We’ve said it before, and we’ll continue to say it — small caps consistently lead the way out of periods of recession. But while penny stocks generally outperform the rest of the market as a class, they rarely move against it.

In effect, small caps are a lot like gain multipliers. When a major broad-based index like the S&P 500 gains 1%, small-cap stocks in our portfolio could see gains of 3%. And when the market slips, our tumbles are equally magnified.

There’s no better example of the correlation between small stocks and the market than October 2008. As stock markets all over the world shed trillions of dollars in value, more volatile small stocks took some of the biggest knocks — regardless of their fundamental soundness as investments.

And when the market began to rebound back in March, the small caps were racking up the biggest gains…

It’s that strong correlation between small stocks and the broad market that makes knowing the market’s movements so significant. And with investors riding an emotional roller coaster in October and November 2009, now’s a particularly important time to check in with what stocks are doing as a group.

When it comes to aggregate market moves, there are two main factors to consider: fundamentals and technicals.

Fundamentals include economic metrics like unemployment and retail sales, whereas technical analysis looks at trends and patterns in price charts to determine where stocks are headed. Put simply, fundamentals look at the actual health of the stocks, while technicals look at the perceived health of the market.

And while we generally focus on a stock’s fundamentals, when it’s time to look at a broad market index like the S&P 500, technicals can be invaluable in helping us determine where prices are headed…

Here’s a chart of the S&P 500 since April…

In the chart, those vertical gray and black bars — known as candlesticks — represent the price movements of the S&P 500 on any given trading day. The gray lines are the average value of the S&P over the trailing 200 and 50 days, respectively, known as moving averages.

There are a lot of factors that make fundamental analysis work — too many to go into in this issue — but the key things that we’re going to talk about today are support, the price level that stocks have trouble falling below, and resistance, the price level that stocks have trouble pushing above.

Looking at the S&P 500 chart above, the stock has been in an uptrending channel (defined by the thick black lines) for some time now. That’s a good sign because it means that the market is obedient to the channel right now — it should continue to trade within that range until some catalyst prompts a reversal.

It also means that we have a somewhat predictable range of movement that we expect the S&P 500 to move within. Depending on its direction, a break through the thick black lines of the channel would send a strong signal to either buy or sell.

But with the market’s movements still predictable right now, we can make a couple of projections for the near term. For starters, if the last two price cycles are any indication of the S&P’s trend, we should see the current upswing last until the last week or so of November, hitting around 1,150 before turning back for another two-week down cycle.

That down cycle is nothing to worry about as long as the index bounces back up off the black lines for the fifth time since August. That’s most likely going to happen in the early days of December.

There’s no question that our small-cap positions are affected by the movements of the market at large. But while many investors look at the market’s movements as random price swings, we’re going to continue to take an analytical stance by looking at the technical indicators that stocks are exhibiting right now.

Things continue to look strong in the market for the rest of the month. We’ll monitor the indexes closely and alert you to any significant changes.

Cheers,
Jonas Elmerraji

November 18, 2009

Why You Need to Watch the Market Closely Right Now was originally featured in the Penny Sleuth.

There’s one antidote for this problem … remembering a few basic rules. Just embrace the 10 ideas that follow and you’ll be in line to make some serious money in the months ahead.

Rule Number 1: Invest on the Right Side of Major Economic Trends

That old investing adage “Don’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain – unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well – and ride the ones that are truly unstoppable. You’ll know them when you see them, because they’ll have trillions of dollars in new capital flowing directly at them – investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples.

Rule Number 2: Sell Your Winners

This may seem counterintuitive, but – if you want to succeed – you must sell your winners. Rule Number 6 – thinking like a plumber to prevent losses – is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way – Safeway Inc. (NYSE: SWY) regularly replenishes the inventory in its Produce Department to keep it fresh. You should do the same with the “inventory” in your portfolio because, if you let your stocks sit on the shelf too long, they’ll eventually go bad – just like fruit that’s past its expiration date.

Rule Number 3: Always Sit in an Exit Row

This rule goes hand in hand with Rule Number 2. One of the most common problems investors have is not knowing when to sell. Sometimes, they’ll let a big loss get out of control (which violates Rule Number 6) – or, worse, they’ll notch a big gain and then sit on the investment so long that it sneakily turns into a loss. The bottom line is that, up or down, you should always have planned exit points when you initiate a position – and enforce them with “protective stops,” adjusting them as prices move in your favor (but never when they go against you).

Rule Number 4: Your Broker is a Salesman

So unless you know you want to buy what he has, don’t go shopping today! Wall Street is not a service business. Brokers exist for one reason and one reason only – to sell you stuff and make money…from your money. And the more of your money you give to them, the less you have to make more for yourself. So buy only what you want and what fits your goals and objectives – not the “stock of the day” the broker is pushing to meet his weekly quota.

Rule Number 5: Invest for High Yields

Contrary to popular belief, rather than investing for capital gains, you should aim for the highest possible yields and the most certainty you can find. The real secret to wealth-building is compounding small gains over long periods of time. In fact, studies show that compound returns can outperform so-called “growth stocks” by as much as 22-to-1. Furthermore, dividends account for a huge percentage of total returns – varying studies have claimed anywhere from 60% to as much as 97% over time. So, don’t ignore them!

Rule Number 6: Think Like a Plumber

Big losses – like six inches of water in your living room – are expensive and can set you back years. Professional traders – and I’m not including the risk-junkie cowboys who drove the derivatives mess to heck in a hand basket – understand this. And because they do, they focus the majority of their efforts on avoiding losses, instead of on capturing gains. It’s counter-intuitive, but it really makes a difference. Besides, if you keep those portfolio pipes from bursting, you won’t have to worry about your assets leaking away, drip by drip.

Rule Number 7: Buy Value

Buying when the underlying value is “right” can mean the difference between pathetic single-digit gain and truly market-beating returns. It’s hard to make money when valuations – as reflected by Price/Earnings (P/E) ratios are greater than 20. More normal valuations sit in the 12 to 14 range. However, to really make money, you need to buy when valuations have been beaten down into the single digits – assuming, of course, that the company’s underlying value is real. Doing so puts the odds strongly in your favor and can dramatically boost returns.

Rule Number 8: Retirement is a Lifestyle Issue, Not a Monetary One

When most people think about retirement, they think about safety. Big mistake. The single biggest problem facing us today is running out of money before we run out of life. If you’ve followed Rule Number 9, this shouldn’t be a problem. However, if you’ve thought about safety and have not invested enough, what you’re really doing is crippling your ability to earn future income – income you’re going to need in order to eat, keep a roof over your head, and provide lifelong life health care. Oh yeah, and have some fun.

Rule Number 9: Start Early and Leave Your Money Alone For as Long as Possible

This is not the same thing as “buy-and-hold” investing. Buy-and-hold is not an investing strategy, it’s a marketing gimmick – and, these days, it’s more like “hope-and-pray” investing, anyway. The world’s most successful investors – think Jim Rogers, Warren Buffett and the late Sir John Templeton, to name a few – don’t buy and hold. And I don’t believe you should, either. These experts buy and “manage,” confining themselves to stocks and strategies that meet their specific objectives. Given that one of our critical objectives is to have our money working hard for us rather than us working hard for it, the point is that you want to start as early in your life as possible and never miss an opportunity to invest. The longer you have your money in play, the better you will be paid when you’re ready to cash out!

Rule Number 10: All Investments Contain Risks – But Not All Investments Contain the Same Risks

Despite all my talk about avoiding losses, the simple truth is this: If you want to grow your wealth, you have to take on risk. It’s unavoidable. Every investment involves risk – the only questions are how much and under what circumstances. Remember, success is not about how much money you can make, but about how much money you keep. As such, the true secret of wealth-building is taking risk properly.

Indeed, the late legendary U.S. Army Gen. George S. Patton Jr., once said: “There is nothing wrong with taking risks.” But he also cautioned: “That’s quite different from being rash.” I completely agree. What’s more, I think that Patton would have agreed with my belief that if you want to be successful in anything, you have to take a certain amount of risk every day. It’s just a fact of life.

Yet, most folks are unwilling to do so – or they spread themselves too thin, and over-diversify, all with the goal of “protecting” themselves. Unfortunately, by doing so, these investors actually set themselves up for failure – not because they take too much risk, but because they don’t concentrate the risks they do take in the right places!

What are those “right” spots? They’re the investments that can provide the potential rewards to justify the risks the investor has taken.

Regards,
Keith Fitz-Gerald
Money Morning

November 17, 2009

Editor’s Endnote: Keith’s new book, Fiscal Hangover: How to Profit from the New Global Economy, was just released yesterday, and it’s already getting some glowing reviews. Right now, you can pick up your copy AND save more than $10 off the cover price. Just click here right now…

The 10 Rules for Successful Investing was originally featured in the Penny Sleuth.

You see, the economic recovery in prices started in EVERYTHING last March — but to be clear, the overall market and the profitable commodities market are inextricably tied together.

The S&P 500, my proxy for the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows it provides insight into future moves in other markets.

The CRB Index, Commodity Research Bureau, recently broke above the 267 level making new yearly highs. It’s now on target for a new near-term goal, which represents a 50% rally in commodities since last years dip.

Higher Oil prices are also a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.

Add it all up and it’s easy to see that the CRB, and other commodities in particular, are on target for now.

The Best Opportunity for Commodities Profits…

My recent commodities travels took me to the west coast to revisit acquaintances made during the July National Chicken Marketing convention.

My big takeaway from the exhaustive chicken information was that corn was deemed undervalued by most of the presenters and professionals in attendance. And I trust these guys, after all, it’s their business to know the cost inputs from the egg to the bird on your plate.

The corn crop at that time looked set to make it through the summer months in great condition with no fears in sight to disrupt high yields.

Though my view on trading weighs heavily on technical analysis I learned long ago not to ignore important fundamental information. The upside was greater for corn to rise than drift below $3.00 on perfect growth.

How to Turn Price Charts into Quick Gains…

Corn prices were low (just over $3 a bushel), and that’s exactly when I told readers of Resource Trader Alert to get into a corn play. Over at RTA we use options to directly play commodities themselves – options help limit our risks while giving us a nice risk reward payout.

(I normally don’t give out the specifics of my trades — but I’ll make a special exception for today’s article.)

For our corn option play the maximum risk was a little over $1100 dollars with six full months of fundamental factors to boost prices to $4.00 a bushel. Chicken convention consensus was that our goal should be reached by year’s end – but in fact it was much sooner. The recent high on our RTA option play was around $2,400 – which represents more than doubled our initial investment.

That’s just how quickly the commodity options can move.

The price of corn rallied 25% but our corn options ended up doubling in that same time. By using options we were able to maximize our profit potential and completely limit our risk.

The Charts Know More Than the Farmers…

The reality of fundamental trading on weather, planting intentions, yields, exports or crop disease is that the information does not flow freely to everyone at the same time. The farmers, seed salesmen and grain elevator operators use their legal inside information in the market before others. The price charts are one way of seeing what people know — without having to “really” know.

At the July chicken conference the major fundamental support of grain prices was slated to be ethanol demand. But the present grain rally connection to ethanol is difficult to prove at best. In fact, the correlation with crude oil gains has just now only started to kick in as prices rise above $80 a barrel.

With that in mind it’s fairly safe to say that the combination of weather premium and dollar weakness started this grain move instead of the much-anticipated demand from ethanol and biofuel production.

The chicken men were right on price but maybe wrong on the reason. This is a perfect illustration of focusing on “what” the market is going to do, not “why.”

And although huge chicken-related profits aren’t quite hatched they are definitely on the right path to growing healthy, big and strong.

It all comes back to commodities,
Alan Knuckman

November 13, 2009

The Single Best Move for Quick Commodity Profits was originally featured in the Penny Sleuth.

What’s he talking about? Today, we take a look and invest right alongside his idea. And it should start to pay off with the arrival of the first swallows of spring in 2010. It’s also timely now — in this weak-kneed economy — because it has traditionally held up well even in when the economy is on the ropes. Even the Great Depression couldn’t put this thing down.

We start with simple truths. The world’s population has more than doubled since 1950 — from about 2.5 billion to 6.7 billion. By 2050, there will be more than 9 billion people on the planet. Almost all of this growth will come from undeveloped markets such as China and India. And they will all be doing one thing, for sure — eating.

Now, hang on. I know that is a banal insight by itself, but this story has layers like a tiramisu. The second layer is the mix of food eaten, which is important. These undeveloped economies are getting richer. Predictably, as people everywhere have done and continue to do when they have a little more money in their pockets, they change their diets. They spend more on food. The average Chinese spends 40 cents of every additional dollar earned on food. In India, it’s about 70 cents of every additional dollar. What do they buy?

They buy more meat, more fruits and more vegetables. Their calorie intake rises. That’s why the U.N. says we’ll need to boost food production by 70% by 2050 — a big task, given increasing restraints on water and quality arable land.

How do we meet that demand? Here the plotlines start to thicken and things get interesting…

Let’s look at soybeans specifically. China is the largest importer of soybeans and has been since 2000. China was once the largest exporter of soybeans, but flipped to a net importer in 1995. It may well be impossible for China to meet its demands for soybeans by producing more of its own. Passport Capital, an astute hedge fund, estimates that in order to grow enough soybeans to become self-sufficient, China would need to cultivate an area about the size of Nebraska.

That looks impossible against China’s arable land base, which has been in decline since 1988 — this despite the fact that China’s subsidizes agriculture. Another reason is the low level of water resources in China. Soybeans require a lot of water — 1,500 tonnes of water for one tonne of soybeans.

Who has lots of water? Brazil. So it is no surprise to discover that the increase in demand for soybeans from China has largely been met by increasing soybean acreage planted in Brazil. (Brazil is the second largest exporter of soybeans in the world, behind the U.S. and ahead of Argentina and Paraguay.)

The easiest way for China to get around its water shortage is to import soybeans. By importing soybeans, Passport calculates that China is effectively importing 14% of its water needs.

It looks likes this trend will continue for quite some time. When you look across the world, arable land per person is in decline. (Arable land simply means land that can be used for farming; it doesn’t mean that it is currently used for farming.) But one nation has more potential for converting arable land into producing farmland than anybody else by a country mile. It’s Brazil again.

Brazil has a large tropical savanna known as the cerrado. You can think of it as the world’s arable land bank. It’s an area of about 250 million acres — about as big an area as all of the arable land in the U.S. It gets plenty of rainfall and sunshine. The soil is very old and runs deep. But there is a problem: The soil is nutrient poor. You need to add a lot of potash and phosphate — two key nutrients — to grow soybeans there.

According to estimates by SLC Agricola and Morgan Stanley, the average new acre of farmland in the cerrado requires 14 times the amount of phosphate and three times the amount of potash of a typical American acre. This means that it is expensive to grow grains here. You need a high soybean price to make it worth the effort — and there is more to it than just adding the nutrients. There is road and rail access, for instance. Someone would have to build all that out, too.

Connecting the Dots — Grains Are Cheap

So now we are in a position to connect some dots. China’s increasing population and affluence will drive its soybean imports. These imports will come mainly from Brazil. And Brazil, as it converts more arable land to producing farmland, will need a lot of potash and phosphate.

What is true of soybeans is also true of wheat and corn and rice and other agricultural commodities. We’ll need more of all of them. And all of them face the same challenges for water and land. All of them require lots of fertilizer.

I’ve not mentioned the biofuel component. But this is another big pull on demand for grains. The U.S. alone aims to produce 15 billion gallons of ethanol by 2015. All over the world, food crops now compete with energy needs.

This is not a gloom-and-doom scenario. It simply means that there is a lot of support for higher prices for agricultural commodities. Inventory levels still remain low worldwide. Grain prices are all well off their highs. After adjusting for inflation, many of them are as cheap as they’ve been in decades.

This is why Jim Rogers said he likes the agricultural commodities. That’s what he was talking about in the quote up top. I couldn’t agree more.

I also mentioned how this idea was hard to kill. In the Great Depression, purchases for jewelry and clothing and the like fell by 50%. But purchases for food — even for meat — held steady. We’ve seen similar patterns in recent busts. In the Asian Crisis of 1998–2001, the demand for food held steady even while other markets collapsed.

Put it all together and you have a great case for higher grain prices. You also have an environment that is very good for fertilizers — in particular, potash and phosphate. An investment in the fertilizer stocks is an investment right alongside the grains.

I’ve just alerted my Capital & Crisis readers to two fertilizer stocks that I believe are best positioned to profit from the coming agricultural commodity boom, but there are a number of fertilizer plays out there that are also ripe for the picking.

A couple worth taking a look at include Agrium (NYSE: AGU) and Western Potash (TSE: WPX). Naturally, I’m partial to the ones that I’ve recommended to my C&C readers – and they’ve got pages of research to back up why that is – but these two tiny stocks could make interesting moves nonetheless.

Sincerely,
Chris Mayer

November 10, 2009

Jim Rogers: Time to Buy Agricultural Commodities was originally featured in the Penny Sleuth.

Here’s how to know if your next penny stock play is legit…

For many investors, the idea that a stock could be representing itself incorrectly is unthinkable. After all, we’ve got the SEC, the exchanges – like NYSE and NASDAQ – and independent auditors taking a look at every filing that a company puts out to shareholders. But in the world of microcap stocks, many of those same protections just aren’t there.

While Securities and Exchange Commission (SEC) was created, in part, to protect investors from nefarious activities in the stock market, the countless securities scandals of the last couple of years have shown us that the agency simply doesn’t have the resources to make sure that the smallest companies are reporting accurately. And in fact, many of the smallest microcap stocks are completely exempt from reporting to the SEC.

Serious listing requirements (almost always) ensure that stocks trading on major exchanges are legitimate businesses, but for stocks that trade OTC or on the Pink Sheets, the requirements to get shares trading are slim to none.

And while most investors think of audited financials as a safeguard that keeps a company’s financials accurate, many companies also aren’t required to get their books audited because of their size.

Even if you’re thinking about investing in a Pink Sheets stock that’s exempt from registering with the SEC and getting an audit performed, you might still be looking at a perfectly good penny stock investment… but you have to do your homework.

Verify the Business

The first step to determining whether a penny stock is legitimate is to verify that the business exists and does what you think it does.

You can start off by entering the stock’s ticker on a major financial site – like Google Finance – and checking out the description of the company. Those descriptions come from SEC filings, so you can generally trust what they say since thanks to the Sarbanes-Oxley Act, it’s a felony for management to lie on company filings.

Also, log onto the SEC’s website and look for company filings to get the full look at a company’s operations. And don’t forget to look at its ticker… an “E” at the end means that the company is delinquent in providing its regulatory filings – a very big red flag.

For companies small enough to not file with the SEC, ask your broker for a copy of the company’s “Rule 15c2-11 file”. In it, you’ll find a slew of information that the company was required to provide to prove their exempt status.

Check the Auditor

When you’re reading a company’s financials on the SEC website, look for the audit opinion (generally near the end of a 10-K annual report filing). It’s a statement from the independent auditors that explains the steps an auditor took to verify a company’s financials as well as whether the financials are accurate in their opinion.

Checking who the auditor is makes a big difference too. Bernie Madoff’s “independent” auditor was neither – he trusted Madoff too, blindly signing off on the scamster’s financials and losing millions of his own in the process. Checking into the accountant’s CPA firm would have showed that it was a tiny storefront with only one CPA and without the manpower to audit a multi-billion dollar financial firm.

Getting audited by one of the “big four” accounting firms – PricewaterhouseCoopers, Deloitte, KPMG, and Ernst & Young – is generally the domain of big blue chips that can afford to have prestigious accounting firms handle the audit, so don’t stress if the auditor’s name doesn’t look familiar. Take the time to research who the auditor is, though, and whether they’re qualified to handle a company audit. A quick Google search should solve that…

Give Them a Call

Hard-to-find contact information is another red flag that should be watched out for. Since most companies are constantly on the lookout for new business, their sales team should at least be easily accessible. If you have concerns about whether or not the company is legit, go ahead and call the phone number on their website. If you can’t find a number or address, check back on the SEC website – companies have to include their corporate contact information on the cover of all 10-K and 10-Q filings.

New technology has also made it much easier to verify a business’s contact information. Just type in a company’s address into Google Maps, and select “Street View”, and you can actually see the building where its offices are located. If the offices for a publicly traded stock are showing up as someone’s home or a mailbox rental store, be very wary of going forward.

Follow the Money

If you really want to know about a company, you have to follow the money – its customers…

For any company that markets its products to consumers, a quick web search should give you an idea of how well – or poorly – the company is treating the people who use its services. Reading customer experiences will also give you an idea of whether or not people are jibing with the company’s offerings.

Googling your way to customer experiences isn’t always an option, especially when a company caters to enterprise or government clients. In these cases, where more money is generally involved, lawsuits are more likely as a result of business disputes. Check an online legal database – like the U.S. PACER System – to see whether your potential microcap investment is being sued by customers.

Check for Promotions

It’s possible for a company to be legitimate while the news that “independent parties” are touting isn’t. These so called “stock promoters” are publishing faux research reports and stock recommendations in hopes that investors will catch on to the penny stocks they’re selling. They do this through websites and newsletters that seem legitimate on the surface, but are essentially nothing more than schemes to get people to buy these stocks.

While we’ve never accepted money to write about any stock here at the Sleuth, some in the industry do… And believe it or not, it’s completely legal as far as the SEC is concerned.

There are a few ways that you can tell whether a stock’s being pumped by a promoter. For starters, go to the horse’s mouth – check out StockPromoters.com – the site features a listing of which stocks are paying for which promoters, as well as what the promoters are getting in return.

Promoters aren’t ashamed about what they do – they want companies to know how good they are at their jobs…that’s why they’re so easy to spot.

More Homework, More Profits

To be sure, doing the research is tough and time consuming. But it’s also the only way to be completely sure that the next penny stock play you’re putting your hard earned money on the line for is legit. Small stocks have some of the greatest gain potential out there – and if you know what to look for, you can make sure that you don’t get burned in the process of pursuing profits.

Cheers,
Jonas Elmerraji

November 5, 2009

How to Tell if Your Next Penny Stock Play Is Legit was originally featured in the Penny Sleuth.

“Junk stocks” have dramatically outperformed the broad market since the bottom in March. There’s a reason that junk stocks — stocks in which total debt is three, four, or five times the value of equity — have rallied so sharply.

Written off as imminent bankruptcy risks, the market left these types of stocks for dead, assuming that equity value would be wiped out in any balance sheet restructuring scenario. But the credit markets have thawed enough to allow most of these stocks to hang on a little longer, in exchange for refinancing debt at much higher interest rates.

These temporary reprieves from bankruptcy court merited perhaps 100% or even 200% rallies in these stocks. But in the market’s frenzy to assume risk, it has bid up some junk stocks anywhere from 500% to 2,000% from the March lows!

Car rental stocks are classic junk stocks — especially in protracted periods of depressed consumer and business travel. These companies operate with massive debt loads in a brutally competitive, commodity business. They’ve all been cutting employee head count and car fleets at incredible rates in order to stem losses. Yet even in good times, competition is so fierce that car rental companies tend not to return capital to shareholders via dividends (unless they are debt-funded dividends paid to private equity owners — as in the case of Hertz prior to its IPO). These companies also tend to repurchase stock only at peak prices, which destroys per share value.

It’s All About Fleet Management

Over the past few years, car rental companies have transitioned away from having mostly “program cars” in their fleets. Program cars are a convenient way for the likes of GM and Chrysler to sell heavy car volumes in a pinch, but these carmakers must sign agreements to repurchase the sold cars or guarantee a rate of depreciation during a specified period of time. Due to recent financial turmoil of both parties in this arrangement, this doesn’t make as much sense as it used to.

Now the car rental companies are adding mostly “risk cars” to their fleet.

These cars are bought without the security of repurchase agreements, so they will be sold into an uncertain future used car market. This gives car rental companies more control over the length of time they own the vehicles, but it’s transforming their balance sheets into speculations on the health of the used car market. If used car market values soften, then the car rental companies have to either accelerate their depreciation expenses or risk taking capital losses upon disposal. Used car prices have temporarily spiked since April, as demand exceeded temporarily tight supplies.

There are many reasons for this temporary spike in wholesale prices of used cars, but a big one has to do with the fact that “cash for clunkers” needlessly destroyed an estimated 700,000 vehicles that otherwise would have flowed into the supply of used cars. This spike is likely sowing the seeds for a bigger decline in the future values, because it squeezed dealer profit margins to the point that it’s brought financial stress to a huge swathe of regular buyers: small “mom and pop” used car dealers.

Fleet management has a huge impact on earnings, because most car rental companies turn their entire fleets over every 18 or 24 months. This makes the visibility of free cash flow for these highly levered businesses very uncertain.

Nevertheless, like moths to a flame, value investors fly to these stocks after getting burned over and over. They hope that one day these companies will deliver attractive returns in a utopian scenario in which cash flow doesn’t have to be reinvested into the fleet and customers will not flee to lower-priced competitors.

In the real world, we can see from history, car rental companies must constantly reinvest most of the cash flow into refreshing their fleets, servicing debts, and posting collateral for off-balance sheet fleet financing. Also, we know that the Internet prompts more and more consumers to shop for the best possible deal. The Federal Reserve board may appreciate a “welcome” rise in prices for car rentals, but consumers certainly do not; they’ll shop for alternatives in this commodity business if faced with higher prices.

Lower Volumes, Competition, and Debts Are a Recipe for Disaster

All of the car rental stocks were left for dead in early 2009, because it was doubtful whether they could renew the billions in financing commitments for their gargantuan fleets. The car rental business, in my view, is a dinosaur left over from the era of cheap credit and steadily growing business and leisure travel. In the future, we can expect to see an overlevered, capital-intensive set of competitors battling it out for scarce business. This may be good for consumers, but it’s terrible for owners of car rental stocks.

The biggest driver of car rental stock prices during this rally has not been a revival in sales, but rather the hope that because the industry is shedding capacity at a fast rate, pricing power will return. I have my doubts, because once the most-anticipated “V-shaped” economic recovery in history fails to live up to expectations, many rental companies will resort to price cutting to generate cash for newly tightfisted creditors.

Shareholders of these companies are thus left with the claims of the skimpy, infrequent free cash flow that’s left over after the following senior claimants are satisfied: employees, landlords, suppliers of car parts, advertising, insurance, lenders who finance their fleets, and the tax man.

It’s time to bet against these “junkers” and collect serious gains in the process. I’ve already alerted my Strategic Short Report subscribers to what I think is the best way to play these soon-to-fall rental companies (you can learn more by clicking here), but it’s not too late for you to position yourself too.

With more than a half dozen car rental stocks out there, your options are far from limited.

Regards,
Dan Amoss

November 4, 2009

Make 50% By Selling These Junk Stocks Short was originally featured in the Penny Sleuth.

Unfortunately, most businesses resort to lay-offs during tough times. But in service-oriented business like retail, banking and entertainment, someone still needs to provide customer service and support.

That’s where the machines come in…

Retail, hospitality and health care businesses spent $2.8 billion on self-service technology last year, according to VDC Research Group. This spending is expected to grow 15% annually over the next four years.

It’s no surprise that businesses would turn to automated help during tough times. Transactions made using an automated system such as a ticket booth or automated teller machine cost a tenth of what the very same transaction would cost if it involved a human employee, according to The Economist.

Small-cap standout Coinstar Inc. (NASDAQ: CSTR) is an obvious choice in this sector. If you’ve set foot inside a grocery store or fast food restaurant in the past few years, you’ve probably seen one of Coinstar’s machines.

The company’s namesake machine automatically converts your spare change into cash or gift certificates to various popular stores, keeping several cents for every dollar in the transaction.  But the company also owns Redbox, the self-service movie rental kiosk found in fast-food restaurants and other retail locations.

Coinstar’s purchase of the Redbox brand fits in beautifully with its business model. After all, the kiosk rental market looks very strong right now. It’s a niche in the automated services industry that has the ability to perform very well during almost any economic climate.

DVD sales are down double-digits this year as consumers continue to tighten spending habits. But rental revenue is up more than 8% across the industry. After all, spending $1 a night on a DVD rental from a kiosk is an easy choice compared with what a consumer would spend buying or going to a theater.

Coinstar enjoys fat margins and growing profitability because it can employ a lean technical support staff. Fewer salaries, and in these days of rocketing insurance costs, fewer benefit expenses can go a long way.

Providing a meaningful, convenient machine-based service can also strengthen customer loyalty. An impressive 85% of customers prefer brands that offer self-service technology, according to The Economist. The last thing anyone wants to do is wait in a long line. Fast, reliable kiosk service isn’t just a way to save money—it’s a better way to cultivate satisfied customers.

Best,
Greg Guenthner

October 29, 2009

Profit From the Rise of the Machines was originally featured in the Penny Sleuth.

But like most investments, successful commodities trading requires knowledge of what’s going on in the market right now.

Buying oil or corn contracts without a deep understanding of where these resources stand is a sure way to lose. That’s why today I’m going to fill you in on where some of the most popular commodities sit, and how they relate to the stock market…

That last sentence may surprise you. Even though the stock market is a few levels removed from commodities trading here in Chicago, I’ve said it before and I’ll say it again: “It ALL comes back to commodities…”

Up, up and away Superman…Dow hits 10,000 again.

Stocks have made new yearly highs and the prognostication of the S&P 500 climbing back to the breakdown point of 2008 on the downside at 1200 seems very attainable. The technically driven stock market ignores the news and sees earnings only through rose-colored glasses.

For the week ending October 16 stocks kept the rally moving with new highs in all the major indices. The broad based S&P 500 was up 16 points, +1.5%, to lead the way followed by the Dow up 131 points, +1.3%. Technology struggled to keep pace with the NASDAQ only up 18 points, +0.8%, to finish the week.

The economic recovery in prices started in everything last March – to be clear the overall market and the commodities market are inextricably tied together.

The S&P 500, the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows it provides insight into future moves in other markets. The CRB Index, maintained by the Commodity Research Bureau, broke above the 267 level making new yearly highs last week. It’s now on target for the 335 objective, which represents a 50% rally in commodities.

Higher Oil prices (wow what a turnaround in the last two weeks from $65 to $80) are a good sign that the global economy is on the mend. In addition, it is supportive of stocks with Exxon and Chevron adding major points to the DOW sending it above 10,000.

Lower Gas Bills – 20% Off Sale

One market that my Resource Trader Alert subscribers have been keeping an eye on is natural gas.

This from Reuters:

“U.S. consumers are expected to pay lower natural gas bills this winter compared with last year due to above-normal gas supplies and cheaper energy prices, the American Gas Association said on Monday.

“Plentiful domestic natural gas supplies and lower wellhead prices will drive bills down this winter and provide relief for natural gas customers struggling in a trouble economy,” the AGA said in its annual winter outlook.

“Natural gas inventories have already hit an all-time high and are expected to remain at record levels by Nov. 1, which is the start of the U.S. heating season. Utilities built up those stocks throughout the year with gas that was much cheaper than in 2008.”

I get emails here at RTA asking why I’m in bullish positions in almost everything we trade. Well the easy answer is in the risk to reward. At historic low levels the upside is much greater than the limited downward potential. One market for me that is possibly setting up for a bearish play is Natural Gas. It used to be very tied to Crude but that relationship has changed dramatically in the last few years.

Gains in the Grains

The Grains, namely Corn and Beans have reverted back to fundamental news to move prices. New relative highs last week were a result of weather fears delaying harvest and hurting yields. When the near term forecast showed less extreme temperature drops a profit-taking sell off hit the trend Thursday.

After further analysis the 60 cent ($3000 per contract) run for Corn and over a one dollar move ($5000 per contract) in Soybeans can be traced to a technical breakout rally October 5th. That day also marks the month low for the S&P, a break in the Dollar Index below 77 and Crude finding support levels. So in reality this Grain rally is as much about global economic recovery and the weakening Dollar adding inflationary fears as the temperature outside tumbles.

As the stock market continues to climb – justified or not – commodities trades are going to keep seeing those bullish sentiments trickle over to commodities floors. Right now is as good a time as any to take the market to task for some serious short-term gains. And I’ll continue to be here to help you do just that.

It ALL comes back to commodities,
Alan Knuckman

October 22, 2009

Your Exclusive Glimpse at the Commodities Market was originally featured in the Penny Sleuth.

Today, I’m going to reveal the biggest secret of them all. And perhaps the one and only reason you should start trading options right now – if you like making a lot of money, fast! It’s a simple strategy that you can use to squeeze penny stock sized gains out of even the biggest blue chips.

It’s why market legend Paul Sarnoff (Steve’s dad) said options are: “The best… Perhaps on the only way to get rich very quickly.”

I’m talking about the secret of “Super-Leverage.”

In a nutshell, “Super-Leverage” allows you to turn a small upfront investment into a potentially life changing payday.

Let me show you how…

When you buy an options contract you are buying the right (not the obligation) to buy 100 underlying shares at a specific price. But, you don’t pay anywhere near what those 100 shares might cost on the open market.

For example:

Steve recommended buying Navistar January $20 calls for $120. At the time, the shares were trading for $16.92.

His charts couldn’t have been more on the money. By the end of that week, the shares were up to $19.59 — a 16% jump.  When it was all over, by the first week of December, the shares topped out at $29.55 a share.  And the options he had recommended were worth $1,150 — an incredible jump of 858%.

You could have bought 10 options for $1,200, and less than two months later, you could have cashed out with $10,300!

That’s the power of “Super-Leverage.”

Can you see why options and “Super-Leverage” can make you rich, quick? Limited risk with unlimited gain is the perfect recipe for explosive profit.

And that’s why, especially now, I urge you to add options to your trading arsenal if you haven’t already. With the market the way it is now, “Super-Leverage” allows you to get in on the action without, gambling your life savings.

Before we wrap up I have one last thing to share. Or rather, options expert Steve Sarnoff does… It’s a FREE ($47 value) report fresh off the press!

It’s called “The Lazy Way To Pick Profitable Options Trades,” and you can download a copy instantly simply by clicking here. (You don’t have to give your e-mail address or anything, just click the link to get the report straight away.)

Cheers,
Jonas Elmerraji

October 16, 2009

Is This the Only Way to “Get Rich Quick”? was originally featured in the Penny Sleuth.

I firmly believe it is my job to be as blunt about that as possible. The potential rewards of options are very tempting, and anyone who forgets about the potential downsides is toast.

Unfortunately, those stark warnings also scare away people who could benefit from options. People who have built solid portfolios… and can easily afford to speculate a bit. They’re the complete opposite of traders who blindly rush in focused on the gains. Instead, they only see the potential losses…

That’s why I offer a simple suggestion — try options trading for yourself. With just a few minutes a day, you can learn how profitable options can be, without risking a single cent.

In the old days — as little as a decade ago — the best way to do this was by paper trading. As the name suggests, it doesn’t involve any real money… or even a broker. Instead, you simply chose an option and kept track of it each day. With a few simple calculations, you could see how you would have done if you actually made the trade.

There are still plenty of good things to say about paper trading. For one thing, it forces you to work — tracking down prices and calculating potential profits. If you’re going to put that much time into an activity, you might be more inspired to do well. It’s a good trait to have if you ever decide to trade for real.

“Virtual Trading” Is the Road to Real Profits

Still, the pen-and-paper method is a little outdated now. Today, lots of websites offer “virtual trading” — free computer programs that let you practice trading without putting any money at stake. Most require you set up an account… not an actual brokerage account, but a membership account — containing basic information like your age and interests.

When you sign up, you’ll get a username and password to get to your account. You’ll also get a small sum of virtual money to start trading with. (Beware of a site that offers to give you more fake money in exchange for real money. The point is to avoid spending ANY out-of-pocket cash.)

I must be honest, I haven’t signed up for many virtual trading accounts — so I can’t honestly compare and contrast them all for you. However, a colleague recently opened up a mock account on the Chicago Board Options Exchange (offered by Options Monster)… so I can tell you all about that.

The CBOE virtual trading site starts you off with virtual money that you can use to simulate trading any of the securities the CBOE tracks — from stocks to options, even some futures.

The Web site does its best to make the trading as realistic as possible. Price quotes are based on the actual prices seen on the exchange. When you wish to buy something for your virtual account, you are given the same kind of choices that you’d face if you were actually buying a real security.

You can dictate limit and stop orders. You can make day orders or standing “good to cancelled” orders. You can even choose to write options or use covered calls.

After you make your virtual order, the software does the rest. If you placed a market order, the security is added to your virtual portfolio. If you used a limit order, the program won’t place your order until the real market hits your limit price.

Everything you need to know is spelled out for you — the program even levies a virtual commission charge on each of your trades.

After that, it’s just a matter of logging in to see how you’re doing. You can also set sell orders, even trailing stops.

Programs like this can be a very useful tool for gauging how well you’d do in the options market — making any lingering fears disappear.

Of course, there are some important differences between real investing and virtual investing that you need to keep in mind.

It’s a lot easier to trade when you’re not spending real money. But virtual trading is so lifelike, you might actually lose sight of that when you really start trading. This is especially true since actual trading will involve money you can afford to lose. If you’re not careful, it will all seem like a game… and in games, taking unnecessary risks is part of the fun.

The solution is to treat your virtual account as actual money. Don’t make crazy trades just because you can. Instead, only make trades you’d make in real life. It’s not only the best way to get a feel for how you’d actual do with options, but it’s also the easiest way to transition from virtual trading to real trading.

Once you see how much money you’re missing out on by not using real money, it won’t be long before you’ll want to try your hand at actually trading options.

Picking the Right Virtual Trading Platform

Here’s a rundown of several of the free virtual options trading platforms you can sign-up for right now…

paperTRADE
This full-featured trading platform from tradeMONSTER offers newbie options investors the chance to experience options trading on a realistic trading platform.

CBOE Virtual Trade Tool
While not as robust as other trading platforms, this simple options trading tool still gets the job done without the advanced tools that some beginnings may find confusing or unnecessary.

Trade Smarter Options
This innovative binary options platform isn’t as realistic as the other offerings, but this website shines by simplifying the options investing process to limited outcomes. If you’re having trouble grasping options concepts, this site may be a good intermediary step for you.

PaperMoney
thinkorswim’s virtual trading system is simply their award winning real-time trading platform with virtual money. This system offers investors the advanced features you’d expect from a real options broker.

Sincerely,
Steve Sarnoff

October 15, 2009

Perfect Your Options Trades for Free with “Virtual Trading” was originally featured in the Penny Sleuth.