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Two Safe Ways to Profit From the "Alibaba Shockwave Effect"

In the mid-1990s, I was fortunate to meet and start working with an Upstate New York money manager named Anthony M. Gallea.

The relationship began when I attended and wrote stories about some of the investment seminars he periodically held for prospective and existing clients. He then became a “source” for some of the investment stories I periodically wrote for Gannett Newspapers. And we ultimately collaborated on a pretty successful book about “Contrarian Investing” that was published by Prentice Hall.

Along the way, Tony shared some pretty important snippets of investing wisdom…

  • Q4 Earnings Season: 12 Stocks Likely to Disappoint Thumbs down

    The Q4 earnings season has started off on an unexpectedly good note.

    Both Alcoa Inc. (NYSE: AA) and Wells Fargo & Co. (NYSE: WFC) last week reported fourth-quarter earnings that beat estimates.

    But before you get too excited about the rest of Q4 earnings season, keep in mind not all companies will be able to beat projections. Some industries were hit harder than others by uncertainty around fiscal cliff tax hikes and spending cuts, as both consumers and businesses reined in spending.

    To prepare investors for the underperformers of Q4 earnings season, Bank of America has identified 12 stocks it thinks will disappoint. Each has a "Sell" rating and missed earnings estimates on revenue or profit last quarter.

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  • How to Play Q4 Defense: Hedge Your Bets, Up Your Stops and Sell Your Gold So far fourth quarter earnings have made a mockery of things.

    Of the 20 S&P 500 companies that have provided Q4 guidance so far, 18 of them have guided lower, "slashing" their forecasts, according to Goldman Sachs and CNBC (as of Monday afternoon).

    What's more, roughly one quarter of the reported earnings have come in flat to middling. According to Capital IQ, overall revenues are up only slightly at 0.34%.

    Yet, for some reason the S&P 500 is only 3.89% off of its highs and is up 12.01% year-to-date through Wednesday afternoon.

    Under the circumstances this suggests two things to me:

    • There's a lot of volatility waiting in the wings; and,
    • The near-term risk is to the downside.
    First, let's tackle the volatility that's still in store; then we'll move on to what you can do to prepare for it.

    The Q4 Earnings Story

    So far this earnings season, roughly one quarter of the S&P 500 has already reported. That leaves the market with nearly 375 companies that have yet to spit out their numbers, roughly 150 alone this week.

    Assuming the balance follows the pattern set so far, companies like Caterpillar Inc. (NYSE: CAT), Philip Morris International (NYSE: PM), and 3M Co. (NYSE: MMM) are going to show "respectable" (under the circumstances) numbers while talking about the "challenges" they see ahead.

    Meanwhile, a few others, like DuPont (NYSE: DD) and United Technologies (NYSE: UTX), are going to reflect weakening earnings and revenue pressures leading to further cost-cutting as a means of protecting profits. These will include job cuts.

    I also expect the bulk of the remaining companies will take the opportunity to lower their expectations -- especially when you consider that 61% of the companies as of Monday afternoon missed revenue expectations.

    The irony here is that 61% of the companies that have reported over the same period have also exceeded analysts' expectations.

    Naturally the markets will punish those who missed even when what they should recognize is that the analysts were wrong yet again. But that's another story for another time.

    What's important to understand is that top-tier company management is using this earnings season to accomplish three things.

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