Tuesday, September 29, 2009

Big Profits from this Small-Cap ETF

My friend Frank couldn't believe I missed Rio's most famous symbol.

"You didn't see Christ the Redeemer?," Frank challenged after I got back to Baltimore. His face twisted in disbelief.

"I saw it from a distance plenty of times," I told him calmly, since I had indeed beheld the 100-foot tall statue while trucking around town.

But what Frank didn't get was that the small things matter most to me. I prefer the feeling of the streetside stalls, hearing old men  shout to sell their wares.

The most obvious destinations are often a distraction...

And the same goes for the most obvious investments.

Which is what brings me to a brand-new Brazilian small-cap stock ETF available to U.S.-based investors.

It's full of just the kind of high-powered consumer plays that I found down on the ground in Rio.  Here's what I mean...

The Market Vectors Brazil Small-Cap ETF

On May 12, 2009, Market Vectors added to its growing assortment of international ETFs by launching its Brazil Small-Cap ETF (NYSE:BRF).

There are other Brazil ETFs, including the gigantic iShares MSCI Brazil Fund (AMEX:EWZ).

EWZ enjoys average volume of over 22 million shares per day. And its main constituents are heavy-duty Brazilian companies like Petrobras (NYSE:PBR) and Vale (NYSE:RIO) that can be found as ADR shares on U.S. exchanges.

BRF, for comparison, holds companies with a base market cap of $150 million―they're not micro-caps, but BRF's holdings are far from household names on a global scale.

You know what, though? Sometimes you don't want to trade a country's 100-foot stock statue. It may stand strong over the years, but a national emblem like Petrobras can also take a beating on bad news if it's the first local best stock to buy in foreign investors' minds.

Those Brazilian behemoths are also far more subject to the whims of global commodities markets than are small caps.

So instead of EWZ's allocation of over 62% to energy and materials best stocks to buy, BRF managers have formed a fund that's heavy on consumer discretionary shares and domestic trends in the Brazilian market.

We find industries like health care and IT in BRF that are totally absent from mega-ETFs like EWZ.

And those low-profile, consumer-driven industries cannot be ignored in a top developing country like Brazil.

Though consumer confidence, i.e. willingness to spend, has dropped in South America's leading emerging market, Brazilians have largely weathered the storm better than Russia, China, and India―the other members of the BRIC club coined by Goldman Sachs back in 2003.

As investors grow more accustomed to seeing ADRs and international ETFs as top performers, they're up for a little more risk... for a lot more reward.

A Growing Taste for Global Small Caps

Overall, the fact that a top ETF provider is delving deeper into the Brazilian stock pool says a lot about the safety of investing there.

And to show you the potential returns from this international approach, look at the Claymore/AlphaShares China Small Cap ETF (NYSE:HAO).

HAO, which means "good" in Chinese, is actually the best in China since December, gaining 71% against an impressive 32% average for leading large-cap Chinese ETFs NYSE:CAF and NYSE:EWH!

Time will tell how HAO's Brazilian counterpart performs against its mega-index counterpart EWZ.

The track record for S&P's Emerging Markets Small Cap ETF (NYSE:EWX) reflects positively on BRF too.

EWX is up by more than 59% since December, compared to just 2% for the S&P 500!

Whatever the case may be in the early going, expect big things from this small-cap ETF.

Sunday, September 27, 2009

It's Official: A New Bull is Born

[source from: Top Stocks For 2010 - http://www.gokandy.com/Blog/Blog.aspx?Id=74 ]

With the S&P 500 up at just under +40% since the March 9th low (+37.35% to be exact), it is worth noting that interest in the goings on in the stocks market 2010 is on the rise. My guess is that the average investor is still mourning the massive hit they took in their 401(k) plans, however those that are paying attention are starting to ask some questions.

In speaking with several different types of investors this week, it became obvious that some of the terms we use to define the environment may be more than a little contradictory. For example, unless you spend your days dealing with the machinations at the corner of Broad and Wall, it makes sense that terms such as "mini bull," "secular bear," and "correction," "pullback," or "pause that refreshes" wouldn't be used in the same sentence.

So this weekend, we thought we'd take a moment to spell out our view on what we see happening in the market these days.

Mark the Calendar!

For starters, get out your sharpie and color in a big smiley face on April 28th. The common definition for a bull market includes two variables: percentage gain and elapsed time. According to our favorite keeper of statistics - Ned Davis Research - a bull market is defined as a gain of 30% or more after 50 calendar days. The good news is that Tuesday was the 50th day after the March 9th low and since the Value Line Composite was up more than 30% on that day (53% to be exact), it's official - we've got a cyclical bull market on our hands.

However, this is where some of the confusion begins to come into play. You see, there are two common types of bull and bear markets - cyclical and secular. For experienced market players out there, please forgive me for insulting your intelligence. But, as I mentioned above, based on my conversations with investors over the past couple of weeks, this is an area that needs some clarification.

Think of a secular market move as something that lasts for many years; usually more than ten. For example, the period from 1965(ish) through 1982 was termed a secular bear market. Then we saw a secular bull market from the period beginning in the fall of 1982 and ending in March 2000. And from where we sit, we continue to be in a secular bear market. (The first tip on this score is the fact that as of the end of 2008, the ten-year return for the Lipper Large Cap Growth fund index was -34.27%.)

On the other hand, a cyclical market move - which we prefer to call mini bulls and mini bears - occurs WITHIN a secular move. These moves are much shorter in nature and if memory serves, usually last somewhere in the vicinity of 5 months to a year or so. There are exceptions of course such as the 2003 - 2007 cyclical bull move; but for the most part, a mini move is something that can be valuable to more nimble investors but not so helpful to the buy-and-hold crowd.

So, to clarify, we believe that what we're currently seeing is a mini bull market that exists within the secular bear market that began in 2000.

Know Your Cycles

One of the most important tricks to successful investing is to know and thoroughly understand your time-frames. For starters, you need to quantify what short, intermediate, and long-term mean to you and your portfolio. In addition, it is vital to recognize that the experts you trust may define the "short-term" completely differently than you do or even the next guy on TV.

For example, to a day-trader, the idea of a short-term position may be one that lasts only a few minutes or hours, while the intermediate-term might be defined as sometime before lunch. However, to the institutional investor, the short-term view may be something more along the lines of six months.

So, before we go any further, we'd like to spell out our definitions of the time cycles investors deal with. To be sure, there will be disagreements on this and we are not saying our way is the right way - but these are the definitions we use in our work.

Wiggles and Giggles Moves lasting from one day to a week

Short-Term: Up to three months

Intermediate-Term: Three months to six months

Long-Term: Six months to eighteen months

It is also important to understand that portfolio managers will often allocate portions of their portfolios to different time-frames (as well as different styles). For example, it might make some sense to allocate one half of a portfolio to the long-term cycle using growth stocks for 2010 and then maybe 15% or so to a flexible style that plays the shorter-term moves. We're not saying this is the right thing to do, but it is a fairly common practice these days in the hedge fund community.

From a personal standpoint, I utilize just such a strategy. I have approximately one-third of my personal investments allocated to the 2010 Top Stocks strategy (a more concentrated version, of course), which is designed to play in the intermediate-term world. I have one-third of my portfolio allocated to shorter-term trading in the U.S. market. And I have a third allocated to the intermediate-term via a "go anywhere" global approach. This obviously isn't right for everybody, but I thought it might be a good example of how different strategies and time-frames are used in portfolio construction.

Where Are We Now?

Okay, now let's jump back out of the textbook and back into reality by trying to answer the question: Where are we now?

From a big-picture standpoint, as we've mentioned, we believe that we're in the midst of a multi-year or secular bear market that could go on for several years yet. However, the good news is that we saw a new mini bull market begin on March 10th, which is something that could see gains of 65% to 80% before it's done.

Thus, it is vital to recognize a couple of things. First, the current move is only one-third to maybe one-half over. And second, this is NOT the time to simply set-it-and-forget it. You absolutely, positively MUST be an active manager in the current environment.

From where we sit, the proper game plan is to get invested and ride the current mini bull with at least a portion of your portfolio. We obviously don't know how long the ride will last, but history suggests that there is more upside ahead over the next six months. Yet, we will also suggest that investors have a plan for dealing with the next mini bear, which will likely occur when the anticipated economic recovery runs its course.

We're not saying that you will need to become a day-trader - on the contrary. We're simply suggesting that over the next several years, you can't be a potted plant. No, you will want to have a strategy that allows you to use the mini bulls and mini bears to your advantage.

Turning to the shorter-term time horizon, it is obvious that we've got a strong uptrend on our hands at the moment. However, history tells us the odds favor a pullback after such a strong run and that any upcoming "wiggle" to the downside may not be something to fear. As we've been saying, we will be looking to buy the dips - assuming we ever get one!

Date Purchased: None Yet
Price: Down to $75
Buy Strategy: Technology took a hit near the end of the week which gave anyone looking to "buy the dip" an opportunity. And while we recognize that Amazon isn't technically a tech stock (the company actually resides in the Consumer Discretionary sector), it has been acting like one and pulled back with the sector. So, we'll be looking to dip a toe into Amazon shortly.
Active Trader Stop: $72.89

MCD (McDonald's Corp.)
Company Profile
Our Success Trading Group members scored another winning trade this week by closing our recently opened position in McDonald's Corp. (Ticker: MCD).

SPIL (Siliconware Precision--$7.28; -0.02; no options): Chip equipment
Company Profile
After Hours: $7.28
EARNINGS: 04/29/2009
STATUS: Test 18 day EMA. SPIL is on its second test of a blast higher that started in early March. Tested in mid-April then took off late in the month. Last week it tested that strong move, coming back to the 18 day EMA (6.98) on the Friday low, then rebounding sharply to close right at the 10 day EMA. That left a nice tight doji with a long tail on the candlestick chart. That indicates a rebound is coming and we are ready to move into SPIL as it continues higher from here.
Volume: 1.371M Avg Volume: 2.405M
BUY POINT: $7.42 Volume=2.6M Target=$8.96 Stop=$6.91
POSITION: - Stock (illiquid option chain)

MTL (Mechel Open Joint Stock Company)
Company Profile
MTL has been showing a number of positive technical signs during its recent trend up. This one could present an entry on a pullback and has a long way to go to reach its split-adjusted highs of nearly $60 last year. $10 Trader is watching for an entry to keep the 2 month winning streak in tact.

APC (Anadarko Petroleum)
Company Profile
The Fed's massive liquidity injection the past 9 months is finally having its impact in the stock market of 2010.  When that much money is put into an economy, indeed the world economies, it eventually starts impacting top stocks for 2010.  Not necessarily because the economy is taking off; despite what the financial stations are saying the data says it is not taking off, just slowing the plummet toward a second Great Depression.  No, a big part of what is happening now is that all of that money is moving into financial markets just to put it somewhere as there is not enough economic activity or stimulus to absorb it.  That is what ultimately ignites inflation.

Thus you see top stocks 2010 related to potential inflation starting to take off.  Energy stocks of 2010 are some of those top stocks.  After moving laterally for a month they set up good patterns and started to breakout.  One we were watching was APC in the natural gas area as natural gas prices will rise with the inflation as well.  So when we saw it break higher we put it on the report, looking to catch a test of this initial move as we did not get it on the break from the pattern or while it was in the last stage of the base.  A test is one of our favorite entry points because it gives us a good entry point after a stock makes its break and it shows us that the buyers still want it, i.e. it is not just going to crash back down on us in a false breakout. 

APC surged higher another session but then on Tuesday it tested the move, tapping the 10 day EMA on the low and starting to bounce. The 10 day often acts as a near support level on a breakout, and when we saw that move we entered the stock at $45.64 and bought some August $45 strike call options at $5.10.  We wanted some time as these 'reflation' moves can last for a significant period, and moreover the only other option was a June option and that is not enough time to counteract the effects of time decay. 

We caught it right because APC started to rally anew the next session, gapping higher and adding $2.78 to $48.26.  Gapped again the next session but struggled some, closing off the high for a modest gain.  Given the stock had already tested the break higher we were not too worried about that gap to nowhere.  Then Friday APC was at it again rallying $3.24 to $51.96, hitting $52.38 on the session high.  That put APC at one of its former upper channel lines from the October to January move, and it was our initial target for the move.  We banked half of the stock at $52.28, locking in a 14.5% gain.  We sold half our option position for $9.50, banking $4.40 per option or 86%. 

Strong move in less than a week and APC may retrench some after that move, but with the market in a liquidity mode you can expect more money to come into these areas and top stocks for 2010 such as APC to continue their move higher for now even if the economic recovery theory proves to be wrong given that the inflation seeds being sown are serious.

CCE (Coca-Cola Enterprises, Inc.)
Company Profile
A trade Option Trader closed this past week realized a 38% gain in 4 months. The 2010 best stock is dealing with an area of resistance and a break above could be reason for me to re-enter a LEAPS call position.

PII - Polaris Industries Inc. is currently trading at $35.32. The June $35.00 Calls (PIIFG) are trading at $2.95. That provides a return of about 8% if PII is above $35.00 on expiration Friday in June.

The Bottom of Stocks Market

Euphoria managed to out-run swine flu last week as the epidemic-du-jour, with "consumer" confidence jumping and the big bank stocks nudging up. The H1N1 virus fizzled for now, at least in terms of kill ratio, though we're warned it might boomerang in the fall with a vengeance. No one was surprised to see Chrysler roll over like a possum on a county highway, but the memory of their muscle cars will linger on like a California surfing song. Here in the northeast, where Sundays are not spent at the NASCAR oval, the spring foliage reached the tenderly explosive stage and it was hard to feel bad about anything.

For now, the "bottom" is in ― that is, the bottom of this society's ability to process reality. It may continue for a month of so, even after the "stress test" for banks is finally let out of the massage parlor with a "happy ending." But events are underway that are beyond the command of personalities. We're done "doing business" in all the ways that we've been used to, but we just can't get with the new program. Let's count the ways:

1) The revolving credit economy is over. It's over because we can't increase energy inputs to the system, which is one way of saying "peak oil." Of course hardly anybody believes this right now because the price of oil crashed nine months ago, along with global manufacturing and trade. But nothing has changed on the peak oil scene ― except perhaps that ever more new oil projects have been cancelled for lack of financing, which will boomerang on us (even if swine flu doesn't) in the form of much lower future oil production. In any case, the credit fiesta is over, and the "consumer" economy with it, because industrial growth as we have known it is over. It's over globally, too, though all regions of the world will not experience its demise the same way at the same rate.

The Asian nations may swap things around a while longer but China is basically screwed. They have less oil left than we have (which is saying, not much at all) and they won't corner the rest of the global oil market without starting World War Three. Meanwhile, they're running out of water and food. Good luck becoming the next global hegemon. Oh, and Japan imports 90 percent of its energy; India over 80 percent. Fuggeddabowdit.

Credit will not vanish everywhere overnight ― even in the USA ― because it is not distributed equally everywhere. But it will vanish in layers, and here in the USA a very broad layer of the lower and middle classes are now losing their access to it in one way or another ― personally, in small business ― and they will never get it back. Anyone who intends to thrive in the years just ahead had better plan on doing it on the basis of accounts receivable ― and what they receive might not even necessarily come in the form of US dollars. It may come in the form of gold or silver or in the promise of reciprocal services rendered.

This has enormous implications for two of the items in which our credit-dispensing operations are most deeply vested: houses and cars. Unfortunately, these are exactly the things that economic life has been based on for decades in our nation, which leads to the next categories:

2) The suburban living arrangement is over, along with all its accessories and furnishings. Taken as "all of a piece," the suburban expansion was one sixty-year-long orgasm of hypertrophy. We did it because we could. We won a world war and threw a party. We had lots of cheap land and cheap oil. It made lots of people lots of money and all its usufructs have become embedded in our national identity to the dangerous degree that the loss of them will provoke a kind of national psychotic breakdown. In fact, it already has. The completely unrealistic expectation that we can resume this way of life is proof of it.

The immediate problem is that we can't build anymore of it. The next problem will be the failure of the stuff that already exists. The first stage of that is now palpable in the mortgage foreclosure fiasco and, just beginning now, the tanking of malls, strip centers, office parks and other commercial property investments. The latter will accelerate and become visible very quickly as retail tenants bug out and weeds start growing where the Chryslers and Pontiacs once parked. The next stage, which involves large demographic shifts in how we inhabit the landscape, has not quite gotten underway.

3) The Happy Motoring fiesta is over. You'd think that with Chrysler crawling into the bankruptcy court, and GM just weeks away from the same terminal ceremony, the news media would begin to suspect that the foundation of everyday life in this country was cracking. Instead, all we hear is blather about "market share" shifting to Toyota. News flash: not only will we make fewer automobiles in the USA, but Americans will buy far fewer cars made anywhere. We'll keep the current fleet moving a while longer, but when it's too beat to repair, we won't be changing it out for a new fleet ― despite all the fantasies about hybrids, plug-and-drive electrics, and so on. The masses will be too broke to buy these things. What's more, they will be very resentful of th e shrinking economic "elite" who can afford them. And, anyway, our roads and highways are destined to fall apart very quickly because there is no way we can sustain the necessary rate of normal maintenance. Meanwhile, we remain completely un-serious about public transit ― even about fixing the vestiges that still exist. The airline industry, of course, will be toast inside of five years.

4) Our food production system is approaching crisis. There's no way we can continue the petro-agriculture system of farming and the Cheez Doodle and Pepsi Cola diet that it services. The public is absolutely zombified in the face of this problem ― perhaps a result of the diet itself. President Obama and Ag Secretary Vilsack have not given a hint that they understand the gravity of the situation. It is probably one of those unfortunate events of history that can only impress a society in the form of a crisis. It also happens to be one of the few problems we face that public policy could affect sharply and broadly ― if we underwrote the reactivation of smaller, local farm operations instead of shoveling money to giant "agribusiness" (or Citibank, or Goldman Sachs, or AIG. .). I maintain that this may be the year that the crisis gets our attention, because capital is suddenly harder to get than fossil-fuel-based fertilizer.

All these epochal discontinuities present themselves, for the moment, as a season of muted "hope" and general apathy. The days are suddenly mild. We've resumed old and happy habits of grilling meat outdoors and motoring to those remaining places that were not blanketed with franchised food huts and discount malls. We have a new, charming president with an appealing family. Newly minted dollars are flowing to the "shovel-ready." The new bad news is less bad than the old bad news (or seems to be). And the year just past has been such a bummer that our hard-wired human nature tells us that good things must be just around the corner.

Personally, I think a lot of good things await us, but not the ones we're expecting ― not a return to buying slurpees on credit cards. It will be very salutary to leave behind the junk empire we've accumulated and move into an epoch of quality and purpose. For the moment, though, our hopes reside elsewhere.

Your editor is feeling a bit beaten up today, Shooters. I am so very weary of arguing against the proponents of collectivism and the nanny state. Thank goodness one of you did the heavy lifting and sent in this fantastic missive…

Beyond my agreement with the gent from UK, and the quote from Atlas Shrugged, I believe there's a need to remind our fellow citizens here in America that we've been busy making our national health care system a socialistic one for many decades.  Of course, Medicare and Medicaid come to mind, both wonderful systems, provided one enjoys funding a giant bureaucracy that uses much of its funds in its own, ineffective administration, imposes rules on one's health care which are sometimes (often?) in conflict with one's health or the best strategy of care, and orders the doctors who have spent years in training how they should perform their duties and practice their craft, and of course dictates to these professionals how much they should be paid for their services.  But these are the same topics covered by the previous two writers.
I'm amazed of the failure to recognize how the insurance industry has socialized health care in America.  The real emergence of the insurance industry's socialization of our health care and consequent run up in the costs began in the early 1970s, when Nixon agreed to allow, no, to promote the use of managed care.  There's a recording floating around the net of Nixon listening to the pitch, and agreeing.  Bought and paid.
But even without that, logic quickly points out that by using vast health care insurance in a system, the insurance socializes the industry, failing to provide the best health care for the money spent.  Instead, it inflates the costs of health care, dramatically so.  If the citizens of the US were to become convinced that health care would dramatically improve while driving costs down, and do away with government programs (Medicare & Medicaid), as well as health care insurance, the industry would indeed dramatically improve and costs would dramatically be reduced.
If there were no government programs to pay for health care, and no insurance programs to pay for health care, then the health care industry would be forced to bring its costs within market limits.  At the same time, competition would force improved care.  In such a system, I further believe it advisable to outlaw liability actions.  This wouldn't be popular with the attorneys, but it would dramatically reduce the costs of health care, as well as many unnecessary procedures.  It seems reasonable to me, after all, most of us make mistakes while performing our jobs, but we aren't brought to court on a liability action.  Of course, in place of no litigation, I'd strongly recommend criminal action should a health care professional cross a defined threshold, such as performing a procedure under the influence, blatant disregard for the health of a patient, and other such thresholds designed to help protect the health of patients.  But in the end, just as auto repair is governed and monitored by the market, so would health care, and more effectively than the government oversight that has been used.  Let us keep in mind that the US does not have the best health care in the world, and that the health of US citizens ranks relatively far down the list when compared to that of other industrialized nations.  Government oversight and pseudo market driven health care has failed us.
I don't have an answer as what to do with those who would be unable to pay for health care even in a system like that described above, where the market truly drives quality and price.  Obviously, in such a system, niche markets for serving those with limited ability to pay would certainly spring up, and there will certainly be those who support clinics for those who can't pay.  Beyond that, I'd think that we here in the US would again become responsible, putting aside savings to cover the costs of medical care before we spent those dollars on a new car, new big screen, and other items that actually are luxury items.  Being forced to seek health care from niche providers or free clinics provided by philanderers instead of the higher quality, only because one made the decision to spend their money on luxury items instead of a health savings account, would soon cure many.  As with all socialized systems, it is disheartening to see folks driv ing much more valuable autos, living in much more valuable homes, wearing jewelry I can't afford to purchase for my wife, yet entering the hospital emergency room demanding high quality service for a simple ailment that should have been cared for by a family MD, and having Medicare or Medicaid pay the bill, while I am forced to wait longer for a true emergency, because I can't afford to come to the emergency room for routine treatment, and that goes on and on.  And so I say, do away with it all, the government and insurance industry health care systems, and we'll ALL pay for treatment as needed, making the personal decision what portion of our income we're willing to use for health care.


Remember that I love you all, even the collectivist loudmouths who send me hate mail (when I offer to unsubscribe those folks, it's out of love too…so they won't get a coronary reading my anti-collectivist propaganda).

The weekend's weather looks pretty promising. Pick up a copy of James Howard Kunstler's World Made By Hand and read it somewhere quiet and sunny. I'll be brushing up on my Rothbard.