecedented Highs

As many of the temporary pressures on the Baltic Dry Index are already starting to ease, it’s hard not to believe the BDI has overshot its floor and will soon find a more rational level — certainly off its unsustainable highs but also above its equally unrealistic lows.

In fact, we’re already seeing this. The BDI is more than +20% off its lows — but still nowhere near a rational level. And as normalcy returns to the index, investors still have a chance to profit from shipping’s worst fears.  While you can’t trade the index itself, almost every shipping stock was pummeled by the fall, and most will follow it up on the rebound.

In the meantime, with many shipping stocks trading near their 52-week lows, already generous yields are at unprecedented highs.  Investors not only have the opportunity to lock in 10%-plus yields with stocks like Navios Maritime (NYSE: NM), they have the added potential for share price gains once sanity returns to this sector.

Regards,
Amy Calistri
Investment Strategist
StreetAuthority.com

February 24, 2009

Shipping Stocks Are Starting to Rebound was originally featured in the Penny Sleuth.

Okay, so maybe Shakespeare did not write this EXACT phrase…but if he had, CNBC would have been quoting him all afternoon Monday.

After suffering months and weeks of bone-chilling stock market selloffs, investors are desperate for sunshine. They are desperate for a new reality, even if that reality be slightly unreal and delusional.

Investors are so exhausted that they are prepared to believe that teams of bureaucrats from around the world can repair what bands of unfettered capitalists destroyed. They are prepared to believe that insanely leveraged economies can deleverage without tears. And they are willing to suspend their disbelief that the worst has passed, in order to embrace the belief that yesterday’s stupendous rally was, “The Bottom.”

Your editors are not entirely persuaded that the winter of our discontent has passed. In fact, it still feels pretty darn cold out there in the financial markets. The credit markets, for example, are still frozen shut.

So forward-looking investors must ask themselves: Is it time to go ice-fishing?

The answer depends greatly upon one’s capacity to brave the elements. Very few investors anticipated any sort of winter at all, much less the severe chill that is paralyzing the global financial markets. Therefore, very few investors prepared or provisioned adequately.

We all know that we can’t simply huddle inside our igloos forever. And we also know that the schools of value-laden stocks that are circulating in the stock market’s murky depths are as plentiful as they have ever been. So we realize that we must get out there eventually and drop a line into the water.

Unfortunately, most of us just lost our shirts — if not also our jackets, shoes, pants and underwear — during the last few weeks. Therefore, even if we believe we should be out in the bone-chilling financial markets trying to hook some bargains, we have very little capital left to risk.

So the next question becomes: What to fish? Many of today’s depressed stocks should provide an appetizing return over the next three to five years. But since economic conditions could become even more dire than most of us now imagine, why not snag the stocks that pay very rich and relatively secure dividends?

Dividends, after all, offer cash in your pocket even during turbulent times in the marketplace. And if you reinvest those payments back into stock, chances are you’ll beat the market considerably.

A study by Wharton Professor Dr. Jeremy Siegel shows that 97% of stock market returns can be traced to reinvested dividends. If that’s not opportunity knocking, I don’t know what is…

Regards,
Eric Fry

October 15, 2008

P.S.: You would have received your first big-time dividend today, if you had checked out our colleague Chris Mayer’s “Paycheck Portfolio.” No need to worry though. Companies in this special portfolio are going to write 75 checks this year, even as the market has been going to hell. There’s no sign of them slowing down any time soon.

In the coming weeks, we’ll be talking much more about dividends and income opportunities that are both lucrative and safe…especially in this market. Feel free to write in and let us know what you think.

Solution to the Economic Crisis was originally featured in the Penny Sleuth.

Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.

But, as with all children, they occasionally run amok. Some fall into the financial hole and can’t get out. Others have great balance sheets but no growth strategy. So, how do you find one that is ready to mature?

Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.

Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.

With these small companies, you might even have a chance to talk to executives and directors. Give them a call, and see what kind of response you get.

Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company.

Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…

In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try to format the reports differently every year to make the evaluation more difficult and tedious to analyze.

Be sure to take your time analyzing everything. If a company continues to throw obstacles in its reporting, that might be an indicator to stay away.

Another important task before investing in a penny stock is to analyze the industry it’s in. Small-caps, in general, get tossed around both up and down more than their larger counterparts. If you are looking at a junior precious metals miner, take a look at what the large miners are up to.

Also, make sure you study what, if anything, the underlying asset of the company is doing. Using the junior miner as an example, make sure you are comfortable with the direction the metal the company is mining is going. If you don’t think gold will continue to rise, you probably shouldn’t invest in a gold miner.

Another important factor you should look at is market share. Obviously, most penny stocks don’t control a large share of their market. But make sure the company you are looking at has a strategy for that. And if it doesn’t, make sure that the industry is growing fast enough to create an opening for the company.

The best way to invest in penny stocks is to find niche companies. Usually, large companies leave areas open that just aren’t worth the hassle for the blue chip to fill. That may be the perfect place to build a smaller company. Make sure that niche has enough room to grow in before you invest.

It takes plenty of time and effort to go through all of these important tasks, but the end result is worth it.

Regards,
Mark Louie
September 4, 2008

Researching Penny Stocks was originally featured in the Penny Sleuth.

There are several accusations about penny stocks that can make an investor hesitant and timid to invest because of a “risky no-gainer gamble” stereotype. These statements are exaggerated and erroneous…

Learning the truth about what you heard in the past…might be a wealthy opportunity for the future…

Here is the top three…

Misconception #1: Penny stocks are priced low because they are poor performing companies.

Penny stocks are usually small and newly created companies. While still trying to get established, penny stocks are analogically infants and toddlers compared to large-cap adult companies. With great parental guidance from a superb managing team, penny stocks can hold a promising future.

Hints: Do your research! Get background information. There may not be an abundance of information on the company because of lack of media attention. So research patiently and vigilantly.

Check if the managing executives and board members are respectable and passionate towards the company. A positive staff is always going to produce great work and show that through the company’s bottom line.

Make sure the company is in a growth position and if they are compatible with future trends and markets. A company’s willingness and desire to expand is a good indication of the value of a company to potentially rise.

Another good way to analyze a company is by reviewing a company’s financial reports and accounting sheets. 10-K annual reports are a great source to attain information. Comparing and analyzing numbers throughout the years will show the “guts” of a company that you won’t read or hear about in the news. However this process can be challenging…

In compliance with SEC rules, companies have to report their financial records. Inside executives know that these records are easily accessible and can show the value and worth of the company. As a loophole, firms will try format the reports differently every year to make the evaluation more difficult and tedious to analyze.

Misconception #2: Penny stocks are all frauds.

Some investors have fallen victim to the “pump and dump” scheme — a system where spammers will buy a stock and then hype it up by sending out positive e-mails and internet ads causing the price of the stock to jump. While the price is up, spammers will sell at a net gain, causing the price to fall, leaving their victimized investors holding the bag.

Hints: Go back to the basics. One of the primary rules to investing…never…ever…invest on tips and rumors. Chances are, your source is wrong or you’ll get in too late…

Do your research! Make sure you know what you are investing in. Make sure your sources are honest and ethical and act upon the interests of its investors and clients. Tips are only ideas. Investments should only be made on your own personal conclusions.

Misconception #3: Penny stocks will usually generate a net loss.

Every stock bares risk. Whether they are priced from $0.01 to $1,000, or a microcap or a large-cap company. Barriers to entry and competition are high these days… Since a majority of penny stocks are young and small companies, its common for penny stocks to default under a competitive market.

In fact, penny stocks are one of the fastest and easiest ways to make double or even triple your money.  It’s a whole lot easier for a $2 stock to jump to $4 than a $60 to $120.

Hints: Do your research! Are you starting to see a pattern here? Make sure the industry sector of the company is compatible for future market trends. Analyze the company by generating different scenarios. For example… Would the company be affected by high oil prices? Is their innovative product going to be the high in demand? How would they perform in a recession?

Generally, the more risk you have, the higher the yields can be. If you enjoy risk and want to make big-time returns, by all means go ahead and invest irrationally. But if you are risk-adverse, go back to the basics and diversify your portfolio.

There you have it, three truths to investing…

These common misconceptions are the response to investor’s bitterness of poorly managed securities. For what it’s worth, that’s up to you. But with sufficient research and a promising future market, penny stocks can yield gains far greater than you could have imagined…

Regards,
Mark Louie
August 11, 2008

Beware of Penny Stock Misconceptions was originally featured in the Penny Sleuth.

But the Fed and Treasury have engineered a strategy to pay off the debt with weaker and weaker dollars. And guess what? So far, so good. Since November 2002, the dollar has fallen against the euro more than 50 percent since its high in October 2000. Of course, this is not the first time we’ve gone through a managed devaluation of the currency. In the 34-year period since Nixon slammed the gold window shut and subsequently ended the Bretton Woods exchange rate mechanism, we’ve had only five major currency trends:

1. Weak dollar 1972–1978 (7 years)
2. Strong dollar 1979–1985 (7 years)
3. Weak dollar 1986–1995 (10 years)
4. Strong dollar 1996–2001 (6 years)
5. Weak dollar 2002– (? years)

The most notable period spanned the 10 years from 1986 through 1995. Then as now, the United States was fighting a historic current account deficit through managed debasement of its currency. But because the present bear market only began in February 2002, the current cycle looks like it still has a number of years to run.

In the best-case scenario, if the current bear market follows the trajectory set by the 1986 — 1995 slump, we could see a weakening dollar for up to 10 years. This presents an opportunity for selling the dollar in one of four ways: direct and indirect speculations, using short- and long-term options for each. These plays will help you safely position your money outside the dollar bear market. And you stand to make a fair amount of money, too.

But there is great danger ahead. Since the trade deficit passed the $759 billion mark — 6.3 percent of GDP — foreigners now must shell out about $1.5 billion a day just to keep the dollar afloat. And even during the managed dollar decline of 2003, the trade imbalance continued to grow. In 2005, Stephen Roach, Morgan Stanley’s chief global strategist, predicted that the current account deficit at the time was on course to reach $710 billion — 6.5 percent of GDP. He was short by only a few billion.

Herein lies the drama. The Bank of Japan spent the equivalent of $187 billion in 2003 — and $67 billion in January 2004 alone — in a bid to prevent its strengthening currency from choking off the country’s export-led recovery. In dollar terms, the Bank of Japan is now spending more than $1.5 billion every day trying to keep the yen from strengthening against the greenback.

Over a four-week period in the fall of 2003, combined foreign central bank purchases of U.S. securities topped $40 billion, more than $2 billion every trading day. Yet these central bank billions managed merely to limit the greenback’s decline to just 2.3 percent over the same period. Can you imagine what would have happened if the banks hadn’t pumped that money into the Fed’s reserves? One former currency trader has asked, “If $40 billion cannot bring about even a minor rally, just how weak and despised is the once — almighty dollar?”

We have relied on the kindness of strangers for too long. “We’re like the untrustworthy brother-in-law who keeps borrowing money, promising to pay it back, but can never seem to get out of debt,” Jim Rogers writes. “Eventually, people cut that guy off.”

There is no way the United States can possibly pay off its creditors should they decide to cash in their IOUs. Right now, the United States holds only about $70 billion in reserves against its obligations — much less than 2005’s $87 billion. That would last about three minutes should creditors begin to sell the dollar, rather than trying to support it.

It’s hard to imagine, isn’t it? The world’s reserve currency spiraling downward, out of control. But then, that’s what the British must have though in 1992 when they attempted to manage a devaluation of the pound. Despite the Bank of England’s best efforts, sterling got away from them; the currency collapsed and Britain was kicked out of the Exchange Rate Mechanism (ERM) established to pave the way for the euro. On that day, known as Black Wednesday in Britain, currency speculator George Soros is rumored to have made as much as $2 billion. Don’t be surprised if more fortunes emerge in the future as the dollar slips dangerously close to free fall.

By flooding the system with liquidity, the Fed cannot control the value of the U.S. dollar against foreign currencies; nor can they control its purchasing power — at least not indefinitely. The Fed’s current policies can “give the majority of investors the illusion of wealth as asset markets appreciate,” wrote Marc Faber in November 2003, “while the loss of the currency’s purchasing power is hardly noticed. This is particularly true of a society that has a very large domestic market, where 90 percent of the people don’t have a passport and therefore know little about what is going on outside their own continent.  And where the import prices of manufactured goods are in continuous decline because of the entry of China, as a huge new supplier of products with an extremely low cost structure, into the global market economy.” If that’s the case, you should look at any declines in the dollar as an opportunity to make some money.

The dollar is the single biggest element of risk in the world of finance today. Rearrange the current system of world finance ever so slightly, let confidence in the greenback falter, and the mighty dollar could go up in flames. There are many ways to hedge against this risk. Better still, there are many ways to profit from the likelihood the dollar will fall. Some methods are direct, some indirect. Some are leveraged, some unleveraged. There is a methodology for every taste, but before explaining the specifics, we ask: What ails the dollar?

The dollar is a victim of its own success. It is America’s most successful export ever — more successful than chewing gum, Levi’s, Coca-Cola, or even Elvis Presley, Britney Spears, and Madonna put together. Trillions of dollars flow through the global financial markets every week, and they are readily accepted at large and small — and clandestine — business establishments from Kiev to Karachi.

Today, there are simply too many dollars in circulation for the currency’s own good. Why? Americans have been living beyond their means for more than two decades. The U.S. dollar’s problems stem from a single cause. “If there’s a bubble,” wrote David Rosenberg, chief economist at Merrill Lynch,” it’s in this four-letter word: debt. The U.S. economy is just awash in it.”

You’ve seen it firsthand: John Q. Public now holds more credit cards and outstanding loans — with a higher and higher total debt load — than ever before. Outstanding consumer credit, including mortgage and other debt, reached $9.3 trillion in April 2003 — a significant increase from its $7 trillion total in January 2000 — but by the third quarter of 2007, debt had nearly doubled since 2000, to $13.7 trillion. With consumer spending alone responsible for approximately 70 percent of U.S. GDP, that’s quite a hefty personal debt load.

The corporate debt picture is no better. American companies have never depended so much on sales of their corporate bonds. Between 2002-2007, investment-grade corporate bond sales increased nearly 60 percent, growing from $598 billion to $951 billion. But junk bond sales for that same period broke the bank, surging from $57 billion to $133 billion.

The third leg of the debt problem, following consumer and business debt, is Uncle Sam. Government debt as of November 7, 2007, officially passed $9,000,000,000,000. That’s about $30,000 for every man, woman, and child in the country. This total includes debt owned by many types of investors, from individuals to corporations to Federal Reserve banks and especially to foreign interests. (By 2004, foreign central banks had stockpiled more than $1.3 trillion worth of dollar-denominated Treasury bonds and agency bonds at the Federal Reserve. By 2007, foreign debt had nearly doubled, to $2.033 trillion.)

What the $7.8 trillion figure does not account for are items like the gap between the government’s Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the government debt burden for every American rises to well over $175,000. In 2005, the Methuselah of investment mavens, Sir John Templeton, then 93, said you should get out of U.S. stocks, the U.S. dollar, and excess residential real estate. Templeton believed the dollar would fall 40 percent against other major currencies, and that this would lead the nation’s major creditors — notably Japan and China — to dump their U.S. bonds, which would cause interest rates to run up, thus beginning a long period of stagflation. He was right.

Don’t let his age fool you — Templeton was still sharp in 1999 when the financial industry hacks in Florida were urging their customers to buy more tech stocks. Templeton warned that the bubble would soon burst. He was right; they were wrong. Of course, he was only 87 back then. He is almost certainly right again. Other great investors, too, are getting out of the dollar. For the first time in his life, Warren Buffett is investing in foreign currencies.

George Soros, who made a fortune selling sterling in the 1992 ERM crisis, warns that the U.S. system could “blow up” at any time. Richard Russell, the influential editor of the Dow Theory letters, speaking at the New Orleans Investment Conference, warned: “If ever there was a crisis that could shake the global economy — this is it.” Jim Rogers is teaching his daughter to speak Chinese. When old-timers nod their heads in agreement — especially when they happen to be the most successful investors in the world — their advice may be worth listening to.

American consumers, companies, the U.S. government, and the country as a whole owe more dollars to more people than ever before. But perhaps the greatest threat to the U.S. economy is its foreign creditors. There is — or should be — a limit to the number of dollars foreigners are willing to buy and hold and thus a limit to their willingness to service our credit habit. Why? Because the United States, while still the world’s number — one economic power, is showing itself to be an unreliable steward of its own currency.

Regards,
Addison Wiggin
August 5, 2008

How to Sell the Dollar was originally featured in the Penny Sleuth.

What are some good sectors to invest in during an economic downturn?

It’s a question I’ve thought a lot about, and have written extensively on, for the last few months.

For me, it all comes down to consumer spending patterns. Where are people going to cut back? Where will they continue to spend?

As this economy continues to slide and the more I begin to realize we’re far from being out of the woods, I find myself starting to cut back on my own spending here and there.

Don’t get me wrong, I’ll still treat myself to a nice glass of scotch (or two) every now and then, but those “little extras” I’ve become so accustomed to suddenly don’t seem so important. I’m really trying to force myself to take less taxis, spend less money on gourmet coffee, etc. And the one thing I find myself doing more and more these days is cooking at home.

I live in New York City and not only are there amazing restaurants everywhere, but they’re usually right around the corner and open until the late hours of the night. So it’s been very easy for me to walk down the block for my breakfast, lunch and dinner.

But I’ve begun to break that habit and it’s done wonders for my wallet.

So that got me thinking, even if we do slide into a protracted downturn, people still have to eat, right? And since they’ll continue to buy groceries — in fact, they’re likely to buy more now that eating at home is much more economical than going out — then it raises the question: which stocks stand to benefit the most from this trend?

I pondered this question as I munched on my eggs this morning and suddenly it hit me — eggs! Who produces eggs in this country?

I don’t know why I never thought of it before, but I guess since the product is such a staple and lacks any type of brand recognition that it goes overlooked a lot of the time. But as I began my research I found that there was, in fact, a company producing the lion’s share of eggs in this country:

Cal-Maine Foods (CALM: NASDAQ)

Cal-Maine produces roughly 15% of the eggs consumed in this country, and its market share is steadily growing; the company has been consolidating this space with a number of well-timed acquisitions. Cal-Maine has also capitalized on the more health conscious consumers by investing in low-cholesterol and organic egg products, which typically go for premium prices.

Cal-Maine also has a rock solid set of financials to back it up, too. Operating Margins are north of 30%, Net Profit Margins are at roughly 20% and the company’s Return on Equity (a metric I love to use) is over 25%!

To put that in perspective, the average company in the S&P 500 has profit margins of 11% and Returns on Equity of 15%, so Cal-Maine is definitely running a tight ship.

But things haven’t always been this great for Cal-Maine and the other egg producers in the U.S. They’ve had a little help from the corn market…

Due to the rising cost of corn, Cal-Maine and other egg companies have seen their feeding costs rise by 30% this year. That may sound like bad news but since eggs are such a customary item on American breakfast tables, Cal-Maine has been able to raise its prices right along with its costs. In fact, the company was able to increase its prices above costs and expand its margins and profits as well.

That’s why this company’s stock has practically doubled over the last 12 months — and many folks, including Barron’s, think it could double again.

I’m not sure about a double, but with a stock that’s trading at a $900 million market cap and paying an 8%-plus yield, I’d still feel comfortable socking Cal-Maine away in my portfolio for a while.

But I’m also going to keep an eye on the corn market. If the price of corn begins to come down in a significant way, you can bet that Cal-Maine’s profits and stock price will drop right along with it.

For more on this question visit my website here…

Regards,

Wayne Mulligan
July 23, 2008

Invest in Eggs During a Recession was originally featured in the Penny Sleuth.

Options can be a menacing trading practice. Once you think you have it figured out, it shifts. Like any investment, there’s going to be some sort of gamble. Although viewed by bitter traders as confusing, risky and unprofitable at times, options can produce monstrous gains that can far outweigh the risks if played right.

Trading options is all based on anticipation. Yet with the volatility of the market, trading can be very frustrating with the market being unpredictable. There are several strategies and tips that you could practice that will increase your odds…

Here are 10 helpful tips that will contribute to minimizing risk and pull in huge profits when trading options:

10) Develop a game plan

How practical is this statement in life? You must always have a game plan when trading or investing. Otherwise, you’ll most likely trade irrationally and insensible and end up losing more than you had hoped. Developing a plan and strategy will have better odds than trading randomly. This should always be your first step to investing.

9) Select a good broker

Even with today’s easy access to a variety of resources, trading options are still very difficult to do on your own. Unless you’re a pro at trading, it would be to your best interest to select a brokerage firm for guidance. There is a plethora of different services out there offering different products. Shop around and learn their tract records. Make sure you choose one that’s compatible with your objectives and personal requirements. Remember, these are the people investing your money. Also, be aware of commission fees.

Evaluate yourself

What are you trying to accomplish? How much money do you hope to make? How much can you take in losses before it affects your life? These are simple questions you should ask yourself when deciding to trade. Evaluating yourself will help you reduce of risk as well as help you plan your trading.

7) Know and understand the market

There are so many strategies and tactics when buying or selling options that you could trade in all market trends. Whether the market is bullish, bearish, or neutral, understand the trends and correlate it to your trading strategies.

Different markets will require different trading strategies. For example, you’re going to want to buy calls in a bullish market and sell calls in a bearish market.

News and press releases will have an impact on a stock price. Don’t buy from what sources are saying despite if they’re true. Chances are you’ll get in too late. Wait for a favorable price.

6) Separate and dilute your capital

There’s no other word more commonly used when preventing risk than diversification. This practice is so widely used in all investing practices. Like stocks, buy in several different sectors and equities to minimize risk.

Never trade with money needed for future obligations. Have a separate portion of your capital for trading options. The worst thing you would want is to lose your mortgage payment or retirement savings on one single sour trade.

5) Don’t get out early

You may have just had a few consecutive losses on several trades and you now have the mindset that all your trades will continue to negatively streak. Initially, you panic and tell yourself to get out to minimize your losses. That might be the worse thing you could do. If you get out too early, you could lose out on potential huge gains. In options, huge gains are what overcompensate any losses.

4) Don’t hold too long

Pay attention to the expiration date. Time value is one of the most important factors when trading options. Having the entire option expire and losing its value would be bad. Understand that options decay over time. If you feel it’s time to sell, sell. It’s better to take a small loss than losing everything.

3) Secure your gains

Losing money right after you make it is a horrible feeling. With the volatility of the market, it’s easy to see a stock jump one week and then drop the next. If you don’t decide to sell after a stock is up in anticipation that it will continue to increase, a simple way to secure your gains is by setting up a trailing stop. A trailing stop is a stop whose price you raise as your profits grow. This will help you lock in any gains you make.

2) Establish a break-even point

A break-even point is the price at which the underlying instrument must shift by the expiration date, to produce an intrinsic value equal to the price you paid when you purchased the option. Defining a break-even point will ultimately help you tell whether the stock is worth selling or buying.

To find the break-even point, use the strike price and premium. If you’re buying a call, add the premium to the exercise price. If you’re buying a put, subtract the premium to the strike price. For example, if you were to buy a $40 put contract on Company XYZ for 5 1/2, the break-even point would be $34.50.

1) Research

This is a no brainer. Researching is the most useful and important thing to do when trading in anything. Pay attention to market trends. The best way to beat the market is to know the market. Great research is the key to consistent success in the market. Outside sources like your broker, news, TV etc. are great ways for information, but it all comes down to you. Your own personal information is more valuable than any other resource.

Options can be confusing and frustrating at times. Yet options can produce enormous gains. The collaboration of these 10 highlighted tips will help you increase your chances of making profits while minimizing risk when trading options.

Regards,

Mark Louie
July 22, 2008

Option Investing Tips was originally featured in the Penny Sleuth.

So the question for many folks has become:

Are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

“In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer. In other words, think about yourself and the millions of other Americans out there who are:

1. Watching the values of their homes drop
2. Spending twice as much at the pump than they did a year ago
3. Watching their net worth shrink by the day

“And then ask yourself, has anything changed over the last couple of months? Have things gotten any better or have they gotten worse?”

Unless you don’t own a home, drive a car or do your own grocery shopping, then you might be tempted to say, “Things ain’t so bad.” But if you can relate to what I’m talking about, then you already know the answer this question.

Calling a bottom right now would definitely be premature. Consumer spending drives 70% of our GDP. You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

And just to show you where we are based on cold hard facts, here are three reasons why I know we’re not out of the woods just yet…

Housing and Real Estate

Nobody thinks this story has completely played itself out yet. Even the analysts that are on the more “positive” side of this debate still agree that we won’t see a bottom in the real estate markets until the end of the year.

And that’s being optimistic!

According to the National Association of Realtors, pending home sales dropped by 4.7 percent in May…that is its third lowest month on record. So things sure aren’t slowing down yet.

And even when the recovery does come along, many economists are predicting a protracted recovery period that could stretch to 2010.

The bottom line is, the less wealth and free cash to spur consumer spending, the less relief we’ll see for the overall economy in the short run.

Energy Prices

Like I said before, unless you don’t drive, then there’s a good chance the increases we’ve seen at the pumps have made a serious dent in your wallet.

Just last week the price of oil broke a new record, hitting $147 per barrel and $200 oil by the end of the summer isn’t out of the question.

Here’s why this situation won’t get better anytime soon…

If you were an oil and gas company, would you feel the need to go scouring the globe for fresh supplies right now? I mean, you’re sitting back, pumping out enough barrels to meet demand and you’re watching the price rise along with your profits on an almost daily basis.

In other words, there’s no economic incentive (just yet) to dramatically increase the amount of oil these companies produce. They’ll do so when our consumption of that oil drops below a certain amount.

But with all the pent up demand in countries like the U.S., China, India, etc., I don’t foresee that happening anytime soon.

We’ve all heard the argument that oil’s cheaper than it was in the 1980s, relative to current income levels. But at the end of the day, what really matters here isn’t the relative price of gas; it’s the perception of the consumer.

If they’re paying twice as much for oil today than they did last year, they have far less disposable income to spend on other things — which once again, can’t be good for the overall economy.

Relative Market Conditions

So the dictionary definition of a “bear market” is when the Dow falls by 20% or more.

We crossed the 20% mark last week. The same goes for the broader S&P 500 Index. Therefore, by any yardstick you want to use, we’re in a bear market.

Now, let’s take a look at some of the previous bear markets we’ve weathered and see how far the S&P had to fall before it began to recover:

• From 1969–1971: 33% drop
• From 1973–1975: 48% drop
• From 1980–1982: 26% drop
• From 2000–2003: 48% drop

From this data you can see that from peak to trough, the average bear market will show a 38.75% decline each time.

Considering we just crossed the 20% mark, it’s fair to say we’ve got a ways to go before we approach the average.

Remember, These Are Just Indicators!

The thing you really need to keep in mind is that all of this data:

• Home sales
• Energy prices
• Market index levels

They’re all simply indicators of where we are. The meaning you derive from them will depend on how well you know the markets.

For example, a seasoned value investor will look at falling stock prices like gold nuggets falling from the sky. That’s because an experienced value investor knows that there’s TONS of money to be made when they can buy stocks on the cheap.

It’s like walking into your local super market and finding all of your groceries on sale for 50% off.

And a seasoned trader loves a market with direction (no matter if the direction is up or down) because the trader knows they can short that market all day long.

That’s why it isn’t a bad thing that this market hasn’t bottomed yet. In fact, if you’re an intelligent person who’s interested in making money, then this could be the best opportunity you’ll have for a long time!

So equip yourself with the right tools, information and then go make the most of this market!

For more on this TickerHound question, click here…

Regards,

Wayne Mulligan
July 17, 2008

Indicators of a Falling Market was originally featured in the Penny Sleuth.

They say a picture is worth a thousand words and in this case it rings true. Gold is solidly in a bull market and while volatile, you can take a look at the platinum chart below, and while it ranged within a $300 range or so while trading above $1,000, it looked volatile and there were times when it seemed it was heading down. Well, it sure didn’t head down but nearly doubled in a matter of months. Expect this from gold in the future…just be patient.

$850 has held very well and, as far as I can see, will never be seen again although a test of it would be nothing but healthy. Both downtrends from the peak have been broken solidly.

All moving averages are heading steadily higher and are far from any bearish sign such as a bearish crossover. The 50-day MA is passing $850 making that level all but history. This is one healthy market on a longer-term weekly chart.

RSI remains above 50 signifying a strong bull market. MACD is making a bullish crossover from a nice level. Slow STO is crossing 80 and is signalling an up-trending gold market:

Silver is taking off and breaking above resistance just below $19 as indicated on the six-month chart in the newsletter. A solid uptrend is holding nicely and $16.50 is very strong support and has held on the many recent tests.

The 50-day MA is soon to cross the support region at $16.50 making it less likely to ever be seen again. MACD is making a bullish crossover from its long downtrend. MACD does not make many crossovers in silver and when it does it usually signifies a strong up move or a correction, followed by consolidation so look for the up move to take its turn here and now. Slow STO turned up right at the bottom and has been an excellent timing signal on this chart recently. Last time slow STO began an uptrend from recent levels the price of silver ran up nearly $10:

Platinum remains within its bullish triangle formation and should continue to tighten its trading range until the triangle is broken to the upside by early fall at the latest. Strong support lies way down just below $1,400 and will likely not be tested ever or for many years. Fundamentally, platinum is very strongly supported at these levels at least until the Eskom power situation much talked about here is resolved. But it still comes down to supply and demand and while other metals are being experimented with in the catalytic converter arena none have yet proven as effective on gasoline engines which are by far the most widely used worldwide and will remains so for many years to come.

The moving averages are still pointing north and solidly so. They have a long way to catch up after the explosion in price but are steadily making progress. RSI remains bullish above 50. MACD is heading lower and as with silver is just signalling a consolidation move, which happens to be with a very bullish formation, the triangle. Slow STO is undecided but slightly bearish and not really giving us much to work with, but with all the other indicators, price and moving averages performing as they are, things are positive:

Palladium is making higher highs and higher lows as it consolidates and postures to break through the downtrend at $450. This pattern will resolve itself one way or another within the next two weeks tops and will give us a better indication of the future.

The three moving averages are heading up and the 50-day MA is not lagging far behind the price and should be supportive. RSI is bullish remaining above 50. MACD is slightly bearish but that just signals consolidation during bull markets. Slow STO is bullish but flattening out as the price runs into the downtrend line.

It was a very constructive week for the precious metals and, by the looks of things, we have more positive things to look forward to in the near future.

You can follow my technical analysis and the complete precious metals industry breakdown at my website: http://www.preciousmetalstockreview.com/.

Best regards,

Warren Bevan
July 15, 2008

Charting New Highs for Precious Metals was originally featured in the Penny Sleuth.

One of the problems with American culture is that we don’t fix anything until it’s beyond repair…levees, the housing, bubble, debt, healthcare, social security, you name it. Unfortunately this also applies to the ongoing energy crisis.

While a potential cellulosic industry (ethanol made from cellulose, the most organic compound on Earth) could break out in the future, it won’t put a dent into $135-plus barrel prices until years from now. America’s dependency and current shortages has forced itself to find an alternative. Improvise would be a more appropriate word. We will see some new and exciting technologies in the following years…

No, it won’t be flying cars, hydrogen cells, or teleporting atom machines…although those would be a fun… Instead, we’re talking about simple energy and cost efficient cars.

The recent closings of four GM truck plants and $4-plus per gallon gasoline prices are a tall tale sign our SUV days are over. The fact that soccer moms can’t even get $10,000 when trading in their Chevy Suburbans proves that times have changed. Hybrid and smart cars are starting to emerge…

We are now heading toward two feasible automobile options that both fit under cost and energy efficiency categories…electric and air.

Building a Better Hybrid

When we think of hybrids, we think of unattractive cars mired with technical problems, short battery lives, and difficult and costly to fix. However there’s a new generation of hybrids that may change its reputation…

Several automakers have already implemented plans to commercial produce lithium-ion battery powered cars. These vehicles are far different than the standard nickel metal hydride-based battery used in today’s current hybrids. General Motors (GM: NYSE) plans to release, the first lithium ion hybrid to U.S. markets in 2010, the Chevy Volt, followed by Toyota, Mitsubishi and Subaru.

In a nutshell, the new lithium ion batteries will last much longer and provide up to 20 times the power than nickel based, allowing cars to travel up to 40 miles on a single eight-hour charge. Need to travel more than 40 miles? No worries, a dual gas engine will cut on, getting you to where you need to be.

Pending on how much your local electricity supplier charges, it would cost you around $2.50 to fully charge a lithium ion hybrid. Also, even if the electricity supplier is burning fossil fuels to produce the needed charge, they’re still releasing less carbon emissions than regular gas powered cars.

A Breath of Fresh Technology

The latest car technology to hit the world’s markets involves an air compression engine. An almost unimaginable idea, this engine uses air compression tanks to push the pistols instead of the explosion of gasoline/air mixtures in a traditional internal combustion engine.

The car’s appearance is small and not that attractive, but at $2.00 to fill a tank good enough for a 125 mile trip, it might be worth it. Like hybrids, they also have a duel gas engine for speeds over 60kph. A high-pressure air pump could fill up the car in 3 minutes while a built-in air pump could refill the tanks in four hours using a simple household outlet. The internal pumps will also refill its tanks while running on gas — making it a somewhat renewable energy product.

Indian carmaker Tata Motors (TTM: NYSE) and French-based Zero Pollution Motors are the first companies to commercially produce this technology. Deals have been made in more than a dozen countries. The Mexican government signed a deal to buy 40,000 of these for taxis in Mexico City.

Air compression cars won’t hit U.S. markets. At least not for now… They’re simply too small and lightweight to pass U.S. crash tests. But this technology has potential — not to mention the fact that it’s easy on the environment.

Hybrid sales were estimated to increase by 11% for 2008. Yet sales are down 1.9% compared to last year through the month of June. However, total car sales are down 10.1% due to a choppy economy and high fuel prices. And even though demand has waned a bit, carmakers still have not been able to meet America’s demand for hybrids…

Simply put, 2008 hybrid sales would be higher if it weren’t for inventory shortages. Toyota, which controls 80% of the U.S. hybrid industry, is claiming a one days inventory supply of their Prius when normal suggested inventory should be around 60 days worth. Dealerships across the country are reporting six-month waitlists for the car. Honda’s Civic and Ford’s Escape are having similar reports as well.

It’s no question that hybrids will be a success. In a recent poll conducted by Edmonds, 35% say they are currently shopping for fuel-efficient cars while over 50% say they will shop for another vehicle if gas reaches $5 per gallon. With only 0.388 sold per 1000 people, there’s plenty of room for growth. A 10% tax break on a hybrid is a nice incentive as well.

The largest factor to the shortage is battery supplies due to poor planning and limited resources. The battery packs, which are the most expensive part of hybrids, could be a huge gainer in the markets.

General Motor’s recently announced lithium ion contracts with both German-based Continental AG (OTC:CTTAY) and Compact Power Inc, a subsidiary to LG Chem of Korea. With numerous other major automakers racing to get lithium battery hybrids out, lithium ion providers will be in demand.  These companies would be worth keeping an eye on in the near future…

With amount of money companies and governments are putting into these projects, it’s likely we could see a promising industry to boom in the future. Hopefully, it will sustain not only the economy, but the environment as well.

Regards,

Mark Louie
July 11, 2008

Investing in Fuel Efficient Cars was originally featured in the Penny Sleuth.