The No. 1 Stock to Own for 2018

My windshield was smashed. Everything of value in my car was gone. They had rifled through every single thing in my car, leaving a mess.

That’s what happened to me the first time I took my car to New York City.

This was in 1989. My entire summer job’s earnings were in this car that I had paid $800 for.

It was a nine-year-old, unpleasantly yellow two-door Toyota Tercel. Still, it worked, and best of all, I had a car for the first time since I’d come to the United States.

So, of course, one of the first things I did when I got back to college … was drive it to New York City.

Back then, New York City was crime-ridden. Bryant Park, which is now a fancy place, had so much drug activity that you’d see needles scattered through the park.

So, why am bringing this up to you today? You see, the stock market is a bit like New York City in the 1980s. There is incredible risk if you’re buying the wrong stocks, and you’ll end up losing more than you bargained for…

Learning the Hard Way

People had warned me: Don’t take your car to New York City. Just take the bus.

Or if you take your car, park it in a paid parking lot. They told me my car would be safe because someone was watching the lot.

Of course, I didn’t follow any of this advice. I was a poor college student, and the idea that I was going to stand around waiting for a bus, then pay $12 for round-trip tickets seemed silly when I had a car.

Paying $15 for parking also sounded ludicrous, especially when parking on the streets of New York City was free.

You can say I learned my lesson the hard way.

To repair my windshield cost $100. The value of the things in my car was another $40. Then, to add insult to injury, I was ticketed because I stayed over the time limit for the spot I parked in. That was another $50.

Following the guidance of people who had experience would have saved me valuable money.

Right now, if you make the wrong moves in the market, I believe you’re going to find yourself in a similar position. Not, however, if you look to mega trends.

The Lens of Mega Trends

You see, many people think that the market is too expensive. They use backward-looking statistical measures like cyclically adjusted price to earnings, or CAPE, to justify their view.

However, the problem with CAPE is that it’s incredibly backward-looking. It looks backward, when stock markets look forward.

And when you look forward using the lens of mega trends like the Internet of Things (IoT), CAPE looks wrong. Completely wrong. The reason for this is productivity growth.

Productivity leaped by 3% in the last quarter. That’s the fastest level the U.S. economy has experienced in three years.

Most economists think this is a fluke. However, the stock market is a better forecaster than any economist. The S&P 500 is up 3.2% since this was announced.

I believe this is the beginning of a huge rise in productivity growth that’s going to go on for years, thanks to these mega trends.

 More Money in Your Pocket

The causes of productivity growth are hard to see in the data today. However, I believe it’s the early dividend due to the rising use of IoT technology like Big Data, artificial intelligence and robotics. These technologies are being used in more countries and in a rising number of industries.

This is why I am optimistic about where the prices of stocks can go in the U.S. and many parts of the world. In fact, the No. 1 stock for subscribers of my Profits Unlimited service is up over 200%, and it’s an international sensor/chip company that’s involved in every facet of the IoT.

As productivity rises, we’re going to see this stock and others continue to rise.

The bottom line is, doing the right thing now means more money in your pocket later. And based on what I’m seeing today, I believe that the right thing to do is own stocks in general, and then to focus on those that are exposed to rising growth and productivity.

Regards,

Paul Mampilly

Editor, Profits Unlimited

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Source: Banyan Hill

An Interesting Way To Hedge Portfolio Risk

One of the great things about options is how flexible they can be for custom-designing strategies to meet your needs.  With options, even something as mundane as hedging can be done in an interesting and creative manner.

This is especially true since volatility ETPs (exchange traded products) have become widely popular among traders and investors.  Being able to buy or sell volatility (related to the level of the VIX) is something which used to be restricted to the realm of the professional options trader.

Now, a fund like iPath S&P 500 VIX Short-term Futures ETF (NYSE: VXX) is as commonly traded as just about any individual stock or ETF on the market.  In fact, VXX is one of the top 10 most actively traded equities, period.  It’s a useful instrument for betting for (or against) a short-term spike in volatility.  In particular, it makes for a great hedging tool for long stock portfolios.

Speaking of hedging, here’s a very interesting trade that hit the wire just recently in VXX…

With the VXX price at $31.50, someone sold a January 29 put while simultaneously buying a January 35 call.  This kind of trade is called a risk reversal and it’s clearly bullish on VXX.  The short put is used to help finance the long call.

In this case, selling the put brought down the price of the call to $0.57 (it would have cost $1.88 without the premium collected from the put sale).  The risk reversal traded 7,000 times, so the trade cost the buyer $342,000 in premium – a substantial amount lower than what the call would cost straight up.

Still, that’s a lot of premium to spend on a product known for mostly going down (as you can see in the chart).  As such, this trade is likely a creative way to hedge against volatility risk through mid-January.  If VXX stays where it is, all that’s lost is the premium amount (not bad for a hedge on what is likely a big portfolio).  However, if VXX climbs above roughly $35.50, the position makes $700,000 per $1 higher.

On the other hand, the position could lose $700,000 per $1 below $29 (along with the premium spent) due to the short put.  However, VXX isn’t likely to plummet that quickly due to macro event risk.  Rather, it is more likely to move down slowly – giving the trader time to adjust the risk reversal as necessary.

I think it’s an interesting way to hedge risk, as long as you are able to make adjustments as VXX moves lower.  It wouldn’t be too difficult (or overly expensive) to buy back the short puts as VXX approaches $29.

Keep in mind, this isn’t the sort of method most of us should use for trading VXX.  If you want to use VXX to hedge (or speculate due to event risk), buying straight up calls or a call spread has defined risk.  For keeping costs low, a call spread is the better choice.

For instance, the January 32-37 call spread (with VXX around $31.50) only costs about $1.  That’s a breakeven point of $33, and a max gain of $4.  You can only lose the $1 you spent in premium, so your payout ratio is 4:1.  That’s a reasonably cheap way to hedge, and balances your payoff with reasonable costs.

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Source: Investors Alley