The reasoning is that the small investor is consistently wrong about when and what to buy, so if the little guy is buying, it’s time to sell. This unofficial rule has been painfully accurate during my 25 years in the markets.

The small investor consistently takes too little risk or too much risk or buys in after the market or an individual stock runs up. These are the only consistent qualities of this class of investor and they always result in losses.

Take a look at what the small investor has been doing lately.

A recent Wall Street Journal article, “A Taste for Risk-Again,” listed the activity of mutual fund buyers, the favorite of small investors, since last year’s sell off.  Purchases in emerging markets, China, and junk bond funds, sectors that have already seen big run ups and that are considered high risk compared to domestic large cap funds, have sky rocketed.

Investors in the first five months of 2009 have poured $4.9 billion into diversified emerging market funds compared to pulling out $2.6 billion in the same funds last year. Investments in the riskier junk bond funds are up 10 times over last year.

At the same time, large cap U.S. stock funds have had $11.2 billion withdrawn in ’09 in addition to the $52 billion withdrawn last year.

What’s the explanation for this surge? Small investors are trying to recoup their losses from last year by jumping in late on higher risk investments. See the pattern? Too much risk, too late.

At the other end of the risk spectrum, the risk adverse small investors who took their losses and ran from the market last fall have been hoarding cash. The savings rate in the U.S. is up from 0% of after tax income in 2008, to 7% in 2009. The cash sitting on the sidelines is gigantic and all of it is generating an after tax and inflation loss.

Despite the run up in the market since March of this year, the best companies in the world are still available for pennies on the dollar and are offering huge dividends. As always, the small investor wants nothing to do with these high quality, lower risk investments.

Merck for example is off about 55% from its January 2008 high. It has a dividend of about 5.7%, that alone is almost three times money market or savings rates, and it’s literally one of the best companies on the exchange.

Merck, and a hundred others just like it, is appropriate for just about everyone and could be a core holding in almost anyone’s portfolio. At a 55% discount it is essential.

Large cap, dividend paying stocks are one of the best places for small investors. It gives them income and stability they can’t get in any other investment and a risk level that is perfect for all but the most risk adverse.  But, as usual, the small investor is 180 degrees out of sync with what he should be doing.

The small investor historically will not be interested in a stock like Merck until it is at or near its 52-week high and the dividend is in the one to two percent area, exactly where you should be taking profits.

The Odd Lot Theory works. Use it to change how you are managing your money rather than being a victim of it.

Take a look at Sounds Profits. It’s a newsletter that focuses on using time proven investment techniques to help its readers use things like the Odd Lot Theory to their benefit.

Good luck.

Steve

Source: When Small Investors Buy, Big Investors Sell

But you can make much more than 41% if you follow my advice. In fact, you stand to make 200% — maybe more – by taking advantage of a little-known strategy I’ve been using (and teaching Sound Profit readers) for some time.

Let’s start with an observation: When a market surges like this one did, a correction is a sure bet. There aren’t many givens in the stock business, but this correction is a given.

I can give you a dozen reasons why, but the following 5 should convince you:

1. The S&P broke through the 200 day moving average which is the beginning of the retreat
2. Upside trading volume has dropped by as much as 50% since late April. Always a downward indicator
3. We have had an increase of the ratio of flat to down market days to up days.
4. Oil has doubled in price which in every market has been a downward signal.
5. But the biggest and most significant red flag is that everyone in the market believes we must have a pullback. We have run too far and too fast.

If you act now you can save whatever gains you have made since March and parlay that into a small fortune. But to do so you may have to stretch your emotional envelope a bit and follow a strategy that might violate some “beliefs” you’ve had about investing.

But if I could show you – with certainty – how to make 200%+ on your money by unlearning a “belief,” would you be willing to listen?

Good.

Let’s begin by disposing of that “belief.”

Markets do not have to go up to make money!

The market is down 66% of the time. If you ignore the short side you are missing two thirds of the gains.

Still don’t buy it? Go back and count your stocks that went down in the last two years. That should do it!

The first step to capturing 2/3’s of the gains the market has to offer:

Admit this market has to go down. It will go up through 10,000 and then 15,000, but right now it is going to sell off.

Capture the downside using Inverse ETF’s.

Is it difficult? It’s like buying a stock that has twice the return and two times the probability of working. It’s that easy!

Some Inverse ETF’s return 200% of an industry’s or index’s downside. 200%! Why settle for average when you can get 200%.

Get out of the herd! Stretch the envelope and turn this correction into a huge return.

Take a look at the Sound Profits newsletter. It specializes in making big returns in strategies like this with easy to understand step by step explanations.

Source: How to Make 200+% on the Coming, Inevitable Market Correction!

We had an expected and needed correction in ’07 into ’09 that was aggravated by the banking/credit/confidence crises. Without the collapse of the banking system the drop would have stopped in the mid to low 9000’s, maybe the high 8000’s and would have turned around after a reasonable period.

As soon as the market sensed that we were not falling into the banking abyss it ran right back to where it would have stopped without all the aggravating factors we had last fall; around 8700.

We are now where a real bull run should start, but we have just finished a 30% spurt in three months. We are out of psychological gas. The market is tired and afraid of having come too far too quickly. That is the cause of the drop in the volume in the markets and why many investors are betting on a pullback.

Whether we pull back now or later, or run up another 30% now or later, this market will still go over 10,000 and go to 15,000. In three to five years you will look back at this period and kick yourself in the butt for not doing the obvious.

We are down 6000 from our high on the DOW. If not for the problems last fall this would look like the biggest buying opportunity of our lifetimes.

This market period can still be the foundation for the biggest money grab in market history. Here’s how to make this work for you.

Go through the stocks in the S&P 500 and identify companies you are familiar with and whose products and history you feel comfortable with. It’s important you are comfortable with the company and how its stock behaves.

In other words, how did this stock do in the last run up from a correction? Or, how has this company behaved over the long term. Is it an obvious long term winner, three to five years, or a not sure? If it falls into the area of not sure, drop it from the list.

It would be nice if they were spread over four or five industries for diversification, but knowing the companies and being comfortable with them is more important right now. I’ll explain why in a minute.

Get your list together and study their price movement over the past six months. Eliminate, or delay buying those that have obviously run up too much. Look at how far they are from their 52 week high. Go with the biggest spread.

Start buying in ¼ positions those that look like they have some upside. In other words, if you normally buy $5000 positions, only buy $1250 positions.

What you’re doing is averaging into a market that will probably give you better prices in the future. Probably is the key word. This big pullback may not happen and you could be left at the station when the train pulls out.

Buy into the list when we have dips. Look at POT, Potash Corp. It dropped 20 points in one day recently and is a screaming buy. It was also a screaming buy at $115 two weeks ago. Using our plan you could go back in at $20 less per share now than a week ago and add another ¼ position.

Don’t worry if the turn around happens before you have all your cash in, cash is king. You’ll have other opportunities.

This market will serve up lots of bargains just like the POT buy in the next few months as it bounces and swerves it way out of the hole. You will make the real money planning on the market being crazy and not trying to guess if it will fall or rise. This approach allows you to plan on both.

The guts of this approach are the familiarity and confidence you have in your companies. They will give you the strength and discipline to ignore the really bad days that we definitely will have.

If you can watch your companies drop and know it doesn’t matter because you are certain it is temporary and they will make big money in the next few years, you picked the right stocks!

This is a new version of an old rule of investing. Be a Warren Buffet! Cheer when the market is terrible! Buy good companies that you know and buy into the dips in a down market.

It’s not perfect but it is the only way I know to make the market craziness work for you.

Source:  8500 Will Look Cheap

The problem is the details of this developing story aren’t exciting or anything the average person wants to hear about. Most have little or no understanding about the specifics and frankly don’t want to know. But, this is a story that will be the make or break issue in the stock market, our economy, and the recovering world economy.

Monetizing the Debt

Essentially we are buying our own debt to keep the treasury prices up and the yields low. This is being done for two reasons; keep mortgage rates low to try and create a floor for real estate prices, and bail out Congress after its 30 year spending spree.

It isn’t working. Rates are moving up despite the White House’s efforts. This presents two very big problems.

First, our debt holders, China in particular, are worried that the U.S. debt they hold will become worth a lot less if this pattern of artificially propping up bond prices continues. Our government’s efforts to artificially hold up anything has always had the opposite result. In this case that would mean rates skyrocket and prices for our debt plummet.

If this happens China is stuck with our debt in a market where they can’t get what they paid for it. I know two things about the Chinese; they don’t lose and they don’t lose. They will not wait for this to happen which means if they believe we are sacrificing them for our own benefit they will dump our debt in a defensive move.

This means our bonds will be trapped in a death spiral of dropping value, exploding interest rates and a world market flooded with our debt. This is the worst possible scenario for us and the rest of the world.

The second problem is more fundamental. Where is Congress getting the money to buy this debt? We are broke! We are worse than broke; we are 10 trillion dollars in the hole.

Are those printing presses I hear? How much longer can we print money to buy up the debt from money we spent last year that we didn’t have? How about the money we spent in the first few months of this year that we didn’t have?

There may be some magic behind those doors in Washington, but I don’t see it. The most likely outcome of this situation, at least we better hope it unfolds this way, is much higher interest rates and a slowing to a stalled economy. This is the optimistic outcome.

Inflation with negative or no growth; 1974 all over again.

The obvious play is the same I recommended a few moths ago. Short the bond.

The best play is the TBT, Ultra Short 20+ Year Treasury ProShare. This pays twice the daily performance of the 20+ year treasury index. In other words as bond values drop and interest rates go up, this will pay you twice the value of the drop in the bond. If the bond drops 10% in value, you get 20% from the TBT.

The TBT is currently about half way between its 52 week high and low. Not cheap, but still way down from its highs.

The entire U.S. government has been handling our affairs like a bunch of drunken sailors on liberty. Vote buying with our money has reached the point of being criminal. It’s been a 30 year binge and now it’s time to pay the bills. You might as well make some money on it.

Source: The Next Shoe to Drop

This mantra was always in response to those in the business who, following a big run-up or downturn in the market, would make the claim that “it’s different this time.” This claim of new market rules usually was an effort to support buying at the top of a market, or buying when things seem over priced.

The former, the old timer’s advice, was, until now, always correct. Markets have always been the markets. They run up, they fall down. They always fall a lot faster than they go up and if you wait until everyone gets in to convince you its ok to do it you will lose money.

This time though I believe some things have changed in the markets, the changes may be of a temporary nature, but this definitely is not our grandfather’s or father’s market.

What I think has changed is how investors will have to prepare themselves mentally for the markets for the next three to five years. It’s called a trading discipline and you will have to change yours or get out of the market. You can stay in and try to do the jump in and out game, but you’ll get crushed even faster than in the past.

Since the majority of small investors have no trading discipline anyway, this will be a new concept for them. There is still a lot of money to be made in stocks and bonds; it will just take a few shifts in expectations and procedures to get to it.

The first change is that this is not a trading market. Some will continue to get lucky with their guesses, and the select few who always seem to make money will, but going forward, the big money will be made by those who can wait it out and use dollar cost averaging to their benefit.

Trading requires some amount of predictability, the biggest change in the new market is the little predictability the markets ever had has been driven underground by the huge collapse of confidence. This market today is jumpier than at any time in our history. The slightest suspicion, wind shift or rumor makes this thing plummet. We will see more falls over the next five years than at a rock climbing competition.

The trader’s position has always been just this side of insane, but now it has crossed the line. With virtually no fundamentals, no confidence that the changes that have been put in place by the Obama administration will produce any lasting results, the debt, the monetization of the debt, the politicalization of the banks and a world community that has grave misgivings about the future of our markets and economy, you’d have to be crazy to think you could predict anything.

What will work going forward are positions in companies like Clorox (CLX). There are the usual reasons to own a stock like this, and the new reasons that work within the new market rules.

First, the usual reasons: The company recently raised their earnings projections. They will earn around $3.70 this year and $4.17 next. The dividend is $1.84, about a 3.4% yield, and there’s plenty of cash to pay it. Their profit margin is rising, they have abundant cash, they’re paying down their debt and they have stable brands; bleach, Kingsford Charcoal, Brita, Glad Bags, Burt’s Bees Skin Care and Greenworks Detergents.

A solid company with reasonable prospects.

In this economy this is what I call a slap in the face investment. It is about $51 per share, was as high as $65 in the last 52 weeks, was as low as $46 and has been showing a very nice upward trend for the past three months.

The new reasons to own it: It isn’t sexy, it will not run off the charts with breaking news, it pays a good dividend that appears to be safe, it won’t be subject to big swings, it won’t fall off the charts because of a rumor, it is expected to show an incredibly boring growth rate of around 15% going forward and most importantly you can own it and still retire on time.

In fact, this stock has everything you will need to survive the next five years; stability, fundamentals, solid management, income and products that consumers will need and buy.

Why income, because I expect to see major, I mean major swings in this market. If you don’t have some type of money showing up in your account from a bond or a safe dividend there will be extended periods in the new market when you probably won’t see any money at all.

The second aspect of your investing you must change is to average into this market. Take advantage of the big price swings we will definitely see. Make the volatility work for you. As Warren Buffet said recently, “I love when things are this bad.”

Investors must learn to cheer when the market crashes, it’s a buying opportunity. If you’re in the right stocks you have virtually nothing to worry about except where you’ll get more money to buy into the dips.

Shift your expectations and investing style for the next five years or be prepared to be very disappointed. Get out of the Stock of the Month Club, get back to boring, solid companies you can live with.

This is the same advice my old timer friends in the markets have been giving me for years. Maybe things haven’t changed that much after all. Maybe we’ve just been dropped kicked back to reality.

Good luck!

Source: Navigating the New Market

Oil has gone from about $38 per barrel to around $58 per barrel in the last two months. The recommended plays from the last two articles have also run.

The two ETF’s I have recommended have performed exactly as advertised. Both, DXO and DIG have consistently returned at least twice the increase in the price of crude oil. Within days of the first recommendation you could have purchased DXO for as little as $2.71 per share, it’s now about $3.46.

The current price of crude, $58, and the expected price target of $75 per barrel would suggest another 60% gain is possible for both in the near term. At this point the move in the price of oil is almost unavoidable, for many reasons.

In just the past two weeks, two different OPEC spokesmen have stated that oil has to go to at least $75 per barrel, and production will either be cut, or would not increase when the world economy to expands, which amounts to a cut. This is reason enough for the excess oil reserves we have to dry up in a hurry.

With information like this on the street it is conceivable that if any really significant positive information about the health of our economy, or any other key world player’s economy, were to be released we could see a run well beyond our near term price of $75.

The U.S. economy is showing signs of improving. The most recent jobs numbers indicate we are on the right track for a healthy recovery.

The stock market’s recent move is indicative of it reacting to news six months into the future. Six months is about when most believe the economy should be moving into positive territory and the increases we have seen in oil prices are paralleling the upward moves in the market.

We are moving into the summer driving season and increased gasoline consumption. This too adds to the demands on our reserves and in recent years has driven the cost of gas up.

China’s economy is starting to rev up. 85% of their stimulus package was committed to infrastructure as compared to 5% of ours. This has had a more immediate affect on their numbers and it is showing in the rate of recovery.

As the economies of the world start to generate bigger and bigger numbers, the demand for energy will explode again. It’s doubtful we will see $146 per barrel again soon, but it will happen again.

The more immediate opportunity is in the next nine months. The price target of $75 is a forgone conclusion. How much higher it runs is a function not so much of consumption but of anticipated demand in response to how quickly the world economies recover.

So here again are the recommendations, with a new one.

DXO is a pure crude play that will give you two times the return of any increase in the price of crude.

DIG is a crude and natural gas play that also gives you two times the return of the price of crude and natural gas. It isn’t as clean a play as DXO but its return has outpaced DXO a little in the past few weeks.

The new play is a gasoline play, UGA. This is a pure play on the price of gasoline. It pays one to one for any price move on unleaded gasoline delivered to New York harbor traded on the New York Mercantile Exchange.

Gas in my area has moved from $1.99 to $2.29 in a week.

This is a move you must make now or get used to watching from the side lines. As the price moves into the sixties in the next few months, the total return on this play will have dropped to the point that it will have become a sucker play with the uninformed buying at the top.

This will not be a straight shot; you will have a few more opportunities on pull backs to average in and get your overall cost down. But make no mistake; oil is going back to the $75 to $100 range, and maybe higher. You have had plenty of opportunities to take advantage of it.

Source: Last Call for Oil

Here’s a company that will require a little risk taking but can give you a return well above the long term stock market average of 10% a year, in fact 34% a year, and you can do it in a bond not a stock. That means you will know exactly what you will make, to the penny, before you invest.  In my experience, this requires a lot less risk than the
average stock investment.

The story goes like this.

A group of very savvy bankers got together and found a way to make money on airliners; 777’s, Airbuses, etc. They buy the airliners from the manufacturers, Boeing (NYSE:BA), Airbus, and then lease them to airlines all over the world, not just the rude, inefficient ones here in the U.S. That’s not fair, Southwest isn’t rude or inefficient.

The bankers make their money on the spread between what their loans cost them to buy the airplane and what the airlines pay to lease them. These are very long leases and have been very profitable for the bankers.

The planes are leased to the best airlines in the world and they make up most of the newer planes in their fleets. The planes you hear about that are being retired for cutbacks are not the leased airplanes. They are the older less efficient models.

The airlines love this arrangement because it takes all kinds of debt issues off their hands and they have a known cost going forward for an airplane. Maintenance and repairs are their problem, but their balance sheets are not loaded up with billions of dollars of depreciating aircraft that will eventually be worthless.

The bankers love it because they make a ton of money for basically pushing paper, which is what bankers do best. Sounds like a win-win, doesn’t it?

Here comes the risk part. This company that leases airplanes is owned by AIG. Yuck!

Wait, this is the only profitable division of AIG and lots of people want to buy it. There was a five billion dollar buyout offer this past weekend. But it’s still owned by AIG, right?

This is where you have to be willing to bet on the winning portion of AIG and take a little risk. Consider this strategy.

There is a very short maturity bond from the company, which is called International Leasing, which will give a great current yield for a few years, 8.51% and a very nice capital gain, 54.8%.

The short maturity limits our market risk because we aren’t marrying this one for 20 years or more, less than four years. It also carries an investment grade rating of BBB+, which gives us a lot of credit quality to bank on.

Here is the actual bond;

International Leasing, BBB+, cusip 45974va73, coupon 5.5%, cost 64.6, or $646, maturity 9/5/12, or about 40 months. The current yield is 8.51% (5.5/646) and a total return of 114% (capital gains $354 and seven interest payments of $55 divided by your cost of $646). That’s an annual return of 34%.

34% a year from an investment grade bond! You have got to be kidding me!

Yeah but, what if AIG goes under? That’s where the fact that International Leasing is one of the only profitable divisions, if not the only profitable part of AIG, comes in.

There are lots of people who want this company. If anything I believe AIG will milk it for a big sale price or continue to run it for the revenues. It’s a cash flow cow.

A very profitable company that many people want to own that happens to have a bum for a parent. The real question is will International Leasing be in business in 40 months? The answer is yes and this bond will be fine.

As with all investments, limit how much you have in any one bond.

This is exactly the type of strategy I send out every week in the Bond Trader and will be presenting at the Gloom and Boom Conference in Miami June 5, 6 and 7. Click on the link for all the details.

Good luck.

Source: Judging Risk

The price of oil is a function of many things, but as with all economic issues its prime mover is demand. Demand for the past 18 months has been dropping due to the economic meltdown worldwide. This has made for great energy prices, but it’s like a warm day in January in Canada.  It’s not real and anyone who has ever lived through a northern winter knows it will not last.

Why?

First, the world is coming out of this recession and oil demand is about to explode and we, the USA, the biggest energy pig in the world, have done nothing to prepare for it. We have less of an ability to provide for our energy needs now than we did 35 years ago.

Second, Asia and the rest of the developing world are coming out of this worldwide slow down, too. Consider how much more oil will be going to Asia and the developing world as they rebound and start to suck up what’s left of the world’s capacity to produce black gold. The demand picture really begins to come into focus.

Third, the current effort of the Obama administration to avoid a depression by pumping trillions into the economy has worked. We are soaring out of the hole faster than anyone could have imagined a year ago. At the same time we are doing so with no way to fuel it, literally fuel it.

We are completely unprotected from the threats to our economy and future well being that comes from importing 75% of our oil.

Fourth, there has been zero new development of oil reserves partly because of a very admirable effort by the Obama administration to shift to clean renewable energy. Clean and renewable is great, but we have about a ten year gap that has to be filled with oil before we can make that a reality.

Fifth, a dysfunctional congress whose priorities are their careers, their party, their district and whatever is left over goes to the well being of this country, in that order. Congress is all but incapable of working toward a long term solution to the problem.

Add them up and we have all of the necessary elements for the biggest rise in oil prices in our history over the next three to five years. Here’s how we can make money on this mess.

DXO, Power Shares Deutsche Bank Crude, or DIG, Ultra Oil and gas Pro Shares, both are designed to give you twice the percentage return of any increase in the price of oil. In the past month or so DXO bottomed at about $1.90 per share and ran to about $3.20 on just a $12 dollar move up in the price of crude. That’s a 68% move. DIG has had a similar neck snapping rebound.

If oil only goes to the $75 range, which is a given at this point, the DXO and DIG stand to move another 130%. The money we can make here is mind boggling.

The best part of this play is that it is inevitable. The chances of oil not moving up in price are almost zero.

You will only get a few opportunities like this in your investing life. Think of all the times you looked back at the market and thought how great it would have been if you had put money in at the bottom. This is the bottom!

As always time is the key to the success of this recommendation. A move to $75 a barrel is very likely by the end of this year, but the big money could be several years out. Give this time to work and you won’t be disappointed.

100% plus this year is just the beginning of this move.

Source: Retire Early Compliments of OPEC