December 24th, 2009
We are currently in a trading range market which means there is no discernible trend and making money in the market is somewhat challenging. One way is to use an option strategy called covered calls. Optionsguy, at Tradeking, offers a primer on successfully writing covered calls.
Essentially the concept of covered call writing is to use an option to generate income from stocks that you already own. For example, suppose you own a dividend paying stock that you wish to keep and is currently trending sideways. You could potentially increase your overall return from the stock or reduce your cost basis by selling the right to buy the stock at a fixed price for a fixed term. If the stock stays below the “strike price” you keep the stock, keep the premium earned by the option buyer, and also any dividend payments that are made. The risk is that the stock either begins a strong move up, resulting in the opportunity of unlimited upside being lost due to the cap on the selling price for the stock. On the other side, the stock may fall below your purchase price, with the call providing only limited downside protection. The CBOE offers a nice summary of how covered calls work, and a free worksheet to help investors evaluate potential covered calls. Another way to learn more about options is to go through the material provided by the Options Industry Council. They offer a free course on covered call writing as well as podcasts and webcasts. Other great tools offered by the Options Industry Council are a virtual trading tool and a covered call calculator. This would give you a chance to try out your covered call ideas before risking any real funds or stock positions. Many brokers also offer free tools to help you evaluate options positions.
To summarize, in order to make a successful covered call trade you need to do the following:
- Own or find a stock that is optionable
- Determine the trend of the stock, preferably sideways or slightly bullish
- Review the option chain for the stock and choose an option to sell
- Utilize the free calculators that are available to assess the potential return from engaging in the covered call
- If you do not already own the stock purchase the stock and than sell the call against the stock.
- Know in advance what you want to do if the call expires worthless, or the stock is called out, or if the stock falls more than expected.
For some ideas of potential covered call ideas, optionsbuddy.com offers a list of high yield covered call ideas. However, it would be prudent to do your own due diligence on these stocks before risking any money.
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Categories: Uncategorized
December 17th, 2009
When one of the biggest energy companies in the world makes a play, it may be something to take a look at. The news this week of Exxon Mobile (XOM) merging with XTO Energy (XTO) has raised a number of questions regarding the implications for other energy companies, natural gas and oil field suppliers. In fact, it raises the question of what additional trading opportunities there might be.
The merger is worth $41 billion and brings together the largest oil company in the US, (XOM) with the largest natural gas company in the US, (XTO). What does this mean for Canada’s biggest energy company Encana (ECA, ECA.TO)? ECA recently split its oil and gas assets into two companies. Clearly, the management of these two companies have a different view of how to create shareholder value. ECA’s decision to split was overwhelmingly endorsed by its shareholders and the rational for the split was that the separation would allow greater focus and tailored strategies for creating value and ensuring growth.
Another company that may be affected by this deal is Chesapeake Energy (CHK), which also has a large natural gas portfolio but has taken a different approach to growth by entering into a number of joint ventures over the last year. The deal has also raised speculation regarding other potential takeover or merger targets. As bigdog points out in his post, many bloggers are looking at smaller companies such as Range Resources (RRC), Ultra Petroleum (UPL), and Anadarko (APC) as potential takeovers.
All of these companies saw their share price jump in response to the news. Interestingly, natural gas itself remains in a tight trading range. While it has been moving up this week, it seems more of a response to the cold weather and reserve reductions rather than the merger news. As a stock trader, you have the option to play the commodity itself by investing in one of the ETFs such as United States Natural Gas (UNG) or the newer United States 12-Month Natural Gas ( UNL). Canadian investors can track the Claymore Natural Gas ETF (GAS.TO). Despite moving up this week, both UNG and GAS.TO remain in downtrends and are quite cheap, as illustrated in the following chart:
Courtesy of Stockcharts.com
This may be a good opportunity to pick up these shares as a position trade, as the upside potential seems to be quite strong. The only caveat is, you may have to hold for a long time to see any substantial return. The driver for natural gas prices seems to be the economics of supply and demand. Currently the high degree of domestic supply is keeping a lid on prices and it is unlikely to change in the short term as most utility companies will have locked in the cheap prices.
So does the management team at Exxon (XOM) know something we don’t?
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Categories: Uncategorized
Tags: APC, CHK, Natural Gas, RRC, UNG, XOM, XTO
December 10th, 2009
As year end approaches, traders need to think about how to best manage taxes for their investments or trading business. While actual tax season does not start until March or April, it has a funny way of sneaking up rather quickly. As a new year’s resolution, it may be wise to take some of your holiday time to get things in order. A good place to start is to review some tax tips put together by Jim Crimmins. Another thing to think about is what tools or software you may need to make your life easier. Tradeking offers a tool called Maxit Tax Manager, you may want to check out.
A good place to start is simply tally up your gains and losses. As Jim mentions, Maxit Tax Manager makes this easy and allows you to assess the best accounting method for your situation, First in First Out (FIFO) or Last in First Out (LIFO). The other advantage of doing at least a proforma income statement, is that it gives you the opportunity to objectively determine how to handle a net loss situation. With the extreme volatility in the market, it is possible some of you may have some losses to carryback or maybe you may be able to take advantage of a ROTH IRA conversion.
Second, it may be useful to look into trader status, or setting up your trading as a business. This has the potential for all kinds of write-offs related to trading such as charting software, education, home office, depending on your situation. You may want to even consider setting up an entity such as a partnership to deflect IRS scrutiny.
Third, capital gains can be complicated and it may be useful to do some research and get some education on the taxes related to long term and short term gains and losses. The US government considers a stock a long term investment if it has been held for 12 months or more. Taxes on long term holdings are much less than those on shorter term gains.
Forth, be aware of taxes related to dividends. Re-investing your dividends can increase your compounded returns. For most individuals, dividends are taxed at a 15% rate.
Finally, it may be tax wise to ensure you are taking advantage of tax deferred programs such as the standard SEP and Roth IRA.
Viewing your investing as a business even if you do not have trader status or a separate entity, means being aware of and managing the costs related to investing. This includes keeping trading costs such as commissions reasonable as well as minimizing any potential taxes you may be liable for. Take advantage of any free tax tools offered by your broker such as the Maxit Tax Manager from Tradeking, to plan for and keep tax liability at a minimum.
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Categories: Uncategorized
Tags: Tax Planning
December 4th, 2009
In a rather nasty reminder of how linked the global economy is, the surprise announcement from Dubai stating that they could not pay the interest on their debt, caused some significant gyrations in the North American stock market. The question is will this contagion spread, and what are the implications? Since the initial announcement, subsequent announcements seem to have quelled some of the fear in the markets. The reason markets reacted so strongly is that investors do not like unexpected surprises. According to the IMF, a preliminary assessment suggests that the implications will primarily affect the recovery in Dubai itself, with the economy taking longer to recover. However, the sense is that the region will still experience growth in 2010.
In terms of global implications, the IMF indicates that the impact on global banks appear to be contained, but as the events are still unfolding, the situation is still dependent on factors such as perceptions of risk, sales of assets, particularly commercial property, and the handling of Dubai World’s debt restructuring.
While the markets reacted strongly initially, since then, markets have recovered and it looks like a whole lot of noise. The challenge we have in trading the current market condition is that we are in wide trading range with many stocks rising on low volumes and lots of volatility with respect to news.
In this type of market it is important to use all the tools that are available to assess potential opportunities. While it is important to be aware of the global news, my suggested approach would be to first take a look at a stock from a technical perspective, than do further research on the fundamentals and any potential news. This is how I would look at any financial stocks such as banks that I might be considering.
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Categories: Uncategorized
December 4th, 2009
We are now in the thick of the Christmas shopping binge, which is generally considered to be kicked off by “Black Friday” and followed by Cyber Monday. The consensus is that Black Friday was off to a rather sluggish start although Cyber Monday seems to have started out with brisk sales. So which stocks will be the winners this year? A perennial favorite is Amazon.com (AMZN). This stock has already seen some excellent returns in the last month as it announced the new version of the Kindle and its expansion of the sale of this product into Canada. As the chart shows, after dropping below $35 in late 2008, AMZN currently sits at 137.58, resulting in a one year return of almost 300%.
Courtesy of Stockcharts.com
This one may still be worth buying a long term call option on, as it may have the momentum to continue. This is also supported by Coremetrics whose research shows that people are spending more money online, with sales jumping 35% over last year. According to their study, the areas experiencing the greatest increase are apparel and jewelry, and even the traditional department stores are making more online sales.
Given this, it may be useful to look at some apparel companies and even some of the department stores. Since the Obama’s took power in the Whitehouse, J. Crew Group Inc. (JCG) has benefited based on the first lady’s penchant for their clothing. The chart still looks positive for JCG, and this may be one to consider. The GAP (GPS), which has suffered in the last few years also has a reasonable looking chart. Some of the trendier stores like Aeropostale (ARO) does not have as nice a chart from my perspective. In terms of department stores, Target (TGT) is looking better from a technical viewpoint than J.C. Penney (JCP). Macy’s (M) looks like it may be a good entry here along with Nordstrom (JWN). Barrons seems to agree with this.
So the question is, how do you decide which retail stocks will be good investments. According to Glenn Curtis it could be as simple as visiting the stores. In terms of fundamental metrics he also suggests analyzing trends in promotional spending, gross margin, sales per square foot, same-store sales, inventories and receivables. You want to see positive trends in terms of growth and sales, but would not want to see inventories growing at a faster rate than sales. Similarly, from a technical perspective, you would rather see a chart that is low to the left and moving higher on the right, suggesting a positive trend. For those online retailers, you may want to take note of how “user-friendly” the website is in terms of finding products or making a purchase.
In any event, as you cruise the malls for deals or surf the web for the online retailers, take note of who seems to be making the sales and consider this as part of your evaluation when choosing potential retail investments. Of course, you could just take a look at the retail spyders ETF, XRT.
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Categories: Uncategorized
Tags: AMZN, JCP, M, retail stocks, TGT
November 20th, 2009
The markets have been trending sideways for the last few weeks as investors try to determine if we are now in the start of an economic recovery, or still in recession. Stocks have rallied over 18% since the start of the year. Some investors are afraid they have missed the boat and others think the markets have moved to far to fast, being up about 60% from the March lows. Alan Brochstein recently ran a screen to try and find some ideas and came of with a list of “rebounders”. So are these stocks worthwhile and is this a good time to buy?
Alan’s screen was based on fundamental criteria, so lets take a different perspective and look at these utilizing a technical screen. First, lets determine if our perspective on the overall markets are bullish or bearish. Last week, I introduced the technical approach developed by Dr. Charles Schaap. So lets stick with this criteria. Using the SPY, which is an etf of S&P500, lets look at a weekly chart.
Courtesy of Stockcharts.com
Price is above the 50 week moving average and RSI is greater than 50, so our premise is that we are at the beginning of a recovery and the market is bullish.
Now lets look at the stocks brought out by the screen.
|
Stock
|
Symbol
|
Technical Rating
|
Comments
|
|
Roper Industries Inc.
|
ROP
|
YES
|
|
|
Watson Wyatt and Co.
|
WW
|
NO
|
Worthy of a watchlist |
|
Matthews International Corp.
|
MATW
|
NO
|
Worthy of a watchlist |
|
Devry, Inc.
|
DV
|
YES
|
High Unemployment may induce people to get training |
|
Alberto Culver Co.
|
ACV
|
YES
|
|
|
Pepesico, Inc.
|
PEP
|
YES
|
|
|
Procter and Gamble, Inc.
|
PG
|
YES
|
|
|
Becton and Dickinson, Co.
|
BDX
|
YES
|
|
|
Abott Laboratories
|
ABT
|
YES
|
|
|
Magellan Health Services, Inc
|
MGLN
|
YES
|
Broken its downtrend line, may be a good entry on a pullback |
Based on the table above, I agree with Alan, these stocks show promise. However, my only caveat is that there is a possibility that the stock markets did get ahead of the economic fundamentals. Unemployment rates remain high, and consumers are still cautious about spending. Also, the lackluster performance of Dell Computer Systems (DELL) suggests that tech spending is still anemic.
While we may not get a deep dip like some pundits are expecting, we may remain in a prolonged sideways trading range. So while these stocks have the potential to rebound, they may move up very slowly.
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Categories: Uncategorized
Tags: ABT, ACV, BDX, DV, MGLN, PEP, PG, ROP, stock market recovery, WW
November 12th, 2009
The “Oracle of Omaha”, Warren Buffett has made a big bet on the railroad industry with his plan to acquire the remaining 77.4% of Burlington Northern Santa Fe Corporation (BNI) increasing his stake to 100%. At a $100/share the deal is valued at $44 Billion and the biggest investment yet by Berkshire Hathaway Inc. (BRK.A, BRK.B). According to Buffett himself, the reasoning for the acquisition as follows:
“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. “Conversely, America must grow and prosper for railroads to do well.”
“Most important of all, however, it’s an all-in wager on the economic future of the United States,” said Mr. Buffett. “I love these bets.”
For some investors, the purchase is a head scratcher; it just does not seem to fit Buffett’s reputation as a value investor, which of course has many speculating on the meaning of the buy. Of course, it may just be a step in Buffett’s plan to make BRK “idiot proof” according to Justice Little of Taipan Publishing. Other investors, believe that since Buffet is renowned for only aquiring assets at a deep discount to intrinsic value, they are somehow being cheated. This appears to be the premise behind the lawsuit brought forth by the City of New Orleans Pension Fund.
Regardless of which position you may be in, Buffett’s legendary investment acumen suggests that it may be a good idea for the average investor to take a look at the transportation industry for investment ideas. In addition to the rails, the transportation sector is also comprised of shipping, truckers and air freight. The question is, does it make sense to be investing in these sectors right now?
In order to answer this, I like to use a simple system developed by Dr. Charles Schaap, and outlined in his book, Invest with Success. Lets start by looking at an ETF for the transportation sector, IYT. Interestingly, as the chart below illustrates, according to the Dr. Schaap criteria, this may be a good opportunity to enter this ETF.
Courtesy of Stockcharts.com
Now lets look at some specific stocks. However, rather than using Dr. Schaap’s SCORE methodology for fundamentals, we will evaluate the fundamentals against the general criteria used by Buffett and summarized by Smart Money as follows:
a) large
b) has consistent earnings
c) a high return on equity and low debt
d) in a business that anyone can understand and
e) enjoys high-quality management.
Lets look at another rail stock, Canadian National Rail (CNI). While the fundamentals are not as strong as BNI, it appears to have benefited from the interest in rail stocks, but has overhead resistance.
Courtesy of stockcharts.com
Other rail companies such as CSX Corp (CSX) and Canadian Pacific (CP) have very similar looking charts. Therefore, the choice of which one to invest in may rest on perceived earnings potential.
Trucking is the main competitor to rail. Trucking may have difficulty competing with the rails due to the high cost of fuels. However, the charts of some of the trucking companies look very similar to the rails. For example, J.B. Hunt Transportation Services Inc. (JBHT), as illustrated in the following chart:
Courtesy of stockcharts.com
Finally, lets take a look at shipping stock to see if they are also moving in the same way. Dry Ships Inc. (DRYS) was a very popular stock in in 2007-2008. However, as you can see from the following chart, while the stock has stopped falling, it is the weakest of all of the stocks we have looked at.
Courtesy of stockcharts.com
While this is only a small sample of the stocks you can potentially invest in the transportation sector, it does appear that the rails currently offer the best opportunity. The other option is of course to go with the ETF, IYT, and participate in the whole industry.
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Categories: Uncategorized
Tags: Berkshire, BNI, Buffet
November 5th, 2009
It has been over a year since the US Federal Government was in the midst of dealing with what is considered one of the worst financial crises of the modern world. On October 3, 2008 The Emergency Economic Stabilization Act of 2008 (EESA) was signed into law. This has led to a series of initiatives including the The Troubled Assets Relief Program (TARP) which is designed to stabilize the US financial system and prevent a collapse. While it may not have appeared to many market participants in early 2008 that markets would ever recover as we saw the collapse of Bear Sterns and Lehman Brothers and the potential collapse of American International Group (AIG). Markets have recovered approximately 50% since the March low. However, The recent Chapter 11 bankruptcy filing by CIT Group (CIT) highlights that the American Taxpayer remains at risk.
In the latest quarterly report card for the TARP program, Special Inspector General Neil Barofsky stated that not only are taxpayers funds being squandered, but the credibility of the US government and economy are at risk. The government has spent about $454 Billion of the $699 Billion allocated, through ten programs. Approximately 70% of the funds have been invested in financial institutions like Citibank (C), Bank of America BAC), where they now own shares. In addition, another $82 Billion has been given to the automotive industry to support firms like General Motors (GM) and Chrysler. The banking industry remains in the process of re-inventing itself, and will likely take a decade to return to the levels of the past. Similarly, the automotive industry has fundamentally changed with Ford Motor Company (F) emerging as a clear winner, by not participating in the bailout.
The biggest implication of all of this government intervention in the markets and the manipulation of the various monetary and fiscal tools is the increased volatility and skewing of normal market cycles. While you may disagree with me, I believe that if the US government and the governments around the world had not taken some action, we would have spiraled into depression similar to that of the 1930′s. However the consequences of the actions taken are visible in the shift away from accepted seasonal tendencies, and the extended cycles in the real estate markets and the financial markets.
The opportunity for traders is to use some of the new financial instruments such as the sector ETFs and inverse ETFs to capture some of this volatility. For example, ICF or SRS for real estate and XLF or SKF for financial services. The challenge for traders is that we may not see the kind of bull market we had from 2003 to 2007, but rather remain in a wide trading range, which renders the whole idea of buy and hold investing moot.
My perspective is that while I would not consider the bailout a rousing success, I think that it was a necessary evil to prevent an extended crisis. The economic news shows we are slowly but steadily emerging from the global recession and the challenge will be to see which companies will be the leaders of the future. I invite you to provide your views on this subject either by commenting on this post or participating in a discussion at http://community.tradeking.com/ .
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Categories: Uncategorized
Tags: Bailout, GM, TARP
October 29th, 2009
As the energy market heated up, so did the demand for alternative energy and solar stocks. While the concept of solar energy is not new, the desire to find alternative renewable sources of energy that reduce the dependence on oil and gas is gaining momentum. During much of 2008 and early 2009, many solar stocks were soaring. For example, First Solar (FSLR) peaked at around $317. As the following chart shows, FSLR outperformed both the SP500 and the Oil index until recently.
Comparison Chart of FSLR Courtesy of Stockcharts.com
In addition to American based companies like FSLR and Energy Conversion Devices (ENER) other nations are getting into the alternative energy race. China, in particular has a number of companies that are showing leadership in this area. Companies like Suntech Power Holdings (STP) and Yingli Green Energy Holding (YGE). Even Canada, a leader in the traditional energy technologies of oil,coal and gas, has spawned alternative energy companies such as Canadian Solar (CSIQ).
Despite the fact that governments are showing support for alternative energy initiatives, such as President Obama’s plan to spend $3.4 Billion on alternative energy initiatives, the long term success of companies such as FSLR , will be dependent on their ability to grow both revenues and earnings on a consistent basis. An assumption that is often made is that most solar energy companies tend to follow each other from a performance perspective. So the question is how do we determine which of these companies will outperform? One way is to look at companies together to see if there is one in particular that is outperforming. A quick way to achieve this is to chart the stocks as follows:
Solar Stocks Comparison Chart Courtesy of Stockcharts.com
This chart provides some interesting insight. While the chart does not cover all the stocks in the sector, it shows that of the stocks charted, only two have outperformed the market benchmark, Canadian Solar (CSIQ) and Yingli Green Energy Holding (YGE). Some of the “cheap” stocks such as Evergreen Solar Inc. (ESLR) and Hoku Scientific Inc. (HOKU), which are both trading under $5.00 currently, have significantly underperformed.
The other challenge is understanding exactly how the company is addressing the challenges of the solar energy market. A recent case study completed by students of technitrader on solar energy stocks may provide some insight into how to approach this.
Finally, the question that may also be raised, is how to best play these types of stocks. FSLR, for example, is a very high priced and volatile stock, that is also optionable. While paying $150 for this stock may not be attractive, the options can make this a more accessible stock. CSIQ and YGE are more reasonably priced stocks and one has the option of either buying the stock directly, or using options, as both these stocks are optionable as well.
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Categories: Uncategorized
Tags: Alternative Energy, CSIQ, FSLR, Solar Energy, Solar Stocks
October 20th, 2009
Every quarter, investors and traders get a chance to look at the fundamentals for a company and focus on three key pieces of information: earnings, revenues, and guidance or earnings estimates. This quarter is no different as bigdog put together a straw poll asking 2 burning questions:
1. Which way are you leaning this earnings season?
2. Any insights on sectors or stocks which may stand out?
(see: http://community.tradeking.com/members/bigdog/blogs/44139-earnings-up-or-down)
The challenge with earnings is you never know how the market (and investors) will react. We have all seen stocks come out with stellar earnings and then sell off. A classic case of buy the rumor and sell the news? However, at the same time, we often see a company that comes out with a terrible result and the stock takes off.
In answer to bigdog, I am leaning sideways for this earnings season, if the price action so far is an indicator of what to expect. While there are no guarantees when it comes to stocks, I am of the belief that there should be growth in sales to support growth in earnings. Cost-cutting can boost earnings but are not a sustainable strategy long term.
Can the charts help us determine whether a stock will be making a good report? One way of assessing this is to look at the charts of companies that have already reported such as AAPL, GE, BAC, PFE, CAT, PETS, and TXN to name a few. Most people are familiar with Apple Computer (AAPL) which reported stellar earnings and revenues once again. The following chart shows the performance of this stock over the last year.
One Year Chart of Apple Computer Courtesy of Bigcharts.com
As you can see, AAPL correlates nicely with earnings, sometimes gapping and generally running up for several days after an earnings report. So far this year, the technology sector seems to be one of the leading sectors and we continue to see positive performance in this sector.
Here is another example that shows the opposite phenomenon. Negative to flat earnings, but the stock still rises:
One Year Chart of Merck and Company Courtesy of Bigcharts.com
So do charts give us a clue regarding the direction a stock might take when it comes to earnings? There maybe some patterns, but we may have to observe a large number of charts to discern these clues. One way may be to observe the charts of stocks who still have earnings reports pending. You can find out this information from an earnings calendar, which many brokers provide, or use the one at Yahoo Finance. Some well known stocks whose earnings releases are coming up in the next few days include: YHOO, CNI, EBAY, MMM, AMZN, JBLU, and T. Watch these stocks and see what happens. Was the earnings report positive? Did the stock rise or fall? What about revenues, did they contribute to earnings or was it due to other things such as cost-cutting? Did the company provide guidance?
2009 has been somewhat anomalous, with the markets refusing to follow many accepted cycle and seasonal patterns. The same may be true as to how a stock price reacts to earnings releases. One way to deal with this uncertainty is to employ option instruments and strategies to protect against gaps, or speculate on large moves, but that is a subject unto itself!
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Categories: Uncategorized
Tags: Earnings