Five with Fitz: What I See When I Look Over the Horizon
When you've been working the markets as long as I have, you learn that the biggest dangers are always found in a place just over the horizon.
It's why I spend my time hunting for stories, news items and opinions that in the old days were considered far "below the fold."
Invariably, what I am looking for is the stuff that everybody else has missed.
Because I believe that's where the real information is — especially when it comes to uncovering profitable opportunities others don't yet see or understand.
It's the story behind the story that interests me. To find it, you need to go beyond the headline news.
In that spirit, here's my take on five things that I'm thinking about right now.
High Oil Prices: The Truth About Obama's Misguided Witch Hunt
It has been less than a month since President Obama declared war on those evil oil speculators.
Standing in the Rose Garden on April 17th, the president laid out a $52 billion initiative to increase federal supervision of oil markets in an effort to crack down on oil price spikes.
At the time, oil was trading at $117.41 a barrel and $5 a gallon gas seemed all but inevitable.
According to the p resident, evil speculators had been working behind the scenes to screw the rest of us while engorging themselves on riches beyond our wildest dreams.
I said it then and I'll say it again…the president is chasing a ghost he'll never catch. Spending $52 billion on additional oversight is a complete waste of money and a misguided witch hunt.
I mean, think about it. If speculators are the same ones responsible for high oil prices, ask yourself why they're the ones getting raked over the coals these days as oil prices fall.
The short version: It's because speculators don't control oil prices and never have.
The Real Culprits Behind High Oil Prices
Pricing inputs – for better or worse – are driven by geopolitics, supply constrictions, war, tyrants with spigots and buyers who will only purchase as long as the prices are low enough.
This is not complicated. Any time there are more buyers than sellers, prices go up. When there are more sellers than buyers, prices go down.
Whether or not what's happening now turns out to be short- term noise or a long- term trend remains to be seen.
As I noted in a widely read article on April 20th, legitimate speculation has a valuable and essential role in the markets. It's very different from the already illegal manipulation that the president seems to confuse with speculation.
Oil prices are driven by two groups of participants – hedgers and speculators.
The former are typically producers or suppliers with a vested interest in securing as high a price as possible for their output. They can also be manufacturers who depend on procuring as low a price as possible for their raw materials. Both parties are interested in delivery as a function of pricing.
Speculators don't care about delivery and, in fact, go to great lengths to avoid it.
They profit from price changes that would otherwise hold hedgers apart while also providing liquidity to other market participants.
Here's an example that may help bring this to life.
What U.S. Consumer Spending Data Is Telling Us
The markets slid yesterday on news that U.S. consumer spending increased by 0.3% in March, while income rose 0.4% over the same time frame. This is the first time since December we've seen income rise faster than spending.
I can't say I am entirely surprised.
As prices for "must haves" like gasoline and food continue to rise, consumers are digging into their savings to cope. This is not small potatoes, given that the average family saved a mere $38 out of every $1,000 in take home pay last month, according to the U.S. Commerce Department.
I can't help but have huge concerns about Team Bernanke's plan; no amount of stimulus is going to overcome the struggle most families are having – which is to boost savings and shed debt.
Here's the thing… if consumers can't save, then they can't buy. And if they can't buy, they can't build up the nation's wealth, which is predicated on consumer spending.
All three sets of figures in isolation really don't tell you much. But when taken together – spending, income, and GDP – they suggest our economy is too weak to put millions of Americans back to work, much less in jobs for which they are appropriately qualified.
What Magazine Covers Really Say About the Stock Market
Will Rogers once said that "good judgment comes from bad experience, and a lot of that comes from bad judgment."
If he only knew.
Then again, as one of America's famous humorists and social commentators, I suspect he "knew" all too well that history rarely works out the way people think.
Take the late 1990s, for instance.
As capital markets liberalized and the Internet Age began in earnest it was a time of great hope.
Companies that had very little other than a ".com" after their name suddenly became worth hundreds of millions of dollars. Boo.com, Pets.com, and Kozmo.com are a few that come to mind.
But were any of them worthy of all the hype?
I was one of the few who didn't think so. Many people considered me a Luddite because of it.
I wasn't trying to be difficult. I just reasoned that when everybody "knew something" that the end was near.
How did I know?
Well I didn't…exactly. But, I had a good idea thanks to something my grandmother, Mimi, used to call the "country club" test.
After being widowed at a young age Mimi was a seasoned, successful global investor in her own right. She reasoned that when an investment or a trend began making the rounds over drinks, it was time to move on.
And if she heard something around the poker table, she'd actually bet in the other direction.
One day, I asked what her secret was.
In no uncertain terms she told me to look carefully at the world around me and, in particular, at magazine covers.
According to Mimi, they were the next best thing to a crystal ball. Because whatever is all over the covers is what's on top of the mind on the cocktail circuit — not to mention fodder for the masses…who are usually wrong.
Frankly, I thought Mimi had consumed one too many martinis. She loved them. Then, as my own career progressed, I began putting two and two together.
It turns out it wasn't the gin talking. Mimi was right.
Magazine Covers and the Stock Market
I've never forgotten Mimi's advice and still study magazine covers intently to this day because they help me latch on to important market shifts and trends that others either miss or simply don't see coming.
I am not so much interested in the stories themselves as I am in reading into the implications of headline copy. Many times I find out that what's being said in the headline isn't as important as what's being left unsaid.
For example, do you remember this magazine cover touting the "death of equities" from Business Week's August 13, 1979 edition?
Investment Advice: 5 Ways to Conquer Gambler's Ruin
The relationship between investing and profits seems simple enough. You buy low, sell high and your portfolio grows — or so goes the story.
In reality though, success comes down to something called "Gambler's Ruin."
Most investors have never heard the term but understanding its implications can mean the difference between heartache and success, especially now.
Gambler's Ruin is a mathematical principle that deals with the preservation of assets – or, more accurately, the probability that you'll lose them over time.
Here's how it works:
Imagine that Player One and Player Two each have a finite number of pennies, which they flip one at a time, calling "heads" or "tails." The player who calls the flip correctly gets to keep the penny.
Since a penny has only two sides, it would seem on the surface that each player has a 50% probability of winning – and that's indeed the case for each individual flip.
But, if the process is repeated indefinitely, the probability that one of the two players will eventually lose all his or her pennies is 100%.
In mathematical terms, the chance that Player One and Player Two (P1 and P2, respectively) will be rendered penniless is expressed as:
- P1 = n2 / (n1 + n2)
- P2 = n1 / (n1 + n2)
In plain English, what this says is that if you are one of the players, your chance of going bankrupt is equal to the ratio of pennies your opponent starts out with to the total number of pennies.
While there are wrinkles in the theory, the basic concept is that the player starting out with the smallest number of pennies has the greatest chance of going bankrupt.
In the stock market the player with the smallest number of pennies is you… and me…and any other individual investor, for that matter, who is up against the big boys.
Investment Advice: Playing to Win
If you've ever been to Las Vegas or Monte Carlo, chances are you understand this at some level, if for no other reason than that the longer you stay at the tables, the greater the probability that you will lose.
Investing is much the same.
He Predicted the Apple (Nasdaq: AAPL) Sell-Off … Here’s What's Next
The recent sell-off we've seen in Apple Inc. (Nasdaq: AAPL) shares came as a real stunner to Wall Street.
But Strike Force Editor Keith Fitz-Gerald saw the sell-off coming.
In fact, he predicted it.
Back on March 27, Keith wrote a lead story for Money Morning in which he articulated seven very clear reasons that investors should consider shorting Apple's stock.
And that was a couple of weeks after he detailed a "put" option strategy – in essence, a "short" trade – that resulted in a 47% profit (in just two days, no less) for the subscribers of his Strike Force trading service who followed his recommendation (a short-term reversal delivered those gains).
I wanted to know what tipped him off that a reversal was coming – as well as what he was predicting for Apple's shares going forward.
"BP, it was clear to me that this kind of reversal was coming – and sooner rather than later," Keith said during a private briefing late last week. "The shares had soared 75% in just five months – one analyst actually described the performance as "euphoric.' Suddenly, we're seeing all these mainstream-news-media stories explaining why Apple shares are going straight to $1,000. But I know from my own experience as a professional trader that even the shares of the best companies on earth don't go straight up. I happened to time it perfectly and help Strike Force subscribers take advantage of the reversal I just knew was in the offing."
Key Questions for Apple Stock
The way we see it, the Apple stock sell-off raises these three key questions for investors:
- No. 1: What's going to happen to Apple shares in the near-term?
- No. 2: If the stock is headed for a volatile stretch, is there any way to profit until the smoke clears?
- No. 3: What's the long-term outlook for Apple – both the company and the stock?
Having worked with him for five years, I've seen Keith make gutsy calls like this – and have them pay off big – time and time again. Since I knew you'd be as interested in his answers as I was, we wanted to share them with you.
Here's what Keith had to say.
Oil Price Manipulation: What President Obama Doesn't Understand About Oil
If you think gasoline prices are volatile now, stay tuned. President Obama's plan to clamp down on oil speculators is going to make things worse.
I'm sure you've seen the news by now.
The president wants to clamp down on so-called "oil price manipulation" and has proposed a $52 billion plan to increase f ederal supervision of oil markets.
What the p resident doesn't understand is that the oil markets already have this function built in.
Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can't afford to have "speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher – only to flip the oil for a quick profit."
Evidently, the president hasn't passed Econ 101.
If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.
Speculation, as opposed to manipulation, is a vital part of the markets – they are not the same thing despite the fact that the p resident is interchanging the terms.
If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he's chasing a ghost that he'll never catch.
The Real Problem with Oil Prices
The real problem is that the United States consumes 20% of the world's crude but only produces 2%.
It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.
If you want the biggest piece of the pie from the deli, you have to pay a premium.
There is no hocus pocus and there's no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.
Sure the $10 million fines he's jawboning about (up from $1 million) sound great but they're really a non-starter. In fact, given that Exxon Mobil Corporation (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they're little more than an acceptable cost of doing business. Nice try.
Take gasoline, for example.
Prices have jumped 78.2% since the p resident took office and that doesn't sit well with the party faithful who are convinced that evil oil price speculators are responsible.
They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.
This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.
Contrast what's going on in the oil markets with what's happening in natural gas.
Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.
Natural gas, by the way, is traded by many of the same traders who trade oil.
Why Wall Street Can't Escape the Eurozone
Despite all of its best hopes, Wall Street will never escape what's happening in the Eurozone.
The 1 trillion euro ($1.3 trillion) slush fund created to keep the chaos at bay is not big enough. And it never was.
Spanish banks are now up to their proverbial eyeballs in debt and the austerity everybody thinks is working so great in Greece will eventually push Spain over the edge.
Spanish unemployment is already at 23% and climbing while the official Spanish government projections call for an economic contraction of 1.7% this year. Spain appears to be falling into its second recession in three years.
I'm not trying to ruin your day with this. But ignore what is going on in Spain at your own risk.
Or else you could go buy a bridge from the parade of Spanish officials being trotted out to assure the world that the markets somehow have it all wrong.
But the truth is they don't.
EU banks are more vulnerable now than they were at the beginning of this crisis and risks are tremendously concentrated rather than diffused.
You will hear more about this in the weeks to come as the mainstream media begins to focus on what I am sharing with you today.
The Tyranny of Numbers in the Eurozone
Here is the cold hard truth about the Eurozone.
Stock Market Volatility: How to Beat the Market at its Own Game
Many investors are convinced the market is stacked against them.
It is…. but not for the reasons you might think.
Dismal returns actually have very little to do with super computers, research, insider information or access to the trading floor.
The real issue comes down to something very simple – the difference between how individuals and professionals approach stock market volatility.
Most investors head for the hills when volatility rises.
Successful traders, on the other hand, embrace it because they know stock market volatility represents an opportunity.
I find this especially ironic considering how often I hear individuals tell me they invest because they want the "big gains."
Because most of the time they choke at the very moment when the upside potential is highest. Instead of buying when prices are low, they head for the exits.
This costs them big time.
The Perils of Stock Market Volatility
A 2011 study from DALBAR, a Boston-based research firm, shows that investors achieved a mere 41.9% of the S&P 500's performance over the 20 years ended December 31, 2010.
In other words, investors left 58.1% on the table.
The DALBAR study also shows that the average investor achieved only 3.8% a year versus the 9.1% annualized returns of the S&P 500 because they tended to jump in and out of the markets at the worst possible moments.
Adding insult to financial injury, Berkeley Finance Professor Terrance Odean's analysis of more than 10,000 retail brokerage accounts shows that the stocks investors sell tend to outperform the ones they buy.
In fact, Odean found that winning stocks went on to gain an average of 3.4 percentage points more in the year after they were sold than the losers to which investors clung.
The pros have a very different view.
Is Apple Stock (Nasdaq: AAPL) the Short of a Lifetime or the New Widow Maker?
I have a confession to make.
I believe Apple stock (Nasdaq: AAPL) is going to be world's first trillion-dollar company yet I want to short the snot out of it.
Am I being compulsive?…impulsive?….or foolish?
Perhaps it is all three considering that Apple has risen more than 3,000% in the last ten years, turning almost any attempt to go against the grain into a "widow maker" trade.
I say almost because I am one of the lucky ones.
A few weeks ago I recommended my Strike Force subscribers purchase put options on Apple, effectively shorting the stock. That resulted in a 47% profit in less than 24 hours for anyone who followed along, excluding fees and commissions.
I'm not alone in my thinking.
Uber investor Doug Kass, general partner of Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP, tweeted recently that he had covered "half his short" on Apple following the announcement of their dividend and buyback plan.
Given that the stock had run up to nearly $608 a share before the announcement, presumably Kass had banked some gains, too.