Archives for January 2012

January 2012 - Page 8 of 11 - Money Morning - Only the News You Can Profit From

The Madness of Crowds: How to Play Bonds, China, and Gold in 2012

by

Yes, I know that markets are irrational.

I read Charles Mackay's 1841 classic, "Extraordinary Popular Delusions and the Madness of Crowds" long before it ever became fashionable.

Even so, when you think about it, 2011 must set some kind of record.

As investors, that means we need to decide whether this madness will continue in 2012 and which direction to take.

Take the madness in the bond world, for instance.

Long-term bonds of a country with an out-of-control budget deficit and a worrying trade deficit are currently yielding 1.6% below inflation.

In other words, year after year, investors are willing to pay 1.6% of their capital to hold them. On top of that, investors have been so keen on this miserable asset in 2011 they have bid up its price by no less than 26%.

Conversely, China is revolutionizing the world economy.

Year after year, China puts up growth rates of 8% or more, and the latest data suggest that will continue throughout 2012.

What's more, Chinese stocks stand on a bargain-basement price-to-earnings (P/E) ratio of less than 8-times earnings. Yet, in 2011, investors shunned these bargains, giving the Chinese market a pathetic return of minus-22%.

It is Madness I Tell You

Do you see what I mean when I talk about irrational?

To a Martian, these statistics would be proof that earthly markets had lost their collective minds. That's not just a random walk – it's a deliberate stroll that will destroy your wealth.

For investors, it raises the question of how long this irrationality is going to last. Will this extreme irrationality persist in 2012, or will it reverse?

The first conclusion to be drawn is that current markets…

... To continue reading, please click here...

What a Little-Known Market Tool Is Telling Us About U.S. Stocks in 2012

by

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?

To continue reading, please click here...

Forbes Misses the Mark, The Tech Sector Delivers Life Changing Gains

by

You can stop worrying about the financial crisis.

I have a new way to help Washington make ends meet. If we were smart, we would just close the patent office.

And why not?

After all, according to some folks, all of the great inventions have already come and gone.
So, if you thought we were still on the cusp of miraculous breakthroughs in technology that are going to change the world, think again.

Despite what you may have been reading, the technology sector is actually positively dull, folks.

In fact, using innovation to cure cancer, solve world hunger, and help humans live past the age of 100 with genius-level IQs is just plain boring. Ho-hum really.

I know this because I read all about in Forbes magazine. So it must be true… right?

Of course, I hope you'll pardon the stinging sarcasm…

But in a recent column, Rich Karlgaard of Forbes actually questioned whether the future of technology would be as bright as the past.

To be fair, Karlgaard's argument refers to a new book on the subject by a prominent college professor who claims technological progress is nowhere near where it used to be.

Or as Karlgaard argues, "doesn't quite stir the soul."

Miracle Breakthroughs

Maybe he should have talked to Barbara Campbell.

Twenty years ago, the New Yorker went blind while still in her 30s

Today, she can at least see rough shapes and enough light to make out the building she calls home. It's all courtesy of the electrodes surgeons implanted in her eyes.

They communicate wirelessly with a pair of sunglasses that sport a tiny video camera.

The LA-based developer of these "bionic eyes," Second Sight Medical Products, won approval to sell its system in Europe last year. In 2012, the privately held company hopes to finally win U.S. approval for its miraculous technology.

But whether the company goes global or not is beside the point. I predict that in as little as 20 years, human blindness will largely be a thing of the past.

And then there's the case of Matt Nagle, a Massachusetts man whose life took a turn for the worse after being paralyzed from the neck down.

To his delight, he has learned to surf the web, send emails, make a robot move its hand and play video games – all with the power of his mind.

To continue reading, please click here...

How Bain Capital Could Sink Mitt Romney

by

Poll leader Mitt Romney is getting slammed by opponents for the 15 years he spent at private equity firm Bain Capital. To hear the opposition tell it, Romney is not the job-creator he claims to be, but rather a greedy profiteer. After winning Iowa by a narrow 0.1% margin, Romney was the New Hampshire frontrunner […]

Read More…

$200 A Barrel Oil in 2012?

by

Geopolitical events out of Iran have increased the chances of oil prices spiking even higher than initially predicted in 2012. Money Morning resident energy expert Dr. Kent Moors joined Fox Business Tuesday to break down the biggest factors affecting oil prices out of Iran, Europe and the United States. Loading the player …

Read More…

China: Big Changes Coming Soon

by

by Guest Author Henry S. Rowan, Senior Fellow, Hoover Institution Stanford University Global Economic Intersection Article of the Week Executive Summary Big changes are ahead for China, probably abrupt ones. The economy has grown so rapidly for many years, over 30 years at an average of nine percent a year, that its size makes it […]

Read More…

Five Stocks to Avoid Like the Plague

by

There's no better time to take a good hard look at your portfolio than the beginning of a new year.

I know this may not be your first rodeo and chances are you've already done at least a little thinking about how your investments came through 2011, and what you'd like to achieve in 2012.

If not, there's no time like the present.

Especially when it comes to something I call "Ditching the Dogs," which is a variant of the well-known and very popular "Dogs of the Dow." You've probably already guessed from the name that I'm talking about unloading those investments that have underperformed, or which are likely to hold my portfolio back in the next twelve months.

Obviously this is a highly personal process and every investor is different, but here are five stocks I'd avoid like the plague right now (and the reasons why):

1. Sears Holdings Corp. (Nasdaq: SHLD) – Long a bastion of American retailing success, I've been leery of the company for a long time. In fact, I've steered clear of it since hedge fund investor Eddie Lampert used more than a little financial wizardry to create Sears Holdings. At the time, his goal was to tap into the vast real estate empire underlying Sears and subsequently K-mart when that company emerged from bankruptcy and he snapped up shares. The stock hit $190 a share in early 2007 on the assumption that it would.

Now, though, it's a very different story. With real estate in the toilet and the value of his "collateralized" debt circling the drain, he plans to fire employees, cut more than 120 stores and sell property. Same store sales are down sharply as is profitability. Fitch Ratings Inc. has cut the company's bond to junk status, and it's likely to have hundreds of millions in writedowns ahead. I think the company is going to restructure, and net income is going to fall to the tune of billions when now-litigation conscious accountants have their day.

2. Research in Motion Ltd. (Nasdaq: RIMM) – Once the darling of connectivity and a status symbol for the cognoscenti, RIMM's share of the smartphone market continues to evaporate like fog on a hot morning. I recommended shorting the company a few years back but was early to the party on several occasions; somehow the stock seemed to fight back. The stock is down 89.52% from its peak of $144.56 in early 2008 and up a creek without a paddle…and you know which creek I am talking about.

To continue reading, please click here...

These Four Investing Lessons Mean Everything Today

by

Talk about information overload…

There's so much news and data, so many opinions about events and data points, so many financial publications, so many shows, so many stocks, mutual funds, exchange-traded funds (ETFs), futures, options, derivatives, so many opposing points of views about everything, it's enough to make your head explode and your investing comfort level implode.

Most people tend towards like-minded analysts and economic analysis that confirms what they're seeing and thinking. There's a kind of comfort zone there, where "We're in this together and if we're wrong, well, I wasn't alone; but if we're right, boy am I smart."

Then there are the "skittish" investors who think they know what they're doing – that is, until they hear a different opinion from someone, anyone, they think has a leg up on them. And what do they do then? They usually ask, "Really?" Meaning, "Do you know something I don't know?" Chances are, at that point, they are going to panic.

And, of course, there are those investors who know they are right, and stick by their convictions and positions all the way to, well, you know where.

Maybe you've been there.

I was there myself when I started trading professionally on the floor of the Chicago Board of Options Exchange (CBOE) in 1982.

But I quickly distanced myself from all the noise that distracted me from being a successful trader.

There is no magic bullet to being a successful investor; that's the bad news. The good news is that it's a lot simpler that everyone makes it out to be.

Here are the four most important trading lessons I have learned:

To continue reading, please click here...

An Options Strategy That Will Save You Some Money

by

Whether you credit a Santa Claus rally, an early January Effect, or some other driving market force, there's no disputing the strong finish posted by stocks in 2011 – or the healthy 2012 opening advance added in the first week of January.

To be specific, stocks – as measured by the Standard & Poor's 500 Index – rose from 1,204.00 at the close on Monday, Dec. 19, to 1,257.60 on Friday, Dec. 30, then jumped to 1,280.15 at midday yesterday (Monday), a gain of 6.32% in just three weeks. The Dow Jones Industrial Average did almost as well, climbing from 11,751.96 on Dec. 19 to 12,398.29 in Monday trading, a 21-day gain of 5.50%.

While those short-term moves are certainly impressive, they're hardly unique in today's volatile market environment. Three similar advances have occurred in the past five months alone – in late August, early October and late November – but each was followed by a sharp short-term pullback that wiped out much of the value gained in the rallies.

And, while few things in the market are certain, there's a strong probability this current market advance will also be followed by a sizeable retracement in the very near future.

So, how do you protect your most recent gains?

One answer is to turn to the options market.

A Defensive Options Play

As veteran Money Morning readers know, two of the most effective and often-used strategies involving options are writing covered calls to bring in added income and buying put options as "insurance" against possible price pullbacks.

As such, investors would typically look to the latter strategy – buying puts – for protection in the present market situation. However, there are times when unusual conditions can force investors to take an alternative approach to option strategies – and that has certainly been the case recently, thanks to the market's extreme short-term volatility.

To continue reading, please click here...

How the U.S. National Debt Could Drain Your Savings

by

Now that Congress has allowed the U.S. national debt to grow bigger than the American economy, it won't be long until the American public suffers the consequences by losing most of its savings to inflation. Figures for last year show the national debt officially exceeded 100% of the nation's gross domestic product (GDP). According to […]

Read More…