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Joshua Brown
08-31-2013,
Stuff I?m Reading this Morning?

They faked the jobs number to get Obama elected last year ? John Crudele (NYP)

Financial TV Wars Heat Up: Maria Bartiromo to Fox Business! Someone keep an eye on Cramer! (NYT)

A masterful thrashing of the ?Stocks are a Bubble? argument. (MacroMan)

How Rob Bennett became the most hated financial blogger on the internet. (ValueWalk) and (JoeTaxpayer)

Hot software stock Workday has had a juicy pullback, is this a good entry? (RiskReversal)

BernankeCare is causing pockets of the market to act strangely. (Bloomberg)

Five years of QE and the distributional effects. (SoberLook)

The ?alternative currency? that is Bitcoin has just crashed again. I?m converting my savings now? (BusinessInsider)

?but what if the Bitcoin Bubble is just beginning? (MebaneFaber)

Another strike against actively managed mutual funds: The Payout. (RickFerri)

Wal-Mart?s running a food drive for its own employees is easily the most disgusting thing I?ve seen all year. (TheAtlantic)

James Surowiecki: Okay but seriously, how are all these web businesses going to keep giving the product away for free? (NewYorker)

Oxford names its Word of the Year for 2013: (MentalFloss)

Cindy Crawford at age 47. Get down on your knees, boy, you?re in the presence of a goddess. (Egotastic)

REMINDER: Backstage Wall Street is now on Kindle!

Joshua Brown
08-31-2013,
The major indices keep hitting new all-time highs, and as a trader, that makes life pretty easy. Basically, you have a bullish tailwind at your back that can forgive your loser picks, while at the same time helping your winners move up nicely.

Indeed, in this era of quantitative easing, which is likely to continue based on the Senate testimony last week of Federal Reserve chair nominee Janet Yellen, I think it makes more sense than ever to buy the "air pockets" in this market. Yet there are some stocks that are just a bit too risky here and probably should be sent packing from your portfolio.

I alerted readers to one such stock earlier this month when I said tech giant Cisco Systems (NASDAQ: CSCO) was likely on the downslope. On Thursday, the stock vindicated my call, as it plunged as much as 13.5% after a dreadful earnings report that missed expectations and a warning that next quarter's revenue would drop 8% to 10% from the same period last year.

In addition to Cisco, there are some other stocks that have performed very well of late that I suspect could be sell-off targets as we head toward the end of the year.

This selling pressure is likely to come from what I've called the "performance protection trade," meaning that hedge funds and professional traders would sell them to beef up their 2013 returns. Other factors could include a rotation out of a hot sector, or possibly a faulty earnings report from a sector bellwether that taints a particular group.

Here are three stocks that I think investors should sell before any potential meltdown:

Joshua Brown
08-31-2013,
If you really want to get a read on how ?the 1%? are faring these days, take a ski vacation to the tony hamlet of Incline Village on the pristine shores of Nevada?s Lake Tahoe.

Each morning, I trekked to Starbucks, one of the few local sources for the Wall Street Journal and the New York Times. There, trophy wives line up to buy their chai tea lattes, all tall, thin, and blonde, wearing designer sunglasses and snow boots, as if produced from a Gucci cookie cutter. The parking lot is jammed with Range Rovers and Cadillac Escalades.



Keeping up with the Jones?s here on fabled Lakeshore Drive can be quite a task, especially when they are populated by such names as Oracle?s Larry Ellison, casino mogul, Steve Wynn, and Saudi arms dealer, Adnan Kashoggi. Ellison alone is thought to have poured $200 million into his mountain retreat. Some of these compounds offer private beach lodgings for bodyguards and dog groomers. Junk bond king, Michael Milken, springs for the cost of the town?s annual Fourth of July fireworks display as it coincides with his birthday.

In the ultimate feat of hubris one upsmanship, one billionaire is converting the profits from his check cashing business to build a $150 million, 36,000 square foot residence that looks like a convention center. He has ruffled the feathers of locals by chopping down every ancient pine and cedar tree on the property to max out the square footage, violating multiple town ordinances. Who knew that cashing checks was so profitable?

Joshua Brown
08-31-2013,
?America?s colleges and universities churn out lots of liberal arts graduates?.By and large, the economy doesn?t need all these generals. We?re not training enough scientists and engineers. The high schools used to churn out enough people with technical skills in the fifties and sixties, but not so today. It?s cheaper just to prepare everyone to go to college and pretend that a liberal arts education is going to solve everyone?s problems,? said Professor Peter Morici at the University Of Maryland School Of Business.

Joshua Brown
08-31-2013,
The Chart of the Day is Kona Grill (KONA). I found the stock near the top of the New High List after I sorted for frequency. The stock hit 18 new highs in the last 20 sessions. since the Trend Spotter signaled a buy on 9/20 the stock is up 36.13%.

Kona Grill restaurants offer freshly prepared food, personalized service, and a warm, contemporary ambiance that creates an exceptional, yet affordable, dining experience. Kona Grill restaurants serve a diverse selection of mainstream American dishes as well as a variety of appetizers and entrees with an international influence.

Joshua Brown
08-31-2013,
Coming out of World War II, few Americans could have known about the great era of prosperity soon to arrive.

From 1946 through 1973, our economy expanded by a 3.8% annual pace. Sure, there were a few recessions along the way, but the rapid rise of the middle class, which enjoyed a rising standard of living, helped set the stage for the world's greatest economy. Roughly one-fourth of all global economic activity takes place on U.S. shores.

But as I noted last week, the U.S. is now in its sixth year of weak economic growth. Economists are growing increasingly concerned that we've entered into an extended period of anemic growth. Indeed, the sole purpose of the Federal Reserve's massive stimulus programs was to revive the economy's "animal spirits." But the economy has yet to respond. The Fed is pushing on a string.

Investors may have a hard time seeing this notion as the stock market moves steadily higher. Profits are still rising, thanks to lean corporate expenses, but fully half of the companies in the S&P 500 are expected to boost sales by less than 5% next year.

Joshua Brown
08-31-2013,
Last week, stock prices reacted to the news. Stock picking could become more important as the market reaches new highs, and one technical indicator could be helpful to traders looking to avoid downside surprises.

It Is Becoming a Market of Stocks
Fed chair nominee Janet Yellen confirmed that quantitative easing and low interest rates should continue for the foreseeable future. Traders seem to believe this is good news, and SPDR S&P 500 (NYSE: SPY) gained 1.56% last week.

The ETF has now closed up six weeks in a row. SPY has had a winning streak of this length 15 times in the past 20 years. In the short term, this winning streak offers us little information. The next week closed up seven times and lower eight times. Longer term, SPY was up six months later 80% of the time.

The winning streak is interesting, but in the long run, stock prices are driven by earnings, and the trend in earnings is likely to determine whether prices are higher or lower six months from now.

Earnings season came to an unofficial end when Wal-Mart (NYSE: WMT) reported last week. On this front, the results were mixed. Among the large-cap stocks in the S&P 500, Standard & Poor's reports 66.59% beat earnings estimates, the best beat rate in at least six quarters.

For the broader market, according to Bespoke Investment Group, only 58.6% of 2,268 companies beat expectations. Bespoke noted, "Since the bull market began in March 2009, this is the second worst earnings beat rate we've seen. Only Q1 of this year was worse."

This mixed picture is typical of the challenge confronting investors. Success requires sifting through data that can be conflicting to find what matters the most to traders at any particular time. This week, earnings seemed to drive the price action in specific stocks, but the general trend in the market may have been set by comments from Yellen, the woman who will replace Ben Bernanke as head of the Federal Reserve.

Yellen is expected to be much like Bernanke from the perspective of investors. As she explained in testimony to the Senate, interest rates should remain low and quantitative easing will continue in an effort to lower unemployment.

This environment is generally good for companies, and earnings are likely to continue drifting higher, but in an unpredictable way. Investment success will most likely come from getting the larger trend right and being in the best stocks. Relative strength (RS) can be a valuable tool in this market environment.

Cisco Systems (NASDAQ: CSCO) missed estimates and fell more than 10% the day after the announcement. Prior to the announcement, RS indicated the stock was weak and should be avoided.

Joshua Brown
08-31-2013,
Markets were headed higher on Monday; the Dow has officially hit a record high of 16,000 while the S&P 500 surpassed the 1,800 mark. These new highs were hit as the economy has continued to improve throughout the year. Following suit with the upbeat economic news, the National Association of Home Builders announced the U.S. homebuilder confidence remained steady in November after a decline of two months in a row. The NAHB/Wells Fargo Housing Market Index reported 54 for the month of November. This followed 54 for October. Economist were expecting a slightly higher 55. Rick Judson, head of the Federal Housing Finance Agency, said, ?Given the current interest rate and pricing environment, consumers continue to show interest in purchasing new homes, but are holding back because Congress keeps pushing critical decisions on budget, tax and government spending issues down the road.? Readings that come in above 50 for the index show that builder confidence is positive and the index has sat above 50 for the past six months. David Crowe, NAHB Chief Economist, said, ?The fact that builder confidence remains above 50 is an encouraging sign, considering the unresolved debt and federal budget issues cause builders and consumers to remain on the sideline.?

While you?re here, be sure to read our latest options trading article on NYSE:TLT, MBIA, and trade ideas for readers


Shares of Boeing Company (BA) were up over 2% on Monday morning after the company received nearly $106 billion in orders at the Dubai Airshow. The company is redesigning their long-haul jet, the 777. They will be deciding on where they will be producing the new jets in the next 2-3 months. Jim McNerney, Chairman and Chief Executive, said ?We will be announcing within the next 2-3 months very specific plans for manufacturing. We have a number of alternatives and we are in the process of considering them.? The new plane will be called the 777X and is said it will be, ?the largest, most efficient twin-engine jet in the world,? the company said. The 259 orders placed and order commitments for the new jet is the largest in history for a plane of similar size.

Shares of General Electric (GE) were trading higher after the company announced their plans to spin off their North American consumer lending program through an initial public offering. They have filed necessary paperwork with the Securities and Exchange Commission to be able to begin the process in the first quarter of 2014. The finance arm of the company provides store credit cards through retailers. In the filing GE said that they will sell up to 20% of the new company through the IPO. They will then distribute the remaining stake to GE stockholders in exchange for GE common stock.

Joshua Brown
08-31-2013,
It?s tough to watch the market rise sharply if your portfolio has been treading water.

That?s the reality facing many investors that stepped to the sidelines earlier this year after seeing their portfolios soar in value since the bottom in March 2009.

But it could have been worse. You could have invested in some absolute duds.

Morningstar keeps track of the performance of all major exchange-traded funds (ETFs) and calculates a major loss for hundreds of these funds in 2013. The key question for investors: Which of these 2013 duds will morph into 2014 heroes? Let?s take a closer look.

Leveraged Gold? Yikes!
It hasn't paid to be bullish on gold this year, as the yellow metal lost its status as inflation hedge. But it?s proved to be downright foolhardy to buy leveraged ETFs that move at two or three times the rate of change in gold prices. These gold leveraged ETFs lost most of the money tied up in them and are clearly too risky to own.

If you are bullish on gold for 2014, you may be better served by buying gold miners or straight-up gold funds that simply move in tandem with gold prices. No need to be greedy with such a speculative and risky asset.



The Factor Shares fund has the ignominious distinction of going long gold (with leverage) and shorting the S&P 500. That was a lousy idea and should be shut down by the fund sponsor. Factor Shares, incidentally has tried this approach elsewhere, with similarly dismal results. The FactorShares 2X: Oil Bull/S&P 500 Bear (NYSE: FOL) and the FactorShares 2X: TBond Bull/S&P500 Bear (NYSE: FSA) are both down more than 60% this year.

Notice the fourth name in this group (which is not comprehensive and merely a sampling). The Global X Gold Explorers ETF (Nasdaq: GLDX) had the bad timing of owning miners in a year when mining economic turned south. But that doesn?t mean this ETF will always be a loser. This fund owns mostly Canadian miners, and in this cyclical industry, lean years are often followed by better subsequent years, as lower prices lead producer to curtail output down to the levels of demand.

Joshua Brown
08-31-2013,
Having been born and raised outside of Pittsburgh, I know firsthand of the ravages of factory pollution.

My grandfather told me stories about the streetlights coming on midday because of the amount of smog in the downtown area. Many of the region's streams and rivers were void of life back in the 1960s due to industrial waste deliberately and inadvertently seeping into the waterways.

Things have improved greatly since those dark days. I have fond memories of fishing local streams for pollution-resistant fish like carp and catfish. Those same streams had been void of life just a decade or so prior.

Today, many of these Pittsburgh streams hold healthy populations of clean water fish like smallmouth bass and trout. This is a great testament to the success of the U.S. environmental movement, as well as commercial firms dedicated to pollution reduction.

Personally, I like it when the free market helps improve the environment. It's a great feeling to be able to earn a profit by doing a good thing for the environment.

The free market has spawned firms like Illinois-based Fuel-Tech (NASDAQ: FTEK), which specializes in pollution reduction technology. Not only do the company's products help mitigate the negative effects of industrial pollution, its shares are setting up to be a great buy. Let's take a closer look.

Founded in 1987, FTEK provides boiler optimization and air pollution reduction technologies to global industry and utilities. In addition, the firm's FUEL CHEM products improve the efficiency, reliability and environmental status of combustion units. It has a market cap of just under $132 million.

The company posted strong third-quarter results Monday after the close, with revenue climbing 35% year over year to $33.6 million. Operating income shot from $1.6 million in the year-ago quarter to $5.3 million this quarter, and net income advanced to $3.5 million from $1.2 million. More domestic projects and a large contract in Chile pushed revenue from the air pollution control (APC) segment higher by over 50%.

President and CEO Douglas G. Bailey stated, "Higher revenues, improved consolidated gross margins, and increased profits for the 2013 third quarter were driven by a favorable mix of domestic and international APC projects, as well as steady contributions from FUEL CHEM. We also ended the quarter in a strong financial position that included $1.05 per share in cash, and a very modest debt profile."

He continued saying, "Our business development efforts continue in earnest, and we are currently pursuing a number of large project awards in the U.S. and overseas. We continue to focus on broadening our international presence, especially in China, and addressing domestic opportunities driven largely by state consent decrees and other mandates. We also remain committed to investing in R&D and pursuing licensing opportunities as a means to enter new markets and build upon our existing competencies."

In addition to the CEO's enthusiasm for growth, the company has a backlog of $33.4 million and working capital of $46.4 million. I think this all equates to a powerful investing opportunity.

As you might imagine, the great Q3 results created a gap up on the price chart. Shares jumped from $4.60 to around $5.60 on the news. FTEK is a very low volume stock, and the gap up has my technical analyst side a little concerned. Although everything appears fundamentally solid, waiting for shares to break out above $5.81 is warranted.

Joshua Brown
08-31-2013,
No parades outside your window? How about traders on the floor of the NYSE wearing hats or blowing noisemakers? Nope.

The Dow just smashed through 16,000 today for the first time in history while the S&P 500 broke above 1800. In the meanwhile, the Nasdaq is hovering around 4000.

And nobody gives a f*ck.

Business as usual.

Here?s how I responded to all the handwringing surrounding the Dow?s break above 15,000 from May of this year ? you can substitute 16k for 15k?

***

?Putting Dow 15,000 in Perspective?

Oh please, like I would ever write something like that.

If anything, too much perspective has been driving people out of their minds. Everyone has their perspective, whether you?ve asked for it or not. What you probably need is less perspective, or should I say more perspective from people whose perspective has been helpful.

Or maybe none at all for now. Let?s take a break from all the unqualified, inexperienced, triflingly myopic and hopelessly biased ?perspective? for the night.
Why does anyone need the record high close in the Dow Jones Industrial Average ?put into perspective?, anyway?

Why do we need another ?commentator? with no trading experience or skin in the game or ass on the line to tell us whether or not ?the Dow matters? or doesn?t matter?

Why do we need another ?take? on the reality before our eyes?

Why would we want to read yet another treatise about how the Dow is not reflective of the whole market?

Or how the Dow isn?t reflective of the economy?

Or how the Dow isn?t reflective of the experiences of job seekers or Boomers or MBAs or working women or Wal-Mart greeters or whatever the fuck they want to juxtapose it with to make investors feel apprehensive or guilty or both?

How many inanimate objects can we re-price the Dow in to convince others that everything still sucks?

Should we remind people how much less gold the Dow can buy them than it could have for their grandparents in the 1940

The Reformed Broker

Joshua Brown
08-31-2013,
We start with a rundown of three trades that closed with last week?s (November) options expiry.

Here are the details -

First up is the MBIA (NYSE:MBI) strangle that we initiated back on June 24th ? a trade which, unfortunately, had very little success from the get-go.

The letter was called Taking Three Trades by the Throat and involved buying out-of-the-money PUTs and CALLs on MBI with the expectation that continuing spastic gyrations in the stock would give us profitable outcomes for both legs. As we wrote at the time ?

The stock has been volatile. And we?re presuming it will remain so, particularly if the market continues to jerk around here for a while. [MBI] could go in either direction and will most likely do both!

But we were wrong. Here?s a chart of what happened since we put on the trade ?

Joshua Brown
08-31-2013,
The past few years have been a great time to be an investor.

Federal Reserve Chairman Ben Bernanke's zero interest rate policy has fueled large gains in just about every market sector since 2009.

There's little question that his policies are bullish in the short term, but what happens when the Fed's easy money stops?

For an answer to this, we can take a page out of baseball history.

In 1998, Mark McGwire set a record by hitting 70 home runs during the season, while Sammy Sosa hit 66. The previous record of 61 home runs had been set in 1961 by Roger Maris. In 2001, Barry Bonds broke McGwire's record by hitting 73 home runs.

At the time, baseball was an exciting sport to watch as home run records captured headlines. Later, fans learned that the hitters were abusing steroids. Home run outputs returned to normal after league-wide steroid testing became the norm in 2003.

Fed policy is acting like a performance-enhancing drug for the market. When it stops easing, I believe the markets will be unable to continue climbing at the frantic pace seen during the past year. Returns will be below average for some time, and stock selection will again become critical.

Personally, I'm not too worried about Fed easing ending. My stock selection process does not rely on a steroid-infused market.

Instead, I use a trading system that blends fundamental and technical analysis that not only tells me what to buy, but when to buy and sell.

It's been proven to work during bull markets, bear markets, wars, market bubbles and when inflation is high or low. You see, not only have I successfully used this system for years, but I've tested my stock-picking system going back decades.

Recently, I started using it to weed through the stock holdings of the 20 most prominent investors in the world and pick the best stocks from each of their individual portfolios -- investors like Warren Buffett, Carl Icahn, Steve Cohen and David Einhorn.

This system -- which I call my "Guru Trader" system -- has two profound benefits. First, each of these "guru" investors has a team of analysts, money managers and traders to do their bidding. So when one of them picks a stock, you know it has been vetted by some of the greatest financial minds in the industry.

Second, this "Guru Trader" system has the added advantage of reducing risk. My system pinpoints stocks with strong technicals, but only signals a buy if the underlying company has strong fundamentals.

Take a look at how this system performed over the past 10 years in backtesting...

Joshua Brown
08-31-2013,
Video of the day

Russ Kinnel and Christine Benz talk mutual funds with Consuelo Mack. (Wealthtrack)

Markets

For now indicators point towards more risk-on behavior. (Reading the Markets)

We are in the ?mature phase? of the bull market. (Dynamic Hedge)

Are these really reasons to be bearish? (Macro Man)

Strategy

Another reason not to buy actively managed funds. (Rick Ferri)

What happens to stocks when disaster strikes? (Crossing Wall Street)

The disappearance of the roll yield has killed the case for commodities. (SSRN via CXOAG)

Finance

More 401(k) plans are coming with advice. (Time)

Social media

Can social media firms ever monetize their users? (ValueWalk)

Is Snapchat a fad or something more permanent? (Farhad Manjoo)

Why Facebook ($FB) needs a Snapchat. (NYTimes)

Global

The implications of secular stagnation. (Gavyn Davies, FT Alphaville, Marginal Revolution, MoneyBeat)

A flaw in the UK recovery story. (Business Insider)

Economy

On the myth of the destruction of the US dollar. (Business Insider)

Q4 GDP is tracking just below 2.0%. (Capital Spectator)

Homebuilder confidence ticks down. (Calculated Risk)

Books

What went wrong: The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream by Timothy Howard. (Reading the Markets)

A nice review for Walter A. Friedman?s Fortune Tellers: The Story of America?s First Economic Forecasters. (Marginal Revolution)

Earlier on Abnormal Returns

What you may have missed in our Sunday linkfest. (Abnormal Returns)

Bitcoin

Why have there been so many Bitcoin thefts? (Business Insider)

An interesting look at Bitcoin price dynamics. (FT Alphaville)

Mixed media

Joshua Brown
08-31-2013,
It might be pie-in-the-sky thinking that Rackspace Hosting (NYSE: RAX) could overtake Amazon Web Services as king of cloud hosting -- at least not in the near future.

That?s not necessarily a bad thing for investors. While Amazon.com?s (Nasdaq: AMZN) enormous profile has cast a shadow over Rackspace for some time now, being No. 2 in this arena is nothing to sneeze at.

Back in March 2012, my StreetAuthority colleague David Sterman named RAX one of the most overvalued stocks in the market -- but these days, Rackspace is getting some rather special attention at current prices. When Dave's article was published last year, RAX sold for about $54. It subsequently grew even more expensive, to nearly $78 a share this January, but it has since fallen nearly 50% from that high.

Last Monday, RAX's share price of $49.31prompted investors to acquire 21,687 call options on the company, about 815% more than usual. That same day, Rackspace reported third-quarter earnings, showing higher than expected revenue ($389 million, up15.7% from a year ago) but lower than expected earnings per share (EPS), which came in at $0.11 compared with the $0.16 expected.

So, you had some investors selling shares -- price fell by 12% mid-day -- and others betting that the stock would go up. Here a few possible reasons for the dichotomy.

Rackspace's earnings miss was due in part to the company's bigger than expected investments on new Performance Cloud Servers, a move being applauded by its critics and one that differentiates itself from Amazon. Without getting too technical, the servers use Intel's (Nasdaq: INTC) Xeon E5 processors with 120 GB of RAM, meaning they?re faster, more reliable and less prone to failure.

According to IT research firm IDC, ?Everyone is gunning for (Amazon Web Services) right now, and performance is one area where competing public clouds feel they can differentiate from them.?

Another factor in Rackspace's miss on earnings might be the nearly 4,800 physical servers it added in the second quarter, which marked a significant increased from the previous two quarters and brought its total number to just shy of 99,000.

After being criticized for the slow pace of growth in its cloud computing business, this was welcome news for investors. The reason for all the new servers: a deployment of new cloud infrastructure in Virginia, Australia and Hong Kong that required added capacity -- which, by the way, is all due to be upgraded soon with Xeon E5 processors.

Unfortunately, Rackspace has been caught between a rock and a hard place. On one hand, as new business churns out revenue, the $5.9 billion company also requires more servers and additional capital expenditures. As a result, second-quarter investments totaled $119.8 million, compared with $188 million for the previous two quarters combined.

?We?ve increased our investment levels to play for a bigger long-term outcome," CEO Lanham Napier says. "This is how we see things right now.

We think now is the time to really go for it.?

Some analysts and the financial media think so too.

? Fortune magazine, citing Warren Buffett's famed advice ?to be fearful when others are greedy, and be greedy when others are fearful,? reported that RAX is now considered oversold according to its relative strength index reading.

? JMP Securities concluded Rackspace made a worthwhile investment in the new servers and expects the company to grow 20% in 2014 with a target price of $67.

? Oppenheimer reiterated a buy rating on RAX with a $62 price target.

On the other hand, analysts at Evercore Partners cut their number from $56 to $52.50.

Joshua Brown
08-31-2013,
Here?s Bob Peck of SunTrust Robinson Humphrey relaying an interesting comScore preview of this year?s online holiday shopping season?

Big picture, eCommerce is set for its first $300b+ U.S. year, growing north of 12%. Mobile commerce growth accelerated in 3Q to 26% from 24% and should be a major driver in 4Q, growing >35% according to comScore. Desktop eCommerce has been growing in the low to mid double digits, accounting for 9.4% of Commerce from 8.7% last year. Consumers continue to worry about unemployment and rising prices.

comScore has 5 bold predictions for the Holiday season:

1) Total US eCommerce is set to grow 15-17%
2) Mobile commerce will reach 12-13% of eCommerce and break $10b
3) Cyber Monday will break online spending records at $1.8b
4) Late shopping will be big, at 25% of the season?s shopping
5) Cyber week will have 5 consecutive $1b+ days

Joshua Brown
08-31-2013,
Random Thoughts



Before the Saints game (who dat!?), I was able to hook up with a long lost friend. As usual, conversations quickly turn to the markets. Since he's a physician, he wanted to know how Obamacare is going to affect the markets. I told him, well, the S&P is at all-time highs, the Nasdaq is at multi-year highs, Drugs are at all-time highs, Biotech-which recently looked like it was rolling over-is coming back and not too far from all-time highs, Insurance is at all-time highs, and Health Services is at all-time highs. I reminded him that after all, I am known as the Trend Following Moron. I try not to confuse the issue with facts ( www.dontconfusetheissuewithfacts.com and www.donotconfusetheissuewithfacts.com ).

So, how will Obamacare affect the market? So far, so good. The Market seems to like it. Obamacare appears to be good for the markets. And, as long as the market continues to bang out new highs, I'm going to continue to stick to that belief. My personal belief? Who cares. We're here to talk about trading.

People seem to be passionate about the issues. You can't let your passion get in the way of your trading. As I wrote in The Layman's Guide To Trading Stocks, "unless you're Bill Clinton, what is, is."

In addition to the aforementioned sectors at new highs, Retail, Transports, Chemicals, I can go on and on, are also at new highs.

So what do we do? Well, since things look pretty rosy, should we run out and buy, buy, buy? Well, I'm still not seeing a whole lot of new meaningful buy setups. This is perfectly normal since the methodology requires a pullback. I am still seeing a few short side setups but I see no reason to swim against the tide. Considering this, continue to focus mostly on existing positions. Take partial profits as offered and trail your stops higher. Put together your momentum list (or pay me to do it for you) and watch for new setups. Get ready to get ready.

Joshua Brown
08-31-2013,
It?s tough to watch the market rise sharply if your portfolio has been treading water.

That?s the reality facing many investors that stepped to the sidelines earlier this year after seeing their portfolios soar in value since the bottom in March 2009.

But it could have been worse. You could have invested in some absolute duds.

Morningstar keeps track of the performance of all major exchange-traded funds (ETFs) and calculates a major loss for hundreds of these funds in 2013. The key question for investors: Which of these 2013 duds will morph into 2014 heroes? Let?s take a closer look.

Leveraged Gold? Yikes!
It hasn't paid to be bullish on gold this year, as the yellow metal lost its status as inflation hedge. But it?s proved to be downright foolhardy to buy leveraged ETFs that move at two or three times the rate of change in gold prices. These gold leveraged ETFs lost most of the money tied up in them and are clearly too risky to own.

If you are bullish on gold for 2014, you may be better served by buying gold miners or straight-up gold funds that simply move in tandem with gold prices. No need to be greedy with such a speculative and risky asset.

The Factor Shares fund has the ignominious distinction of going long gold (with leverage) and shorting the S&P 500. That was a lousy idea and should be shut down by the fund sponsor. Factor Shares, incidentally has tried this approach elsewhere, with similarly dismal results. The FactorShares 2X: Oil Bull/S&P 500 Bear (NYSE: FOL) and the FactorShares 2X: TBond Bull/S&P500 Bear (NYSE: FSA) are both down more than 60% this year.

Notice the fourth name in this group (which is not comprehensive and merely a sampling). The Global X Gold Explorers ETF (Nasdaq: GLDX) had the bad timing of owning miners in a year when mining economic turned south. But that doesn?t mean this ETF will always be a loser. This fund owns mostly Canadian miners, and in this cyclical industry, lean years are often followed by better subsequent years, as lower prices lead producer to curtail output down to the levels of demand.

The other gold fund that spit the bit in 2013 but could rally in 2014 if gold prices stabilize: The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), which has fallen a stunning 55% this year. According to Morningstar, the average holding in its portfolio is valued at 0.63 times book value. Assuming the companies in this fund don?t need to write down assets, value investors are likely to flock to them once they sense that gold prices have stopped falling.

Volatility Still Doesn?t Pay
One of the key hallmarks of this bull market is a complete lack of fear that the gains will be reversed. Even bearish analysts and investors don?t anticipate a major market plunge, perhaps because balance sheets are so much stronger than they were five years ago. In that light, an ETF that was positioned for a spike in the VIX -- a key gauge of market fear, popularly known as the "volatility index" -- has been a real dud.

These ETFs are the worst in the group because of how they are constructed. Their focus on short-term VIX movements has left them vulnerable to a bleeding out of value as front-month contracts get rolled over. My take: Volatility will return -- someday -- but why would you want to keep betting on this losing wager? It?s more like playing roulette than investing.

There are dozens of other ETFs that are down more than 40% this year, and they all share a common theme: a leveraged investment against the major indices and specific industries. I won?t say more about them here, except to note that the only time that you should buy a double- or triple-leveraged fund is when you have an extremely high level of conviction that your investment thesis is correct.

Searching For Bargains
Putting funds that focus on gold, volatility and/or use lots of leverage, what else is on the list of 2013 losers? After reviewing them, here are my picks for solid bounce back potential in 2014.

Joshua Brown
08-31-2013,
From Arthur Hill at the Stockcharts.com Blog, we get a look at a very important market internal measure called the Advance Decline Volume Line, which I believe to be a key to the continuing health of the rally. This measure is defined thusly:

The AD Volume Line is a cumulative measure of net advancing volume, which is the volume of advancing stocks less the volume of declining stocks. This indicator reflects the performance of large-caps because large-cap stocks typically trade much more volume than small and mid-caps.

Hill is looking at this AD Volume Line for the S&P 1500, which is the S&P 500 plus the Midcap 400 and the Smallcap 600, although obviously large cap volume will dominate this particular data series as the big stocks trade more shares each day. Here?s what it looks like this year:

The chart below shows the S&P 1500 AD Volume Line ($SUPUDP) also breaking out and hitting a new high. This indicator has been trending higher the entire year with a series of higher highs and higher lows. The early November low now marks first support. With the S&P 1500 and these two breadth indicators hitting new highs, the long-term uptrend is clearly intact and clearly strong.

Joshua Brown
08-31-2013,
Having been born and raised outside of Pittsburgh, I know firsthand of the ravages of factory pollution.

My grandfather told me stories about the streetlights coming on midday because of the amount of smog in the downtown area. Many of the region's streams and rivers were void of life back in the 1960s due to industrial waste deliberately and inadvertently seeping into the waterways.

Things have improved greatly since those dark days. I have fond memories of fishing local streams for pollution-resistant fish like carp and catfish. Those same streams had been void of life just a decade or so prior.

Today, many of these Pittsburgh streams hold healthy populations of clean water fish like smallmouth bass and trout. This is a great testament to the success of the U.S. environmental movement, as well as commercial firms dedicated to pollution reduction.

Personally, I like it when the free market helps improve the environment. It's a great feeling to be able to earn a profit by doing a good thing for the environment.

The free market has spawned firms like Illinois-based Fuel-Tech (NASDAQ: FTEK), which specializes in pollution reduction technology. Not only do the company's products help mitigate the negative effects of industrial pollution, its shares are setting up to be a great buy. Let's take a closer look.

Founded in 1987, FTEK provides boiler optimization and air pollution reduction technologies to global industry and utilities. In addition, the firm's FUEL CHEM products improve the efficiency, reliability and environmental status of combustion units. It has a market cap of just under $132 million.

The company posted strong third-quarter results Monday after the close, with revenue climbing 35% year over year to $33.6 million. Operating income shot from $1.6 million in the year-ago quarter to $5.3 million this quarter, and net income advanced to $3.5 million from $1.2 million. More domestic projects and a large contract in Chile pushed revenue from the air pollution control (APC) segment higher by over 50%.

Joshua Brown
08-31-2013,
Stuff I?m Reading this Morning?

Beijing?s plans to liberalize the Chinese economy send Asian markets soaring. (Guardian)

Mark Hulbert: Five ways to know you?re in a bubble. (MarketWatch)

Farhad Manjoo: Good luck using 20-year-olds as reliable predictors of tech trends. (WSJ)

John Hussman explains how risk-managed strategies can be very wrong for a long time and still outperform over a cycle. (HussmanFunds)

What happens to stocks when disaster strikes? (CrossingWallStreet)

Shelly Adelson (Las Vegas Sands) readies for the battle of his career as internet gaming makes in-roads. (WaPo)

Buzzfeed chief Jon Steinberg:Having a Mobile Strategy is Like Having a Laptop Strategy 20 Years Ago (Medium)

Jason Zweig on floating rate funds ? they?re good except when they?re bad. (WSJ)

Expect the Bitcoin mania to go into overdrive now that US agencies are expected to be cool with it. (Bloomberg)

The Barron?s ETF Roundtable is must-read for asset allocators and advisors. (Barrons)

Superhero movies save Hollywood. (BusinessWeek)

REMINDER: Backstage Wall Street is now on Kindle!

Joshua Brown
08-31-2013,
I sit here painfully typing this letter, as my fingertips have been worn down to bloody stumps. I have been pounding out the Trade Alerts since the month started, sending out 37, and the month is only half over. That works out to a 3.3636 Trade Alerts a day!

I have been so busy that I literally haven?t had time to eat, living entirely on black coffee, and losing three pounds since November 1. Maybe I should go into the weight loss business. I hear it?s more profitable than this financial stuff.

Not only have I worked myself to the bone, my staff is rapidly wearing out as well. Everyone is taking a well-earned rest this weekend, melting a few ice cubes along the way.

Still, you don?t get market melt ups like this very often in life. You have to strike while the iron is hot, make hay while the sun shines, and carpe diem. Usually I warn investors that if they ?invest in haste, they will repent at leisure.? In this market it?s the opposite. Invest at leisure, repent with haste.

Still, it?s all worth it when it?s working. Including both open and closed trades, the last 18 consecutive Trade Alerts have been profitable. I am rapidly closing in on an old record of 25 successful Trade Alerts, made earlier this year.

The Global Trading Dispatch service of the Mad Hedge Fund Trader is now up 56.4% in 2013. The November month to date record is now an enviable 11.92%.

The three-year return is an eye popping 111.43%, compared to a far more modest increase for the Dow Average during the same period of only 30%.

That brings my averaged annualized return up to 38.2%.

This has been the profit since my groundbreaking trade mentoring service was launched 35 months ago. These numbers place me at the absolute pinnacle of all hedge fund managers, where the year to date gains have been a far more pedestrian 3%. I predict the arrival of a lot more job seekers on Craig?s List in January.

I took profits on all of my extensive shorts in the Treasury bond market, taking advantage of the sudden back up in ten-year yields from 2.47% to 2.77%, the sharpest move of the year. I then reloaded on the first 9 basis point back up in yields.

I then bet that the stock market would continue another tedious sideways correction going into the Thanksgiving holidays. I bought an in the money put spread on the S&P 500, and then bracketed the index through buying an in the money call spread. Both of these expired profitably on Friday.

I then took advantage of the weakness to add another long in the Industrials ETF (XLI), a rifle short at one of the best performing sectors of the market. I piled on more shorts in the Japanese yen (FXY), (YCS), believing that the Bank of Japan will have to accelerate its monetary easing program to deal with an economic slowdown. I also caught the China recovery play by going long the Australian dollar (FXA).

This is how the pros do it, and you can too, if you wish.

Carving out the 2013 trades alone, 74 out of 89 have made money, a success rate of 83%. It is a track record that most big hedge funds would kill for.

My esteemed colleague, Mad Day Trader Jim Parker, has also been coining it. He caught a spike up in the volatility index (VIX) by both lapels. He also was a major player on the short side in bonds, to the delight of his many followers.

The coming winter promises to deliver a harvest of new trading opportunities. The big driver will be a global synchronized recovery that promises to drive markets into the stratosphere in 2014. The Trade Alerts should be coming hot and heavy. Please join me on the gravy train.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011 and 14.87% in 2012. The service includes my Trade Alert Service and my daily newsletter, the Diary of a Mad Hedge Fund Trader. You also get a real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. Upgrade to Mad Hedge Fund Trader PRO and you will also receive Jim Parker?s Mad Day Trader service.

To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

Joshua Brown
08-31-2013,
I sit here painfully typing this letter, as my fingertips have been worn down to bloody stumps. I have been pounding out the Trade Alerts since the month started, sending out 37, and the month is only half over. That works out to a 3.3636 Trade Alerts a day!

I have been so busy that I literally haven?t had time to eat, living entirely on black coffee, and losing three pounds since November 1. Maybe I should go into the weight loss business. I hear it?s more profitable than this financial stuff.

Not only have I worked myself to the bone, my staff is rapidly wearing out as well. Everyone is taking a well-earned rest this weekend, melting a few ice cubes along the way.

Still, you don?t get market melt ups like this very often in life. You have to strike while the iron is hot, make hay while the sun shines, and carpe diem. Usually I warn investors that if they ?invest in haste, they will repent at leisure.? In this market it?s the opposite. Invest at leisure, repent with haste.

Still, it?s all worth it when it?s working. Including both open and closed trades, the last 18 consecutive Trade Alerts have been profitable. I am rapidly closing in on an old record of 25 successful Trade Alerts, made earlier this year.

The Global Trading Dispatch service of the Mad Hedge Fund Trader is now up 56.4% in 2013. The November month to date record is now an enviable 11.92%.

The three-year return is an eye popping 111.43%, compared to a far more modest increase for the Dow Average during the same period of only 30%.

That brings my averaged annualized return up to 38.2%.

This has been the profit since my groundbreaking trade mentoring service was launched 35 months ago. These numbers place me at the absolute pinnacle of all hedge fund managers, where the year to date gains have been a far more pedestrian 3%. I predict the arrival of a lot more job seekers on Craig?s List in January.

I took profits on all of my extensive shorts in the Treasury bond market, taking advantage of the sudden back up in ten-year yields from 2.47% to 2.77%, the sharpest move of the year. I then reloaded on the first 9 basis point back up in yields.

I then bet that the stock market would continue another tedious sideways correction going into the Thanksgiving holidays. I bought an in the money put spread on the S&P 500, and then bracketed the index through buying an in the money call spread. Both of these expired profitably on Friday.

Joshua Brown
08-31-2013,
?A high stock price is somewhat distracting,? said Tesla CEO, ElonMusk.



go to the Mad Hedge Fund Trader's website

Joshua Brown
08-31-2013,
I took the biggest risk of my life at age 33 and I was terrified.

With a wife and two kids, a mortgage and almost nothing in the bank, I left my management position at broker-dealer and dropped my Series 7. I essentially bolted from the business I had been in for a decade, giving up my license and my livelihood on a bet that I could be doing better for my clients as their advisor and make a lot more money once I was happy and the pit in my stomach dissolved.

Thank God it worked. I?m not sure what I would have done if it hadn?t. In hindsight, I wouldn?t change much about my timing and all of what I had gone through to get things things right in the end ? it was the real-world education of a lifetime. However, if I could change one thing, maybe it would be not waiting so long and staying with a profession that I truly hated. It probably would have been a lot less stressful had I pulled the ripcord in my twenties, before the babies and the bills.

Oh well.

Jim Chanos, one of the most successful investors of all time, began his career on The Street as a banker and then a brokerage firm analyst. The conflicts inherent in those roles drove him to seek out something more and that?s when he became a hedge fund manager. You see, Chanos was interested in the pursuit of truth and, what?s more, a way to make money from the discovery of truth before others could find it. The name of his firm, Kynikos Associates comes from the Greek word for cynic (and it can also mean ?dog-like?, another apt metaphor for a fund that relentlessly hunts down meaning in the public information that others cannot see).

Here the legendary manager offers some advice to young professionals about timing their risk-taking:

?If you ever have an idea and you think you need to take career risk to accomplish it, do it early in your career?

Life intrudes ? as when you get older you end up with more responsibilities and your ability to take risk diminishes. If you are 25 and have a great idea and you fail, no one is going to hold it against you, and future employers and investors might actually look favorably upon it.

So it you really want to pursue something, do it while you?re young ? you?ll have more energy and you?ll be able to take more financial and career risk. If it doesn?t work, you still have your whole life ahead of you.?

I would counsel the same thing. I have some close friends in their late-20′s and early-30′s on The Street who are in the process of doing exactly this. They?re going for it now before they lose the chance or life intrudes.

For more words of wisdom from Jim Chanos, I highly recommend Mamta Badkar?s round-up at the link below:
22 Brilliant Quotes From Legendary Short-Seller Jim Chanos (BusinessInsider)

Joshua Brown
08-31-2013,
Quote of the day

Andrew Beer, ?Fee reduction is the purest form of alpha.? (All About Alpha)

Chart of the day



Market breadth is confirming new market highs. (StockCharts Blog)

Markets

Bubble talk dominated the past week. (A Dash of Insight)

Five signs of a bubble: not there yet. (Mark Hulbert)

Joshua Brown
08-31-2013,
The S&P 500′s valuation on current earnings is more expensive than it was last year and more expensive than it was the year before. Relative to 2012 and 2011, it is not cheap. In addition, it is also expensive relative to the earnings growth rate and to the rate of growth in the US economy overall.

But the S&P 500 is not at a bubble valuation at the current moment.

I know sometimes you wish things would be black or white, Summer Roberts or Marissa Cooper, but that sort of exactitude just isn?t how the world works.

And so the answer as to whether or not the market is cheap comes laden with asterisks and caveats and on-the-other-hands.

Here?s FactSet Research with some nuance on the current valuation puzzle:

The forward 12-month P/E ratio for the S&P 500 now stands at 15.0, based on yesterday?s closing price (1790.62) and forward 12-month EPS estimate ($119.26). This is the highest forward 12-month P/E ratio logged by the S&P 500 in more than four years (September 2009). Given the high values driving the ?P? in the P/E ratio, how does this 15.0 P/E ratio compare to historical averages? Is the index now overvalued? On the one hand, the index is now trading above both the 5-year (13.0) and 10-year (14.0) average P/E ratios. On the other hand, it is still trading below the 15-year average P/E ratio (16.2), and is not close to the peak P/E ratio of 25 recorded in the late 1990?s and early 2000?s.

Joshua Brown
08-31-2013,
Thanks for checking in with us this weekend. Here are the items our readers clicked most frequently on Abnormal Returns for the week ended Saturday, November 16th, 2013. The description reads as it does in the relevant linkfest:

Chilling signs of a market top. (The Reformed Broker)
Ray Dalio thinks you shouldn?t bother trying to generate alpha. (The Tell)
Ten laws of stock market bubbles. (Doug Kass)
How to teach yourself to focus. (The Kirk Report)
Are we in a bubble? (Crossing Wall Street)
Josh Brown, ?If the entities in control of trillions of dollars all want asset prices to be higher at the same time, what the hell else should you be positioning for?? (The Reformed Broker)
Guess what stock has added the most points to the S&P 500 this year? (Businessweek)
Everything you need to know about stock market crashes. (The Reformed Broker)
Jim O?Neil is swapping BRICs for MINTs. (Bloomberg)
How to survive a market crash. (Your Wealth Effect)


What else you may have missed on the blog this week:

When actively managed funds make sense. (Abnormal Returns)


Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.



The post Top clicks this week on Abnormal Returns appeared first on Abnormal Returns.

Joshua Brown
08-31-2013,
Thanks for checking in with us this weekend. Here are the items our readers clicked most frequently on Abnormal Returns for the week ended Saturday, November 16th, 2013. The description reads as it does in the relevant linkfest:

Chilling signs of a market top. (The Reformed Broker)
Ray Dalio thinks you shouldn?t bother trying to generate alpha. (The Tell)
Ten laws of stock market bubbles. (Doug Kass)
How to teach yourself to focus. (The Kirk Report)
Are we in a bubble? (Crossing Wall Street)
Josh Brown, ?If the entities in control of trillions of dollars all want asset prices to be higher at the same time, what the hell else should you be positioning for?? (The Reformed Broker)
Guess what stock has added the most points to the S&P 500 this year? (Businessweek)
Everything you need to know about stock market crashes. (The Reformed Broker)
Jim O?Neil is swapping BRICs for MINTs. (Bloomberg)
How to survive a market crash. (Your Wealth Effect)


What else you may have missed on the blog this week:

When actively managed funds make sense. (Abnormal Returns)


Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.

Joshua Brown
08-31-2013,
Is a melt-up for US stocks into the end of the year inevitable? Will benchmark-chasing by the under-invested push us into the 16,000′s on the Dow and the 1900′s on the S&P?

Even the permabears like Hussman ? while still predicting a crash eventually ? concede that a continued run-up is more likely than anything else over the next few weeks.
After six straight weeks of gains for the market, this ripping rally into New Years and possibly beyond has now become the majority view. What a long way we?ve come, from both a price and a sentiment standpoint.

Here?s the New York Times:

?I think there is a general expectation that the market is going to continue to rally for the rest of the year,? said Brad McMillan, chief investment officer for Commonwealth Financial, based in Waltham, Mass. ?Retail investors are starting to move back in, and I think that?s providing a fair amount of support.?

Toward the end of the year, fund managers who are trailing their benchmarks may help bolster stocks as they chase performance.

?I think it?s going to be a slow grind up,? said Dan Veru, chief investment officer at Palisade Capital Management, adding that the only thing ?that can derail this is some exogenous macroeconomic event that comes out of nowhere.?

The gains have been incredibly easy to come by this year and the volatility has been almost non-existent ? provided you were listening to the right people and not getting chopped up to pieces by make-believe signals and indicators. But I?m not so sure the end of the year can be quite as inevitable as the consensus now expects. It?s almost never that simple?

Joshua Brown
08-31-2013,
Is a melt-up for US stocks into the end of the year inevitable? Will benchmark-chasing by the under-invested push us into the 16,000′s on the Dow and the 1900′s on the S&P?

Even the permabears like Hussman ? while still predicting a crash eventually ? concede that a continued run-up is more likely than anything else over the next few weeks.
After six straight weeks of gains for the market, this ripping rally into New Years and possibly beyond has now become the majority view. What a long way we?ve come, from both a price and a sentiment standpoint.

Here?s the New York Times:

?I think there is a general expectation that the market is going to continue to rally for the rest of the year,? said Brad McMillan, chief investment officer for Commonwealth Financial, based in Waltham, Mass. ?Retail investors are starting to move back in, and I think that?s providing a fair amount of support.?

Toward the end of the year, fund managers who are trailing their benchmarks may help bolster stocks as they chase performance.

?I think it?s going to be a slow grind up,? said Dan Veru, chief investment officer at Palisade Capital Management, adding that the only thing ?that can derail this is some exogenous macroeconomic event that comes out of nowhere.?

The gains have been incredibly easy to come by this year and the volatility has been almost non-existent ? provided you were listening to the right people and not getting chopped up to pieces by make-believe signals and indicators. But I?m not so sure the end of the year can be quite as inevitable as the consensus now expects. It?s almost never that simple?

Source:

Joshua Brown
08-31-2013,
SnapChat is ?worth? more than $3 billion.

Okay, sure, depending on how you define the term worth.

If by worth you mean what some other person is willing to pay for it, then yes, sure. But if by worth you?re referring to the amount of value that might someday be derived from it, well then keep smoking crack. There is a finite window in which the Web 2.0 landgrab will continue, and sellers should be thinking about cashing out sooner than later at this stage in the game, now that all the big ones are public and bloated with massive cash warchests and ?currency? in the form of obscenely high share prices. This will not continue indefinitely, it never does. ?

The SnapChat kids are adorable, they probably envision a world of tomorrow in which disappearing text messages are worth trillions of dollars and change life and civilization as we know it. Or maybe they think they can break Zuckerberg?s balls for a few more months and eventually extract $5 billion from him as Facebook grows increasingly worried about ?losing the younger teens.?.

Who knows?

Fun to watch either way. Facebook can afford to pay a few billion for SnapChat and then quietly write half of it down a year from now. What it cannot afford ? at least in its own mind ? is to let Google get it.

Let the insanity begin.

From the Los Angeles Times:

Snapchat is not even 3 years old. It?s run by a couple of twentysomethings with no prior business experience. And it has never made a cent.
Yet investors are fighting for the opportunity to throw hundreds of millions at the mobile messaging service that is all the rage with teens.
The tiny Venice Beach start-up just turned down a $3-billion all-cash offer from Facebook Inc. And then, according to the Silicon Valley rumor mill, it rejected an offer from Google Inc., this one for $4 billion?

The tech industry may not be in another bubble, said Aswath Damodaran, professor of finance at the Stern School of Business at New York University, referring to the rapid rise and fall of Internet companies in the late 1990s and early 2000s. But these paper valuations are a ?form of delusion,? he said.

What is pushing up the price tags? The ability of these companies to draw a fast-growing following of young users, analysts say.

Yes, young users are the key to crazy valuations. If only said young users had a clue as to their value ? they might actually ask for a couple of dollars at some point rather than contentedly have their content and identities sheared from them like wool from a lamb.

Source:
Social media start-ups? value is enormous ? if you trust investors (LA Times)

Joshua Brown
08-31-2013,
SnapChat is ?worth? more than $3 billion.

Okay, sure, depending on how you define the term worth.

If by worth you mean what some other person is willing to pay for it, then yes, sure. But if by worth you?re referring to the amount of value that might someday be derived from it, well then keep smoking crack. There is a finite window in which the Web 2.0 landgrab will continue, and sellers should be thinking about cashing out sooner than later at this stage in the game, now that all the big ones are public and bloated with massive cash warchests and ?currency? in the form of obscenely high share prices. This will not continue indefinitely, it never does. ?

The SnapChat kids are adorable, they probably envision a world of tomorrow in which disappearing text messages are worth trillions of dollars and change life and civilization as we know it. Or maybe they think they can break Zuckerberg?s balls for a few more months and eventually extract $5 billion from him as Facebook grows increasingly worried about ?losing the younger teens.?.

Who knows?

Fun to watch either way. Facebook can afford to pay a few billion for SnapChat and then quietly write half of it down a year from now. What it cannot afford ? at least in its own mind ? is to let Google get it.

Let the insanity begin.

From the Los Angeles Times:

Snapchat is not even 3 years old. It?s run by a couple of twentysomethings with no prior business experience. And it has never made a cent.
Yet investors are fighting for the opportunity to throw hundreds of millions at the mobile messaging service that is all the rage with teens.
The tiny Venice Beach start-up just turned down a $3-billion all-cash offer from Facebook Inc. And then, according to the Silicon Valley rumor mill, it rejected an offer from Google Inc., this one for $4 billion?

The tech industry may not be in another bubble, said Aswath Damodaran, professor of finance at the Stern School of Business at New York University, referring to the rapid rise and fall of Internet companies in the late 1990s and early 2000s. But these paper valuations are a ?form of delusion,? he said.

What is pushing up the price tags? The ability of these companies to draw a fast-growing following of young users, analysts say.

Yes, young users are the key to crazy valuations. If only said young users had a clue as to their value ? they might actually ask for a couple of dollars at some point rather than contentedly have their content and identities sheared from them like wool from a lamb.

Joshua Brown
08-31-2013,
Saturday links: the coming robot age

The weekend is a great time to catch up on some long form items that we passed up on during the week. Thanks for checking in.

Profiles

A profile of the newly resurgent Suze Orman. (The Daily Beast)

How Peter Lynch gives away his money. (NYTimes)

Lunch with Henry Blodget who is a bull on media. (FT)

Steve Ballmer on his exit from Microsoft ($MSFT). (WSJ)

Finance

Midsize endowment funds are getting more sophisticated. (Insitutional Investor)

Finance people say any number of stupid things. (Morgan Housel)

Why every asset manager needs an ETF strategy. (PWC via Focus on Funds)

Economics

Tyler Cowen on how the coming robot age could lead to a new libertarian age. (Politico Magazine)

Switzerland is taking the idea of minimum income to its logical extreme. (NYTimes contra Marginal Revolution)

The shadow banking system is evolving but not necessarily for the better. (FT Alphaville)

Startups

Why startups are attractive for techies relative to finance. (Points and Figures)

Selling solar power door-to-door works. (Reuters)

Technology

Who will be the ?Time Inc.? of the online news world? (smithy Salmon)

Amazon?s ($AMZN) greatest weapon is Jeff Bezos? paranoia. (WSJ)

An interview with Tony Fadell of Nest on the lack of innovation in the home. (Bits)

Health

You can thank the anti-vaccination crowd for the return of whooping cough. (TNR)

Anti-gluten is a full-blow fad. (Bloomberg)

Society

Why lifetime appointments to the Supreme Court no longer make sense. (Slate)

What can small post-industrial towns do to survive? (New Geography)

Food

There is a ?souvlaki renaissance sweeping Greece.? (WSJ)

The bourbon whiskey family tree. (GQ via @kottke)

Sports

Sports fans are tapped out. That is why sports leagues are looking elsewhere for dough. (Buzzfeed Business)

On the possibility of enhanced use of technology to call balls and strikes. (Grantland via MR)

Rock

How selling out saved indie rock. (Buzzfeed)

How The Beatles became the biggest band in the world. (The Daily Beast)

Books

An excerpt from Ninety Percent of Everything: Inside Shipping, the Invisible Industry That Puts Clothes on Your Back, Gas in Your Car, and Food on Your Plate, by Rose George. (The Week)

An interview with Michael Mauboussin author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing on complexity. (Compounding My Interests)

James Pethokoukis talks with Tyler Cowen author of Average Is Over: Powering America beyond the Age of the Great Stagnation. (AEI)

An excerpt from The Power of Glamour: Longing and the Art of Visual Persuation by Virginia Postrel. (Slate)

An excerpt fromRob Delaney?sRob Delaney: Mother. Wife. Sister. Human. Warrior. Falcon. Yardstick. Turban. Cabbage. (The Atlantic)

Earlier on Abnormal Returns

What you may have missed in our Thursday linkfest. (Abnormal Returns)

When actively managed funds make sense. (Abnormal Returns)

Mixed media

Why prostitutes are a safer bet for Justin Bieber. (The Kernel via @thestalwart)

The contemporary-art bubble is entering its final stages. (smithy Salmon)

How to waste time properly. (Nautilus)

Thanks for checking in with Abnormal Returns. You can follow us on StockTwits and Twitter.

Joshua Brown
08-31-2013,
The weekend is a great time to catch up on some long form items that we passed up on during the week. Thanks for checking in.

Profiles

A profile of the newly resurgent Suze Orman. (The Daily Beast)

How Peter Lynch gives away his money. (NYTimes)

Lunch with Henry Blodget who is a bull on media. (FT)

Steve Ballmer on his exit from Microsoft ($MSFT). (WSJ)

Finance

Midsize endowment funds are getting more sophisticated. (Insitutional Investor)

Finance people say any number of stupid things. (Morgan Housel)

Why every asset manager needs an ETF strategy. (PWC via Focus on Funds)

Economics

Tyler Cowen on how the coming robot age could lead to a new libertarian age. (Politico Magazine)

Switzerland is taking the idea of minimum income to its logical extreme. (NYTimes contra Marginal Revolution)

The shadow banking system is evolving but not necessarily for the better. (FT Alphaville)

Startups

Why startups are attractive for techies relative to finance. (Points and Figures)

Selling solar power door-to-door works. (Reuters)

Technology

Who will be the ?Time Inc.? of the online news world? (smithy Salmon)

Amazon?s ($AMZN) greatest weapon is Jeff Bezos? paranoia. (WSJ)

An interview with Tony Fadell of Nest on the lack of innovation in the home. (Bits)

Health

You can thank the anti-vaccination crowd for the return of whooping cough. (TNR)

Anti-gluten is a full-blow fad. (Bloomberg)

Society

Why lifetime appointments to the Supreme Court no longer make sense. (Slate)

What can small post-industrial towns do to survive? (New Geography)

Food

There is a ?souvlaki renaissance sweeping Greece.? (WSJ)

The bourbon whiskey family tree. (GQ via @kottke)

Sports

Sports fans are tapped out. That is why sports leagues are looking elsewhere for dough. (Buzzfeed Business)

On the possibility of enhanced use of technology to call balls and strikes. (Grantland via MR)

Rock

Joshua Brown
08-31-2013,
Today's Chart of the Day is Noah Holdings (NOAH). I found the stock by sorting the New High List and then sorted for Weighted Alpha. Since the Trend Spotter signaled another buy on 11/4 the stock gained an additional 14.05%.

It is engaged in providing independent services primarily comprising of distribution of wealth management products to the high net worth population in China. It distributes over-the-counter wealth management products originated in China which mainly includes fixed income products, private equity funds and securities investment funds. The Company also delivers to its clients a continuum of value-added services including financial planning, product analysis and recommendation, product and market updates and investor education.

Joshua Brown
08-31-2013,
Markets were up slightly on Friday after U.S. factory output increased in October for the third month in a row. The Federal Reserve announced that manufacturing output was up 0.3% in October, following a 0.1% increase in September. Factory output accounts as the largest factor in industrial production. Industrial production, however, fell in October which was largely attributed to the mining sector. There was a decrease of 1.6% in oil and gas drilling after six straight months of gains. The saving grace in output has been the factory sector. They have been stepping up hiring in the past three months. The increasing growth at factories is partially due to a growing demand overseas and the stronger housing market has increased demand for furniture and other wood products. Paul Dales, a senior economist at Capital Economics, said, ?As long as the overseas recovery continues and the domestic fiscal drag fades, output should continue to grow at reasonable rates.?

The United Sates Postal Service announced that they have lost a total of $5 billion over the last year. This will mark as the seventh straight yearly loss for them. The agency said that they have been trying to keep up with the decreasing amount of mail along with $5.6 billion yearly payments for health care costs for future retirees. They also said this should underscore the urgency for Congress to allow them to cease mail delivery on Saturdays and reduce payments for their retirees health benefits. There was, however, a growth in package delivery of 8%, but this is not nearly enough to offset the losses they have accrued. This year?s loss does show quite a substantial improvement over last year?s loss. This time last year the agency reported a loss of $15.9 billion. This year operating revenue came in at $66 billion, while operating expense were reported at $72.1 billion. Joseph Corbett, chief financial officer at the Postal Service, said, ?It?s the first growth in revenue since 2006.?

Berkshire Hathaway, who is owned by the famous Warren Buffett, disclosed that they have purchased a $3.45 billion stake in Exxon Mobil Corp (XOM). This attributes to a total of 40.1 million in shares of the oil company. This stake totals about 0.8% of Exxon. Despite such a seemingly small share of the company, this purchase speaks volumes. Pavel Molchanov, an energy analyst at Raymond James & Associates, said, ?When Warren Buffett gives his seal of approval to any company, that is never a bad thing.? Shares of Exxon were trading higher after the announcement. Fadel Gheit, a senior oil analyst with Oppenheimer & Co, said, ?He likes buying big, established global brand names, and Exxon is a good flight-to-quality stock. The stock has also lagged the market in the last three to five years. That makes it a typical Warren Buffet holding.?

That?s all for the day.

Joshua Brown
08-31-2013,
The Great Depression is an era few of us would choose to revisit.

Though the economy isn't especially perky these days, key measures of joblessness, poverty and hunger are nowhere near the levels seen back in the 1930s.

But by one key measure, the economy is actually in worse shape. From 1930 until 1933, the U.S. economy grew less than 3% each year. That was the longest such streak of the 20th century -- and we've already broken it in the 21st century.

We're on pace for a sixth straight year of sub-3% GDP growth, and signs are pointing continued anemic growth in the years ahead (which I'll expand upon in a moment).

Frankly, anything near 3% GDP growth would be welcome. We appear to have approached that level in the third quarter, hitting 2.8%. But almost a full percentage point of that was due to a buildup in inventories, and such gains tend to reverse in the following quarter. Translation: Get ready for 2% GDP growth -- at best -- in the fourth quarter. The recent government shutdown means we may end up closer to 1.5%.

Of course the stock market seems to be simply ignoring the economic travails. As I noted in a recent column, the Wilshire 5000 has risen 68% since the end of 2009 -- yet the economy has grown just 17%.

If you don't want to believe that the Federal Reserve's liquidity-inducing quantitative easing (QE) programs haven't been the main catalyst behind this impressive multi-year stock market rally, then you must believe that today's share prices reflect better economic days ahead. To be sure, if the economy began to grow at a 3% pace for several years, all of the market's recent gains would be justified, and stocks would likely rise much more from here.

So it's a huge question, especially in light of the fact that the Fed's QE programs are reaching the late innings.

How To Get To 3%
There are a few simple markers to assess an economy's growth potential. The first is population growth.

Joshua Brown
08-31-2013,
There's a long-standing argument between finance academics and investors.

Most academics assert that the market is efficient and there is very little edge available for traders and short-term investors. When challenged with long-term success stories of traders who consistently beat the market, the academics say those individuals are presently the statistical outliers. In other words, they are simply lucky -- just like the folks who win the lottery several times or consistently succeed at any game of "chance."

I am fortunate to be married to a woman who holds a doctorate in finance and is a great resource when it comes to programming trading strategies and understanding market microstructure.

However, we are often at odds when it comes to the viability of active trading. I love to prove her ideas wrong by showing her papers by respected academics who take my side. I am certain she gets the same vicarious thrill when my market ideas are proven inaccurate.

The one thing my wife and I agree upon is the wisdom of long-term dividend investing. (In that respect, we're also in agreement with regular readers of Amy Calistri's Daily Paycheck advisory, which emphasizes the portfolio-growing power of dividends.)

My wife recently pointed me to academic research that adds support to the no-nonsense power of dividend stocks. This research zeroes in on non-U.S.-based small- to mid-cap dividend payers -- and what it discovered is mind-blowing.

Heartland Advisors, investment advisor to the Heartland International Value Fund (Nasdaq: HINVX) in collaboration with the University of Wisconsin, will soon publish a paper asserting that international small- and mid-cap dividend-paying stocks significantly outperform their non-dividend paying counterparts.

The results of the study are nothing short of amazing. They researched the rolling average 12-month returns from 1993 to 2013 for the universe of non-U.S. stocks with market caps between $100 million and $5 billion. The average rolling 12-month return for these stocks was just over a respectable 6% -- but the highest dividend yielders returned 16.3% over the same time. It's great to see academic-led research confirming what long-term dividend investors have known for years.

International stocks may lie outside many investors' comfort zones -- but in today's global economy, the search for returns and yield often leads to foreign lands. While there are many unknowns with international stocks, that's no reason to avoid them. One key to success in the markets is to step outside your comfort zone to embrace opportunities with high potential returns, wherever they may lie.

One way to gain quick exposure to and earn high dividend-powered returns from international small-cap stocks is through the Wisdom Tree International Small Cap Dividend Fund ETF (NYSE: IDV). This exchange-traded fund is an ideal tool for gaining diversified access to the small-cap international dividend paying market. It has returned more than 20% this year and has a 12-month yield of just under 5%. (Here are the details of the ETF's holdings, sectors and countries invested.)

Joshua Brown
08-31-2013,
It's official... the United States is about to become the largest energy producer in the world (if it's not already).

According to the Energy Information Administration (EIA), the U.S. is currently producing about 22 million equivalent barrels of oil and natural gas a day -- up from 18 million barrels in 2008. While no one knows the actual figures for Russia (the largest producer for the past several years), estimates out of Moscow are forecasting the country will produce 21.8 million barrels a day in 2013.

Think about that for a second...

Just five years ago, lofty energy prices in the U.S. nearly crippled the state of the overall economy. Back then there was so much demand for energy -- and such little supply -- that companies like Cheniere Energy (NYSE: LNG) were working day and night to build natural gas import terminals to take advantage of cheaper prices overseas.

Today, the landscape in the American energy market has completely changed. Thanks to new developments in horizontal drilling and hydraulic fracturing ("fracking"), the U.S. has unlocked waves of oil and gas reserves that were once thought unrecoverable.

As you'd expect, the optimism surrounding this "shale boom" has made American energy stocks some of the best places to put your money over the past several years.

Joshua Brown
08-31-2013,
The technicians spent the year watching to see which direction the ?Japanese Trade? would resolve itself toward after a blow off top in the spring followed by six months of consolidation.

For the uninitiated, the Japanese Trade is short Yen, long Nikkei, based on the alignment of the Japanese political establishment and the BoJ in the urgent need for cyclical growth.

It looks like this week we may have gotten the answer as to how that consolidation is resolving ? and it?s to the upside. Full disclosure, we?ve been long this trade all year and have added to it in Q3.

Joshua Brown
08-31-2013,
Much virtual ink has been spilled on how difficult it is for individual, and even professional, investors to generate alpha in the capital markets. Ray Dalio of Bridgewater Associates the largest hedge fund operator in the world said as much this week at the Dealbook conference:

?I think the most important thing for an investor is to create a proper balance of those investments,? he said. ?In other words, I think that going forward, most investors are not going to be able to produce alpha,? a measure of outperformance.

Joshua Brown
08-31-2013,
$142 million for a Francis Bacon triptych. $120 million for a pastel by Edvard Munch. $106 million for an oil painting by Picasso.

After a slow 2012, the fine-art market is back. Stock market gains worldwide and growing wealth in Asia have lifted prices to new all-time highs. That includes the recent $142 million for the Francis Bacon triptych, eclipsing last year's record $120 million for Munch's "The Scream."

The fine-art market is trading just like the stock market. Buyers are stepping out and lifting the bid. That's putting a lot of cash into the pockets of investors with rare collections.

But art connoisseurs aren't the only ones cashing in. I want to tell you about a global leader in the auctioneer business that is also cashing in on these nine-figure masterpieces.

Not only does the company generate big commissions from conducting auctions for the world's rarest art and wealthiest individuals, it enjoys a duopoly with just one competitor, is protected by high barriers to entrance, is highly leveraged against growth in Asia and also pays a quarterly dividend.

That has fueled an outsize gain of 80% in the past two years. Take a look below.

Joshua Brown
08-31-2013,
Random Thoughts


The Ps had a decent day, taking on nearly ?%. This action has them continuing to breakout out of their high level consolidation/Double Top Knockous-ish Pattern. And, this action keeps them at all-time highs.

The Quack didn't set the world on fire but it did manage to close in the plus column, continuing its rally out of the recent Double Top Knockout Pattern. This was enough to keep it at multi-year highs.

As I preach, you can only predict the short-term when it comes to the markets with any degree of accuracy. The Ps and Quack have triggered a buy signal and have so far followed through. So far, so good but as usual, continue to take things one day a time.

I'm not complaining but it was a mostly a big cap affair. The Rusty ended flat on the day.

With the Ps and Quack at new highs, overall, the day scores as a positive.

It is no surprise that many sectors like Ps and Quack managed to close at new highs. Some of these include Brokerages, Insurance, Defense, Health Services, Manufacturing, Retail, Chemicals, Transports, Conglomerates, and Consumer Non-Durables.

Even some areas such as Drugs which have recently rolled over have turned back up and are now making new highs.

Every day that the market makes new highs is a day when you shouldn't fight it. What is, is. As long as it continues to do this, go with the flow.

So what do we do? Nothing has changed: I'm still seeing a few shorts setting up. No worries though. This is perfectly normal since the rising tide is lifting all boats (i.e. weaker stocks are pulling back). Again, with the market at new highs you certainly do not want to fight it. Since there aren't a lot of meaningful longs, now would be a good time to trail stops and look to take partial profits in any existing longs in your portfolio as the initial profit targets are hit. If this thing turns into the real deal, then you'll still have a partial position and participate. And, if it don't, then you scratch out of the remainder of the position for a better-than-a-poke-in-the-eye trade. Honor your stops on any leftover shorts. This money and position management plan-stops, trailing stops, taking partial profits-will keep you in the game a long time. It creates a portfolio ebb and flow. This helps to keep you on the right side of the market during trends and mostly out of the ma rket during choppy conditions.

Click here to watch today's Market in a Minute.

Best of luck with your trading today!

Dave
omgmachines.com/ericx
__________

Expert swing trader Dave Landry comments on the charts for the major markets, indexes and sectors for the upcoming trading day in his daily one-minute video.

Make sure your sound is turned up. A new browser window will open and the video will begin playing within a few second

Joshua Brown
08-31-2013,
In a fairly rapid time, the solar power industry has been able to tackle two major challenges that threatened to decimate the industry.

First, far much too capacity led to rapidly falling prices, which pushed the industry's weakest players into bankruptcy and has left a few more of them struggling to stay afloat. Restrained capacity growth has become the theme of 2013, enabling demand to catch up, and prices on solar panels are no longer plunging at a rapid clip.

Second, the steep fall in solar panel prices has pushed this technology a lot closer to "grid parity," compared to fossil fuels. If natural gas prices had not also plunged as well in recent years, demand for solar would really be booming.

But gas prices have fallen, and it's unlikely they will spike higher in coming years. Gas drillers will simply boost output any time prices rise, which is OK with an industry that has learned to become profitable with natural gas at $3.50 to $4 per thousand cubic feet (Mcf). Even as gas rallied to $5 per Mcf, solar still couldn't compete, at least not without government tax credits (that are set to expire in the U.S. in 2016, have been sharply rolled back in Europe and remain firmly in place in China).

Meanwhile, the improving backdrop for solar has kicked off a furious rally, led in part by short sellers who are getting trampled. The average move up from the 52-week low exceeds 500% for this group.

Joshua Brown
08-31-2013,
When chip equipment maker Applied Materials (Nasdaq: AMAT) surpassed $10 billion in annual revenue for the first time in fiscal 2011, its competitors could only sigh. The company's industry leadership was never in doubt, but a series of acquisitions gave it such a broad suite of offerings that rivals wondered if they could ever take market share again.

Applied Materials' massive market presence eventually led its two biggest rivals, Lam Research (Nasdaq: LRCX) and Novellus Systems to join forces in 2011, but even that combined entity has yet to crack the $5 billion annual revenue barrier.

KLA-Tencor (Nasdaq: KLAC) is also in Applied Materials' rearview mirror, with only $3 billion in annual sales. And a handful of smaller companies bring up the rear, none of which have even $1 billion in annual revenue. (Note: Only U.S. companies have been considered here.)

Joshua Brown
08-31-2013,
Today, many followers of the Mad Hedge Fund Trader?s Trade Alert service have up to eight November option spreads expiring at their maximum potential profit.

My strategy of taking advantage of the short November expiration calendar and betting that the markets stay in narrow ranges turned out to be wildly successful. At this stage I am batting eight for eight. If these all work, then I will have issued 15 consecutive profitable Trade Alerts since October, something most hedge fund managers would die for at this time of the year.

I have already taken profits on five of my November positions, but judging from the email traffic, many of you are hanging on to the bitter end and have asked me how to handle these.

It?s really easy. You don?t have to do anything. Nada, Squat.

Trading in the underlying ceases today, Friday, November 15 at 4:00 PM EST. The contracts legally expire on Saturday night, November 16. The cash profit is then credited to your account on Monday, November 18, the margin freed up, and the position disappears into thin air.
Only the (SPY) November 2013 $180-$183 bear put spread is giving us a run for our money. As I write this, the (SPY) is trading at$179.27, and we are a mere 73 cents in the money on the $180 puts that we are short.

If the (SPY) closes on Friday over $180, then you will be short 100 shares for every contract of the November $180 puts that you are short. Your long position in the November, $183 puts expired on Friday, so you will be naked short. This is not a position you want to have.

It is always best to cover this at the opening on Monday morning to limit your losses and keep your risk from running away. You may also not have sufficient margin to run a naked short, so If you don?t liquidate, your broker will, probably at a worse price.

Don?t try to trade a leveraged short (SPY) position in a bull market. It?s probably beyond your pay grade, and I doubt you?ll sleep at night.

I?m betting that the (SPY) will close on Friday below $180, so I am hanging on to my position. With only one single day to expiration, it is a coin toss what will happen. But with the markets this sluggish, if I am wrong, it will only be by pennies. Quite honestly, being up 56% on the year I don?t mind taking a gamble here.

I know all of this sounds very complicated to the beginners among you. Don?t worry, this all becomes second nature after you?ve done the first few thousand of these.

If you have any doubts, call your broker and they will tell you what to do, especially the part about you needing to do a thousand more trades. Here, an ounce of prevention is worth a pound of cure. Then it?s on to the next trade.

In the meantime, take your winnings and plan your winter Caribbean holiday with your significant other. Or plan a ski vacation at Incline Village in Nevada. They?ve already had two nice dumps of snow. If you do, drop me a line and I?ll take you out for coffee at Starbucks.
Well done, traders!

Joshua Brown
08-31-2013,
?A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,? said my friend, Federal Reserve governor nominee, Janet Yellen.

Joshua Brown
08-31-2013,
The Chart of the Day is Canadian Solar (CSIQ). I sorted the New High List for Weighted Alpha and this stock has a WA of 1,376.33+ and is up 1,534.87% in the last year. It was the COD on 9/25 and since the Trend Spotter gave a buy signal on 9/5 the stock is up 226.74%.

It is a solar module producer. The Company offers ingots, wafers, solar cells, solar modules and other solar applications for on-grid and off-grid use to customers worldwide. It also designs and produces specialty solar modules and products such as solar-powered bus stop lighting; and specialty products, such as portable solar home systems and solar-powered car battery chargers.

Joshua Brown
08-31-2013,
Any time a company exceeds or lags quarterly profit forecasts by a big margin, the resulting share price action is quite predictable. Indeed, the list of stocks making recent 52-week highs are dominated by companies that posted stellar third-quarter results.

But the market action doesn't always play out that way. On occasion, a company will handily surpass consensus profit forecasts, analysts will boost their outlook for the next year, and yet the stock price falls in value.

How do you explain such a disconnect?

Perhaps some investors were looking for even greater upside than the company delivered. Or perhaps investors have begun rotating out of the company's industry, selling off all stocks in the group on an indiscriminate basis. Whatever the reason, a combination of surging profits and falling share prices is a nearly perfect setup.

I reviewed several hundred stocks that topped third-quarter profit estimates by at least 20%. Predictably, the vast majority surged higher in response. But I was able to come across three dozen companies that fit the backdrop of "good earnings/bad share response." From there, I tossed out any stocks in which analysts lowered their 2014 profit forecasts after the quarterly conference call. If a company blew past third-quarter estimates but expressed caution about the year ahead, then the earnings surprise isn't really notable.

We're left with 11 stocks, all of which exceeded third-quarter EPS (earnings per share) forecasts by at least 20%, all of which now have 2014 consensus profit forecasts that are higher than when earnings season began, and all of which have actually fallen in value since earnings were released.

Joshua Brown
08-31-2013,
Can you imagine?!

What will the investment world do if those darn indexes keep climbing despite the crazy overvaluation and the record-breaking bullish sentiment and blockbuster IPO and secondary stock issuance levels and the ever-expanding earnings multiples?

What will happen?

Will they just stand idly by and watch the abomination unfold without doing anything? Will they not stand up and shout from the rooftops that all has gone awry, and the dangers of a steep decline ? even a wholesale crash ? are everpresent? Will not duty as patriots and just old fashioned common sense force their hands ? and cause them slap the sell button not once but twice, and then again as they open their shorts? For surely the dreaded thing is so monstrously overbought that every honest man is bound by King and country to force a correction.

No?

Joshua Brown
08-31-2013,
I grew up in and still live in the South. During the dog days of summer in July and August, when folks say, "It's not the heat, it's the humidity," believe me, it's the heat AND the humidity.

Everything wilts. People move more slowly. Business slows down a little, too. There's a real and noticeable effect.

The fixed-income markets -- represented by Treasurys, corporate and municipal bonds, and other income-oriented investments -- experienced the dog days firsthand this summer as investors fretted over the prospect of the Federal Reserve scaling back its bond purchases, also known as tapering. Look what happened to the 10-year Treasury:

Joshua Brown
08-31-2013,
Markets were heading slightly lower on Wednesday morning as investors fears continued over how soon the Fed could start pulling back on their bond-buying program. The comments from two Federal Reserve officials yesterday did not ease worries. Both Minneapolis Fed Bank President Narayana Kocherlakota and Atlanta Fed President Dennis Lockart, said that the monetary policy should remain ?accommodative.? Today the Fed Chairman, Ben Bernanke, is expected to speak at 7:00 p.m. Investors will hone in on possible clues as to when they might have their sights set on cutting back on the program. Some even think that the Fed could begin tightening the reigns as early as December after a stellar October jobs report was recently announced. Rick Meckler, president of investment firm LibertyView Capital Management, said, ?We are bouncing back and forth here because the market is divided on higher rates and the benefits of a strong economy. Investors have not made up their mind on which is more of a driving force for the market.?

PetroChina has landed a deal to purchase Petrobras for $2.6 billion. PetroChina is the top oil and gas firm in China, while Petrobras is an oil and gas assets company based out of Peru. The deal was signed today but still needs approval from both the Chinese and Peruvian governments. Petrobras currently pumps out an estimated 800,000 tons of oil per year. PetroChina said, ?The three target blocks are all quality oil properties in Peru with achievable profit potential. The acquisition of the assets will help to expand the scale of PetroChina?s oil and gas cooperation in Latin America, and drive the sustainable development of PetroChina?s overseas business.?

Shares of Macy?s (M) were headed higher after the company surpassed analysts expectations with strong sales. They attributed their strong sales partially to their stronger advertising efforts. The company?s third-quarter earnings rang in at $177 million, or 47 cents per share. This beat out last years $145 million, or 36 cents per share a year ago. Revenue was up to $6.28 billion, or 3% higher. Analysts were expecting revenue to come in at $6.19 billion. At Macy?s (M) stores open at least a year there was a 3.5% increase, also beating out analysts projections of a 2.1% gain. The company said that they showed strong sales in October which has made them more stable heading into the holiday season. The holiday shopping season can account for nearly 40% of companies annual revenue. They are taking steps to set themselves up for success as being one of the first retailers to announce their plans to stay open on Thanksgiving. Brian Yarbrough, an analyst with Edward Jones, said, ?They?re in good shape. Unless something changes abruptly in consumer sentiment, they should have a great holiday season.?

That?s all for the day.

Joshua Brown
08-31-2013,
Imagine pocketing checks from an investment throwing off 7% interest.

It's not easy to picture in today's low-interest environment with saving accounts paying less than 1% and the S&P 500 carrying a dividend yield just under 2%.
Now, imagine pocketing dividends from a company yielding 7% with rock-solid business income all but backed by, and coming directly from, the federal government.

Hard to believe, but an investment like this exists. Around the time that I first told High-Yield Investing readers about the company last month, one person was so excited about it, he was inspired to email me this question:

"I was recently reading about Government Properties Income Trust (NYSE: GOV). With monthly income plus special tax preference, it seems almost like a no-lose stock. Is it too good to ignore?"
-- David K.

I wouldn't call it a "no-lose" proposition, but GOV is definitely worthy of consideration.

As the name implies, Government Properties Income Trust owns buildings that are leased to state and federal government agencies. The company owns 82 properties from New York to California that hold more than 10 million square feet of rentable space. Virtually all (94%) of the income generated by these buildings comes from the U.S. government, 10 state governments, and the United Nations.

Just to be clear, GOV itself is not a government agency, nor are its dividends implicitly backed by the government. This is just an ordinary company that has some rather extraordinary tenants: the Social Security Administration, the FBI, the Department of Energy, the Food and Drug Administration and the Department of the Interior.

All of these agencies (and a few dozen more) rent space from Government Properties Trust. Even the Internal Revenue Service pays rent to GOV. So if you're tired of sending money to the IRS, this is one way to turn the tables and have them write checks to you.

As I've said before, there are some perks to being Uncle Sam's landlord. Compared with typical retail and office tenants, government agencies are more stable (less chance of default) and tend to stick around longer (more likely to renew leases). On average, they remain in the same spot for 26 years, dutifully sending in rent checks every month.

Now, that doesn't mean that the company is immune to trouble. For example, defense cutbacks have taken a toll in Washington, D.C., where occupied office space has dropped by more than 1.5 million square feet. That's the biggest decline among the nation's metro markets.

Still, GOV is in fine financial shape, with an investment-grade balance sheet and manageable debt (3.5 times annual EBITDA (earnings before interest, taxes, depreciation and amortization)). And the firm's portfolio is 93.4% occupied, with an average remaining lease term of 5.4 years. Those properties are throwing off enough income to support a nice 7.1% dividend yield.

Funds from operations have been running about 125% of dividends, which means the company is comfortably generating $1.25 in cash for every dollar distributed to stockholders. That's a nice margin of safety.

All in all, this 7% dividend payout is well supported by a stable income stream. And 13 new properties acquired last year are earning even more (about 8.2%). I want to see how the ongoing budget situation plays out in

Joshua Brown
08-31-2013,
It?s a year since I explained my reckless, intentionally dumb 3D printer trade. As I explained back in November of 2012:

I own both of the 3-D printer stocks in my personal account in small enough amounts that they can?t hurt me but large enough amounts that, if I?m right, their rise will be meaningful.

My completely unscientific plan has been to ignore valuation and avoid any news about them, only looking at them bi-weekly to see where they?re trading. So far I?m up quite a bit. It could all be wiped away in a week or I could double my money again?either way, I?m staying hands-off with my Triple D ($DDD) and my Stratasys ($SSYS) positions and willfully remaining ignorant about the short-term. I?m doing this on purpose.

Because I believe the big opportunity is too great for me to allow inconsequential tidbits of news and data to shake me out. Screw the news, forget the fundamentals?if this thing turns out to really be a thing, all I know is I?m going to want to own the two pure-plays down the road.

I did exactly what I said I would, thankfully. I tuned out every genius trader who was ?fading strength? or ?managing risk? or ?noting key levels? because I truly don?t feel they know what the f*ck they?re talking about when a brand new industry sprouts up out of nowhere. I deliberately ignored almost every headline, TV discussion, research report, analyst rec, etc. And I especially ignored people focusing on minute-by-minute price ticks.

Here were the results (quoted in percentage gain on the right axis), $SSYS in white, $DDD in purple, the S&P Midcap 400 Index in green since that post.

Joshua Brown
08-31-2013,
Quote of the day

Brad Balter, ?(T)here are thousands of long-short equity hedge funds out there already?who needs another?? (NetNet)

Chart of the day

Joshua Brown
08-31-2013,
In this market, finding a stock with strong upside that also happens to have come down well off of its 52-week high isn't as easy as it may seem.

But thanks to what I call the performance protection trade, there are high-fliers that have pulled back. Stocks such as Tesla Motors (Nasdaq: TSLA) and Facebook (Nasdaq: FB) fit this description well, as does auto and equipment rental giant Hertz Global Holdings (NYSE: HTZ).

HTZ has rewarded shareholders with a 40% gain in 2013, easily besting the benchmark S&P 500 Index's 24% year-to-date showing.

However, at the time of its 52-week high of $27.75 in mid-July, HTZ was up more than 70%. Shares sold off through the rest of the summer before retesting that high in September.

Then, in late September, HTZ suffered a huge one-day sell-off that drove it below both the 50-day and 200-day moving averages. HTZ currently trades near $22.80, about 17% off its recent highs and right about where it traded in mid-April.

Joshua Brown
08-31-2013,
?I?ve been doing fifty million a year in commission business with your desk, and believe me, it?s not because I care what your chief strategist?s research reports say. You?re not allowed to give me ?color? on the trading activity of others anymore because your line?s recorded. You?re also not able to create products that will fail for me to be able to short. And I sure as hell don?t need your firm?s Barclays Center tickets, I?m a Knicks fan and I have a box at the Garden. The least you can do is get me a million shares of the LinkedIn IPO.?

One of the key sources of alpha for famous hedge fund managers operating in the late 1990′s was the IPO flip. They won?t admit it now when citing their ?compound returns? from that era, but everyone in the game knows it. And then the strategy kind of went to sleep as IPOs cooled off and the markets stopped guaranteeing mammoth first-day pops.

But over the past year or so it?s been Game On again. As explained in the below linked-to article at ValueWalk, this is a perfect environment for it. The public is once again hungry for deal stocks and will bid up shit like Potbelly and the Container Store by 100% upon the open, it?s almost a lock. In the meantime, companies ? specifically tech startups ? have been holding off on their IPOs to the extent possible, giving capital rich hedge funds an even better opportunity than IPO share ? they?re actually buying in at earlier stages while the company is still private. This makes the profit on the flip even juicier.

Profits are profits and no one is saying these gains require an asterisk next to them. But be aware that this source of alpha is likely finite and fleeting.

Joshua Brown
08-31-2013,
In the world of identity theft, it doesn't pay to assume "it won't happen to me."

In fact, with an average of a new victim every three seconds in 2012 -- and the rate of breaches seeming to increase at a faster pace than the national debt -- you might as well assume that it will happen to you and be prepared when it does.

Identity theft can dig you a debt ditch deeper than the Mariana Trench. But I've found a $1.4 billion company -- a mere pollywog among the multi-billion-dollar big fish in this sector -- that's throwing out lifelines to consumers and dishing out profits to investors.

In fact, this little gem just reported record revenues and hundreds of thousands of new customers in the third quarter. Its IPO went for $9 just over a year ago, and newcomers to the stock are basking in 75% gains.

We'll take a closer look at the company in a moment, but first, let's talk about what drives this crime today, how big the business of identity theft has become, and what is being done to protect people like you and me.

A $21 Million Violation Of Privacy
Unfortunately, the same technologies that make banking, shopping and working so convenient also make identity theft easier. An estimated 12.6 million people were victimized last year, at a cost of $21 billion. At a projected annual growth rate of 4%, the losses are on pace to grow even more staggering.

Stolen Social Security numbers caused the most damage because they're almost always required to open new accounts, but credit card fraud accounts for more than 65% of all cases.

The ways in which thieves steal information has become sophisticated: They can read "noise" waves and intercept data with ATM skimmers, or infiltrate peer-to-peer networks like music sites. Other ways include phishing (by email), "SMSishing" (by text) or "Vishing" (by voicemail).

It's not all rocket science, though. Many old-school ways still work: Dumpster diving, wallet stealing, snail mail swiping, looking over someone's shoulder at a device, giving credit card numbers to customer service reps or inputting any data online.

Unfortunately, thefts are adept at cracking codes, creating viruses and weaseling their way into improperly secured networks at work, school, banks -- really, any place that involves a computer.

People can only go so far to protect themselves, and, unfortunately even the most savvy IT professional in the world isn't capable of building an impenetrable fortress.

Unlocking The Door To Profits

Joshua Brown
08-31-2013,
In the world of identity theft, it doesn't pay to assume "it won't happen to me."

In fact, with an average of a new victim every three seconds in 2012 -- and the rate of breaches seeming to increase at a faster pace than the national debt -- you might as well assume that it will happen to you and be prepared when it does.

Identity theft can dig you a debt ditch deeper than the Mariana Trench. But I've found a $1.4 billion company -- a mere pollywog among the multi-billion-dollar big fish in this sector -- that's throwing out lifelines to consumers and dishing out profits to investors.

In fact, this little gem just reported record revenues and hundreds of thousands of new customers in the third quarter. Its IPO went for $9 just over a year ago, and newcomers to the stock are basking in 75% gains.

We'll take a closer look at the company in a moment, but first, let's talk about what drives this crime today, how big the business of identity theft has become, and what is being done to protect people like you and me.

A $21 Million Violation Of Privacy
Unfortunately, the same technologies that make banking, shopping and working so convenient also make identity theft easier. An estimated 12.6 million people were victimized last year, at a cost of $21 billion. At a projected annual growth rate of 4%, the losses are on pace to grow even more staggering.

Stolen Social Security numbers caused the most damage because they're almost always required to open new accounts, but credit card fraud accounts for more than 65% of all cases.

The ways in which thieves steal information has become sophisticated: They can read "noise" waves and intercept data with ATM skimmers, or infiltrate peer-to-peer networks like music sites. Other ways include phishing (by email), "SMSishing" (by text) or "Vishing" (by voicemail).

It's not all rocket science, though. Many old-school ways still work: Dumpster diving, wallet stealing, snail mail swiping, looking over someone's shoulder at a device, giving credit card numbers to customer service reps or inputting any data online.

Unfortunately, thefts are adept at cracking codes, creating viruses and weaseling their way into improperly secured networks at work, school, banks -- really, any place that involves a computer.

People can only go so far to protect themselves, and, unfortunately even the most savvy IT professional in the world isn't capable of building an impenetrable fortress.

Unlocking The Door To Profits
Because identity theft has become so prevalent and such a b

Joshua Brown
08-31-2013,
Janet Yellen speaks before the Senate Banking Committee this morning at 10am. She?s released her brief address beforehand and will probably be answering a wealth of questions, especially on the idea of the taper.

Here?s BofA Merrill?s US Economics team with a preview on that score:

The taper question, ultimately
Yellen states that ?supporting the recovery today is the surest path to a more normal
approach to monetary policy? ? in other words, policy needs to remain easy now to
tighten later. Additionally, ?a strong recovery will ultimately enable the Fed to reduce
its monetary accommodation and reliance on unconventional policy tools such as
asset purchases.? Early commentary focused on the word ?ultimately? as a possible
signal that Yellen does not plan to taper for a while. But ?reduce its monetary
accommodation? typically has meant rate hikes in official Fed communication, while
reducing ?reliance on unconventional tools? likely refers to the eventual reduction in
the size of the Fed?s balance sheet rather than tapering. Recall, most Fed officials
take a ?stock approach? to QE; in that view it?s the total amount of assets owned and
not the purchase pace that defines the degree of accommodation. No doubt she?ll
get questions about the Fed?s tapering plans on Thursday.

Expect market participants to be hanging on her every word?

Joshua Brown
08-31-2013,
Janet Yellen speaks before the Senate Banking Committee this morning at 10am. She?s released her brief address beforehand and will probably be answering a wealth of questions, especially on the idea of the taper.

Here?s BofA Merrill?s US Economics team with a preview on that score:

The taper question, ultimately
Yellen states that ?supporting the recovery today is the surest path to a more normal
approach to monetary policy? ? in other words, policy needs to remain easy now to
tighten later. Additionally, ?a strong recovery will ultimately enable the Fed to reduce
its monetary accommodation and reliance on unconventional policy tools such as
asset purchases.? Early commentary focused on the word ?ultimately? as a possible
signal that Yellen does not plan to taper for a while. But ?reduce its monetary
accommodation? typically has meant rate hikes in official Fed communication, while
reducing ?reliance on unconventional tools? likely refers to the eventual reduction in
the size of the Fed?s balance sheet rather than tapering. Recall, most Fed officials
take a ?stock approach? to QE; in that view it?s the total amount of assets owned and
not the purchase pace that defines the degree of accommodation. No doubt she?ll
get questions about the Fed?s tapering plans on Thursday.

Expect market participants to be hanging on her every word?

Fine, sorry. Here:

Joshua Brown
08-31-2013,
Random Thoughts


As I often preach, when I market is hovering near new highs you have to be careful not to chase your own tail. Near the top of the range it will look like the market is poised to explode and near the bottom of the range it will look like the market is ready to implode.

You can't anticipate the move too much. Otherwise, you'll end up over weighted on one side, and, as Murphy would have it, it'll be the wrong side.

Speaking of ranges, up until yesterday, the Ps and Quack have mostly been stuck in the short-term range. That changed on Wednesday. Both indices broke out nicely to new highs. Although breakouts are prone to failure and you shouldn't trade them blindly, the fact that this breakout came from a Double Top Knockout buy signals (especially in the Nasdaq) suggests that it might just have legs.

Internally the market was strong on Wednesday. A lot of areas, too many to mention, banged out new highs-I suppose this isn't a shocker with the Ps at all-time highs and the Quack at multi-year highs. Some weaker areas that looked questionable snapped back. Again, it was strong throughout. In market speak, the market had good breadth.

Is this the "all clear?" Well, in this business you never know for sure-if you did, you'd own the world. It does look like the indices are off to a good new start, especially since they are coming off the Knockout buy signal.

So, do we rush out and buy? Well, not exactly. I'm still not seeing a lot of meaningful buy setups at this juncture. This is perfectly normal. The methodology requires a pullback so until the market pulls back-and ideally, continues its rally first---we likely won't see a lot of new potential positions.

So, what do we do? I'm seeing a few shorts setting up. No worries though. This is perfectly normal since the rising tide is lifting all boats (i.e. weaker stocks are pulling back). With the market at new highs---especially with yesterday's vigor-you certainly do not want to fight it. Since there aren't a lot of meaningful longs, now would be a good time to trail stops and look to take partial profits in any existing longs in your portfolio as the initial profit targets are hit. If this thing turns into the real deal, then you'll still have a partial position and participate. And, if it don't, then you scratch out of the remainder of the position for a better-than-a-poke-in-the-eye trade. Honor your stops on any leftover shorts. This money and position management plan-stops, trailing stops, taking partial profits-will keep you in the game a long time. It creates and portfolio ebb and flow. This helps to keep you on the right side of the market during trends and mostly out of t he market during choppy conditions.

OH, BTW, how beautiful was Wednesday's OGRE? You're welcome! Come to the chart show today, I'll walk you through it. Trust me though, they don't always work out in such a textbook fashion. Ahhh, but when they do......

Click here to watch today's Market in a Minute.

Best of luck with your trading today!

Dave
omgmachines.com/ericx
__________

Expert swing trader Dave Landry comments on the charts for the major markets, indexes and sectors for the upcoming trading day in his daily one-minute video.

Make sure your sound is turned up. A new browser window will open and the video will begin playing within a few seconds.

Joshua Brown
08-31-2013,
Random Thoughts


As I often preach, when I market is hovering near new highs you have to be careful not to chase your own tail. Near the top of the range it will look like the market is poised to explode and near the bottom of the range it will look like the market is ready to implode.

You can't anticipate the move too much. Otherwise, you'll end up over weighted on one side, and, as Murphy would have it, it'll be the wrong side.

Speaking of ranges, up until yesterday, the Ps and Quack have mostly been stuck in the short-term range. That changed on Wednesday. Both indices broke out nicely to new highs. Although breakouts are prone to failure and you shouldn't trade them blindly, the fact that this breakout came from a Double Top Knockout buy signals (especially in the Nasdaq) suggests that it might just have legs.

Internally the market was strong on Wednesday. A lot of areas, too many to mention, banged out new highs-I suppose this isn't a shocker with the Ps at all-time highs and the Quack at multi-year highs. Some weaker areas that looked questionable snapped back. Again, it was strong throughout. In market speak, the market had good breadth.

Is this the "all clear?" Well, in this business you never know for sure-if you did, you'd own the world. It does look like the indices are off to a good new start, especially since they are coming off the Knockout buy signal.

So, do we rush out and buy? Well, not exactly. I'm still not seeing a lot of meaningful buy setups at this juncture. This is perfectly normal. The methodology requires a pullback so until the market pulls back-and ideally, continues its rally first---we likely won't see a lot of new potential positions.

So, what do we do? I'm seeing a few shorts setting up. No worries though. This is perfectly normal since the rising tide is lifting all boats (i.e. weaker stocks are pulling back). With the market at new highs---especially with yesterday's vigor-you certainly do not want to fight it. Since there aren't a lot of meaningful longs, now would be a good time to trail stops and look to take partial profits in any existing longs in your portfolio as the initial profit targets are hit. If this thing turns into the real deal, then you'll still have a partial position and participate. And, if it don't, then you scratch out of the remainder of the position for a better-than-a-poke-in-the-eye trade. Honor your stops on any leftover shorts. This money and position management plan-stops, trailing stops, taking partial profits-will keep you in the game a long time. It creates and portfolio ebb and flow. This helps to keep you on the right side of the market during trends and mostly out of t he market during choppy conditions.

OH, BTW, how beautiful was Wednesday's OGRE? You're welcome! Come to the chart show today, I'll walk you through it. Trust me though, they don't always work out in such a textbook fashion. Ahhh, but when they do......

Click here to watch today's Market in a Minute.

Joshua Brown
08-31-2013,
Stuff I?m Reading this Morning?

Highest conviction hedge fund exposure by asset class. (ZeroHedge)

Jobless Claims drop for fifth straight week. (USAToday)

Someone gave JPMorgan the idea that America was interested in social engagement with it. What a solipsistic bubble bubble of ignorance these people have constructed for themselves to live in. (Bloomberg) and (BusinessInsider)

Five stocks ready to break out from multi-year bases. (bclund)

Jeff Gundlach says stocks are the only game in town?for now. (Reuters)

Tyler Cowen: The robots are already here and taking our jobs. Become a libertarian. (Politico)

Ari Weinberg on creating a personal investment benchmark. (BBC)

This is not a story from an alternate universe or different dimension: SnapChat, with a dozen employees, is supposedly worth $3 billion according to internet math. (NYT)

?While quantitative value strategies focusing on both value and profitability metrics have added significant value to portfolios, they cannot identify which individual stocks you should buy.? (CBSMoneyWatch)

The yuppies and old hipsters are getting stoned in public all day with vaporizers. (NYP)

REMINDER: Backstage Wall Street is now on Kindle!

Joshua Brown
08-31-2013,
The Chart of the Day is Daqo New Energy (DQ). I found the stock by sorting the New High List for Weighted Alpha and this stock has a WA of 481.60+. Since the Trend Spotter signaled a buy back on 8/23 this stock has shot up 456.78%!

It is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. The polysilicon is further processed into ingots, wafers, cells and modules for solar power solutions.

Joshua Brown
08-31-2013,
Home furnishings retailer Restoration Hardware Holdings (NYSE: RH) hasn't been publicly traded for long, but so far, the company has made the most of it. Since it went public on Nov. 2, 2012, the stock has rallied more than 200%.

For its initial public offering, the company sold 5.2 million shares at $24 apiece, which valued the deal at about $124 million.

Leading up to its IPO, the company saw double-digit revenue growth for 10 consecutive quarters, and over the past 12 months, top-line growth has continued. Many analysts have adjusted their price targets higher. Jefferies, for example, raised its price target from $68 to $88 in September. The company's next earnings announcement is scheduled for mid-December.

The fact that a company selling high-end home furnishings can flourish in a slowly recovering economy is a good sign not only for Restoration Hardware, but also for the housing market.

While certainly not sporting as spectacular gains as RH, other home furnishings retailers have also rallied. Bed Bath & Beyond (Nasdaq: BBBY) and Williams-Sonoma (NYSE: WSM) have seen their share prices rise about 25% to 30% in the past year, reflecting improvements in the housing market.

Restoration Hardware caught the attention of Steve Cohen, Paul Tudor Jones and other hedge fund billionaires. Having big-money guys like these supporting the stock is another positive, but traders will need to watch the company's filings with the Securities and Exchange Commission closely for changes in ownerships.

On the charts, RH looks great from a technical perspective. On the weekly chart looking back to its IPO, the breakout in May is at the core of my bullish take on the stock.

Joshua Brown
08-31-2013,
I spent a weekend attending a graduation in Washington State, a stone?s throw from where the 2010 Vancouver Winter Olympics were held. While sitting through the tedious reading of 550 names, I was struck by how many seemed to come from abroad.

As I listened to the wailing ceremonial bagpipes, I did several calculations on the back of the commencement program and was shocked with what I discovered.

Higher education has grown into a gigantic industry for America, with a massively positive impact on our balance of payments, generating an impact on the world far beyond the dollar amounts involved.

According to the non-profit Institute of International Education, there are 819,644 foreign students in the US today, up an impressive 7.2% from last year. This combined student body pays an average out-of-state tuition of $25,000 a year each totaling some $24 billion. The positive impact on the US balance of payments is huge.

China is far and away the dominant origin of these students, accounting for 235,597, up 26% from the previous year. South Korea and India take the number two and three slots, thanks to the generous scholarships provided by their home governments. Saudi Arabia and Brazil are showing the fastest growth rates.

A fortunate few, backed by endowed chairs and buildings financed by wealthy and eager parents, land places at prestigious universities like Harvard, Princeton, and Yale. The top destinations of foreign students are the University of Southern California in Los Angeles, CA, the University of Illinois at Urbana-Champaign, Indiana?s Perdue University, and New York University, with each of these claiming 9,000 foreign students.

However, the overwhelming majority enroll in the provinces in a thousand rural state universities and junior colleges that most of us have never heard of. Many of these schools now have diligent admissions officers scouring the Chinese hinterlands looking for new applicants.

The financial windfall has enabled once sleepy little schools to build themselves into world-class institutions of higher learning, with 30,000 or more students. They boast state of the art facilities, much to the joy of local residents and state education officials. Furthermore, the overwhelming leadership of education industry is steadily Americanizing the global establishment.

I can?t tell you how many times over the decades I have run into the Persian Gulf sovereign fund manager who went to Florida State, the Asian CEO who attended Cal State Hayward, or the African finance minister who fondly recalled rooting for the Kansas State Wildcats.

You know the recently ousted president of Egypt, Mohamed Morsi? He was a former classmate of mine at USC. Go Trojans!

Those who constantly bemoan the impending fall of the Great American Empire can take heart by merely looking inland at these impressive degree factories. These students are not clamoring to get into universities in Beijing, Moscow, or Tokyo.

Joshua Brown
08-31-2013,
?When a manager with a reputation for brilliance takes a business with poor fundamental economics, it is the reputation of the business that remains intact,? said oracle of Omaha, Warrant Buffett.

Joshua Brown
08-31-2013,
It goes without saying that the stock market is an extremely competitive arena. Money management firms spend millions to find profitable niches, strategies and tactics.

Where short-term trading is concerned, the advent of high-frequency trading has made speed more important than ever. This niche has become so competitive that some firms have relocated their operations to their stock exchange's facilities to get their orders to the exchange before the competition's.

Fortunately, long-term investors don't have to concern themselves with the arms race in high-frequency trading. While large firms fight it out for microsecond advantages, long-term investors can exploit time-tested niches. One such niche outperformed the S&P 500 Index by an average of 13% from January 1995 to July 2012, including a period of 45% outperformance between 2000 and 2005.

However, the success of this strategy hasn't captured investors' interest. One reason, to be frank, is that it's a little boring in comparison to other investing strategies. Another is that after the catalyst for this strategy occurs, shares often trade lower for the first month or so. A third is that this strategy was decimated during the 2008 financial crisis. These factors appear to work in unison to spook many investors despite the high returns.

This strategy is known as spin-off investing. It entails buying shares in a company that has been spun off from a larger parent firm. A parent company may have many reasons for spinning off a subsidiary, but typically, the primary goal is to increase shareholder value by jettisoning debt and slashing expenses.

Yet shareholders of the original company often dump their granted shares of the new, smaller company. This is shareholders in the parent company often have no interest in owning the spun-off company, so they sell their shares, sending the spin-off's stock lower -- at least initially. However, other investors often recognize the value in the spin-off's lower price, sending shares on an upswing.

Spin-offs are often successful, and one main reason is that the spin-off's executives are frequently given greater incentives -- in the form of stock options in the new company -- to succeed than they may have had at the parent firm. Think of a spin-off as a startup -- but one with a seasoned executive staff, an existing business model and customer base, and direct experience in the field.

You can search for pending spin-off companies on the Securities and Exchange Commission website and by keeping up with the financial news. Several of the most successful spin-offs include Hillshire Brands (NYSE: HSH), spun off from the Sara Lee Corp.; Mondelez International (Nasdaq: MDLZ), spun off from Kraft (Nasdaq: KRFT); and Phillips 66 (NYSE: PSX), spun off from ConocoPhillips (NYSE: COP).

My favorite way to invest in spin-offs is to gain diversified exposure to the best spin-off companies through the Claymore Beacon Spin-Off ETF (NYSE: CSD).

The top 10 holdings include:

Joshua Brown
08-31-2013,
It goes without saying that the stock market is an extremely competitive arena. Money management firms spend millions to find profitable niches, strategies and tactics.

Where short-term trading is concerned, the advent of high-frequency trading has made speed more important than ever. This niche has become so competitive that some firms have relocated their operations to their stock exchange's facilities to get their orders to the exchange before the competition's.

Fortunately, long-term investors don't have to concern themselves with the arms race in high-frequency trading. While large firms fight it out for microsecond advantages, long-term investors can exploit time-tested niches. One such niche outperformed the S&P 500 Index by an average of 13% from January 1995 to July 2012, including a period of 45% outperformance between 2000 and 2005.

However, the success of this strategy hasn't captured investors' interest. One reason, to be frank, is that it's a little boring in comparison to other investing strategies. Another is that after the catalyst for this strategy occurs, shares often trade lower for the first month or so. A third is that this strategy was decimated during the 2008 financial crisis. These factors appear to work in unison to spook many investors despite the high returns.

This strategy is known as spin-off investing. It entails buying shares in a company that has been spun off from a larger parent firm. A parent company may have many reasons for spinning off a subsidiary, but typically, the primary goal is to increase shareholder value by jettisoning debt and slashing expenses.

Yet shareholders of the original company often dump their granted shares of the new, smaller company. This is shareholders in the parent company often have no interest in owning the spun-off company, so they sell their shares, sending the spin-off's stock lower -- at least initially. However, other investors often recognize the value in the spin-off's lower price, sending shares on an upswing.

Spin-offs are often successful, and one main reason is that the spin-off's executives are frequently given greater incentives -- in the form of stock options in the new company -- to succeed than they may have had at the parent firm. Think of a spin-off as a startup -- but one with a seasoned executive staff, an existing business model and customer base, and direct experience in the field.

You can search for pending spin-off companies on the Securities and Exchange Commission website and by keeping up with the financial news. Several of the most successful spin-offs include Hillshire Brands (NYSE: HSH), spun off from the Sara Lee Corp.; Mondelez International (Nasdaq: MDLZ), spun off from Kraft (Nasdaq: KRFT); and Phillips 66 (NYSE: PSX), spun off from ConocoPhillips (NYSE: COP).

My favorite way to invest in spin-offs is to gain diversified exposure to the best spin-off companies through the Claymore Beacon Spin-Off ETF (NYSE: CSD).

Joshua Brown
08-31-2013,
Who says that the market doesn't trade off of inside information?

The short interest in glass and fiber maker Corning (NYSE: GLW) more than doubled in the two weeks ended Oct. 31, to 83 million shares. (Data were released Nov. 11.) The short-interest surge came just days before Apple (Nasdaq: AAPL) said Nov. 5 that it was going to work with GT Advanced Technologies (Nasdaq: GTAT) in the production of touch screens at an Apple manufacturing facility.

To be sure, the deal was a great win for GTAT, as my colleague David Goodboy noted a few days ago.

But GTAT's win shouldn't be seen as a real impediment to Corning. And short sellers, even as they traded on this news early, will still likely get burned -- because Corning is shaping up to be both a deep value play and a growth play.

Merrill Lynch's Wamsi Mohan was one of the first analysts to weigh on the Apple/GTAT linkup: "This announcement does not change our opinion of the current limitations of Sapphire (or of) the price and feature advantage of Gorilla Glass. In our view the applications are likely to be more niche and Gorilla's position in the touch market relatively unchanged." He has a "buy" rating and $22 price target, representing 30% upside.

Mohan's specific concerns: The Sapphire production process is "orders of magnitude more expensive than Gorilla Glass," which would likely add $20 to the cost of each iPhone if it were used in that device. The high cost relates to low manufacturing yields and arduous production techniques, he notes, adding that "Sapphire is heavier than Gorilla and does not perform as well in drop and tumble tests." That's why Mohan expects the AAPL/GTAT linkup will likely serve a small niche product, such as the iWatch.

Joshua Brown
08-31-2013,
As the market continues to flirt with all-time highs, a considerable amount of churn is taking place beneath the surface. Investors are increasingly flocking to companies that are seemingly big and safe, while shedding exposure to smaller and riskier names.

It's a logical move, considering the current bull market is getting along in years. Indeed, I extolled the virtues of mega-cap stocks back in August, and you can still find some great bargains among America's largest companies.

Yet if the market is going in this direction, it also means that smaller stocks are falling to levels that hold real appeal. And in no sector is this divergence more apparent than in biotechs. The biggest biotech stocks appear fully priced -- while their smaller brethren are now far from their 52-week highs.

Joshua Brown
08-31-2013,
Imagine buying a used paperback book for $5, reading the first few chapters, and then finding a $1 bill tucked neatly between two of the pages. Because the book came with a little cash, the net purchase price essentially drops to just $4.

That's essentially what we see with cash-rich companies like GPS-maker Garmin for example. The company holds $13.84 per share in cash with zero debt. So a potential acquirer that bought all the outstanding shares at the recent price of $46.25 would really only end up paying about $32.41.

Of course, buying a few shares doesn't mean you can march in and demand payment. But as a stockholder, you do have a pro-rata claim on that cash. And while you can't spend it freely like the $1 in the book, it can still be used in numerous ways to enhance shareholder value.
That money can be used to repurchase stock, to make a special dividend distribution, to pay down debt, to upgrade equipment, to fund an acquisition... you name it.

Equally important, having access to that much cash negates many of the financial worries that can cripple a stock. Expanding companies need capital, and raising it isn't always easy (or cheap). Some cash-strapped companies have no other option but to issue more common shares or borrow money at exorbitant rates.

So deep cash balances not only yield positive changes, but they can help companies avoid negative ones. Simply put, cash is the lifeblood of a business. That's why I invest just as much time analyzing the balance sheet as I do the income statement.

Here are a few more companies that have a nice stockpile of cash and a dividend yield above 3.5%

Joshua Brown
08-31-2013,
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Quote of the day

Barry Ritholtz, ?There are some people who have yet to pay their tuition to Wall Street University. They shall do that over the course of their investing lifetimes through high fees, unnecessary taxes, costs and expenses.? (Big Picture)

Joshua Brown
08-31-2013,
A steady scan of the financial headlines these days implies that it's the golden era of dividend investing.

But it's not true.

Though many companies are boosting their dividends at a solid pace, dividend yields remain far below the levels seen back in the 1970s. Back then, companies earmarked the vast majority of their profits for dividends. Today, payout ratios usually hover below 35%.

If one investment theme is surely at a high point, it's stock buybacks. As I noted two months ago, companies have bought back more than $1 trillion since 2009, and the pace of buyback activity has actually grown stronger in 2012 and 2013.

The timing is curious. The market has posted impressive gains since bottoming out more than four years ago, and many stocks are trading near all-time highs. In the past, companies would only pursue large stock buybacks when their shares were in the doghouse.

Still, it's worth tracking any buybacks plans that promise to retire 10% or even 15% of the current share count. And in the current earnings season, we've seen a fresh batch of hefty plans that fulfill that mandate. Here are a dozen companies, each sporting a market value of at least $1 billion, which have a chance to make a meaningful dent in their share counts.

Joshua Brown
08-31-2013,
Random Thoughts


Each day you look at the market carefully. You study a handful of indices, several hundred sectors/ETFs, and most importantly, a few thousand stocks.

So what did the above tell me yesterday? Well, it was a mixed day (duh implied). Some areas banged out new highs, some areas sold off, and some areas didn't do much at all.

Commodities have lost steam. Energies are now back to where they were around 2 months ago. Metals & Mining are now trading back below were they were over 3 months ago.

The Banks which had broken out nicely in October have now given up all of those gains.

Insurance which was making new highs on Monday has pulled back into its base.

Transports are just shy of all-time highs.

Retail, especially Specialty Retail, is doing well.

Drugs, which had been looking a little questionable, have been coming back as of late.

Defense and Manufacturing remain in uptrends.

I can go on and on about the good, not so good, and indifferent. Again, it is getting mixed.

As I preach, markets, like life, have to be taken one day at a time. And, each day brings a new clue. Monday's action was a lot better than Tuesday's.

The Ps are just off of all-time highs but they are also just about where they were 2 weeks ago. This action has the 10-day moving average flattening out. The Quack also hasn't made any forward progress (net net) in a few weeks. A big up day would make all the difference in the world. More flat to weak days keep us in "show me" mode.

International markets (EFA) have also lost some steam.

I still think if the Quack/Q's take out last Thursday's high they have the potential to accelerate even higher. Unfortunately, each day that passes helps to negate this signal. So, it's important for them to rally soon.

You don't want to argue with a market that is hovering around new highs but eventually, it has to make those new highs. I'd hate to have to start drawing a sideways arrow.

So what do we do? I think the database has been speaking lately. It hasn't produced a whole lot of meaningful setups in quite a while. On the surface, things still look pretty good. However, it is getting a little mixed beneath. Therefore, again, the database could be the telling us to continue to let things shake out a bit. Considering this, focus mostly on the management of existing positions. As usual, honor your stops. As I've been discussing, stops can help to adjust your portfolio. If we continue higher, your shorts will stop out and all you'll be left with is longs.

Futures are getting hit fairly hard pre-market. For the aggressive, look to play an opening gap reversal (OGRe) should it occur. If you don't know what that is, pass. Get educated. Read the articles under Education on my website.

Click here to watch today's Market in a Minute.

Best of luck with your trading today!

Dave
omgmachines.com/ericx
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Expert swing trader Dave Landry comments on the charts for the major markets, indexes and sectors for the upcoming trading day in his daily one-minute video.

Make sure your sound is turned up. A new browser window will open and the video will begin playing within a few seconds.

Joshua Brown
08-31-2013,
Random Thoughts


Each day you look at the market carefully. You study a handful of indices, several hundred sectors/ETFs, and most importantly, a few thousand stocks.

So what did the above tell me yesterday? Well, it was a mixed day (duh implied). Some areas banged out new highs, some areas sold off, and some areas didn't do much at all.

Commodities have lost steam. Energies are now back to where they were around 2 months ago. Metals & Mining are now trading back below were they were over 3 months ago.

The Banks which had broken out nicely in October have now given up all of those gains.

Insurance which was making new highs on Monday has pulled back into its base.