Call it an earnings season hangover. Call it profit taking. Or call it a technical reverse. Just don’t call it a good day on Wall Street.

With the equities market down by over 1% at the moment, investors who got in at the recent highs are wondering what in the world they may have gotten themselves into. A slew of the markets most-popular investments of late are taking it square on the chin.

General Electric (NYSE:GE) is down by over 3%. Harley Davidson (NYSE:HOG) is down by nearly 3.5%. And Chevron (NYSE:CVX), a TFN Strategic Trader short position, is down by another 1.2% today after dropping by an equal proportion tomorrow.

The breadth of the decline is wide and getting even wider.

If you read my commentary yesterday, you know the downturn is far from a surprise. Even better, you know how bullish I am on Asian markets.

Just to prove the potential in Asia, I want to look at a winner in China’s growing economy.

While the rest of the world contemplates just how an economy can grow without the creation of new jobs, companies like SmartHeat Inc. (NASDAQ:HEAT) are producing record-breaking earnings.

No artificial growth here

Although China is not on a politically motivated, Al Gore-type environmental kick, there is no doubt the expanding country is working to clean up its smog-filled air. Companies like SmartHeat are taking full advantage of the initiative.

SmartHeat works to build a variety of heat exchangers and temperature meters. Its products allow companies to increase their heating efficiency, which helps lower heating costs and reduces emissions.

While this morning’s earnings report from the company has plenty of useful information, one line by the company’s CEO, James Jun Wang, stands out:

“The current economic slowdown has significantly increased customer awareness towards utilization of energy savings equipment from which we are a primary beneficiary. SmartHeat is well positioned to potentially reap significant benefits from the world’s economic recovery.”

The company backed up the statement with a revenue figure that grew by 125% from this time last year. While $12.5 million is a miniscule figure in today’s world of billion-dollar conglomerates, the fact that the company managed to turn the income into a profit of $2.6 million (up 257%) solidifies the idea that SmartHeat is far from a speculative play.

The company has a high-demand profit and is profiting from it.

Going forward, SmartHeat has boosted its full-year outlook and expects the Asian recovery to treat the company well. Next quarter, Wang expects revenue of $35 million, almost three times last quarter’s figures.

Shareholders have been treated well by the bullish news, with the stock up by double-digit proportions today.

With such quickly growing figures, the markets are naturally going to have a tough time determining the company’s fair value.

Right now, using the old earnings figures, the company has a price-to-earnings ratio of about 35. But when I plug in the estimated $15.5 million in annual earnings announced this morning, that critical figure drops to just 14.7, high but not too high.

To include the high-flying growth in the valuation equation, we have to divide the P/E figure by its anticipated earnings growth. In this case, the company earned $6.3 million in 2008, giving us a denominator of about 150.

Crunching the numbers, it gives us a PEG of an ultra-low 0.01, making shares of SmartHeat well worth the $9.75 they are currently trading for… if the earnings predictions come true.

Take a look at the company and see what you. Just don’t say we don’t ever give you anything for free.

Source: A Hot Stock in a Cool Market

Earnings Announcements: Novellus (NVLS)

This from Mike:

If the global financial crisis has taught investors one thing, it’s that now is not the time to gamble with your money or your prosperity.

More companies have been bought, bailed out or bankrupted since this financial crisis began than most of us have seen in our lifetimes. And even as Wall Street’s dominoes keep falling, no one can be sure if the worst is over.

From here on – recession or not – targeting dividend stocks is one of the few strategies that will deliver income safely and efficiently.

In theory, dividends should prop up an investor’s portfolio during uncertain periods, or in market downturns. That’s because even if a company’s stock price falls, executives do all they can to maintain the firm’s dividend payout. That’s part of the reason that, over time, dividends have accounted for a major portion of investors’ total returns.

“Dividends are a nice anchor in a turbulent market,” said Judith Saryan, manager of Eaton Vance Dividend Builder Fund (EVTMX), FoxBusiness last year.

Or anytime. In fact, over the last 100 years, 40% of a stock’s total return is from dividends. That’s not surprising. According to a study by Ned Davis Research Inc.,  dividend-paying Standard & Poor’s 500 stocks rose by an average of 9.4% a year between 1972 and June of last year, well ahead of non-dividend-paying stocks, which rose by only 1.8% annually during the same period.

“Dividends are a sign of quality,” said Todd Ahlsten, manager of Parnassus Equity Income (PRBLX), said in an interview last year. “They force management to look at cash flow and how it invests in its business.”

But not all dividends are created equal. As losses mount, Standard & Poor’s 500 heavyweights have been putting their dividends on the chopping block, cutting or outright eliminating them for an indefinite time period.

And these aren’t fringe companies and chump change we’re talking about…

General Motors Corp. (GM), Ford Motor Corp. (F), Sprint Nextel Corp. (S), MBIA Inc. (MBI) – their dividends are gone.

And Citigroup Inc. (C), Bank of America Corp. (BAC), Fifth Third Bancorp (FITB) reduced their dividends to a mere penny. Fannie Mae (FNM) lowered its to 5 cents in August and hasn’t paid one since.

Nor does the list end there.

Just yesterday (Thursday), in fact, motorcycle icon Harley Davidson Inc. (HOG) slashed its dividend 70%, the first such reduction since 1993. The move was aimed at conserving cash, but sent Harley’s shares down 8%. in a move that was aimed at conserving cash. And the Dow Chemical Co. (DOW)– facing credit-market uncertainty, lower product demand and legal problems related to a failed joint venture – yesterday cut its dividend 64%, the first such move in the company’s 112-year history.

But there are still hundreds of companies holding their ground in the global financial crisis.

These firms understand that continued growth and success depends on a large body of investors. And to keep them on board the companies must maintain – and hopefully increase – their dividend payouts.

DRIPS Aren’t Dropping

With the stock market’s wrenching decline, many company’s shares are trading at bargain levels. A company that’s been able to maintain its dividend usually represents a better value to its shareholders.

In the reverse situation, where stock values soar, dividend yields fall, meaning income investors have to settle for lower returns.

So, with stocks down and yields high, income investors should consider starting or stepping up dividend reinvestment plans (DRIPS).

In DRIPS, the dividends investors would normally receive as cash are reinvested back into the stock under their name. To start, investors often don’t even need as much as the price of a full company share.

For example, if you invest $20 in a stock that trades for $100 per share, the DRIP will buy you one-fifth of a share of that stock. The dividend is reinvested accordingly, as well.

Over time, money is reinvested back into the stock, giving you more shares. And with more shares, the more dividend income you’ll receive.

Among other advantages, although there is usually a nominal transaction cost involved, the DRIPS’ automatic reinvestments allow investors to skip full-blown brokerage fees, which aren’t conducive to such small purchases.

Among the cons, most DRIPs require investors to be registered shareholders, which entails a little more paperwork than being a regular, or beneficial, shareholder. To enroll in a DRIP plan, investors must buy shares through a transfer agent. The process can take up to eight weeks before your account is opened and fully registered.

Some DRIP companies also have maximum amounts you can invest and hold in their stock. And they vary by time periods – monthly, quarterly, annually and lifetime.

For the public companies that offer the dividend plans, DRIPs provide a stable base of long-term shareholders. And often, these value-minded investors tend to buy more when share prices are down, as opposed to short-term traders, who are apt to bail out on a price decline.

For example, 71% of chemical company RPM Inc.’s (RPM) shareholders are enrolled in its DRIP. And more than 64% of Aflac Inc.’s (AFL) shareholders are enrolled in its DRIP, according to DRIP Central.

More than 1,600 public companies and American Depository Receipts (ADRs) have DRIPs, offering a wide choice of industry and market preference to potential investors.

But with so many to choose from, targeting the best ones can be a challenge without a broker helping you.

The Best DRIPs are…

The best DRIPs are from companies that have a high-yield and a track record of increasing their dividends.

In addition to RPM and Aflac, here are a few DRIP companies to keep your eye on. Not only have they hung onto their dividends in the worst financial crisis since the Great Depression, some have increased their payouts.

• Coca-Cola Co. (KO): There’s a reason “Coke” is the second most recognizable word in the world. The world’s biggest beverage-maker recently beat fourth-quarter earnings expectations, largely due to its ability to cut costs and promote demand with a rotating file of products. The company kicks out a 38-cent dividend every quarter. At its current share price of around $44.30, that’s a 3.45% yield. If that’s not enough, know that Warren Buffet owns 8.6% of the company.

• Intel Corp. (INTL): Intel is the market leader among chipmakers, dominating its competition by continually being the first to the market with the best product. It pays a 14-cent dividend every quarter, which at its current stock price represents a 4.07% yield.

• The Hershey Co. (HSY): The Pennsylvania-based candy and food maker has been a recession stalwart. It began paying dividends in 1930 – meaning it’s been making the quarterly payouts longer than most companies have even been around – and has been increasing them for 32 consecutive years, according to The Money Paper. Right now, its 30-cent quarterly dividend represents a yield of 3.32%. With its stock hovering a few dollars above its 52-week low, many of its DRIP investors are probably loaded up on Hershey shares like Halloween candy.

• Microsoft Corp. (MSFT): Microsoft is the largest software producer in the world, and has a firm grip on that title. The slowing demand for computers and computer software has taken a toll on Microsoft, but the projection of the industry and Microsoft’s dominance makes it one of the most stable tech stocks out there. Its current dividend yield is 2.72% on its shares, which kick out a 13-cent dividend every quarter.

• Exxon Mobil Corp. (XOM): Like the above companies, Exxon doesn’t need much of an introduction. The oil giant is one of the world’s largest companies, having paid investors dividends since 1882. Its 2.13% yield isn’t the highest in this small group of companies, but Exxon’s share price is one of the most stable.

If that’s not enough, here’s an extensive list of DRIP companies, and their minimum and maximum investment requirement.

It also details how much dividend income a company pays, how often, how long its paid dividends and whether it increased its dividend over time.

Editor’s Note: This is the latest installment of a new series that will explore ways for investors to recover from the U.S. financial crisis.

Source: For Dividend-Seekers, Financial Crisis Means it’s Time to Dip Into DRIPs

This from Jason:

“I’ve been buying American stocks,” Buffett said in an editorial in The New York Times. “This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds… If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.”

As the world’s richest man, Buffett offers a kind of comfort that few others can.  And it couldn’t come at a better time. The fourth quarter of 2008 was the worst quarter for the Standard & Poor’s 500 Index in more than two decades, as the closely watched stock-market benchmark tumbled 23%.

It’s likely that even Buffett took the same bath as the average investor.

In separate filings with the U.S. Securities and Exchange Commission (SEC), Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK B) said it spent $9.45 billion on equity securities in the first nine months of last year, Bloomberg News reported. Among the purchases:

• Berkshire bought a majority stake in U.S. Bancorp (USB) over a period of time that never saw the bank’s share price drop below 29.09, according to Bloomberg News. That stock is currently trading at less than $15 a share.

• Berkshire increased its Ingersoll-Rand Co. (IR) stake six-fold last year when the shares never fell below $36.54. That company’s stock has lost about half its value since Buffett made those purchases.

• And Berkshire stocked up on shares of Eaton Corp. (ETN) between July and September  – a stretch in which the stock never fell below $52.32.  Eaton closed yesterday (Wednesday) at $44.36 a share.

With such ill-timed purchases, some analysts are beginning to think that “Warren” has lost his touch.

“People like to second guess Warren Buffett, but it’s not just a flip question to ask if he should have kept his powder dry a bit longer,” Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of Ram Partners LP, told Bloomberg. “He’s paid dramatically higher prices than where some of them are now trading at, so you have to wonder if he was too quick on the trigger.”

But, as a long term investor who has said that his favorite time to hold a stock is “forever,” Buffett sees things differently.

“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now,” said Buffett.  “What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

To support this claim, Fortune points to a long-revered Buffett metric: Total U.S. stock value versus gross national product (GNP). According to Buffett, stocks are a logical investment when their total market value equates to 70%-80% of GNP. And right now, it does.

In late January, total stock value equated to just 75% of GNP, down from a record peak of nearly 200% in March 2000. Indeed, for most of the past decade, the ratio of stock value to GNP has ranged from 150% to 190%. That makes now an ideal time to buy. And Buffett continues to do just that.

What Warren’s Buying

In addition to taking healthy stakes in U.S. Bancorp, Ingersoll-Rand, and Eaton, Buffett also committed $4.7 billion to Constellation Energy Group Inc. (CEG), $5 billion to Goldman Sachs Group Inc. (GS), and $3 billion to General Electric Co. (GE) last fall.

Buffett has also spent the past few years stocking up on railroad stocks, especially Burlington Northern Santa Fe Corp. (BNI). Berkshire’s most recent purchase of 2.6 million shares took its stake to more than 76 million shares – in excess of 20% – of the nation’s second-largest railroad.

And last week, Berkshire threw in a few surprises.

After buying 3% of Swiss Re (OTC: SWCEY) in January 2008, Berkshire last week poured another $2.6 billion into the world’s second-largest reinsurance company. Swiss Re has lost about three-quarters of its market value since Buffett’s original investment – further evidence that the investing icon remains undaunted by his losses.

Berkshire agreed to buy $300 million of corporate debt issued by motorcycle icon Harley Davidson Inc. (HOG). The senior unsecured notes purchased by Berkshire offer a 15% annual interest payment, making it one of Buffett’s many recent fixed-income investments.

Buffett agreed to buy $300 million of debt from USG Corp. (USG) in November, and his preferred shares of Goldman Sachs offer a 10% yield. The $2.6 billion he put into Swiss Re was accompanied by a 12% yield.

“He’s got cash coming in faster than most people would have a ready place to put it,” Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares, told Bloomberg. “This economy is certainly providing him with opportunities.”

With about $30 billion in cash on hand at Berkshire Hathaway, analysts are wondering where Warren’s going to strike next.

There is some speculation that if Berkshire shares continue to slide, Buffett could order a share buyback.

In the past, Buffett has said a company must meet two conditions to warrant buybacks of its stock: “First the company has available funds – cash plus sensible borrowing capacity – beyond the near-term needs of the business and, second, finds its stock selling below its intrinsic value, conservatively calculated,” he said.

Shares of Berkshire are down 37% in the past year and there’s little doubt that Buffett has the money.

Of course, Buffett also said last month in an interview with PBS that he would notify shareholders of his intentions before engaging in a buyback program.

“If I ever name a number, I’ll name it publicly,” Buffett said. “I mean, if we ever get to the point where we’re contemplating doing it, I would make a public announcement.”

The last time Buffett made such an announcement was nine years ago.

Another possibility is that Berkshire will invest in energy companies with large holdings in oil sands – notably Calgary-based Nexen Inc. (NXY).

Buffett, along with Microsoft Corp. (MSFT) mogul Bill Gates visited the Athabasca Oil Sands region in northeastern Alberta last August.

“The world will be using more oil 15 or 20 years from now,” Buffett told the Financial Post in an interview. “We are on a course that cannot be changed. It would surprise me if the world doesn’t want to use 100 million barrels a day in 15 or 20 years.”

“You need some … elephant fields [of oil to meet looming demand] and we haven’t found any elephant fields in the last 15 or 20 years,” he added. “So the sands are huge.”

However, some analysts remain skeptical.

“Seems there is a rumor that Berkshire is interested in Nexen – no one can give me comfort that this is indeed the case – they haven’t bought into [exploration and production] names before … but stranger things have happened,” investment bank Scotia Capital wrote in a note to clients.

What Buffett will do next remains unclear, but there is one certainty: He won’t be sitting on the sidelines and hoarding cash.

“Today, people who hold cash equivalents feel comfortable. They shouldn’t,” Buffett wrote back in October. “They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value,” Buffett said in October.

“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: ‘I skate to where the puck is going to be, not to where it has been’.”

Source: Buffett Bargain Hunting Despite 2008 Losses

This from Today’s Financial News:

It is only day number two for the Obama administration and already the economic pressure is growing. It looks like his pick for Treasury Secretary, Tim Geithner, may not get confirmed as quickly as many would like. And cries that the new president’s stimulus package will not be nearly enough are getting louder and louder.

So far… no change. But we are hopeful.

What’s more, the latest round of economic data shows no signs of economic rebound. New jobless claims rose by a surprising 62,000 claims to reach 589,000 for the week, the highest level since 1982.

Do not expect a sudden wave of hiring from the construction industry. After its worst year in history, the new-homes market continues to hit new lows. Housing starts dropped by over 15% to break November’s low and set a new record with just an annual rate of 550,000 started last month.

That is not the kind of news that lights a fire under Wall Street.

But it is the kind of news that forces us to glance a critical eye towards the investing world. With the equities market once again embarking on a wild up-and-down ride, investors absolutely have to know which stocks are safe and which ones will destroy what’s left of their portfolio.

Yesterday, I revealed the three companies that offer the best shot at market-creaming rewards during the first 100 days of Obama’s presidency. Today I will list the three stocks that likely will not be around to see the end of his reign.

If you think it was tough to find three picks with the potential of handing investors double-digit gains over the next three months, try narrowing the field of losers to just three.

The only way I could do it was by limiting my search to the companies that stand a good chance of seeing their share price hit zero. Invest in these companies and you may not lose just a portion of your money, you may lose every single penny of it as an unprecedented wave of corporate bankruptcy plagues Wall Street.

Stop “hogging” the bailout line

The first company is a tough one for me as I have personal ties to Harley Davidson (NYSE:HOG). I grew up just a few miles from its largest factory, spent numerous nights discussing the world of business with some of its high-level engineers and operations managers and many of its union production-line workers are good friends of my family.

Needless to say, it is tough not to be an emotional investor when it comes to the motorcycle maker. But we cannot let our feelings get in the way, especially if we know it will cost us money.

Harley is affected by the same phenomenon destroying Detroit’s chances of success. Its union labor costs are higher than its competitor’s costs, demand for its products is plummeting, the company is riddled with over-capacity and the few folks that still want to buy a bike cannot get the credit they need.

Harley Davidson sells the ultimate discretionary item, coolness. It is one of a few products in history that allows a person to walk into a showroom a stiff, old square and walk out a leather-wearing, fear-inducing, badass.

But when the economy shrinks, fewer and fewer folks can afford to buy their coolness. That means Harley’s sales are dropping and its earnings plummeting.

We will see evidence of this tomorrow when the company releases its fourth-quarter earnings. After two quarters of disappointing results, there is no reason to believe the last three months were any better.

Analysts predict sales were down by 6% to just $1.3 billion. But thanks to high overhead and investment losses that drop in revenues will translate to a 26% decrease in quarter profits to just $0.58 per share.

With more than two million Americans losing their jobs last year, Harley will not see a quick turnaround in sales. Even worse, it will not get the federal aid like its headline-worthy big brothers in Detroit.

Finally, if it is considered a bullish signal when company insiders buy shares of their company, it is a horribly bearish sign when they jump ship. Investors should have seen the writing on the wall when two of Harley’s top officials, including its CEO, recently packed their saddlebags and rode their iron horses out of Milwaukee.

There is a strong chance that Harley’s future is far more bleak than its automotive brethren. That means its shares have even more room to drop.

Unless you take a short position, stay far away from this hog. It is headed to the slaughterhouse.

A hog goes… Winnie

If buying a Harley Davidson instantly makes you cool, I do not even want to think about what buying one of Winnebago’s (NYSE:WGO) aluminum homes-on-wheels makes you.

If you thought selling an overpriced motorcycle was hard in this economy, try selling an expensive, gas-guzzling vacation maker. Millions of Americans now have the extra time they need to take a road trip, but they are using it to send out their resumes, not touring from campground to campground

At the risk of sounding like a broken record, I have to tell you once again if you think the problems in Detroit are nauseating, you will have a seizure digging through Winnebago’s recent earnings reports. It is amazing the company has made it this far.

The company offers a wide range of motor homes that come with a price tag of $50,000 and up. If you want a half-decent touring unit, you better have a six-figure checking account or darn good credit.

Unfortunately, right now, few folks have either. And the folks that do are buying the discount yachts flooding the market, not “Winnies.”

Just about one month ago, Winnebago announced its fiscal first-quarter results. The figures were not pretty. In fact, the company’s CEO, Bob Olson, said, “This downturn has been one of the most difficult downturns that I have been associated with.”

Olson’s company announced a quarterly loss of $9.3 million after revenues fell by a whopping 68% to just $69.4 million.

Winnebago has already done just about all it can to prevent even larger losses. Over the last few years, it cut its workforce by 60%, it recently forced all workers, including C-level execs, to take a weeklong unpaid leave and it shutdown its production for two weeks.

All that is left to do is hope and pray there is a sudden revival in demand. But even with Obama’s stimulus package, which will likely put just a $500 tax rebate in consumer pockets, the likelihood of a Winnebago craze is not very high.

More likely, Winnebago will be forced to start piling up debt. Unfortunately, in this credit-tightened market, that debt will not come cheap. It may be enough to push the company’s head under water.

Industry-competitor Coachmen (NYSE:COA) recently bailed out of the RV business. Now it just manufactures housing and busses. Winnebago does not have that option. It has a very narrow product lineup.

That means you must steer clear of this company as its shares drive off a cliff. The stock is above $5 right now, but it will not stay that way for long.

Satellites dropping from the sky

Finally, if there is one company with shareholders desperately fearing the “B” word, it is Sirius XM Radio (NASDAQ:SIRI). The company’s debt threatens to bring it to its knees within the next month, yet so many investors continue to throw their money into the company.

They are making a huge mistake.

Sirius has an incredible debt load. It started with over $300 million in debt due in February. But thanks to converting that debt into dilution-inducing equity stakes, that figure is down to about $190 million.

If the company somehow manages to convince its remaining debt holders to convert their stake into stock (which is losing value by the second), Sirius still has nearly $600 million due later in the year.

If the company has to pull out all of the stops just to get through February, what can it possibly due to get itself out of the jam it faces later in the year? There are few options.

One option would be to increase revenues by raising prices, but the FCC says no way. The inability to raise its basic prices was part of the package that allowed Sirius and XM to merge last year.

The only way forward for this company is to renegotiate its expensive talent contracts and its incredible debt burden. The best way to do it is in bankruptcy court. That means today’s shareholders will see their position reduced to nothing.

Shares are already down to just $0.11 each. For investors that got in when they were trading for much more, the bottom does not look so far away. But if you get in at today’s prices, hoping for a rescue, you better be able to afford to lose your entire stake.

Sirius, in its current state, will not be around to see all of Obama’s first 100 days. It simply has too much debt and not enough options.

The nation’s economy is in rough shape. Investors are reeling in pain after last year’s losses. Avoid these three stocks like a mean dog with an attitude and take another look at the three companies I told you were worth buying. If you do, you have a very strong chance to avoid the incredible losses the market endured last year.

Obama promised us change. Act now or that is all you will be left with… pocket change.

Source: The three best – and worst – stocks of Obama’s first 100 days (PART II)

Foreclosures jumped 81 percent nationwide last year. That’s 3.2 million homes.

In December alone, foreclosures jumped 41 percent versus the December 2007 reading.

The readings for the reports this week anticipate further drops in both December Building Permits and Housing Starts. The only question is by how much. Last month, expectations for both reports were off by at least 10 percent. This month is expected to be nearly identical to last month for Building Permits, and a drop of about 15k units in the Housing Starts report.

Try as I might, I can’t see either of these reports coming close to expectations. I don’t think a slowdown of 75k units on each is unrealistic. The housing market is just in terrible shape. Excess inventory is growing, not shrinking. A reading of 550k or even less on both reports is reasonable. I guess we will find out Thursday.

Earnings:
Tues: BAC, CSX, IBM, JNJ,
Wed: ABT, AAPL, EBAY, USB, UTX
Thur: BAX, GOOG, MSFT
Fri: GE, HOG,

Source: Nothing Left for The Big Bad Wolf

If you think the economy is slowing here in the United States, do not even think about looking to Europe. Thanks to already-high unemployment rates, an extremely expensive (and lazy) workforce, and a conglomeration of central banks too small to act independently, yet too large to get anything done, the continent is in some real trouble.

Need proof? Ask General Motors (NYSE:GM) this morning. It just announced it would be halting a huge portion of its European production. It is a sign of a major economic slowdown.

General Motor’s largest European brand, Opel, reports it will close one if manufacturing plants next week for a period of at least three weeks. Another one of its plants closed last week and will not reopen for another week. With nothing to sell, there is nothing to make.

The plant closures come as GM anticipates selling 40,000 less cars through the Opel division this year. With news like that, it is no wonder the company is reeling in pain and share price is in single-digit territory. Fortunately, the night is darkest just before the dawn.

Of course, American automakers are not the only companies hurting thanks to a major European downturn. Last week, I had the opportunity to chat with some of Harley Davidson’s (NYSE:HOG) operations managers.

As we toured the company’s assembly lines, the proportion of bikes headed overseas was staggering. With a slowdown in America already slowing bike sales, Harley is hoping foreign sales continue to rise.

With the news we are seeing out of Europe this week and the strengthening of the American dollar, it is apparent those hopes will be squelched. It is not good news for the nation’s premier motorcycle manufacturer or for any other exporters.

The American economy is slowing, but the problems are much worse in less financially stable countries. Take the time to lower your portfolio’s European exposure. There are foreign markets worth investing in, but Europe is not one of them.

Source: European Turmoil: General Motors (GM) shuts down production

In my last “Sector Watch” column, I pointed out that crude oil futures had generated a daily sell signal and, in keeping with the sector ETF analysis that I do here, the way to play the oil market was by using the U.S. Oil Fund (AMEX: USO) – the ETF that tracks the performance of West Texas Intermediate (WTI) light, sweet crude oil by investing in futures contracts for WTI, as well as other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels.

So what did the “code” tell us?

Quite simply, the way the daily chart pattern looked, USO was tracing out at least an A-B-C (or 1-2-3) Elliott Wave Theory correction.

This means that the initial drop is the “A” (or “1″) wave down, followed by a “B” (or “2″) wave rally, then finally, a “C” (or “3″) wave decline to new correction lows.

This forms just one of the three parts of the system that I use to accurately pinpoint index and stock movements, so I can guide my readers toward profits.

But it’s also really as easy as “1-2-3.” Which is why I decided it had to make up the name of my trading service – the 1-2-3 Trader.

As for USO, the stock was trading above $99 when I last wrote to you two weeks ago. Today, however, it’s fallen to around $91.50.

If you want to play USO, the good news is that it’s still in the “A” (1) wave down, which means that we’re still waiting for the “B” (2) wave rally to begin – the point where we can initiate a put position.

Now onto this week’s highlighted stock…

An Opportunity To Profit From Oil’s Partner In Crime

In last Thursday’s Smart Profits Report, I showed you an example of how the pattern recognition component of my system generated a profitable trade on Harley Davidson (NYSE: HOG).

Specifically, we bagged a 112% gain in less than a month.

The very same “1-2-3″ system also churned out three other winners…

• An 80.4% gain in just three days on Boeing
• An 89.1% gain in a week on Coca-Cola
• A 53.4% gain in a day on Federal Express

As good as those profits were, they’re in the past now. It’s time to show you how the pattern recognition component of my system can predict what’s going to happen in the future.

Take a look at the daily chart of the U.S. Natural Gas Fund (AMEX: UNG) – the ETF that reflects the performance of natural gas prices. Whenever possible, I like to look at other stocks in the same sector to confirm my analysis and UNG has a very similar chart pattern to USO.

Yes, UNG has undergone a much larger correction than USO, but the chart patterns are almost identical.

The 1-2-3 Way To Profit From Natural Gas

Since reaching its high of $63.89 on July1, UNG triggered a daily sell signal and has fallen by more than 35%.

Once a sell (or buy) signal is triggered, my trading system calls for at least a three-wave move.

 

As you can see, the current chart pattern suggests that UNG is still in the “A” (or “1″) wave of the selloff, and when the initial selling is complete, a “B” (or “2″) wave rally should get underway.

 

Right now, there is no way to tell for sure if the “A” wave is complete, or how high the “B” or “2″ wave will go when it gets underway. But we can say one thing:

 

Assuming that no damaging hurricanes enter the Gulf of Mexico, when the inevitable, counter-trend rally begins, I would buy put options on a retracement of 30% to 50%.

 

And an important word of warning: When trading the short side of the energy markets during hurricane season, it is very important that you only use put options.

 

While you may be tempted to short the stock in question, the risk is just too high. Put options limit your risk, which is necessary this time of year.

Source: How to Crack the Market’s Code

When you’re spending 10 hours a day on the phone, “cold calling” potential customers, trying to sell them on your firm’s products and services, the gig gets a bit tiring after a while. That’s how I began my career as a stockbroker in the early 1980s – and it was a job that left me very little time to focus on my real passion: Researching stocks and making successful recommendations.

Instead, I was forced to sell investments that weren’t always in the best interest of my clients. And needless to say, after a couple of years, I was discouraged. My firm’s recommendations weren’t doing very well and it often seemed like I was telling my clients to “average down” their losing positions.

That’s tough on your conscience and I was quickly losing confidence in my chosen career path.

That is until one evening when I went to meet another potential client, Dr. Sullivan. I made the trip to his home in Annapolis, MD – and when I stepped inside his mansion, what I saw blew me away…

Back To The Future

Dr. Sullivan’s office walls were covered with stock charts. Not only that, he had rows of computers lined up – not a common site in the early 1980s.

When I asked about this, he simply told me, “I pick stocks based on chart patterns.”

I was a bit taken aback by this, not to mention a little skeptical. But I sat down and listened. And as he explained it all, I became fascinated. In just a couple of hours, I knew he was onto something.

Within days, I leased my own computer (yes, leased!) and started to develop a technique that would accurately predict a stock’s future movement.

It wasn’t an easy task. Back then, chart pattern trading was difficult to do, because unless you had a bundle of money to buy a computer, the only way to study charts was to subscribe to a weekly publication called Daily Graphs, which is still published today.

But there’s a very simple way to summarize a chart pattern…

The Two Main Forces That Move The Market

Fear and greed.

You’ve probably heard about these two crucial investment concepts before. They’re essentially the two main forces that move the stock market.

Simply put, when a stock goes up, it’s because of greed. When a stock goes down, it’s because of fear.

And since these human emotions never change, Dr. Sullivan and I began finding recurring patterns in stocks’ past movements.

But what really triggered my interest big-time was when I discovered that this theory applied to patterns found on both daily charts and even intraday charts, too.

After a while, I began trading with my own money – and fared so well that I decided to see how I’d do against Wall Street’s “elite.”

I entered a trading competition sponsored by Winners Circle Magazine – and the results surprised everyone except Dr. Sullivan and me. I won the contest with returns of 257%.

Since then, I’ve taken pattern recognition trading to another level. Here’s how you can, too…

25 Years Later…

You know how all those folks on television keep boldly declaring that, “You can’t time the markets?”

I can’t remember how many times I’ve heard various so-called “experts” say this. But if that’s true, then why do they always show charts?

Simple. Because they know that charts are fascinating to investors and that many of them use charts to make investment decisions.

The question is, though: Does this type of trading really work? Most certainly. Let me show you…

Here’s an example of a recent trade I sent to my subscribers. First of all, take a look at the chart below…

How We Rode “The HOG” For 112% Profits In Less Than A Month

In January, shares of Harley Davidson (NYSE: HOG) began trading in a bearish consolidation pattern. And when the stock made a new low in March, the pattern recognition component of my system determined that the projected minimum downside target was $32.50.

With that target set, I waited for the stock to rally before taking action. Why? Two reasons…

1. The higher the stock goes, the less risk and more profit potential in the trade.
2. The broader stock indexes were moving higher and I didn’t want to add any short positions until the rally ran out of steam.

As it turned out, the stock indexes topped out in late May and HOG traded back up to the top of its consolidation pattern before heading lower. This generated a new sell signal on June 10, but I waited for the inevitable bounce, which occurred right on cue – from June 11 to June 17.

So on June 18, I issued a trade alert to buy the August $40 puts.

Just three weeks later (on July 11), the stock reached our target price and I sent an alert to subscribers, instructing them to sell the puts at the market. This produced a profit of 112% in less than a month.

This is just one of many successful trades that the system has produced this year – even as the stock market has tanked. My subscribers have had the opportunity to book cumulative gains of 591%.

On Monday, in my regular “Sector Watch” column, I’ll talk more about the “code” that I’ve developed that consistently racks up steady, safe gains and beats the broader market. So stay tuned for that.

Source: The Two Forces That Move the Market…