3 Crash-Survival Tips Every Investor Should Know

October 4, 2017 Brett Owens

It’s a question I’m hearing from a lot of investors these days, and it just came up again a few days ago:

How should I prepare for the next market crash?

It’s not hard to see why folks are worried about their nest eggs, with the S&P 500 bubbling along at 24 times earnings and the Fed talking about faster rate hikes.

So today I’m going to dive into 3 simple strategies I use to protect and grow my own money, starting with…

“Crash Insurance” Tip No. 1: The Best Defense …

When I’m looking for stocks that hold their own in a crash or snap back for big gains when the dust settles, I zero in on three things: hefty discounts, share buybacks and quick dividend growth.

And a little over a year and a half ago, Boeing (BA) certainly qualified: it was a bargain at less than 12 times free cash flow, and management knew it: they’d been ramping up BA’s buybacks for nearly two years!

Buybacks Rise …

That was enough for me: I urged members of my Hidden Yields dividend growth service to buy Boeing on December 18, 2015. As if on cue, worries about Chinese stocks sent the S&P 500 into an 11% tailspin from January 1 to February 11.

How did we do?

Boeing did fall further than the market, but it wasn’t long before its share price caught up with its rising earnings per share, which got a nice assist from management’s timely buybacks. Today, shareholders are sitting on an 85% total return since the trough of the selloff, tripling the market’s gain in that time!

… and Boeing Ignites

As you can see above, BA really hit the afterburners starting in late 2016. That’s when it hiked its dividend by a monster 30%, yanking in new investors and setting us up for a nice 4.1% dividend yield on our original buy today—nearly double the 2.2% you’d get if you bought Boeing now.

“Crash Insurance” Tip No. 2: Buy Cheap in Your Sleep

My next strategy is as boring as its name suggests: dollar-cost averaging.

But that masks its power, because this savvy move not only lets you survive the next wipeout but use it to snap up great stocks at terrific prices.

It couldn’t be easier: all you have to do is buy a fixed-dollar amount of a particular stock on a set schedule. That way, you’ll be locked in to buy more shares when they’re cheap and fewer when they’re pricey.

Here’s how it works: let’s rewind to 2007 and say you decided to “gradually” invest in Pfizer (PFE), one of the 3 buy-and-hold “forever stocks” I just recommended. And let’s say you invested $7,000 annually in PFE on the last trading day of the year for the following decade.

On December 31, 2008, in the depths of the meltdown, Pfizer closed at $17.71, so your $7,000 would have gotten you 395 shares (excluding commissions). But on your priciest “buy” day (December 30, 2016, when PFE traded at $32.48), you would have automatically tempered your purchase, adding just 215 shares to your holding.

This is hands-down my favorite way to “time” the market—and you can do it with no extra legwork at all!

Which brings me to…

“Crash Insurance” Tip No. 3: No Withdrawals

Of course, the best crash-survival strategy is to be able to ignore the crash completely!

That’s where my “No-Withdrawal” plan comes in—especially if you’re retired or leaning on your portfolio for income. All you have to do is buy stocks (or funds, as I’ll show you in a moment) paying high, safe dividends … and hold for the long haul.

How high are the dividends we’re talking about here?

How does a 7.5% yield sound? That will send a nice $37,500 our way on a modest $500,000 nest egg. It’s also where my plan gets its name, as an income stream like that lets you live on dividends alone—without being forced to sell into a downturn.

And you might be surprised to hear that there are plenty of “unicorns” out there throwing off safe 7.5%+ payouts. We just have to go where other investors aren’t.

A great example is the Nuveen Tax-Advantaged Dividend Growth Fund (JTD), a closed-end fund my colleague Michael Foster analyzed on May 1.

Funny thing is, despite its gaudy yield, JTD’s top 10 holdings don’t look much different than those of any other equity mutual fund.

Source: Nuveen

However, it throws in three smart twists to squeeze that 7.5% payout out of household names like Apple (AAPL), owner of a 1.6% yield, and JPMorgan Chase & Co. (JPM), at 2.4%.

First, it devotes about 19% of the portfolio to preferred shares, many of which boast higher yields than common stocks.

Management then adds its own secret sauce: a modest amount of leverage (currently 29.9% of the portfolio) borrowed cheaply to reinvest in higher-yielding common stocks and preferreds. JTD also uses a savvy call-option strategy to smooth out volatility and protect its portfolio from a downturn.

As an extra bonus, it minimizes your tax bill by focusing on long-term capital gains and qualified dividend income, both of which are taxed at lower rates than short-term capital gains.

And this stealth income play is just the start. Because now I’m going to show you 6 other “unicorns” that combine to hand you a payout that’s even safer than JTD’s—and higher, too!

Your Own Personal 8% “No-Withdrawal” Plan

What I’m about to reveal is a 6-stock portfolio I spent months crafting for one purpose: to hand you a solid 8% income stream no matter what the market does.

That’s enough to generate a $40,000 a year on your $500,000 nest egg (with plenty of room for more payout hikes, to boot).

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This 8% “No-Withdrawal” portfolio is far safer than making an all-in bet on a fund like JTD because it spreads your cash out across 6 investments—CEFs, real estate investment trusts (REITs) and preferred shares.

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Technology

3 Electric Car Winners That Don’t Sell Electric Cars… Or Batteries Either

October 3, 2017 Tony Daltorio

One obvious theme I picked up in my Singularity research project is the fact that it seems like everyone is jumping into the electric car ‘race’. By 2018, there will be 112 battery electric and 72 plug-in hybrid models available globally, says Bloomberg. That is up from 76 and 36 respectively just a year ago.

Adding to an already crowded field is Dyson. Yes, that Dyson from the U.K., founded by inventor James Dyson, that is best known for its vacuum cleaners. And no jokes please about how the Dyson electric car will be loud, made of cheap materials, underpowered and yet make Elon Musk blush with its exorbitant price.

The point you need to realize is that electric cars are beginning to reach the tipping point. My physics background tells me the tipping point is when a balanced object tips over after an additional weight was added to it.

But in societal terms, a tipping point is the point when a quick and dramatic shift in behavior occurs.

We’re not there yet with electric vehicles, which account for only roughly two million of the two billion vehicles on the road in 2016. But the point is approaching, according to some surprising sources.

EVs Tipping Point?

One such source is the world’s largest mining company, BHP Billiton (NYSE: BHP). Its chief commercial officer, Arnoud Balhuizen, said to Reuters: “I think if we look back in a few years we would call 2017 the tipping point of electric vehicles.”

It’s easy to see why BHP thinks 2017 is such an important year for the future of electric vehicles. There have been a number of very positive developments pushing forward EVs.

First, we have countries including France, Norway and the U.K. setting firm dates for when vehicles powered by fossil fuels would no longer be sold in their countries. India has taken similar action with a 2030 target date and China is working on setting a definite deadline for ending sales of internal combustion engine vehicles.

China’s expected move is so important because of its size – it accounts for one-third of the entire global auto market. It is also the biggest electric car market, with 507,000 such vehicles produced domestically last year, a rise of over 50% from the prior year.

And keep in mind, still only one in five Chinese citizens own a vehicle!

The most likely date China will set is 2040. But the founder and head of BYD (OTC: BYDDY), Wang Chuanfu, is lobbying the government for a 2030 date.

He may not get his wish but the Chinese government is already helping companies like his. It plans to launch a carbon trading scheme, likely in 2019, whereby traditional automakers in China will have to produce a certain number of electric vehicles or else be forced to buy credits from electric car makers such as BYD.

For those of you not familiar with BYD, it is China’s largest electric vehicle maker and the largest producer of lithium-ion batteries. It is bringing online an additional four gigawatts of battery-making capacity by year’s end. That will make its annual battery output 12 times larger than the expected production from Tesla’s Gigafactory. Warren Buffett owns 8.5% of the company.

Source: Investors Alley

Bottom line – almost 80% of the global auto market is pushing toward the phase-out of fossil-fuel-powered vehicles and toward electric cars.

Why the Optimism

Of course, it isn’t just government action that says we may be near a tipping point. It’s also the economics of batteries.

Bloomberg New Energy Finance (BNEF) forecast that, in a mere eight years, electric vehicles will be as cheap as gasoline autos. All thanks to the plunging price of producing lithium-ion batteries.

These batteries have already fallen in cost by 73% since 2010. Batteries currently account for roughly 50% of the cost of an electric car, but BNEF says these costs will fall another 77% by 2030.

However, the BNEF scenario all depends on whether the battery makers can get their hands on the necessary metals and minerals – what I call the technology metals – in sufficient quantities. After all, there are expected to be built dozens of gigafactories (nearly all in Asia) in a forecast $240 billion battery industry within the next 20 years.

EVs and Copper

So what will be the effect on commodities?

My thinking is in line with that of BHP Billiton. . .that the impact for producers of raw materials would first be felt in the metals markets (positively) and then felt in the oil market (negatively). By the way, I talk about all sorts of technology related-commodities in my new newsletter – Growth Stock Confidential.

BHP expects there to be about 140 million electric vehicles on the road in 2035, or about 8% of the global fleet. If so, that is great for big copper mining companies like BHP since an electric car uses approximately four times as much copper as does a gasoline or diesel vehicle.

A report released this summer from the industry body, the International Copper Association (ICA), forecast demand from the auto sector for copper will increase nine-fold in a decade, from 185,000 metric tons this year to 1.74 million tons in 2027. That would be the equivalent of about 6% of global copper demand in 10 years.

Electric vehicles use a substantial amount of copper in their batteries and in the windings and copper rotors used in electric motors. A single car can contain over three miles of copper wiring, according to the ICA.

This presents an investment opportunity with rising demand meeting supplies that will struggle to keep up. That’s due to the fact that current mines are aging (ore grades are dropping) and few major discoveries have occurred in the last two decades.

Three Copper Investments to Buy

One company worth consideration to buy is the aforementioned diversified miner BHP Billiton (NYSE: BHP). It was the world’s fourth largest producer of copper in 2016 at 1,113 kilotons. A kiloton is equal to about 1,120 of our U.S. tons. BHP’s stock has risen 12% year-to-date and 17.6% over the last 12 months.

Its copper assets include the Escondida and the Spence mines in Chile and the Olympic Dam mine in Australia. BHP is investing into copper’s future with the recent announcement of a $2.5 billion project to extend the life of the Spence mine by 50 years. There is expected to be an additional 185,000 tons extracted annually thanks to the investment.

The company is also spending $43 million on a new facility to produce 100,000 metric tons of nickel sulphate – a key component in lithium-ion batteries – annually. Production is expected to start by April 2019.

Next on the list is the world’s largest publicly-traded (Chile’s Codelco is government-owned) copper producer, Freeport-McMoran (NYSE: FCX), which trailed only Codelco in copper production last year (1,696 kilotons). Its stock is up 5.5% year-to-date and 27.5% over the past year.

It produces copper at seven mines in Arizona and New Mexico, as well as the El Abra mine in Chile and the Cerro Verde mine in Peru. And, of course, its crown jewel is the Grasberg mine in Indonesia, which is one of the world’s largest deposits of copper and gold. A dispute with the Indonesian government over the mine was recently settled.

Like many miners, Freeport suffered under the burden of too much debt incurred during the commodity supercycle (2001-2014). But it has lowered its debt by $9.5 billion since the end of 2015, thanks to strong cash flow from its copper operations.

Another possibility is the fifth-biggest producer of copper in 2016, Southern Copper (NYSE: SCCO), which indirectly is part of Grupo Mexico and has operations in Peru and Mexico. Its stock rose 22% so far in 2017 and is up more than 46% over the past 52 weeks.

The company hit a record high for copper output in 2016, at 900 kilotons, which translates to a 21% year-on-year growth. That is really good news since it is the highest margin major copper producer globally with a cost of only $0.95 per pound. Copper is trading currently at about $2.95 a pound.

Southern Copper also happens to be sitting on the largest proven copper reserves in the industry. And its mines have an expected 90+ years of life, giving you a great long-term play on copper and the whole electric vehicle revolution.

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Insider Trading

The End Is Near

October 3, 2017 Michael Carr

There’s been something missing from the current market.

Throughout history, we haven’t had a bubble until there was a new way of thinking in the markets.

Well, I think the Spirited Funds/ETFMG Whiskey & Spirits ETF (NYSE: WSKY) proves that final piece of the puzzle is in place.

WSKY is an ETF that invests in companies that make booze.

Too much of a niche product for you? Then maybe the ETFMG Video Game Tech ETF (NYSE: GAMR) is for you. This one buys only video game companies.

Exchange-traded funds (ETFs) are baskets of stocks that are bought or sold as a unit.

ETFs offer investors a low-cost way to obtain a diversified portfolio. They are a good thing, but Wall Street always takes good things too far.

The Final Piece of the Bubble

The number of ETFs has grown as Wall Street created indexes. Any index can be turned into a fee-generating ETF. That explains why we now have more indexes than individual stocks.

(Source: Bloomberg)

The history of Wall Street excesses includes turning subprime mortgages into derivatives that would destroy the financial system we knew in 2008.

In the late 1990s, Wall Street used accounting rules to turn internet startups into billion-dollar companies.

In 1987, portfolio insurance led investors to believe it was impossible to suffer a large loss in stocks.

You’ve probably noticed all these developments ended in disasters. In 1987, the Dow Jones Industrial Average fell more than 22% in one day. In 2000 and 2008, the Dow fell more than 50%.

This desire to take things too far predates Wall Street. The very first bubble in history imploded after futures on tulip bulbs were created in 17th century Holland.

The creation of stocks led to a bubble in 18th century England. Railroad bonds led to several bubbles in the 19th century. Emerging market debt first imploded in the early 20th century.

As stocks rallied this year, valuations became stretched. Irrational valuations are one part of a bubble. We were missing the final piece of the bubble, which was the new way of thinking.

ETFs now provide that piece of the bubble.

The Most Likely Path of the Stock Market

Some investors are buying ETFs because they think stocks only go up. This group is ignoring valuation and buying plain vanilla index funds. Trillions of dollars are now in funds that are designed for long-term investors.

When the next bear market comes, this money will drive downside risks when investors see stock prices go down as well as up.

Billions of dollars are in leveraged ETFs. These funds move two or three times more than their underlying index. They will lose money twice or thrice as fast, as plain vanilla funds are another source of selling pressure.

Volatility funds also hold billions of dollars. These ETFs will move wildly in a bear market as volatility increases, scaring investors out of the funds and creating even more volatility.

All of this means the end is near.

Bubbles always end with a sharp rally up. That’s the most likely path of the stock market through the end of the year.

In a bubble, some investors wonder what to buy. The answer is to buy everything until the bubble pops. It’s time to enjoy what’s likely to be a once-in-a-generation rally.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

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Source: Banyan Hill

Insider Trading, Options

The Most Likely Time for Market Panics Is Over the Next 30 Days

October 2, 2017 Chad Shoop

At our Total Wealth Symposium conference two weeks ago, the main question I got was: Where do I see the market headed in the next few months?

It’s one of those questions you need a crystal ball for, because the truth is, no one knows.

We have an idea, and we follow our indicators and other tools to help us gauge where the market is heading. But in the end, it’s an answer that changes from day to day.

One of the tools I use is a calendar based on an 18.5-year cycle.

The calendar dates back to 1784 and has identified major bear and bull markets, as well as shorter-term market panics and stock market rallies.

And 2017 is a year where, according to the calendar, market panics are likely.

But here we are, starting the 10th month of the year, and there hasn’t been any.

However, the year’s not over yet. And the most likely time for market panics is over the next 30 days…

A Pattern of Pullbacks

The calendar identifies each year with a letter.

For example, in 2007 to 2008 the calendar called for extreme low prices, and it expected a new stock market cycle to begin after that, which would lead to several years of rising prices. Just like the calendar predicted, the market bottomed in March of 2009 and rose rapidly for several years.

The year 2017 is annotated by the letter F, which means stock market panics are likely.

So, in April, I went back and showed you how each year that ended with an F stacked up since 1900.

Take a look at this chart of the previous years marked with an F and the max drawdown during those years (from highs to lows):

According to data based on the Dow Jones Industrial Average, each of those years suffered at least a 5% pullback.

So far in 2017, the max drawdown (the difference from the highs and lows this year) is about 3%.

Does that mean this year will not have a 5% correction? I don’t know yet.

But what I do know is that if we are to see one, the month of October is the most likely time it will occur. Here’s why…

The Most Volatile Month

Going back over 100 years, October is a historically volatile month. It’s actually the most volatile, with a standard deviation (a measure of volatility) of 1.44%. The average of all 12 months is just 1.08%.

You can attribute the reasons for October being the most volatile to many historic drops, crashes and downright panics occurring during the month.

The Dow experienced a 554-point drop on October 27, 1997. A 733-point drop on October 15, 2008. And in 1987, the Dow plunged 22% on October 19.

It also experienced crashes in October of 1929, 1978 and 1979, and October marked the highest just before the bear market in 2007.

With the 18.5-year cycle calling for at least a 5% correction this year, October poses the best opportunity for that.

I’ll continue to follow the markets closely. Even though this calendar is accurate overall, precise dates are off, and the panics could be up to a year from today. So even if we survive 2017 without a panic, we are not in the clear yet — a panic is still likely.

The good news is that this will be just a correction. The calendar doesn’t call for an all-out bear market until we get into the 2020s.

Regards,

Chad Shoop, CMT
Editor, Automatic Profits Alert

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Source: Banyan Hill

Cryptocurrency

Hedge Funds Love Cryptocurrency

October 2, 2017 Adam Sharp

During the first few years of bitcoin’s existence, its users were largely libertarians and cryptography enthusiasts. People who believed in the idea of an independent currency secured by a unique cryptographic solution.

Of course, there has always been a portion of its base consisting of speculators and investors. And I bet most of its early true believers would admit they also like the price appreciation that comes as adoption grows.

Over the last year, however, things have changed. Bitcoin is suddenly a $68 billion entity. That number represents the market cap (the total value of all coins in circulation today). You get that $68 billion by multiplying the current number of coins (16.5 million) by today’s price ($4,144 as I write).

The New York and Silicon Valley money crowds have officially taken notice. Many of them started out simply drooling over the returns. But a portion of them have fallen in love with the underlying idea and tech.

The result is an ongoing explosion in the number of funds dedicated to investing in cryptocurrencies and tokens.

CNBC’s Brian Kelly recently said that about 70 cryptocurrency hedge funds have recently launched at a “frantic pace.”

One of those funds is Kelly’s own Digital Asset Fund. I happened to meet one of his investors at a conference, and he seemed very pleased with the fund’s performance thus far.

AngelList founder Naval Ravikant co-founded one of the first crypto hedge funds in 2014, called MetaStable.

Naval is one of the best angel investors on the planet. He invested in Uber in its first round when its valuation was about $5 million. That’s just one of his many great early-stage investments.

MetaStable raised $60 million in a year when the price of bitcoin ranged from $770 to $300. So I’d imagine it’s doing quite well…

And now billionaire Mike Novogratz has announced a $500 million fund dedicated to investing in cryptocurrency.

As reported by Bloomberg…

With a $500 million hedge fund, Novogratz will be able to capture trading opportunities that require more scale, as well as wield influence with developers, entrepreneurs and regulators. Of course, he’ll also make money on other people’s money: The person familiar with his fund, who has seen early versions of marketing documents, said it will charge investors a 2% management fee and 20% of profits, with a two-year lockup.

Novogratz made a killing in cryptocurrency when he first bought $500,000 worth of Ethereum at less than $1. As I write this, it trades around $298. The trader told Bloomberg that he’s taken $250 million in profits so far.

Three of the premier venture capital firms in the world – Sequoia, Union Square Ventures and Andreessen Horowitz – are also investing heavily in the space. To say this is the smart money would be a bit of an understatement.

All of this interest from sophisticated investors has caused the price of bitcoin to rise from around $1,000 at the start of this year to a recent peak of $5,000.

And while all the new hedge funds have brought more institutional interest in cryptocurrencies, we’re still talking small time here.

Let’s compare the size of bitcoin ($68 billion) to some other common investments:

Ethereum: $28 billion
Alphabet (Google) market cap: $660 billion
S&P 500 companies combined market cap: $20 trillion
Total estimated U.S. household wealth: $118 trillion.

With the total cryptocurrency market valued at around $144 billion today, we’re talking about a small drop in a very large bucket.

The vast majority of financial institutions can’t even buy cryptocurrency, because it’s not a recognized security. It would go against their charters, which put restrictions on the types of assets they can purchase.

Bitcoin ETFs would give the entire financial world a simple way to buy in. These have been in the works for more than three years, but the SEC has thus far rejected them.

Most recently, it denied the Winklevoss Bitcoin ETF in March of this year. It should be noted that Dalia Blass has been tapped to head the SEC’s Division of Investment Management, which regulates – and approves or disapproves – ETFs. She also happens to work for the law firm that represents the Winklevoss twins… so there’s hope.

I’m not sure how much longer regulators can stall on the issue. With bitcoin volume surging to more than $2 billion per day this year, the demand is clearly there.

Tyler Winklevoss said his team is committed to bringing the fund to market…

We remain optimistic and committed to bringing the Winklevoss Bitcoin ETF to market, and look forward to continuing to work with the SEC staff. We began this journey almost four years ago, and are determined to see it through.

If they succeed, the implications for bitcoin would be substantial. This would provide a way for every investor and money manager to buy bitcoin from their retirement or brokerage account. Demand would skyrocket overnight.

There is already one publicly traded option: the Bitcoin Investment Trust. But I don’t recommend it. It trades at a huge premium to the price of bitcoin (which once again shows that the demand is there), so it’s much better to purchase crypto directly from an exchange.

If you do, you’ll be getting in before the big institutional and retail flood that many of us fully expect.

It’s one of the biggest reasons I’m so bullish on cryptocurrencies. If you go long now, you’re taking more risk in exchange for much larger potential returns.

It’s simply the best risk-reward scenario I’ve ever come across.

For guidance on navigating this thrilling young market, take our research service for a spin. You can learn more about it here.

Good investing,

Adam Sharp
Co-Founder, Early Investing

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Source: Early Investing

Options

Make This Trade For Astronomical Profits

September 29, 2017 Jay Soloff

Watching stock market volatility has become quite interesting the last few weeks. I’m not talking about watching the actual day-to-day VIX moves, they’ve mostly been boring. Instead, I’m referring to how the VIX has been moving in relation to what’s going on in the world.

In other words, I find investors’ reaction to major world news items to be… quizzical. There simply doesn’t seem to be a lot going on, well, anywhere, which is cause for concern among stock investors.

At first, it seemed like the nuclear threat from North Korea was going to be a source of higher VIX levels for the foreseeable future. However, traders soon brushed off the harsh rhetoric between the US and North Korea. And, even threat of nuclear war is barely moving the needle in the VIX.

Granted, it could just be that most experts believe the only solution to dealing with North Korea is a diplomatic one. Still, you’d think even the tiniest threat of nuclear annihilation would strike a chord with investors. But fear, it seems, is at a minimum these days.

At least part of the reason volatility remains lower than expected is due to the rampant amount of volatility selling taking place. I’ve mentioned this before, but selling volatility is typically a highly successful strategy. And, it’s become a major source of yield for many traders.

Shorting the VIX is just part of it though. Actual, realized volatility has also been at its lowest levels in recent history. It’s not just the options traders who aren’t concerned – stock buyers (and sellers) are simply not moving the market very much either. It’s been the case for much of 2017.

Still, volatility can become a factor in a hurry. We know from the Financial Crisis of 2008-2009 just how high and fast the VIX can move. It’s never a good idea to totally ignore volatility. There’s nothing wrong with selling it to make money, but be darn sure you’re ready to buy it if things get dicey.

One massive trader is not convinced volatility will remain low the rest of the year. This trader made a massive bet on higher VIX levels back in the summer – and just recently rolled the enormous trade (originally set to expire in October) to December.

The trade itself is a call ratio spread financed with short puts. More specifically, the trader bought the VIX December 15 call versus two of the December 25 calls, while also selling the December 12 put. The trade was executed for a $0.20 debit, but the trader received a $0.20 credit when setting up the original October trade. In other words, this entire spread was basically done for even.

The really interesting part of this trade is just how huge it was in terms of number of contracts. The call spread was 260,000 by 520,000 contracts, with the puts also selling 260,000 times. That’s a crazy amount of options. If you include the closing/rolling of the October spread, there were 2.1 million options traded in this one gigantic trade – the highest in recorded history.

So what’s the trade mean?

Well, the strategy breaks even with the VIX between 12 and 15 on December expiration. It’s a winner from 15 up 35, with peak gains at 25. Finally, it’s a loser under 12 or above 35. Essentially, it’s a huge bet on higher volatility, or a relatively cheap way to hedge a massive stock portfolio. (By the way, peak gains would be about $250 million.)

As always, if you’re interested in betting on higher volatility or hedging your own portfolios with VIX, there are simpler ways to do so. One example is the December VIX 15-20 call spread, which can be bought for $0.75. Breakeven is at $15.75 and you can earn $4.25 max gain if the VIX spikes to 20 or above at December expiration. That’s over a 5 to 1 payout to risk ratio, which makes it a very cheap way to get long volatility if it spikes higher by the end of the year.

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Source: Investors Alley

Insider Trading, Uncategorized

When This Chart Changes, All Markets Will Crash

September 28, 2017 Michael Carr

This is a chart of what investors believe inflation will average over the next 10 years. It’s based on what the current interest rates are.

It’s always close to the current rate of inflation. In other words, investors believe inflation will stay about the same.

That’s a surprisingly accurate assumption. Inflation generally does stay within a narrow range.

But when it unexpectedly jumps, like it did in 1968, the stock and bond markets fall.

The Federal Reserve calls this important metric “inflation expectations.” It understands that if expectations are stable, markets are fine.

But if inflation jumps, expectations will jump. The Fed’s goal is to manage expectations.

When inflation jumped in 1968, expectations stayed high for more than 20 years. Stocks suffered four distinct bear markets from the next 15 years. A bear market in this case is a decline of at least 20% in the S&P 500.

If inflation and inflation expectations jump, that will happen again.

Investors will see volatility and declines more often. Consumers will suffer as prices rise at stores. Overall, it will simply be terrible.

And it’s likely to happen within the next few years.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

Energy, Options

Quick Profits from Renewed Interest in Solar Stocks

September 28, 2017 Jay Soloff

Is solar power becoming a lucrative investment again? It seems like solar energy companies have taken a backseat to other, more exciting tech companies over the past few years. However, new energy policies may shift solar back into the… well… light of day.

Currently, solar power only provides about 1% of electricity in the US. However, it is by far the fastest growing major energy source in the country. As technology improves, it is very possible solar (and wind) power could replace fossil fuels as the leading source of electricity generation in the US in the next 10-15 years.

Here’s the thing…

What’s really got solar power investors excited these days is the potential for a tariff to be imposed on imported solar panels. The current administration believes cheap solar panels from foreign countries are hurting the effectiveness of US-based solar companies. As such, a tax on imported panels is being widely discussed as a way to improve domestic competition in the space.

Whether you believe in the use of tariffs or not, one certain consequence of a solar tariff is sales of US manufactured panels will increase. That’s why stock investors are snapping up shares in companies like First Solar (NASDAQ: FSLR), the largest solar company in the US.

As you can see from the chart, FSLR jumped over 5% on the news of a possible solar tariff. Like with many manufactured products, domestic solar companies have trouble competing with panels and other solar tech created in cheap labor nations, like China. Clearly, these companies would benefit from an import tax.

It’s also clear that stock investors believe the benefits of a solar tariff will aid companies like First Solar. But what do options traders think?

Apparently, options traders are not nearly so keen on FSLR’s upside as stock traders. On the same day the stock was up over 5%, 60% of the options trades in FSLR were bearish. In fact, the largest trade of the day was someone purchasing 3,000 October 20^th 47.50 puts for $0.92.

That means, with the stock around $51, a trader dropped $275,000 to bet FSLR would be back below roughly $46.50 in the next month. That’s the level the stock was at before any of this tariff talk was taking place.

Why would options traders be so bearish on what appears to be good news for FSLR? First off, options traders can often be contrarian. They tend to take a more measured, longer-term approach to trade theories. While the idea of a tariff sounds good for US solar companies, who knows if and when it will be enacted. Remember the infrastructure spending promises?

My guess is the options crowd is fading the rumor, while the stock crowd is eager to front-run the situation. As an options guy, I normally side with the options traders, but who knows in this case. The stock may dip back down if there’s no movement on the tariff in the next week or so. However, if the tariff talk gains steam, the stock may keep going up.

The one thing I do believe is FSLR is highly unlikely to be sitting at $51 by October 20^th expiration. And that’s why I like the idea of buying an options strangle trade here. For $350 you could grab one 50-52 strangle (buying both the 50 put and 52 call at the same time), which breaks even around $46.50 or $55.50.

Either breakeven level is plausible to get to within the next month. And, you don’t even have to guess who’s right between the stock traders and options traders.

Resources

There’s Life in the Oil Patch

September 27, 2017 Matt Badiali

Today, we have too much oil on the market. The supply of oil is still well above its five-year average.

In other words, supply is high.

That should keep prices lower. However, Hurricane Harvey could push U.S. supply down … which is good for oil prices.

There is also the risk of a shooting war between major powers. The strength of the words used by both North Korea and the U.S. are fanning the flames of aggression.

It won’t take much of a mistake to cause an international incident. That risk is driving oil prices higher.

You can see it happening in the chart of Brent crude, the benchmark for European oil prices. Brent hit its highest point since July 2015.

For the first time in a long time, it’s time to focus on the oil sector. While oil supply is still strong, demand is warming up.

The European economy is improving. Europe is the world’s second-largest consumer of crude oil. Increasing demand there would go a long way for rebalancing the oil market.

This trend could signal big gains in a beaten-down energy sector.

Regards,

Matt Badiali
Editor, Real Wealth Strategist

Growth Stocks, Technology

3 Stocks to Profit from No-Profit Electric Cars

September 26, 2017 Tony Daltorio

There was a real race going on at this year’s annual mid-September Frankfurt Motor Show in Germany. Not an actual race, of course. But a race among automakers’ executives to see who could promise the greatest number of future electric vehicles.

This makes sense as government policymakers around the world push hard for a move away from combustion engine cars and toward battery-powered electric vehicles. France and the U.K. have a 2040 target to have that changeover happen. Norway’s target is 2030.

And as I recently highlighted in a recent article, China – home to one-third of the world’s car market – is also working on a timetable to end completely the sales of fossil-fuel-based vehicles. Its largest electric vehicle maker, BYD (OTC: BYDYY), is urging the government to set a target date of 2030.

The sentiment among auto company executives toward electric vehicles has certainly changed from nine years ago. That was when the first Roadster from Tesla Motors (Nasdaq: TSLA) went on sale. Before that, the only major automaker that was serious about electric cars was Japan’s Mitsubishi Motors (OTC: MMTPF).

Profits Anyone?

While some U.S. investors act as if Tesla is the only company that will be making electric vehicles, the sector is rapidly becoming very crowded. Auto companies from Europe to Japan and Korea to our domestic automakers – General Motors (NYSE: GM), Ford Motors (NYSE: F) and Chrysler Fiat Automobiles NV (NYSE: FCAU) – are all piling into selling battery-powered vehicles to the public.

This raises a big question for investors in the sector — will the automakers have to sacrifice margins and possibly even profitability in this race to, as the CEO of German carmaker BMW (OTC: BMWYY) Harold Krüger called it, “electric mobility.”

The CEO of Japan’s Honda Motor (NYSE: HMC), Takahiro Hachigō, spoke bluntly to the Financial Times about what everyone is the sector is facing at the moment, “Until we reach certain volume, the profitability will not be as great [as compared to conventional vehicles].”

In many cases, profit margins at automakers are already stretched. Margins will only worsen in this transition period to electric vehicles as investments into research and development rise and component costs do as well. All the while electric vehicle sales are still not at the profitability tipping point.

Even ignoring money-burning Tesla, other vehicle manufacturers are feeling the jolt from the move toward electric vehicles. Germany’s Daimler AG (OTC: DDAIY) said its margins could fall by two percentage points (despite a cost-cutting program) thanks to the costs associated with getting batteries and redesigning cars. One such cost is the $1 billion Daimler plans to invest in its Alabama plant to produce electric cars in the U.S.

Turning our attention to domestic automakers, analysts at BCA Research estimate that GM loses about $9,000 for every Chevy Bolt it sells. In order to get the “average” corporate profitability from the Bolt, BCA says General Motors would have to raise the price on each car by $26,900. Obviously, GM isn’t going to do that.

Much of the added costs for electric vehicles comes from the battery. And a lot of this cost comes from the necessary metals and minerals that make the battery work.

The ‘Picks & Shovel’ Winners

The good news for the automakers is that battery costs are falling. But instead of buying a car company, you should take a look at investing into the makers of electronic components that will go into future electric vehicles.

At that very same Frankfurt Motor Show, the ebullience of the auto components makers was evident. They were kids in a candy store. It’s easy to see why. . .

Right now, the vehicle manufacturers control design, and nearly every other important aspect of vehicle production. But that is slipping away from them as the wave of the future is more electrical systems and electronics and not mechanical systems.

Estimates are that 50% to 70% of the value of a car will lie in those electronic components, which the automakers purchase from other companies. Companies, ironically enough, that U.S. carmakers spun off years ago because they were thought to be low-margin businesses.

However, as with all investments, you have to pick and choose among the companies in the sector. Some auto parts companies still have their hand in the sand, saying that the changeover to an electric car future may never happen.

Here are three stocks for you to consider where management ‘gets it’.

Stock #1 – Delphi Automotive PLC

At the top of the list is a company that was once part of General Motors (NYSE: GM), Delphi Automotive PLC (NYSE: DLPH). The spinoff was completed in 1999, as sadly, GM management listened to Wall Street advice about streamlining operations by getting rid of a business “going nowhere.”

But now, it’s Delphi that’s in the fast lane. That will be even more true once it completes its own spinoff – of the powertrain business – that will be completed in March 2018.

The spinoff will allow Delphi to focus the remainder of itself (about ¾ of the current company) on self-driving, connected and electric cars. Delphi is heavily involved in components for hybrid vehicles and its $12 billion advanced electronics business is the company’s top revenue generator.

The reason behind the split was given by CEO Kevin Clark: “The pace of change in our industry is accelerating.” That move has pleased shareholders, adding about 28% on to the value of its stock, putting it up 50% year-to-date. Delphi is moving right along with that “pace of change” in the industry.

The company continues to innovate in all sorts of new vehicle technologies. . . . .

It teamed up with Frances’ Transdev on operating Europe’s first self-driving vehicle service and with BMW (OTC:BMWYY) on developing a self-driving car. It also partnered with Israel’s Innoviz Technologies on providing high-performance LiDAR solutions for autonomous vehicles and with Blackberry (Nasdaq: BBRY) on an autonomous driving operating system platform.

Stock #2 – Visteon Corporation

The next company to consider was also a spinoff – this time from Ford in 2000 – Visteon (NYSE: VC). The reasons were similar to those of General Motors.

Visteon designs and manufactures electronics products for automakers. Visteon provides everything from standard gauges to high resolution, reconfigurable digital 2D and 3D displays to infotainment and audio systems.

It is turning out to be a big winner as the automakers and Silicon Valley battle to see who will control the cockpit electronics inside your vehicle. Visteon is agnostic and winning sales from carmakers whether they are using their own systems or those of some tech company’s systems.

The vehicle display market is expected to reach $21 billion by 2022 and Visteon is sitting in the catbird seat. It already has a record $17.3 billion order backlog. That trend should keep the stock motoring ahead, adding to the more than 51% year-to-date gain.

Stock #3 – Autoliv Inc.

The third company has been a relative laggard, with its stock only up about 8.5% so far in 2017, the Swedish auto parts giant Autoliv (NYSE: ALV). Most of that upward movement in the stock price happened after a recent announcement.

Its management said it is currently considering whether to follow the path taken by Delphi and splitting itself in two, separating its fast-growing electronics business from the parts of the company that makes things like seat belts and air bags.

Autoliv’s electronics components business consists of things like radars used in autonomous vehicles and positioning systems. It expects the market for electronic safety products to more than double over the next several years, from $20 billion this year to $40 billion in 2025. Autoliv management is targeting $3 billion in such sales in 2020, up from $2.216 billion in 2016.

So there you have it – a choice between fast-growing auto parts companies or automakers that will struggle to remain profitable.