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Don't Miss These Three Year-End Trading Strategies

Before yesterday's Thanksgiving leftovers even got cold many U.S. consumers ventured out to catch the best Black Friday deals, already worried about how much this holiday shopping season will cost them.

But instead of fretting over how much you'll spend this year, now's the time to focus on how much more you can earn.

You see, over the next few weeks, three year-end trading strategies will come into play, all capable of producing major short-term profits for astute investors.

They are:

  • Annual tax-loss selling – which, given some major stock and sector declines since early-year highs, could be heavy this year.
  • A "Santa Claus rally" in late December, triggered in part by bargain hunters buying beaten down stocks.
  • And the "January Effect," a strong tendency for nearly all stocks – especially small caps – to gain during the first month of the year, or even earlier.

We've outlined all three here, so you can pick your favorite option for year-end profiting.

Tax-Loss Selling

There are a few ways to play the tax-selling phenomena, depending on your goal, but the most common is to offset your taxable gains.

The best time to unload a large paper loss is the end of the year. Taking a loss on a position reduces your trading gains and limits your tax liability. You'll also see professional fund or portfolio managers do it to replace losers with stronger performers before they issue quarterly or annual reports – a process often referred to as "window dressing."

So if you're sitting on a position with a large paper loss in a stock you want to drop, go ahead and sell to realize the losses for tax purposes. But make sure you beat the crowd – begin looking for selling opportunities now, and try to get out on a day when the market – and hopefully your stock – is sharply higher. (No one wants to take a loss that's larger than absolutely necessary, even to save on taxes.)

If you have a handful of losing stocks and don't know where to begin, start with your biggest gainers, or choose those stocks with the poorest fundamentals.

But before you go cleaning house, there are few things to remember to maximize your profit potential from this trading strategy.

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The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS)

I've made no secret of my aversion to Treasury bonds. Yields right now are irrationally low, and thus do not accurately reflect U.S. credit risk.

And since inflation is already running higher than bond yields – and is likely to rise even further – Treasuries offer an inadequate return at best, and at worst, a capital loss if sold before maturity.

Even Treasury Inflation Protected Securities (TIPS) aren't as safe as you might think.

Fortunately, the U.S. Treasury is finally thinking about issuing something useful: Floating rate notes (FRNs).

If the Treasury does end up issuing FRNs, and the pricing is reasonable (and the U.S. Treasury still has a credit rating better than junk bonds), then you should seriously consider buying some.

Don't Trust TIPs

Floating rate debt issues are not that common here, but there have been many in Europe. They were even more common in my early banking days in the 1970s – when interest rates were generally rising.

FRNs have one great advantage over fixed-coupon bonds: If interest rates go up, fixed-coupon bonds go down, sometimes by a lot if the bonds have a long time to maturity.

For example, if 30-year interest rates rise from 4% to 5%, the trading price of a 30-year bond ($100 face value) will drop to $84.48. If you were to sell at that point, you'd lose 15% of your principal – the equivalent of nearly four full years worth of interest.

However, a floating rate note on a good credit rating should always trade near par. If short-term interest rates go up from 1% to 5%, the note will pay 5% in the next interest period, so it will still trade close to par. That means you have principal protection as well as interest rate protection.

Theoretically, TIPS should offer similar protection. And they do if interest rates always stay at the same margin above inflation. But in periods like the present, interest rates trade below inflation, so the price of TIPS gets bid up above par.

Today, 10-year TIPS yield only 0.19% and 30-year TIPS yield only 1.00%. Since real bond yields in normal markets should be in the 2% to 3% range, there is potential for the loss of principal here. Indeed, in real terms there is a certainty of loss of principal – the "on-the-run" 30-year TIPS trade at a price above $128, so over the next 30 years you are bound to turn $128 into $100 in real terms – not a good deal.

Sidestepping Uncle Sam

Additionally, there is another problem with TIPS: The government sets the price index to which TIPS are linked. And if you think the government is too honest to fudge the price statistics to make its debt cheaper, I have some sad, disillusioning news for you.

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11 Investing Terms You Have to Know

The language of investing used to be fairly simple. A limited vocabulary of investing terms gave you enough understanding to successfully navigate the markets.

Those days are gone.

Things like 24-hour media coverage and analysis, computer-driven trading systems that affect prices within minutes of breaking news, complicated macroeconomic issues, and sophisticated investment products have created an increasingly complex market environment.

This means investors must understand a variety of sometimes strange or seemingly unrelated terms if they hope to prosper – or, at the least, hold their own – in these treacherous economic times.

Failing to become familiar with these investing terms could damage to your portfolio.

Investing Terms You Must Know

The following 11 investing terms have become commonplace in today's market and economy. Study these and you'll have a much better chance of not just surviving, but profiting:

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Corporations Are the Real Winners When it Comes to Free Trade Agreements

Whether the free trade agreements with Colombia, Panama and South Korea create jobs or destroy them is debatable, but one thing is sure: U.S. corporations will reap the most benefit from the deals.

After years of delay, the U.S. Congress on Wednesday approved the free trade agreements – the largest since 1994's North American Free Trade Agreement (NAFTA) – in a rare instance of bipartisan cooperation.

The deals will cut tariffs and open up markets between the United States and South Korea, Colombia, and Panama.

And while the political arguments focused on the deals' impact on jobs and the U.S. economy, U.S. corporations will emerge as the real winners.

That's why Caterpillar Inc. (NYSE: CAT), a frequent beneficiary of past free trade agreements, was one of the first to applaud the deals.

"Once these agreements go in effect, Caterpillar products produced in Illinois and Mississippi and the Carolinas will be able to be exported to Colombia, Panama and Korea duty-free," Bill Lane, the Washington directorfor the heavy equipment maker, told NPR. "That's a big deal."

The Boeing Co. (NYSE: BA) was equally pleased.

"When commerce increases, downstream that turns into aircraft orders. More movement of people and certainly of goods opens up more opportunity to sell aircraft," Ted Austell, a vice president at Boeing, told Reuters.

Many Winners

U.S. President Barack Obama, who had strongly urged Congress to approve the free trade agreements, said a government study showed the South Korea deal alone would benefit machinery and equipment makers, pork and beef producers, and the chemical and plastic products industries.

The sector with the most to gain in the Panama and Colombia deals is the agricultural industry, which had complained that the delay in approving the agreements – negotiations begun under the Bush administration – was costly.

"We can't underestimate how much U.S. agriculture has lost out," Devry Boughner, director of international business relations for Cargill Inc., told Reuters. "Corn, soybeans and wheat exports from the U.S. have gone from a 78% market share in the Colombian market to 28%, owing in part to the fact that Canada got to Colombia first."

Dozens of large corporations and business groups have actively lobbied Congress for years to pass the free trade agreements to gain access to new markets or make their products cheaper and more competitive in existing markets.

Some of the other large U.S. companies that lobbied for the South Korea deal include AT&T Inc. (NYSE: T), Chevron Corp. (NYSE: CVX), Johnson & Johnson (NYSE: JNJ), Microsoft Corp. (Nasdaq: MSFT), Pfizer Inc. (NYSE: PFE), Prudential Financial Inc. (NYSE: PRU) and QUALCOMM Inc. (Nasdaq: QCOM).

The Latin American Trade Coalition, which supported both the Colombia and Panama free trade agreements, included Caterpillar, General Electric Co. (NYSE: GE), Wal-Mart Stores Inc. (NYSE: WMT), Citigroup Inc. (NYSE: C), International Business Machines Corp. (NYSE: IBM) and Oracle Corp. (Nasdaq: ORCL).

Why so much corporate interest in free trade agreements?

"Let me just put it this way," explained Caterpillar's Lane. "About eight years ago they passed the Chile free trade agreement. Caterpillar exports to Chile tripled. These agreements have real-life implications and what they've all done is increase U.S. exports."

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The European Banking System is Finally on the Verge of Collapse

I hate to sound alarmist, but it looks as though the European banking system – and consequently the global banking system – is edging its way towards another epic collapse.

That means in just a few short months, stocks could be back at their 2009 lows while gold prices travel north of $2,500 an ounce.

This is the worst-case scenario that's been bandied about ever since Europe's debt problems first came to light.

How do we know that this is what's happening?

Because somebody is having trouble obtaining the money they need — and they just borrowed it from the lender of last resort.

The European Central Bank (ECB) last week lent $500 million dollars to an undisclosed Eurozone bank through a credit mechanism that had been dormant for the past 12 months, with the exception of one $70 million draw in February.

This comes as no surprise – the warning signs have always been there.

In fact, I warned Money Morning readers just a few weeks ago that the Eurozone could have its own American International Group Inc. (NYSE: AIG) – or worse, its own Lehman Bros. Holdings Inc. (PINK: LEHMQ) – lurking somewhere in the shadows.

Still, while this may not surprise you, it certainly surprised the heck out of the rose-colored glasses crowd that can't seem to understand the European sovereign debt crisis is finally about to wash up on our shores.

That's why stocks in the United States and around the world have taken such a brutal beating recently. Officially the story is about the renewed worries over Europe's debt crisis and U.S. data that suggests we're once again sliding into a recession.

But what's really happening is that global traders are moving quickly to liquidate holdings and raise cash while they can.

That's why so-called risk assets like stocks, corporate bonds, industrial metals, oil and higher-yielding junk instruments are tanking, as gold, the dollar and the yen are bucking up.

The U.S. Federal Reserve already is engaging in damage control. President of the Federal Reserve Bank of New York William Dudley has said the risks of a double-dip recession are "quite low," despite anemic growth. And it's been rumored that U.S. Federal Reserve Chairman Ben S. Bernanke will telegraph new monetary stimulus measures Friday during his speech in Jackson Hole, WY.

But really, who are they kidding?

This crisis has nothing to do with liquidity (which is how the central bankers are trying to fight it) and everything to do with solvency (which is how they should be fighting it).

Not only are the risks of a global recession mounting by the minute, but I believe the concentration of risks is approaching critical mass.

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A Potential "Big Trade" That Will Put George Soros to Shame

Many investors dream of making the "big trade."

Spurred on by stories of fabled investors who accumulated generations of wealth with just one big trade, they talk incessantly about what they could or should have done.

But actually doing something about it pays better.

Consider George Soros, who reportedly made $1.1 billion in a single trade against the Bank of England by shorting the British pound on September 16, 1992. Or Jessie Livermore, who reportedly made $100 million on October 24, 1929 – Black Thursday. Or how about Jay Gould, who tried to corner the gold market on September 24, 1869. Nobody knows exactly how much Gould made but he left his children $77 million when he died in 1892.

Well, if you have the guts, now is the time to make your move, because I think the next "big short" is already out there. In fact, judging from open interest I'm seeing on gold puts and VIX puts, I'd bet on it.

Right now there are literally tens of thousands of contracts open on both at various strike prices, so the odds are good that somebody – perhaps a group, a hedge fund, or another big money player – is placing highly leveraged bets that things will reverse.

With the proper structure, these trades could dwarf the bets made by Soros, Livermore, and Gould.

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Fed Interchange Fee Decision Shocks Retailers, But Consumers Will Pay the Price

A U.S. Federal Reserve decision Wednesday to cap debit card transaction fees at a higher level than expected angered retailers – but it may end up costing consumers much more.

Instead of lowering the "interchange fee" cap from the current $0.44 per transaction to the $0.12 proposed in the Dodd-Frank financial reform legislation, the Fed voted to set the cap at $0.21. Additional fees allowed by the rules would result in a charge of $0.24 for the average debit card transaction of $38.

Although retailers will now pay less, they are peeved the Fed did not stick with the much lower cap, which would have saved them twice as much. Retailers had argued that the high interchange fees have hurt smaller businesses, forcing them to raise prices for customers.

But many, including one of the primary proponents of financial reform, Rep. Barney Frank, D-MA, doubt that retailers will now put any of the near-50% reduction in the cap toward customer savings.

"I think they were fighting to raise their revenue," Frank told The Wall Street Journal.

Indeed, consumers stand to lose as a result of the Fed's decision. Few merchants are likely to lower prices, and banks may well raise customer fees to recoup some of their lost profits on debit transactions.

"I don't think the retailers would have spent millions of dollars lobbying for this law if they intended to pass along every single nickel of savings to consumers," Greg McBride, senior financial analyst for Bankrate Inc. (NYSE: RATE), told the Orlando Sentinel. "This was an issue of where the cash would flow – to the banks or the merchants. Ultimately, I'm afraid, the consumer is going to get stuck footing the bill."

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Why Seasonal Trades Are the Solution to Market Volatility

Given all the volatility in the markets of late it might be time to try something with a high probability – though not a guarantee – of paying off.

I'm talking about "seasonal trades."

Seasonal trades are moves you can make in the futures markets, or now via exchange-traded funds (ETFs), that have a history of producing a profit.

Let me explain.

Seasonal trade opportunities arise from patterns that occur at specific times of the year. They are most apparent in the agricultural sector, where changing weather patterns have an impact on prices.

For example, one such seasonal trade – a bullish October sugar play that has posted a perfect record over the past 15 years, producing an average profit of $1,035 per futures contract in seven weeks or less – launched in mid-June.

That particular trade is keyed to the June conclusion of the sugar harvest in Mexico, the last of the year in the Northern Hemisphere. After that, existing stocks of sugar start to decline and prices are subject to weather scares that could disrupt Southern Hemisphere harvests and new-crop growth in the North. As a result, sugar prices typically tend to rise from mid-June through late July.

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Two Options Strategies That Can Turn Short-Term Price Gyrations Into Big-Time Profits

Everyone acknowledges that at its most basic level the stock market is driven by fear and greed. And, in the past, the immediate impact of fear has been far more dramatic than the short-term effect of greed.

In other words, stock prices have historically tended to fall faster – and further – when investors are running scared than they rise when investors get a pleasant surprise.

Lately, however, with Treasury yields still near all-time lows, commodity prices hovering near record highs, and little else offering significant potential, there's a lot of money out there in mutual funds, exchange-traded funds (ETFs), retirement accounts and other institutional portfolios that's looking for a place to go.

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