Karim Rahemtulla (Investment U):
Of all the great investments you could have made in 2009, gold is right up there among the best of them.

The price of gold has surged this year, taking gold shares upwards with it. Readers of my Xcelerated Profits Report have rung the register with 45% profits on Goldcorp (NYSE: GG) and a triple-digit winner on Golden Star Resources (NYSE: GSS). We’re also up big on Yamana Gold (NYSE: AUY) at the moment.

All is good, right?

On the surface, perhaps. But not if you believe what the options market is saying…

Yamana Options Signal a Share Price Drop

Using Yamana as an example, the options market is betting that over the next 12 months or so, Yamana may fall from current levels of around $13 back into the single digits again.

Just take a look at the January 2011 $7.50 put options (the right to sell Yamana shares at $7.50), currently trading at $0.70 cents per contract. This means the put buyer thinks Yamana’s price will fall to $6.80 – almost 50% below current levels – in order to be in the money. The $6.80 price is derived from subtracting the price of the option from the strike price ($7.50 minus $0.70 = $6.80). This tale is similar across other gold shares, too.

These put options are expensive relative to Yamana’s share price – the result of gold prices moving sharply in previous weeks and causing the volatility in gold stocks to increase.

As a quick refresher, the price of an option is based on four major factors:

The price of the underlying shares
The options strike price
The time to expiration
The volatility of the underlying shares
Two Ways to Play Gold Prices… But Only One Viable Option

So if you’re a gold investor looking to participate in the market, what can you do to protect your profits, or buy shares at a lower price? Here are two potential ways…

Click here for the rest of Mr. Rahemtulla’s Analysis at Investment U.

There’s one antidote for this problem … remembering a few basic rules. Just embrace the 10 ideas that follow and you’ll be in line to make some serious money in the months ahead.

Rule Number 1: Invest on the Right Side of Major Economic Trends:That old investing adage “Don’t fight the Fed” serves as a good example here. Rising interest-rate environments make meaningful gains difficult to sustain – unless you know what to look for. Far too many investors got it wrong in the 2000-2003 and 2008-2009 periods by betting on growth stocks in a recessionary economy, and they’re still getting it wrong. Those investors are likely to get burned again should the economy slow even more, despite the government-bailout and federal-stimulus efforts. Make sure to analyze all of the other major global trends, as well – and ride the ones that are truly unstoppable. You’ll know them when you see them, because they’ll have trillions of dollars in new capital flowing directly at them – investment plays in such areas as infrastructure, inflation, energy, food, and water (both supply and purity) are great examples.

Rule Number 2: Sell Your Winners: This may seem counterintuitive, but – if you want to succeed – you must sell your winners. Rule Number 6 – thinking like a plumber to prevent losses – is only part of the success equation. To be really effective, you have to take profits, too. That way, you get more capital that you can put to work. Think of it this way – Safeway Inc. (NYSE: SWY) regularly replenishes the inventory in its

Produce Department to keep it fresh. You should do the same with the “inventory” in your portfolio because, if you let your stocks sit on the shelf too long, they’ll eventually go bad – just like fruit that’s past its expiration date.

Click here for rules 3-10 from Keith Fitzgerald, Chief Investment Strategist of The Money Map Report.

In fact, the evidence is that most investors have the attention span and patience of a field mouse. Here’s the average holding period for a stock on the New York Stock Exchange:

What jumps out at you right away is that the average holding period is less than a year. That means that, on average, an “investor” typically holds an NYSE stock for a matter of months. This is not investing, which is why I put the term in quotes. I don’t know what it is. Mindless gambling comes to mind.

It’s no surprise that the last time we were down here was in the Roaring Twenties. We all know what that was the opening act for.

This chart also speaks to a larger problem in the markets today — there are too few owners and too many renters. Just as in real estate, owners generally take better care of a property than renters. Why should it be different with companies?

Source: Stop Trading

What I am worried about is what will happen when investors fall off the top of this wall.

“Let me take my chances on the Wall of Death”

– Richard Thompson

An astute observer can easily see how Wall Street and Washington have been trying to push investors toward the latter position. For the past few weeks, we have heard endless examples of lagging corporate profits and failing economic numbers spun as “better than expected” buying signals.

Sometimes the stories are completely contradictory – like when the Fed claims one day that it has to pump out more cash so we can start adding jobs, and the next says not to worry about all that excess cash crashing the dollar, because the lack of new jobs for the foreseeable future will keep inflation under control.

“Well You’re Going Nowhere When You Ride on the Carousel”

The lyrics come from a wonderful song – “Wall of Death” by Richard Thompson, a songwriter and master guitarist out of London’s Notting Hill. Several of Thompson’s lines are more apt descriptions of the current situation than anything I could gin up on my own.

For example, for the past year or so, United Parcel Service (UPS:NYSE) management has sworn up, down and sideways that they would make their annual nut. Didn’t matter how badly they fared with each successive quarter. They would still spin out some yarn as to how the market was stabilizing and the next quarter would be soooo good, the company would up profits in the end.

So far, it has not been working out too well for them… or for the investors who have drank their Kool-Aid. As a result of all this smoke and spin, UPS earnings surprised to the downside by -2.4% last December and by a whopping -7.1% last March. By the time the dust had settled, shares were off their highs by some 57%.

Climbing the Wall – Again

Now, for the past few weeks, UPS shares have been rising again as anxious bulls fling themselves madly at the wall of worry: “Washington and Wall Street keep saying that the situation is stabilizing. What if UPS declares major gains, and I miss the boat?”

The mere thought of getting out of the gate late had buyers in such a tizzy, they drove UPS shares up more than 15% over a few short trading days. And then UPS announced that, once again, they were in the soup. Volume was down 4.6% in the U.S. and 5.5% globally. Revenue was down 17% – far below the levels investors had been led to expect. And profits were down more than 49% quarter over quarter.

One could certainly understand why UPS shares fell like a rock when word of this debacle began to circulate. What is a tad harder to wrap one’s mind around is what happened next…

The End Is Nigh – and This Time We Really Mean It

In an effort to stem the bleeding, Chief Financial Officer Kurt Kuehn claimed: “Declines in both our domestic and international businesses appear to be stabilizing.” Now even Kurt couldn’t just say such a thing with a straight face, so he added a bit as to how volume would remain significantly below last year’s levels.

Not to worry friend Kurt! Despite seeing such promises like that broken month after month, investors jumped back aboard, and drove UPS shares back up to a new multi-month high.

Down 2%, up 2%… all off the same set of really rather miserable facts – heck, all in the same damned 6 ½-hour trading day!

“You Can Go With the Crazy People in the Crooked House”

This isn’t about worrying, folks. One might worry that the economy isn’t growing fast enough. Despite billions in stimulus spending, this economy isn’t growing at all.

One might worry that the central bank’s plans might not be adequate to the task of husbanding our nation’s currency. St. Louis Federal Reserve Bank President James Bullard has publicly warned that the Fed has no such plan in place, and no plan appears to be forthcoming anytime soon.

One might worry that corporate profits aren’t climbing at an adequate rate to support the rise in share prices. Most every report I read indicates down in the very fine print that corporate profits have been falling and will continue to fall like cartoon anvils.

This is not a wall of worry.

This is a wall of death.

Source: The Market Is Climbing a Wall, All Right. But What About Those Spikes on the Other Side?

Investors are further assured that the stocks held in the index have nothing to do with borrowing or lending, women’s fashions, cosmetics, modern cinema, popular music, or pork.

Personally, I wouldn’t touch this fund with a barge pole. It is virtually guaranteed to earn sub-par returns.

Here’s why…

Investing in Sin Stocks vs. Socially Responsible Stocks

If you were given the choice six years ago between investing in the environmentally and socially responsible Sierra Club Stock Fund (Nasdaq: SCFSX) or investing in sin stocks with the Vice Fund (Nasdaq: VICEX), which invests primarily in tobacco, alcohol, defense and gambling, which would you have chosen?

I’ll give you a hint. Your profits would have been much bigger if your conscience weren’t your guide.

• The Sierra Fund has delivered negative returns over the past six years.
• The Vice Fund has delivered positive performance – and beaten the S&P 500 handily, too.

This is no aberration.

Merrill Lynch recently examined the performance of alcohol, tobacco and casino stocks in all recessions since 1970 and found that while the S&P 500 fell 1.5% on average, sin stocks rose an average 11%.

This downturn isn’t shaping up to be any different.

Sure, consumers are cutting their spending far more than in past recessions. But history shows that people do not drop their bad habits in hard times.

Rather many people feel an intense need to escape through alcohol, tobacco, or a trip to their local casino.

This is not too surprising.

If a citizen of ancient Greece or Rome were magically transported into the modern era, he would be astounded by the current state of agriculture, transportation, housing, medicine, architecture, technology and general living standards.

Humanity itself, however, would offer few surprises. We remain the flawed human beings we have always been, struggling with the same deadly sins our ancestors wrestled with millennia ago: greed, gluttony, sloth, pride, anger, envy and lust.

Investing in Sin Stocks Through The 7 Deadly Sins

Given this reality, when it comes to investing in sin stocks, four months ago The Oxford Clubunveiled its new Seven Deadly Sins Portfolio.

It is already up 41%, more than 10 times as much as the S&P 500.

We locked in a 92% profit in the casino stock Wynn Resorts (Nasdaq: WYNN) in 64 days. Our shares of Smith & Wesson (Nasdaq: SWHC) have doubled in less than four months. All but one of our positions are up over 20%.

Why are these vice stocks outstripping the broad market by such a wide margin? One answer is careful security selection.

But two other studies out of Yale and Princeton offer a further rationale.

• One study attributes vice stock outperformance to the lack of attention pension and other institutional investors pay to these stocks in order “to maintain an aura of respectability.” (That creates opportunity.)
• The other believes it’s because companies in sin industries benefit from high barriers to entry, thanks to strict regulations and taxation.

These factors are not likely to change.

I’m not endorsing the sin industries, incidentally.

I don’t smoke and I hope my kids never do. I don’t gamble unless the stakes are negligible. And I don’t own a handgun, although I am a supporter of Second Amendment rights.

Why Would Anyone Invest in Sin Stocks?

So why would I consider investing in sin stocks and these types of companies?

• Because my investment portfolio is a vehicle for achieving and maintaining financial independence, not for making grand moral statements.
• Consumers and investors have every right to patronize or own any legal, publicly traded business that creates jobs, pays taxes and allows citizens to enjoy their many freedoms.
• Moreover, you only need look at Afghanistan under the Taliban to see what a society unleavened by political, religion and economic freedoms looks like.

Last month French President Sarkozy made news when he said the burqua – a symbol of the repression and subjugation of women – “is not welcome in France.”

Shariah law isn’t welcome in my portfolio either. And the returns have been superb because of it.

Source:  Investing in Sin Stocks: How to Oppose Radical Islam in Your Portfolio

On Monday March 9, barely three months ago, I strongly recommended buying Diamond Offshore (NYSE: DO) as part of Money Morning’s “Buy, Sell, or Hold” feature.  Both the stock and the Standard & Poor’s 500 Index had both hit 52-week lows the Friday before.  But oil had already bottomed three weeks prior, and the lax fiscal and monetary policies of governments around the world seemed almost certain to promote reflation.

Additionally, since the earlier oil bottom, Diamond Offshore stock had been outperforming the market.

Diamond not only had compelling fundamentals, it sported an incredibly high dividend yield, particularly if you combined both the regular and the special dividend payouts. That made the stock a compelling buy.

Not only has Diamond Offshore’s stock turned around since that early-March recommendation, the U.S. stock market as a whole turned around.

Making an investment at a market bottom is a rare opportunity. It is both risky and difficult to try and time the market, but that is precisely what we have done with two of our Buy, Sell, or Hold recommendations. I recommended the iShares MSCI Brazil Index exchange traded fund (ETF) (NYSE: EWZ) on October 27, and the fund went on to appreciate 92% in the subsequent eight months.

Now, Diamond Offshore stock has climbed more than 60% from a March 9 bottom of $54.29 a share, to its current level above $90.

I have consistently advised readers to slowly build stakes in our recommendations over a period of time. And that strategy helps mitigate risk and take advantage of panic selling.  In the cases of the iShares Brazil ETF and Diamond Offshore, we were actually able to boost our profit exponentially by starting our investment at the very bottom.

Diamond Offshore’s special dividend yielded an incredible 13% when we bought it. Since the stock has run up in value, however, that same special dividend has been reduced to a 7.4% yield but remains considerably high.

As I pointed out in my previous recommendation, Diamond Offshore likely will keep paying the dividend in order to help recapitalize other holdings of its experienced and savvy majority holders. And some analysts question whether this is sustainable over the long-term.  Obviously, Diamond Offshore at some point will depart from this special dividend, but I don’t expect that to happen anytime soon.

Still, with the strong gains that we’ve seen so far, it would be prudent to take some profit by selling half of the position and allowing the rest to ride on a pure valuation and risk-management call.

Let me explain.

The whole investment was predicated on three general types of factors: Macroeconomic, company fundamentals and the special dividend.  And everything I expected worked like clockwork, without any negative surprise showing up from nowhere to derail our initial investment thesis.

On the macro side, all the factors we analyzed are playing out as we expected. Oil prices have been very supportive.  This is not only supported by the monetary and fiscal reflationary policies I have outlined but also by strong demand from China.  The monetary base expanded significantly.

The type of massive fiscal stimuli deployed by the United States and China is common knowledge.  And China is doing its part by supporting its economy with massive investment and taking advantage of its $2 trillion in foreign exchange reserves and to gobble up resources at low prices.

On the company-specific side, Diamond Offshore did indeed beat earnings expectations by a mile and expanded margins as we predicted.  This was aided by sharp rebound in oil prices and strong execution on the part of management.

Similarly, the dividends were paid out and the special dividend likely will stay in place for a few more quarters.

But even with all of this upside, there are many uncertainties about the market that are could reinforce headwinds and spur more profit taking.  The Iranian elections could result in a more moderate regime that might ease tensions in the Middle East and allow some rapprochement between Iran and the United States.  This might be conducive to lower oil prices, even though the risks of Iran’s continued pursuit of nuclear weapons under the veil of a nuclear electricity policy will remain.

The Federal Reserve’s balance sheet expansion and the large issuance of U.S. Treasuries is coming under criticism from many quarters and has already achieved the normalization of many financial markets.  We could see a slowdown in any of these stimuli deployments.

In addition, the heightened risks of inflation, dollar weakness, and interest rate increases in the longer term have brought long-term interest rates up.  Higher rates have already increased the cost of mortgages and put renewed pressure on the already badly hit housing market. Together with higher oil prices, this could put the brakes on future economic growth.  It does not mean that the recovery will stall, but continued increases in job losses, as is typical in recessions will keep damping prospects.

Profit-taking also poses a risk ahead of the earnings season, as the United States and other stock markets have seen strong gains over the past three months.  Should this transpire, we could see a counter-trend correction due to a temporary fly-to-safety into bonds for a while, a strengthening of the U.S. dollar, and a drop in commodity and pro-cyclical stocks.  This could affect Diamond Offshore in the short term.

We must also consider Diamond Offshore’s opportunistic purchase of a semi-submersible unit PetroRig I.  We will not have the price and terms of this deal until closes on or around June 25.

Some analysts believe that this purchase – or the possibility that Diamond will get more aggressive in serving Brazilian oil major Petroleo Brasileiro SA (NYSE ADR: PBR), also known as Petrobras –could jeopardize the special dividend, but I disagree.  The issuance of a $500 million, ten-year debt placement will cover this purchase and raise the operating and financial leverage of the company, thus raising the potential upside for earnings-per-share (EPS) in this new pro-cyclical bull market for commodities.  And I believe the recapitalization needs of the sister company in the group has some more length to go.

Recommendation: Having obtained already very strong profits, sell half of your holdings in Diamond Offshore Drilling Inc. (NYSE: DO) in light of heightened risks that could materialize. Set a 20% trailing stop on the remainder.  I have little doubt that over the long-term we can expect DO to consistently outperform the market.

(**)  Special Note of Disclosure: Horacio Marquez holds no interest inDiamond Offshore Drilling Inc. (NYSE: DO).

Source: Buy, Sell or Hold: Time to Take Profits on Diamond Offshore Drilling (NYSE: DO) ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-time-to-take-profits-on-diamond-offshore-drilling-nyse-do/17904/feed 0 http://www.contrarianprofits.com/articles/why-your-money-should-be-in-commodities-now/16993 http://www.contrarianprofits.com/articles/why-your-money-should-be-in-commodities-now/16993#comments Thu, 21 May 2009 20:03:31 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=16993 We’ve been so caught up watching stocks soar we haven’t paid much attention to one of our favorite asset classes: commodities.
Yesterday, we mentioned we were bullish on agriculture. In particular, we like the PowerShares DB Agriculture ETF (NYSE:DBA).

Underground investor Jim Rogers is also bullish on agriculture. He says Asian demand and low inventories will lead to a long secular bull market in corn, soybeans and fertilizer.

As Brian Hunt wrote in yesterday’s DailyWealth:

DBA “is one of the largest and most liquid ways to trade agriculture through the stock market. It divides its holdings evenly between corn, soybeans, wheat, and sugar.”

From this chart, you can see that DBA is has been showing some strongly bullish action lately. And it has the Jim…

On February 2, I said:

If the VIX is rising, that means the Dow Jones should be falling, possibly breaking under 8,000 sometime in the next few weeks and head towards 7,000.

The play should be obvious. But I’m going to point it out anyways because I’m feeling saucy.

If the Dow Jones drops under 8,000 as the VIX spikes, buy a put on the Diamonds ETF (NYSE:DIA), which is an ETF that tracks the value of the Dow Jones Industrial Average.

As I write, the Dow is trading at 7,140. So if you sold puts on DIA, you’d have made 11% in about 40 days time.

Now is the time to get out of this trade (if you haven’t already).

Why?

On Feb 24, I talked about how “big round numbers” can be huge psychological turning points for the market. I said that 7,000 was one of those turning points because it market a ten-year long resistance line.

Well, 7,000 has been breached, as you can see from the chart above.

The Dow briefly flirted with 6,500 (which was also one of my targets) and then zoomed up right past 7,000 again.

This is pretty freaking bullish. Quite frankly, it gets me really agitated.

No, it’s not because I’ve shorted every stock in the world. It’s because there’s nothing to really get excited about.

It seems that the news, which is being seen as positive, really isn’t.

First, Citigroup says that for the first two months of the year, it made a profit. Man, that’s complete BS if I’ve ever heard it.

Then Bank of America said it won’t be accepting anymore TARP money.

If banks don’t have to count hundreds of billions in toxic asset write downs… of course they’d have a profit (so would most other banks).

So, why would these two banks not count write downs in their estimates?

Maybe mark-to-market accounting rules will be suspended this week. Then the banks won’t have to worry about write downs anymore.

From the Wall Street Journal…

After facing a barrage of criticism Thursday, the chairman of the Financial Accounting Standards Board told a U.S. House panel that he will work to expedite issuing guidance to companies on the application of mark-to-market rules.

The FASB said they’d have it done in three weeks.

If these rules get suspended or relaxed, this market is shooting higher on the back of the financials. Heck, it’s already shooting higher on the mere thought of these rules being relaxed.

Considering the financials were the sector that led the Dow Jones down to its recent lows, it should come as obvious that the financials will lead the Dow Jones higher in the weeks ahead.

Go long the Dow Jones by buying the Diamonds ETF (NYSE:DIA).

7,000 is your stop. But I have a feeling this market is pushing past 8,000 in the weeks ahead, if these rules are relaxed.

If your portfolio is filled with green today, you have just one person to thank. Vikram Pandit, the same Citigroup (NYSE:C) CEO that helped bring the Dow to 6,500, gave the equities market a boost today when he told his staff he is confident of his company’s capital strength.

In an open letter to his employees that was obviously designed to find its way to Wall Street, Pandit tells anybody that will listen he believes the company’s pummeled share price was due to “broad-based misperceptions about our company and its financial position.”

He went on to discuss the company’s financial success so far this year. Thanks to revenues of $19 billion in January and February, the company has recorded an operating profit of $8.3 billion so far this year.

Of course, Pandit warns, that figure is before taxes and any special charges or write-downs. He also says March’s volatility could take its toll on the figures.

In other words, those are merely accounting figures. The real numbers will be nowhere close when we close this quarter’s books.

Why should we believe them now?

Pandit may be shooting himself in the foot with this memo. He is setting the earnings bar pretty high and has proven the company’s business model still works. If his next quarterly earnings report does not live up to today’s expectations, Pandit will be in the hot seat with no excuses.

Read the full article here: Citi’s memo: Can you believe it?

This from Mike:

It’s not the time to try to call a bottom… but it is time to plan for it.

Our favorite leading indicator of economic activity, the Baltic Dry Index, will likely be the first to signal the end of a recession. And it provides a convenient clue to one stock I believe will comeback faster than most others, once the market-wide comeback is underway.

The Baltic Dry measure shipping costs, and therefore shipping activity, and is therefore a great “boots on the ground” measure of what’s going on in the world economy. When costs are up, it benefits shipping companies. My favorite right now is Frontline (NYSE: FRO).

Frontline focuses specifically on tanker ships for transporting oil. When economic activity picks up, so will oil prices and shipping rates. And that plays right into Frontline’s hands.

The oil focus means Frontline’s recent quarters haven’t been as bad as other shippers because of oil stored offshore to take advantage of the contango situation.

Overall, the company still posted growth for 2008, but last week’s quarterly numbers were certainly lackluster. Earnings per day on a “very large crude carrier” dropped to $61,500 from $96,500 a year earlier.

Still, Frontline management seems to be making the right moves in tough times. It’s proceeding with cautious investment in new capacity, switching some of its more profitable daily arrangements to more predictable long-term contracts.

Even so, the stock is getting hammered again today, down another 4% as of this writing.

But that puts the stock price at about two times trailing earnings. And with enough cash flow to cover interest costs, I’m sure Frontline can remain a going concern through the crisis.

When spending does pick up those who buy Frontline at, or near, the market bottom will likely be the first to benefit.

Source:  Frontline (NYSE: FRO): Stock of the Day