Income Tripler

Small-Cap Stocks: The Most Important Trend Headed into 2009

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, December 23, 2008: Issue #906

Yesterday we got confirmation that the U.S. economy contracted by 0.5% in the third quarter. And most economists expect the downturn to accelerate, with GDP checking in as low as negative 6% in the fourth quarter. Here’s why I’m not concerned…

A more important trend is emerging. Remember, on November 19 I told you to consider going big, by going small with small caps. Well, the markets didn’t leave much time for preparation.

In that short span, small caps jumped 6.38%, almost tripling the returns of large caps, based on the Russell 2000 and Russell 3000 indexes. Of course, it’s too early to declare a full-blown rally. But we shouldn’t be ignorant to the subtle shifts in market leadership.

Remember, the market’s a forward-looking beast. And that means even in the darkest hours we need to be thinking about the next bull market… and positioning ourselves to profit.

Read more…

Louis Basenese 2008 Archives, Stock Tips Site Map, Top Home Page recession beating investment, small caps, small-cap stocks

OPEC: Lots of Oil, No Power

Oil prices have dropped. After OPEC announced that it would cut productions by 2.2 million barrels a day – it steepest cut ever.

But in response, Wall Street has done little more than yawn. In fact, prices actually went down. The price of oil per barrel dropped again this morning to $39.90, under its 4-year low. Merrill Lynch’s oil guru, Francisco Blanch, thinks oil could reach $25, while we suggested $20 just last week.

No one seems to know or have any control over where oil is going, least of all OPEC. It couldn’t stop oil from going to $147, perhaps its influence on the price of oil lost. Has it underestimated the amount of demand destruction occurring in the market as well?

OPEC represents only 40% of the world’s oil producing nations, and their proposed cuts are guidelines – not regulations. The simple fact is that they cannot stop nations like Iran and Argentina from pumping as much oil as they want.  

And combined with a drop in demand, our oil supplies have flourished. The EIA reported crude supplies rose by half a million barrels last week, with gasoline and distillates rising by three to five times as much.

And while this morning’s market conditions are weighing on producers, cheap gas doesn’t seem to have affected them. Exxon Mobil (NYSE: XOM) is actually up almost 9% over the past 30 days alone, while Chevron (NYSE: CVX) and BP (NYSE: BP) are both up over 7%. The oil & gas sector is up over 12% since November 18th.

Companies mentioned in this article: XOM, BP and CVX.

Blackboard Archives

Louis Basenese Blackboard opec

A Breadth of Fresh Air Amidst The Doom & Gloom

The markets will end the year deep in the red. If today was the official end, the S&P 500 would check-out with a sickly 37.81% loss.

How could we possibly make lemonade out of those lemons? Leave it to us master juicers.

You see, the recent buying activity, albeit brief, pushed stocks over a key threshold. Technicians refer to it as market breadth - the number of stocks trading above a key metric (like their 52-week highs or their 50 day moving averages).
And based on the numbers from Bespoke Investment Group, more than 50% of stocks in the S&P 500 now trade above their 50-day moving average.

That’s clearly a bullish indicator.

What’s most interesting though, is the fact that the consumer discretionary sector is one of the most bullish, with 65% of such stocks trading above their 50-day moving average.

Companies in this sector include producers of goods and providers of services we want, but don’t need. Think automobiles, high-end clothing, restaurants, hotels and other luxury goods.

According to BusinessWeek, the sector is up 12.62% over the last month. And individual stocks are up even more including boat manufacturer Brunswick Corp. (NYSE: BC), purse retailer Coach, Inc. (NYSE: COH), high-end hotelier Gaylord Entertainment Co. (NYSE: GET) and the mid-life crisis magnet, Harley-Davidson, Inc. (NYSE: HOG).

These stocks historically perform best in new bull markets, as they get beaten down the most during recessions.

So does the price action mean we’re entering a new bull market? Only time will tell. If nothing else, the recent strength is an encouraging sign amidst so much gloom and doom.

Companies mentioned in this article: BC, COH, GET and HOG.

Blackboard Archives

Louis Basenese Blackboard consumer discretionary sector, new bull market

The Falling U.S. Dollar: Taking An About-Face

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Wednesday, December 17, 2008: Issue #902

Investing requires tough decisions. What to buy? When to buy? How much?

But none more difficult than this: Admitting the fundamentals no longer support an investment you own. Or, as the French philosopher Geoffrey F. Abert summed it up over 900 years ago, “It often takes more courage to change one’s opinion than to stick to it.”

And today I’m living proof.

Just three weeks ago, to the day, I declared, “The dollar’s not done.” I laid out my case about Jim Roger’s being wrong.

But I’m officially changing my stance on the falling U.S. dollar.

To be clear, it’s not because I finally saw the light, recognized the error of my ways, or heeded the “sage” advice of so many of you that wrote in to chastise my “foolishness” or “ignorance.” And I didn’t get a personal phone call from Jim Rogers, either.

Read more…

Louis Basenese 2008 Archives, Interest Rates & The Dollar, Top Home Page, U.S. Economy & The Stock Market dollar index, falling U.S. dollar, weak dollar

After the Madoff-Ponzi, The Lesson’s Clear

Everyone’s scrambling… House subcommittee chairman Paul Kanjo wants to launch a government investigation. Outgoing SEC Chairman Chris Cox is “gravely concerned by the apparent multiple failures” of the SEC. He too, wants to get to the bottom of this.

And of course, House Financial Services Committee chairman Barney Frank, whose regulatory urgings did a masterful job ensuring Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) didn’t fail, wants to introduce even more legislation.

He’s trying to require hedge funds and investment managers open up their books. But it’s useless. Everyone’s trying to find a complex solution to “what went wrong?” and how some of the biggest investors lost so much - when a simple answer suffices.

Investors simply violated two of Investment U’s pillars of investing - asset allocation and position sizing.

If you don’t invest too much (position size) in any one opportunity and spread your investments around widely (asset allocate), it’s impossible to be wiped out in one fell swoop. Yes, protection is that simple.

But even the “smart money” refuses to adhere to these boring, yet effective principles. For instance, Spain’s Banco Santander (NYSE: STD), the largest euro-zone bank invested a total of $3.1 billion in the Madoff’s Ponzi scheme.

In the aftermath, the lesson’s simple. Asset allocate, don’t regulate. Because another day will bring another con man just as smooth talking and connected enough to be plausible as Bernie Madoff. And no matter how many protections we bake into the system, financial “innovation” will always outpace regulation.

In other words, for true protection look in the mirror. A little discipline (asset allocating and position sizing) can go a long way in securing your hard earned capital.

Companies mentioned in this article: FNM, FRE and STD.

Blackboard Archives

Louis Basenese Blackboard asset allocation, position sizing

The Fed Gets Zero for Zero

Guns a blazin’ since this financial crisis began, the Fed fired its final shot yesterday. It lowered the target range for the federal funds rate to 0% to 0.25%. Welcome to the United States of Japan!

In all seriousness, the federal funds rate is the rate (price) banks charge other banks on overnight deposits. It’s the primary monetary policy tool at the disposal of Ben Bernanke and the Federal Open Market Committee (FOMC). And the purpose of dropping rates is to encourage banks to borrow money and therefore invest more freely. In other words, it’s supposed to kick start economic activity.

But it’s not working.

As Patrick Jacq, senior fixed-income strategist for BNP Paribas SA tells Bloomberg, “There is no demand coming from the interbank market at all.” Instead they’re sitting on their hands, and mountains of cash.

Here’s the important takeaway. Aside from the one-offs like Blockbuster (NYSE: BBI), which just secured a small loan. Or companies like Ford Motor Company (NYSE: F) and General Motors Corp. (NYSE: GM) standing in line to get a handout from the government, just like American International Group (NYSE: AIG), lending activity is dead.

In fact, the Fed’s latest survey reveals 85% of banks tightened lending standards, despite the massive worldwide efforts to encourage the opposite.

Bottom line, no matter how much investors wish and push the markets higher, a lasting recovery isn’t possible until banks start doing their part. And right now, they’re doing zilch.

Companies mentioned in this article: BBI, F, GM and AIG.

Blackboard Archives

Louis Basenese Blackboard FOMC, interest rates, The Fed

32 Billion Reasons The Average Investor Will Fail

by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Thursday, December 11, 2008: Issue #899

I’ll be the first to concede the going’s tough. That almost every “time-tested” strategy that worked well in bull markets is sputtering and collapsing.

But is it so bad we’ve given up on turning a profit? And just resigned ourselves to preserving our principal, right?

WRONG.

This week the Treasury sold $32 billion in 4-week bills at a yield of ZERO percent.

That’s not a typo. Investors actually clamored for the opportunity to lend the government their money in return for absolutely no return. In fact, investors bid $126 billion at the auction, more than four times the amount available.

As Michael Franzese, the head of government bond trading at Standard Chartered explains, “I have never seen this before… It’s all about capital preservation for the turn of the year, not capital appreciation.”

Forget unbelievable. It’s idiotic. What investors are essentially saying is that absolutely no better opportunity exists in the market right now - that survival is their paramount goal of investing, not profiting. But ignore what the lemmings are doing. Their folly is creating endless (and historic) opportunities for us to increase our wealth. Of course, simply telling you that will not suffice…

Read more…

Louis Basenese 2008 Archives, Investment Strategies, Louis Basenese, Stock Tips Site Map, Top Home Page market investment opportunities, market investments

Value Investors - Beware The Value Traps

by Louis Basenese, Advisory Panelist
Associate Investment Director, The Oxford Club
Wednesday, December 3, 2008: Issue #895

Value investors, consider this your warning… With thousands of stocks down 50% (or more), investors are salivating over the bargains. But for every true deal, there are at least three “value traps” - stocks destined to languish at depressed levels indefinitely. Or worse, get cheaper still.

Think Kmart here. In late 2001, it became the poster child for value investors. They argued it was dirt cheap based on countless metrics like book value and sales. And it was destined for a historic turnaround.

Sure enough, the stock went from the bargain bin to the trash heap, as the company filed bankruptcy in early 2002.

So before you go bargain hunting in this market, arm yourself with this list. It could be your only chance to avoid getting snared by the countless “Kmarts” begging for your investment…

Read more…

Louis Basenese 2008 Archives, Louis Basenese, Stock Tips Site Map, Top Home Page value investing, value investors, value traps