Archives for February 2012

February 2012 - Page 5 of 11 - Money Morning - Only the News You Can Profit From

Trading Silver with Options: How to Earn 127% in Four Months

If you listened to Money Morning's recent special report from global resources expert Peter Krauth, you know the long-term outlook for silver is decidedly positive.

Soaring investment demand, continued industrial use, a growing supply shortage, and falling ore quality all signal a sharply bullish outlook for the "poor man's precious metal."

So, how can you position yourself to profit from silver's coming advance without exposing yourself to the excessive risk?

One way is to use options – either on silver futures contracts or shares of silver-related stocks and exchange-traded funds (ETFs) – in a strategy that strictly defines and limits your risk while still offering short-term returns of 100% or more.

Silver Options: How to Create a Bull Call Spread

Known as a "bull call spread," this technique involves simultaneously buying and selling two call options with the same underlying security and expiration date, but with differing strike prices.

Typically, a bull call spread involves buying an at- or slightly in-the-money call option – one with a strike price very near the current price of the underlying asset – and simultaneously selling an out-of-the-money call option with a strike price several increments above the current security price.

The difference between the two strike prices is referred to as the "spread."

To illustrate, let's look at an example using options on silver futures, which are traded in the CME Group's Comex division. In this case, one futures options contract represents 5,000 ounces of silver.

To create your bull call spread, you would purchase the slightly in-the-money July $33.00 call, quoted at $3.451 an ounce ($17,255), and simultaneously sell the out-of-the-money July $35.00 call at a price of $2.572 an ounce ($12,860).

The net cost of this spread is 87.9 cents an ounce ($3.451 – $2.572 = $0.879), or $4,395. That is also your maximum possible loss on the trade should the July silver future stand below $33.00 when the options expire on June 26, 2012.

What's more, the spread trade breaks even at a July silver futures price of just $33.879 as opposed to the break-even price of $36.451 had you merely purchased the $33.00 call alone.

So, what's the catch?
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Can General Motors Co. (NYSE: GM) Shake Off Trouble from Europe?

General Motors Corp. (NYSE: GM) reported today (Thursday) its biggest annual profit ever for 2011, but weakness from Europe could dull the share-price rally.

Net income for the 2011 fiscal year hit $7.6 billion, 62% higher than the $4.7 billion GM earned a year ago and more than the previous record of $6.7 billion in 1997. Revenue increased 11% to $150.3 billion.

Net income for the quarter hit $472 million, or 28 cents a share, down from $510 million, or 31 cents a share, a year ago.

North America was GM's biggest income driver, accounting for $7.2 billion of the year's profit. GM suffered a $747 million loss in Europe, where consumer spending is struggling.

"We clearly have work to do in Europe," GM Chief Financial Officer Dan Ammann told reporters. "We have work to do in the South America business. Frankly, we have work to do all around the company in terms of cost opportunity."

Investors remain wary over how successful GM will be at maintaining its profit rise as long as Europe remains weak – and looks increasingly weaker.

"Just because things were looking OK at the end of last year doesn't mean that they will continue to look OK," Richard Cookson, chief investment officer of Citi Private Bank, told MSNBC. "Our best guess is that conditions will continue to deteriorate. This is going to be unpleasant, to put it mildly."

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Investors Turn to TIPS as Warren Buffett Warns on Inflation

Warren Buffett last week did more than warn investors on the dangers of low interest rates and inflation.

The Oracle of Omaha also had harsh words for traditional bonds.

In a Fortunearticle Buffett went so far as to say, "Right now bonds should come with a warning label."

"They are among the most dangerous of assets," Buffett wrote, "Over the past century these instruments have destroyed the purchasing power of investors in many countries."

To prove his point Buffett labeled inflation as the primary threat to bond investors, noting it takes no less than $7 today to buy what $1 did in 1965.

Instead of bonds, Buffett recommends "productive assets," including farmland and real estate.

But he saved his highest praise for stocks, especially the stocks of companies like The Coca-Cola Co. (NYSE: KO) and International Business Machines Corp. (NYSE: IBM), that consistently deliver inflation-beating returns.

But what if you're not comfortable betting most or all of your chips on stocks? And if traditional bonds are out, where else can investors turn for inflation beating returns?

TIPS Insure Wealth Against Inflation

Enter Treasury Inflation Protected Securities, or TIPS.

Unlike regular bonds, TIPS are designed to protect your principal against the ravages of inflation.

In fact, TIPS zig when other securities zag, providing diversification and safety to your portfolio.

TIPS are considered to be an extremely low-risk investment since they are backed by the U.S. government, and their par value rises with inflation while their interest rate remains fixed.

Here's how they work.

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Emerging Market Dividend Stocks Give Investors the Best of Both Worlds

In today's market, dividend investing is the best way to achieve a decent income stream without taking on too much risk.

On the other hand, this is also true: emerging markets give investors the benefit of the world's fastest economic growth.

Investors would be wise then to combine these two strategies by buying emerging markets stocks that pay steady dividends.

In practice, this is more difficult than it ought to be – but it's not impossible.

In fact, as you'll learn later I have found numerous ways to profit from this best of both worlds strategy.

What You Need to Know About Emerging Market Dividend Stocks

Dividend-paying stocks in emerging markets have the same advantages as they do in the U.S. market.

Just like here in The States, a sizeable dividend from overseas is not only money in your pocket, it's also evidence that the management is working in your interests as a shareholder.

And by paying dividends investors can be sure that at least some of the earnings the company is generating are real and not the result of an accounting flim-flam.

If a company in a fast-growing emerging market is able to pay a decent dividend and participate in local growth, then you can anticipate very good returns indeed, since the dividend itself is likely to grow on the back of the company's rapidly increasing profits.

Of course, there are always risks in emerging market investing, but a good yield gives your holding a solidity that isn't present in companies with mere paper earnings.

But here's what you need to know…

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Making Earmarks Pay: Lawmakers Help Themselves to Congressional Pork

For members of Congress, the only thing better than getting "pork" for the folks back home is getting a slice of that pork for themselves.

Pork, also known as earmarks, describes the long-standing Congressional practice of steering tax money back to home districts to pay for expensive, constituent-pleasing projects.

But in recent years lawmakers started taking pork a step further. Instead of just using earmarks to keep voters happy, some members of Congress have found ways to benefit personally.

Some arranged for improvements to areas near property they owned; others sent money to organizations they would later go to work for after leaving office.

Of course, none of this is illegal.

Congress literally makes its own rules regarding the ethics of earmarks. Still, much of what goes on looks bad.

Take the case of former Rep. William Delahunt, D-MA. The seven-term Congressman retired last year and launched his own lobbying firm in Boston.

Before long the small coastal town of Hull had hired Delahunt for $15,000 a month to help out with a wind energy project.

Coincidentally, Delahunt had set aside a $1.7 million earmark for the Hull project back in 2009. The bulk of his fee – 80% – is being paid from the same earmark money.

And that's not all. The Mashpee Wampanoag tribe has paid Delahunt's firm at least $40,000 to lobby for a casino. As a congressman, Delahunt sent the tribe earmarks worth $400,000.

Delahunt also has done work for Quincy, MA, lobbying for a downtown redevelopment project. Back in 2008, he was sending Quincy $2.4 million in earmarks.

"I cannot recall such an obvious example of a member of Congress allocating money that went directly into his own pocket," Barney Keller, communications director for theconservative group Club for Growth, told The New York Times. "It speaks to why members of Congress shouldn't be using earmarks."

While Delahunt may be the most blatant example of a lawmaker enjoying generous helpings of Congressional pork, he's not the only one.

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Tech Stocks: NVIDIA Corp. (Nasdaq: NVDA) Earnings Must Show Move to Mobile

NVIDIA Corp. (Nasdaq: NVDA) will join tech stocks reporting earnings this week when it releases fourth-quarter results after the bell today (Wednesday) – and attempts to attract investors with a plan to profit from mobile computing growth.

Analysts polled by Thomson Reuters forecast quarterly earnings of 19 cents per share on $950.5 million in revenue.

The graphics chipmaker already cut its revenue outlook in January from $1.066 billion to $950 million. It said flooding in Thailand had slowed the global hard-drive market, lowering PC shipments.

NVIDIA invented the graphics processing unit (GPU) in 1999, and its graphics cards are used in many desktop computers and notebooks. Graphics card sales account for 30% of the company's revenue.

But the industry is changing in a way that will render NVIDIA'S core business obsolete. Competitors are releasing new processors more advanced than NVIDIA's.

What investors should look for in Wednesday's report are NVIDIA's plans to expand beyond its PC focus into the next era of computing, and if those plans can stand up to stiff competition.

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Obama's Defense Cuts Mean More Mergers for Tech Investors

I can explain the impact of President Obama's new defense budget to investors in one word – mergers.

Indeed, the M&A field will remain a driving force in the defense sector for at least the next two years.

The good news for tech investors is that Obama's focus fits with the Pentagon's push for more high-tech breakthroughs.

We're talking about more drones instead of fighter jets and robots to replace troops for some tough jobs.

But don't gloss over information technology since it cuts through the entire supply chain.

Since World War II, the U.S. military has pursued high tech at a rapid pace.

However, that trend gained speed in recent years after the Pentagon rolled out the concept of making computers an even bigger part of our fighting forces.

You see, the top brass likes to call it "net-centric warfare." I know it sounds complex. But it really is very simple.

Here's the big idea: link every facet of defense to secure networks. Ideally, that means senior leaders could track every boat, bullet and bayonet on one computer screen.

Obama's Budget Cuts in a Modern World

And now, new budget cuts mean the military must do more with less.

Today, we're facing a new Cold War with China, while at the same time we are cutting spending and reducing troop strength.

Here's what it all means for investors…

At least once a month, the CEO of a company with great tech realizes he needs more financial muscle to survive the leaner times.

That usually means selling to a larger firm.

So look for defense companies that have access to financing or enough cash to go on shopping sprees.

Just last month, Lockheed Martin Corp. (NYSE: LMT), revealed it bought a firm that provides autopilot and other devices for small drones.

I believe this is a shrewd purchase. After all, the military is clearly moving toward more unmanned aerial vehicles.

These UAVs come in a wide range of sizes and applications.

At one end we have the Predator drone. It's about the size of a private jet and receives heavy use by the U.S. against Al Qaeda terrorists.

Now just shrink that down to the size of a large insect and you have the new generation of drones. In the very near future these types of drones will find wide use in surveillance missions.

A high-tech team at Wright-Patterson Air Force Base is working on micro drones that look like bugs. They fit in the palm of your hand and are designed to find the enemy in tight urban terrain.

Cyber-security will also remain an active area for the Defense Department and Homeland Security. While Obama's budget for 2013 cuts 100,000 troops, it does emphasize cyber-operations.

Consider that on December 29 Raytheon Co. (NYSE: RTN) said it is buying a small, privately held cyber-security firm. That was the second such merger in three weeks for Raytheon.

Those two Raytheon mergers occurred just weeks after the Pentagon said it reserves the right to respond to an attack on its computers with the use of force.

The field is attracting foreign interest as well. French giant EADS (EPA: EAD) says it wants in on the action and will buy firms to do so.

Though EADS hasn't said it will buy in the U.S., it's a good bet the company will at least look in America as it tries to balance out the sales of its jumbo jets.

On the other hand, not all the defense mergers will turn on high tech…

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Start Seizing Master Limited Partnership (MLP) Profits

Last week, Kent challenged me to offer you a way to make some money in energy.

I started scanning the energy and agricultural stocks I monitor, and began combing financials, looking for some undervalued little company about to pop.

Then I stopped.

I already knew a failsafe way to ace Kent's challenge. And so do you. We talk about it all the time.

It's the midstream sector of the energy supply chain, particularly in Master Limited Partnerships or MLPs

And it's the best and easiest way to make money in energy today.

I want you to understand the value of these companies that are involved in the gathering, transport, and storage of oil and gas. Not in terms of just how important they are to the industry, but also how important they can be to generating very strong returns for your wallet.

Because if you're ignoring them, you're missing out.

Big time.

That's why today I'm going to share with you one investment opportunity in Kent's Energy Advantage portfolio that is blowing the doors off and making investors a killing.

And you can join in.

MLPs: The Golden Age Continues

The United States is in the early stages of one of the greatest financial booms in its history.

Technological advances in horizontal drilling have allowed companies to access natural gas and oil resources once thought to be unattainable.

Upstream gas drillers continue to develop shale deposits in Pennsylvania, New York, Utah, and other states. So someone has to take care of all the gathering, feeder and transport pipelines, terminals, storage facilities, fractionating, and initial processing of these fuels.

This is what has made Master Limited Partnerships (MLPs) such attractive opportunities.

These midstream companies make their money by charging transport fees for the fuels they process. And over the past few years, these fees have remained almost constant, even though natural gas prices have dropped considerably.

MLPs offer investors the opportunity to make profits in two ways.

  • The stock appreciates in value, due to growth in the sector and strong financial returns.
  • The stock pays higher-than-average yields and quarter distributions to investors (otherwise known as dividends).

The yield benefit is driven by the fact that all company profits are distributed directly to partners and the investors, bypassing corporate taxes.

And when we identify MLP plays that do both at the same time, that's when we really start to see some profits.

A 139% Return in Under Three Years

MLPs are attractive investments. So are the indices that track their overall performance.

And for the last 18 months, Energy Advantage readers have benefited from growth of one fantastic index.

The JPMorgan Alerian MLP Index ETN (NYSE: AMJ) tracks the performance of the booming energy MLP sector. Created in 2009, the market cap-weighted index currently pays an attractive yield of 5%, while the underlying share price has doubled in a little less than three years.

The index offers many of the same benefits of investing in a traditional MLP. The two biggest benefits are those opportunities to acquire a strong yield and to reinvest those dividends into appreciating shares.

This two-step process unleashes the power of income investing.

Just how much potential are we talking about?

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SandRidge Energy Inc. (NYSE: SD) CEO Tom Ward Has Done it Again

SandRidge Energy Inc. (NYSE: SD) is a company that I'm very familiar with – and yet it's an enigma even to me.

I mean that quite literally.

You see, I recently paid a visit to the SandRidge building during a trip to Oklahoma City. After getting my security badge, I began to make my way to the 12th floor.

There was just one problem: When I got into the elevator there were no buttons below 16.

What do you do when you go to see someone and their floor isn't on the list? I decided to ride the lift all the way to the top floor.

Fortunately, the staff that met me at the top floor was kind enough to point me in the right direction – but not before I looked around a little bit.

I just couldn't help but be entranced by the amount of activity up there. The top floor of the SandRidge building was absolutely humming.

Well, what I didn't know at the time was that Sand Ridge was about to shock everyone. The company was about to go where nobody expected.

Tom Ward – SandRidge's CEO and a man best known as the co-founder of Chesapeake Energy Corp. (NYSE: CHK) – was taking his new company to

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Today's Earnings Preview: Can Zynga Inc. (Nasdaq: ZNGA) Loosen its Facebook Ties?

Zynga Inc. (Nasdaq: ZNGA) will report earnings for the first time today (Tuesday) since going public, and investors want to see if Zynga has a future plan for profits that isn't tightly pinned to Facebook Inc.

Zynga is the largest social gamer in the world, behind FarmVille, CityVille, Mafia Wars, and Words with Friends. It has 230 million active monthly users, but growth slowed in the end of 2011 because of few new hit games released.

Zynga debuted its $1 billion IPO in December. It listed its relationship with Facebook under risks associated with the business in its IPO filing.

Wall Street expects the Zynga earnings report to show profit of 3 cents per share on revenue of $301.1 million for the fiscal fourth quarter. That would be a 54% revenue gain from the last quarter of 2010.

Zynga is profitable, unlike some of its social media-related counterparts, but the question is, can it build a company that's not so reliant on Facebook?

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