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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…

  • U.S. Stocks

  • Frank Holmes: Trying to Stop a Bull Market Has Risks Bull

    U.S. stocks have been on a tear. The S&P 500 Index has climbed a surprising 23% so far this year, as a global synchronized recovery takes shape and funds flow back to equities.

    As I often say, investors take risks when they try to stop a bull run, and plenty of data suggest you might regret taking that action this year.

    Consider the optimistic views from Joshua Brown, i.e. The Reformed Broker, as we have "all the rocket fuel we need for an explosion." There's no election, no war in Syria, and no taper talk. Banks are highly capitalized, stocks around the world are cheap and hedge funds' short positions are the highest since January, says Brown.

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  • The Big Banks On Trial, Again It looks like the big banks aren't out of the woods from past indiscretions yet. Just this week the most powerful court in Europe has accused 13 major global financial institutions (many US based) of colluding back in the heady days that led up to the 2008 financial reckoning.

    But that's only the tip of this high-end iceberg...

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  • Eurozone Debt Crisis: Why U.S. Investors Still Can't Relax Currency euro paper

    After nearly four years, billions in bailouts and increasingly strict austerity measures, not only is the Eurozone debt crisis no closer to resolution, but the attempts to solve it are pushing the region deeper into recession.

    According to Eurostat, the Gross Domestic Product (GDP) for the 17-nation Eurozone plunged 0.6% in the final quarter of 2012, a steeper drop than the 0.4% economists had expected and the worst decline since 2009.

    It's the third consecutive GDP decline for the Eurozone, reaffirming that the area is mired in a recession that started with the 2008 financial crisis and has been exacerbated by the ongoing Eurozone debt crisis.

    For all of 2012, the Eurozone economy shrank 0.5%, while the U.S. economy grew 2.2%. Even the GDP of beleaguered Japan increased 1.9%.

    Most ominously, the GDP decline of the Eurozone's largest and strongest economy, Germany, mirrored that of the region as a whole, falling 0.6%.

    Long one of the few bright spots, Germany is slowly getting dragged down by its weak neighbors, which include Italy, Spain, Greece and even France.

    The bad GDP news also belies the sunny assessments recently delivered by many economists and EU leaders.

    "These are horrible numbers, it's a widespread contraction, which does not match this positive picture of stabilization and positive contagion," Carsten Brzeski from ING told the BBC.

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  • U.S. Stocks 2012: Will Third-Quarter Earnings Kill Rally? When Alcoa Inc. (NYSE: AA) reports third quarter numbers after the close Tuesday, the Dow bellwether will unofficially kick-off the final earnings season of 2012, giving U.S. stocks a chance to continue their rally.

    Numbers from Alcoa, which supplies the global economy with a plethora of materials used for everything from soda cans to airplane parts, are closely watched. A dismal report from the company is predicted to set the stage for rather glum spate of third quarter reports.

    The world's largest aluminum maker is expected to report a profit of a penny a share, compared to 15 cents a share earned in the same quarter a year ago. Sales are expected to fall 14% to $5.6 billon.

    A strong focus will be on its overseas growth. China's troubling slowing growth coupled with the Eurozone's recession is expected to be a notable drag on international revenue for global firms like Alcoa and Yum! Brands Inc. (NYSE: YUM), which also reports Tuesday after the bell.

    "Any evidence they're expecting improvement globally would be good," Mark Luschini, chief investment strategist at Janney Montgomery Scott told MarketWatch.

    Scores of economists have increasingly warned that earnings for the second to last quarter of 2012 will be weak at best. The big question is just how weak, and how big an impact the glum results will have on markets through the end of 2012.

    Here's what to expect from third-quarter earnings reports.

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  • U.S. Stocks 2012: Five High-Value Stocks at Bargain Prices Everyone likes getting a bargain, and investors are no exception - but finding cheap U.S. stocks that also offer huge profit potential is no easy task.

    Picking stocks with low prices is not enough. Thanks to the market's May swoon and seven-for-eight losing streak earlier this month, there's no shortage of low-priced U.S. stocks in 2012. But many of those are destined to chug along forever with low prices - or go bust altogether.

    At the same time, some U.S. stocks priced at $100-plus per share could be considered bargains.

    The key in both cases, of course, is value.

    Only by comparing a stock's price to its underlying value can you decide whether it's a "bargain."

    Unfortunately, it's not quite as easy as it sounds. There are almost as many definitions of "value" as there are securities analysts.

    However, most agree on the following fundamental measures of intrinsic worth:

    • The stock has a low price/earnings (P/E) ratio relative to other companies in its industry segment or the market as a whole.

    • The P/E ratio is below the stock's own average P/E over the past 10 years or so.
    • The company's earnings history is stable - i.e., the low P/E is not due to unusual capital gains or some other one-time revenue event.

    • The company's earnings have increased for the past three years on stable or rising cash flow.
    • The stock is selling at a price below book value - i.e., the company's tangible assets are worth more than the value of the outstanding common stock.

    • The company has little or no debt - and, if there is debt, it is rated "A" or better.
    • The current low stock price is not the result of a sharp drop in operating margins, management shake-ups or some kind of financial scandal.

    • In spite of its solid fundamentals, the stock price is lagging others in the same industry segment.
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  • U.S. Stocks: Applied Materials (Nasdaq: AMAT) To Cash in On Mobile Growth Rising demand for chips in 2013 should give a much-needed boost to this U.S. stock.

    I'm talking about the flagging stock of semiconductor equipment manufacturer Applied Materials (Nasdaq: AMAT).

    Investors have been down on AMAT lately.

    Applied Materials lowered its guidance for the year just last week, acknowledging concerns over a decline in technology spending. Such worries had already dinged the stock, which had fallen from a 2012 high of $13.21 on Feb. 16 to about $11 July 09.

    Since the company announced its profits for the year would come in at 15 to 20 cents per share lower than previous projections, AMAT has slumped further to around $10.39.

    But given the company's financial strength, solid position in its market and signs of a turnaround in chip demand for 2013, this pullback could represent a buying opportunity.

    "[Applied Materials] is the biggest player in the industry, and it's got a deep and well-established economic moat," writes Jonas Elmerraji of The Street. "That means that once the semiconductor waiting game is over, AMAT should be able to deliver impressive numbers once again."

    Santa Clara, CA-based Applied Materials makes most of its money from selling semiconductor chip-making equipment to foundries like Intel Corp. (Nasdaq: INTC) and Taiwan Semiconductor Manufacturing Co. (NYSE ADR: TSM).

    Those companies sell chips to the companies that make the computer, tablets, smartphones and other electronic gear, such as Apple Inc. (Nasdaq: AAPL), Hewlett-Packard Co. (NYSE: HPQ) and Samsung Electronics Co. (PINK: SSNLF).

    Applied Materials also sells equipment for the manufacturing of solar panels and LCDs, though both of those divisions are significantly smaller than the semiconductor division. Still, the troubles of the solar industry over the past year also have stung AMAT.

    But as often happens, it's when things look most glum that investors need to pay closer attention.

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  • These U.S. Stocks on the Move After Better-than-Expected Earnings U.S. stocks are trying to hold onto gains today (Wednesday) after another round of earnings reports and testimony by U.S. Federal Reserve Chairman Ben Bernanke.

    Bernanke spoke before the House Financial Services Committee Wednesday and did not diverge from his non-committal message a day earlier on whether or not the Fed would provide more stimulus.

    Economic reports today include housing starts for June, which rose 6.9% to a seasonally adjusted annual rate of 760,000 units, the highest level since October 2008. Thanks to record low interest rates, applications for mortgages rose last week as many homeowners try to refinance.

    But, it was not all good news from the Commerce Department as new permits for building homes dropped 3.7% in June to a 755,000 unit pace.

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  • Three Cheap U.S. Stocks with Huge Profit Potential Bargain-hunting investors this year have been able to feast from a market buffet of cheap U.S. stocks.

    Reports have surfaced in the past few months about how the Standard & Poor's 500 is offering the lowest-priced stocks in years based on price/earnings ratios.

    Bloomberg in March reported that companies in the S&P 500 were trading at 14.1 times earnings, the lowest valuation of all 34 peak periods since 1989.

    Then in May former U.S. Federal Reserve Chairman Alan Greenspan declared that "stocks are very cheap."

    Again just last week Bloomberg noted that the S&P 500 is trading 16% below its average valuation since the 1950s.

    Now, after the S&P 500 recorded its best June since 1999, investors want to know if it's still the time to buy or if the party's over. With the Eurozone debt crisis still looming and a spate of recent gloomy U.S. economic reports, market optimism has thinned.

    But there are still bargains to buy.

    How to Find Cheap U.S. Stocks

    First, to determine if a stock is undervalued with high profit potential, and not cheap and going nowhere, investors need to scrutinize the driving factors of why a stock's price has fallen.

    For instance, you must look at what's happening to the stock's sector - is there a macroeconomic or cyclical reason for the stocks to slip?

    Then look at the company - is it in healthy financial shape? What are its future prospects?

    Some stocks like Bank of America (NYSE: BAC) may seem undervalued when looking at tangible value, which tells us BAC is worth almost double what it is trading at now. But the company posted negative earnings per share last quarter. Analysts expect it to post a positive EPS of 16 cents this quarter and give it a forward P/E just above 8, which is cheap - but it's a stock that comes with a lot of volatility, so its low price is risky.

    Others have had a long slide and may be at a bottom, such as tech struggler Hewlett Packard (Nasdaq: HPQ). CEO Meg Whitman is trying to turn the company around, but HP has lost more than half of its market value over the past year. With its forward P/E less than 5 it seems like a bargain, but there isn't a strong case for why this stock could rally.

    And finally look at General Motors (NYSE: GM) or Ford Motor Co. (NYSE: F). Both currently have P/E ratios below 6 and even though the auto industry has been one of the hardest hit U.S. sectors over the past few years it looks to be on the upswing now.

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  • Dow Jones Erases 2012 Gains – What's Next? The "sell in May and go away" approach panned out this year as the month was not merry for markets.

    U.S. equities experienced a steep drop during May, enduring the worst monthly declines in two years. The Dow Jones Industrial Average fell 6.2%.

    A good part of May's decline was blamed on the ongoing European sovereign debt crisis that has swelled of late and shattered investors' confidence. But things on the home front are far from ideal.

    The flight from stocks flowed into the first day of June. The Dow plunged 274 points Friday, erasing all of the year's gains. Fueling Friday's fall was May's dreadful U.S. jobs report, which showed employers added just a trifling 69,000 in payrolls, less than half the expected 150,000.

    The Standard & Poor's 500 Index and Nasdaq both plummeted more than 2%. The Nasdaq has given back more than 10% since its late-March peak.

    Traders consider a 10% drop to be a market correction. Meanwhile, the S&P 500 is just a mere point above correction territory.

    Just 17 of the 500 companies in the S&P index ended higher on Friday.

    "The big worry now is that this economic slowdown is widening and accelerating," Sam Stovall, chief equity strategist at market research firm S&P Capital IQ, told the Associated Press.

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  • The Most Important Investment You Can Make Right Now
    I was taken aback by the question: "What is the single most important investment I can make right now?"

    Not by the question itself - I get that one a lot.

    But because of who was asking it and what they excluded.

    It was put to me by Jason, Susan and Hao - all of whom are juniors at Skidmore College where I was lecturing last week.

    They wanted to know what they - as college students - could do to ensure their financial future.

    Not only that, but they specifically asked me to exclude specific investment choices that a more seasoned, older investor would consider.

    I thought about it for a few minutes, then responded: "It's discipline."

    Investors are faced with a unique challenge, I explained. Many are not at the mercy of the markets as they believe, but are actually subjected to the whims of the person they see in the mirror every morning.

    That's why consistent investment results are often more dependent on behavior than actual performance.

    Put another way, investors who "behave" themselves by being disciplined tend to do far better than those who don't.

    Beating the Markets Takes Discipline

    For example, DALBAR, a Boston-based research firm ,released a 2011 report that showed investors had achieved a mere 41.9% of the S&P 500's performance over the twenty years ended December 31, 2010.

    In other words, investors managed to leave a staggering 58.1% on the table.

    According to the report, the average investor achieved a mere 3.8% a year versus the 9.1% annualized return of the S&P 500 because they tended to jump in and out of the markets at the worst possible moment depending on their emotions.

    This reinforces something I talk about all the time in my presentations around the world - investors lose billions by trying to time their decisions based on nothing more than greed, fear or simple paralysis.

    In my opinion, it's why the single biggest investment anyone can make is "discipline."

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  • What a Little-Known Market Tool Is Telling Us About U.S. Stocks in 2012 If you're a longtime investor, you're no doubt familiar with the Price/Earnings (P/E) ratio - a common measure for valuing the stock market.

    But you may not be as familiar with the more-obscure Earnings/Price (E/P) ratio, which some experts refer to as the "earnings yield" on stocks.

    If you're not familiar with the earnings yield, it's time to brush up.

    While it may be obscure, the E/P ratio is an important tool. It not only tells you stocks' value, it allows you to compare that value to other assets like bonds.

    And right now it's telling us a lot about buying U.S. stocks this year.

    Basically, the risk/reward in favor of stocks over corporate bonds has never been this high...ever.

    Let's take a look.

    How to Use the Earnings/Price Ratio

    We can get a pretty good handle on the value of stocks if we look at the E/P ratio of the Standard & Poor's 500 Index.

    In 2010, the earnings for the S&P 500 came in at $83.77. According to Standard & Poor's, the earnings estimates for 2011 are at $97.81 and will climb to $111.73 for 2012.

    Taking the 2011 S&P 500 earnings estimate of $97.81 and the current S&P price of about 1,290, you come away with a multiple of 7.5% (97.81/1290). Simply put, this means that the expected earnings of the S&P 500 are 7.5% of the price of the index.

    By the same token, if earnings come in at the expected $111.73 in 2012 and stock prices remain the same, the earnings yield jumps to 8.6%.

    Why should you care? Because you want a higher rate of return for the risk of investing in stocks when compared to the rate of return of other asset classes.

    Generally, the earnings yields of equities are higher than the yield of risk-free treasury bonds, reflecting the additional risk involved with stocks. But right now the difference is extreme, with 10-year government bonds yielding a paltry 2%. Meanwhile, corporate bonds are paying about 5%.

    Now let's compare the return on stocks to the rate of inflation.

    Over the past 50 years, the average earnings yield for the S&P 500 has outpaced inflation by 2.4%. When the market is above that mark, equities are considered attractive. When it's below, they're expensive.

    Subtract the current core inflation rate of 1.5% from the 2011 S&P 500 earnings estimate of 7.5%, and we end up with 6% - well above the 50-year average. Even if we use the 3.4% consumer price index rate, you're left with a difference of 4.1%. Compare that to bond yields and you're still way ahead.

    So that's where we are, but how about where we're headed?

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  • Why We May See a Rally in U.S. Stocks With so much negative news dominating the headlines, investors can't be blamed for being worried or shying away from stocks. But if you take closer look at the market - specifically the Standard & Poor's 500 index - you might be surprised by what you see.

    The S&P 500 is down just 3% year-to-date, and is actually up more than 5% over the past three months. The indexes for China, India, and Brazil, on the other hand, are all down over the past three months. Brazil's market index is down 19% year-to-date, China's is down more than 21% and India's is down more than 24%.

    "People don't understand that the S&P 500 has now outperformed the BRIC nations (Brazil, Russia, India and China) for four years," Richard Bernstein, CEO and chief investment officer for Richard Bernstein Advisors, told USA Today. "We are in the very early stages of a resurgence of the U.S. equity markets, and I don't think people are aware of the shift that is going on."

    Indeed, many analysts actually think U.S. stocks are cheap right now.

    The price/earnings (P/E) ratio for the S&P 500 dropped to 12.8 as of the third quarter of 2011. The historical average for the S&P's P/E is 15, meaning stocks are moderately underpriced.

    In fact, the average P/E has been even higher in recent decades. Since 1988 the S&P average P/E has been 19.2 - which translates to a 33% discount for current stock prices.

    Four Reasons for a Rally

    Corporate America has quietly been rebuilding since the financial crisis of 2008, but the constant barrage of bad news - the multiple disasters in Japan in March, budget battles in Washington, concern over the Eurozone debt crisis - has camouflaged much the progress that's been made.

    "The pessimism today is actually creating opportunities for investors," Kate Warne, chief investment strategist at Edward Jones, told USA Today. "There are a lot of short-term concerns, a lot of serious risks, but investors really need to keep their eyes on the horizon, because we are also seeing strong fundamentals. And that is what is driving the market longer term."

    Analysts have identified several positive signs - in addition to the relatively low S&P 500 P/E ratio - that indicate U.S. stocks are stronger heading into 2012 than many realize:

    • Cheaper commodities: The prices for commodities have fallen significantly since the first half of 2011, which should give corporate earnings a boost at least through the first couple of quarters of next year.
    • Lean and Mean: The fiscal discipline dictated by the financial crisis of 2008 has helped many companies weather the troubles of 2011. And now many companies are poised to quickly grow profits as soon as worries ease.
    • Dividend Increases: Companies that pay dividends have been increasing them, and that should continue. Despite the increases, the overall payout ratio has dipped to 29% from a 50-year average of 45%. Higher dividends mean a higher total return for investors, and provide some insurance against downturns.
    • More Buybacks: Buyback activity among U.S. companies rose to $439 billion in 2011 and is expected to rise to $500 billion next year. That sort of money flowing into the stock market helps boost prices.
    With fundamentals strong, a run of positive news, or even neutral news, could be the catalyst that triggers a big rally in U.S. stocks.

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  • We Warned You U.S. Stocks Could Plunge – Here's the Safety Play You Need to Make Now U.S. stocks reversed course in the final minutes of trading yesterday (Monday) to push the Dow Jones Industrial Average back over 11,000 - but that still wasn't enough to make a dent in the index's 4.8% loss so far this month.

    Europe debt fears and dismal economic news have caused the Dow to fall in five of this month's seven trading sessions, each time by more than 100 points.

    We warned you September would be a tough market month - several times.

    What's more, we showed you how to protect yourself.

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  • How Bernanke Will Keep a Fire Lit Under Stocks Until Year End – And Which Sectors Will Soar While many investors have solid reasons to remain concerned about the broader economic picture, there are some market sectors roaring forward that no one can afford to miss - and they will continue to provide profit opportunities thanks to the work of U.S. Federal Reserve Chairman Ben Bernanke.

    Stocks rattled around in 295-point range of the Dow Jones Industrial Average over the past five days like pebbles in a maraca, but ended quietly -- a fraction above flat. The big-cap indexes have now posted six of their past seven closes within half a percent, hemmed in by some sort of spooky gravitational pull.

    Earnings came in quite a bit better than expected for most major companies, as the cheap dollar has helped overseas sales for Caterpillar Inc. (NYSE: CAT) and McDonald's Corp (NYSE: MCD). Over in the exciting web content space, Netflix Inc. (Nasdaq: NFLX) wowed the crowd with outstanding third-quarter results, logging a sales increase of 31.0% and adding 1.9 million net new customers. That's a lot of new buyers in an economic environment that is supposed to be so terrible that the Federal Reserve thinks unprecedented medicine is required.

    To read about how the Fed can keep stocks soaring, click here Read More...
  • The 10 Most Pressing Questions About the U.S. Economy – And Their Answers Will the economy lapse into a double-dip recession? What can be done about the soaring U.S. budget deficit? What's next for the stock market?

    These are just a few of the tough questions facing investors. And there may be no one better to offer answers, insight, and advice than Money Morning Contributing Editor Shah Gilani.

    A retired hedge-fund manger, Gilani has routinely been there to shepherd investors through blinding market uncertainty. He's used his contacts on Wall Street to give Money Morning readers the inside scoop on the collapse of American International Group Inc. (NYSE: AIG), the May 6 "Flash Crash," and most recently the "Mortgagegate" scandal that currently threatens to undermine the fragile U.S. recovery.

    Indeed, Gilani has been a tireless advocate for investors and a prescient market maven. That's why Money Morning's editors recently sat down with Gilani to talk about today's most pressing issues and discover what he expects for financial markets in the months and years ahead.

    In the partial transcript of that interview below, Gilani discusses why it's a good time to invest in stocks, what steps should be taken to fix the U.S. economy, and whether or not gold prices have peaked.

    In short, the U.S. government has failed the public as a matter of course, but there is still a way out of our current economic malaise and ample opportunity for investors to profit.

    To find out the answers to the ten most pressing questions facing the economy, read on... Read More...