Dave Landry's Market in a Minute - Monday, 12/2/13

Random Thoughts


You hate to read too much into a holiday shortened session but you certainly can't ignore the action. So with that said....

Friday was a little mixed.

The Quack plowed ahead to close at multi-year highs, gaining over 1/3%.

The Ps tried to rally but came back in to close slightly in the minus column.

The Rusty put in a similar performance but managed to finish in the black, albeit barely. Nevertheless, this is enough to keep it at all-time highs. Better-than-a-poke-in-the-eye is what I say.

With the broad based Rusty hovering around new highs, it is no big shocker that internally things are still looking pretty good.

Drugs, led by Biotech, managed to bang out all-time highs.

The Semis, which have been trading mostly sideways as of late, ended slightly higher. This action has them probing the top of their trading range.

Defense, Regional Banks, Conglomerates, Computer Hardware, and Health Services to name a few remain in uptrends and at or near new highs.

The Chart of the Day is MDC Partners (MDCA). I found the stock by sorting today's New High List for frequency then used the flipchart feature to review the charts. The stock was also the Chart of the Day back on 7/31. Since the Trend Spotter signaled a buy on 9/11 the stock is up 42.90%.

It is a marketing communications firm providing marketing communication and consulting services throughout the United States, Canada, and the United Kingdom. Its services includes advertising and media, interactive marketing, direct marketing, public relations, corporate communications, market research, corporate identity and branding, and sales promotion. The Company also provides mobile marketing, and database and customer relationship management services.

Not too long ago, I hit a big milestone.

I officially received my 50,000th dollar in dividend income from my Daily Paycheck portfolio.

I'm not trying to brag. Instead, I want to show you how I did it, and how you could possibly too.

A little less than four years ago, StreetAuthority co-founder Paul Tracy challenged me to build a portfolio of dividend stocks that would pay out more than 30 dividend checks a month -- one for every day of the year. He even gave me $200,000 and a dedicated brokerage account to get started.

I collected the very first dividend from my real-money portfolio on December 24, 2009 -- just a few weeks after launching The Daily Paycheck advisory. It was issued by Invesco Value Municipal Income Fund (NYSE: IIM).

My first dividend was for $18.13, or 7 1/4 cents per share for my initial holding of 250 shares.

It doesn't sound like the most promising start. After all, $18.13 won't get you very far toward retirement -- that is unless you reinvest dividends and have a bit of time. As of today, I've received 46 dividends from IIM for a total of $953.02. My latest dividend was for $23.37 -- 28.9% more than my very first dividend. IIM did raise its monthly dividend to 7 1/2 cents per share back in August 2011. But most of the dividend growth is by way of dividend reinvestment.

You see, I reinvested my very first dividend back into IIM. The following month, I had incrementally more shares generating incrementally more income.

361 Capital portfolio manager, Blaine Rollins, CFA, previously manager of the Janus Fund, writes a weekly update looking back on major moves, macro-trends and economic data points. The 361 Capital Weekly Research Briefing summarizes the latest market news along with some interesting facts and a touch of humor. 361 Capital is a provider of alternative investment mutual funds, separate accounts, and limited partnerships to institutions, financial intermediaries, and high-net-worth investors.

361 Capital Weekly Research Briefing
December 2, 2013
Timely perspectives from the 361 Capital research & portfolio management team
Written by Blaine Rollins, CFA





It was another unhappy week for the bears as the slow markets again posted new record highs?
For the most part, equity markets in the U.S. and Europe continued to glide higher as the U.S. celebrated the Thanksgiving holiday which also kicks off the peak shopping season. Early indications are that Thursday and Black Friday retail sales got off to a good start ? online sales on Thanksgiving Day were up 20% overall, and Walmart announced it had processed over 10M transactions at its stores on Thursday night. Despite some concerns being raised about equity markets starting to get ?bubbly,? stocks continued to march higher, with the Nasdaq breaking above 4,000 this week for the first time since the internet bubble popped. For the week, the DJIA gained 0.1%, the S&P500 rose 0.1%, and the Nasdaq added 1.7%. November saw the S&P rise 2.8% and the Nasdaq up 3.6%.
(TradeTheNews)

Market tops and bottoms are always a popular topic of conversation. There are a number of theories about how to forecast key turning points in advance, but, in reality, those theories rarely work.

While it does seem like an exercise in futility to forecast the day and price of tops and bottoms, there is valuable information to learn from studying the general nature of market turning points. This knowledge will help us understand what to look for and how to react to the market as it develops rather than provide a false sense of comfort about what we should see.

In the stock market, we tend to see tops build slowly and bottoms appear unexpectedly. This can be seen in the chart below, which shows the 2007 market top on the left and the March 2009 bottom on the right.

It's no secret that there's a horizontal oil boom happening in the United States today. What is less appreciated is how unique this boom is to the United States.

There are lots of places in the world that have oil in the ground that horizontal drilling and multi-stage fracturing could exploit. But more is required than just having the oil. The U.S. is unique in that it provides the perfect combination of the ingredients necessary to allow for the horizontal revolution to take off.

Let's tick the boxes on these ingredients. First, the U.S. has the oil in the ground trapped in large quantities in tight/shale oil rocks that horizontal wells and multi-stage fracturing can exploit.

Second, the U.S. already has in place a network of thousands of miles of pipelines that were originally used to develop conventional oil plays.

Third, the U.S. has the thousands of drilling rigs required that are needed to drill these unconventional fields that have low rate wells and require constant drilling.

Fourth, the U.S. has the thousands of skilled energy workers required to accomplish the massive amount of drilling, fracturing and completion work that is required.

Fifth and perhaps most importantly, the United States has a system of land ownership that financially incentivizes landowners to have their land developed.

All of those ingredients coming together have allowed the United States to move quickly and exploit the opportunity created by horizontal drilling and multi-stage fracturing.

Other parts of the world may have the actual oil in the ground, but the lack of the other four ingredients means that reaching that oil is many years away. The pipelines, drilling rigs and staffing will require billions of dollars of investment and years. The complications of not having a system of land ownership similar to the United States may present a permanent problem.

All that being said, there is one other country that also has all of the necessary ingredients. And that is America's neighbor to the north.

If you are interested in investing in tight/shale oil producers, you might want to take a look at some of the Canadian producers. The reason for that is that the Canadian producers offer the same opportunities as their U.S. counterparts, but many of them sell for half the valuation in the market today. One of the best examples of this is Bellatrix Exploration (NYSE: BXE).

Bellatrix offers exposure to three horizontal oil and gas plays. The gas plays are of the "liquids-rich" variety, which means that the economics of the plays are excellent, even in the current world of depressed natural gas prices.

In light of the holidays why don?t you check out: David and Goliath: Underdogs, Misfits, and the Art of Battling Giants by Malcolm Gladwell.

Quote of the day

Matt Levine, ?No matter how long the anomalies have persisted, if they?re just brute statistical facts they could always go away tomorrow. Your anomalies have no soul.? (Bloomberg)

Chart of the day

Had some fun playing with the Bloomberg Billionaire tool this morning, located here.

Some of the data I was able to pull about YTD dollar and percentage gains in billionaire net worth tells an interesting story about what?s worked this year (tech and activism) and what has not (emerging markets and commodities). It?s amazing how this mirrors what?s worked and not worked in a typical investor?s portfolio.

Some tidbits:

Tech has been great in 2013, especially old tech like Microsoft:
Bill Gates, retired, is the biggest winner of 2013 in dollar terms. His net worth is up 23% YTD to $77.7billion, reclaiming the top spot.
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

Emerging markets like Latin America, not so much:
Carlos Slim, the world?s #2 billionaire, actually managed to lose money this year, net worth down $3.7 billion YTD (too much EM exposure).
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

And don?t even get me started on metals and other commodities:
The biggest billionaire loser is Chilean copper heiress Iris Fontbona, who lost $6 billion or 20% of her fortune in 2013. Commodities.
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

And the year?s big Wall Street winner was Carl Icahn ? everything this guy touched turned to gold:
Carl Icahn surpassed George Soros this year in net worth. $23.7 billion vs $22.9 billion. Carl made 8 billion dollars this year, OMG.
? Downtown Josh Brown (@ReformedBroker) December 3, 2013

Have some fun with the data on your own, click below:
Bloomberg Billionaires Ranking

Just as every fisherman has stories about the big one that got away, every investor has "woulda, coulda, shoulda" tales of investments that would have been wildly profited wildly if they had only purchased.

I myself have one such tale from the past year. It gnaws at my insides to think about the massive profits that I missed out on, even though I felt a strong conviction to buy. The good news is that it's not too late to jump on board.

This stock was trading near $65 in 2007 before the financial crisis knocked it down below $5. The price wallowed in the nowhere zone under $5 for several years before slipping into penny-stock territory below $1. Although this company was (and is) majority owned and controlled by the U.S. government, most investors had written it off as not viable. At one point, the stock price fell to less than a dime a share. The price collapse caused the company to be delisted from the New York Stock Exchange, relegating its shares to the over-the-counter market.

I considered buying shares in the $0.15 area, thinking that there was no place for this once-mighty quasi-government agency to go but up. All the bad news was already reflected in the price, the housing market had improved, and there was no longer chatter about the government shutting down the company. I noticed the volume picking up and the price rising -- but fear and doubt kept me from buying.

Between late March and late May, this stock rocketed from a low of $0.09 to nearly $5.50. I watched the entire 6,000% moonshot in amazement. Every $100 investment near the lows would have skyrocketed to more than $6,000 in around 60 days, an incredible return by anyone's standards. The price has since dropped back to about $2.70, but it could easily double or even triple from here.

If you haven't guessed, I am talking about the Federal National Mortgage Association, commonly known as Fannie Mae (OTC: FNMA). A $15 billion-plus company by market cap, Fannie Mae provides liquidity and stability services in the secondary U.S. mortgage market. In other words, it guarantees and securitizes mortgage loans originated by lenders in the primary mortgage market.

Fannie Mae's financial condition has improved dramatically since the housing crisis. Over the past five years, Fannie Mae has facilitated $3.9 trillion in mortgage credit, supported 3.4 million home loans, 12 million mortgage refinances, and 2 million units of rental properties. By the end of this year, it will have paid back $114 billion to taxpayers.

After posting this type of performance and rebound, why are there lingering concerns about Fannie Mae? The U.S. government still owns nearly 80% of both Fannie Mae and its sibling firm, Freddie Mac, and most of Washington's Republicans and Democrats want the firms dismantled (and their shareholders wiped out) as part of a broader overhaul of the housing finance industry.

But at least two large hedge funds disagree with Washington's assessment and are fighting to keep Fannie Mae a viable, ongoing concern: Fairholme Capital Management (Nasdaq: FAIRX), led by Bruce Berkowitz, and Bill Ackman's Pershing Square Capital Management.

Currently Fannie's largest stockholder outside the U.S. government, Berkowitz wants to restructure Fannie and Freddie through negotiations with their stakeholders, with the goal of freeing them from government control. Ackman's firm owns a nearly 10% stake in Fannie Mae's common stock and has earned a return of 44%.

Put simply, Berkowitz wants to design a new mortgage insurer by jettisoning the old mortgages, including those in foreclosure. This book of old business would be transferred to common shareholders such as Ackman, who doesn't seem concerned by this possibility. He has said the mortgage insurers should keep the foreclosed assets, rehabilitate the homes and rent them out -- basically, become a large residential REIT.

Judging by Ackman's statement, I expect that should Berkowitz's plan be instituted, Ackman will lead the charge in turning what's left of the common shareholders' holdings into a gigantic REIT. This would be a win-win for everyone involved. Ackman has gone as far as saying that it would instantly stabilize the housing market.

Risks to Consider: The hedge funds fighting for Fannie Mae's survival are no match for the powers of the U.S. government. Although I firmly think that a proposal similar to Berkowitz's will prevail, there remains a high risk of Fannie and Freddie being dismantled, leaving the common shareholders with nothing. Always diversify and use stop-loss orders when investing.

Action to Take --> I am convinced that Fannie Mae will reach $8 within the next 12 months. Dismantling Fannie and Freddie would be too much of a headache for Washington, not to mention the shareholder blowback should such an idea become reality. Politicians usually take the path of least resistance, and that path is to maintain Fannie Mae by following a Berkowitz-type proposal. Buying the stock between $3 and $2.25 with a 12-month target of $8 and an initial stop-loss just below $1.75 makes solid investment sense.

- David Goodboy

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Steve Jobs offered me one third of Apple for $50,000 and I was so smart that I turned it down. It?s funny when you think about it now, except when I?m crying,? said Nolan Bushnell, the founder of game company Atari and Jobs? first employer.

I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my eleven month return on capital comes close to 1,000%. I also like buying flood insurance in the middle of the summer when the forecast here in California is for endless days of sunshine.

That is what we are facing now with the volatility index (VIX) where premiums have been hugging the 12%-14%% range for the last several months. Get this one right, and the profits you can realize are spectacular.

The CBOE Volatility Index (VIX) is a measure of the implied volatility of the S&P 500 stock index, which has been melting since the ?RISK OFF? died a horrible death. You may know of this from the talking heads, beginners, and newbies who call this the ?Fear Index?. Long-term followers of my Trade Alert Service profited handsomely after I urged them to sell short this index two years ago with the heady altitude of 47%.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.

The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation. You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?

For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story. Class dismissed.

The (VIX) is expressed in terms of the annualized movement in the S&P 500, which today is at 1,800. So a (VIX) of $14 means that the market expects the index to move 4.0%, or 72 S&P 500 points, over the next 30 days. You get this by calculating $14/3.46 = 4.0%, where the square root of 12 months is 3.46. The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 4.0%, you make a profit on your long (VIX) positions.

Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 4.0% range. I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.

It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.

But wait, there?s more. Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $14, you are picking up a derivative at a nice oversold level. Only prolonged, ?buy and hold? bull markets see volatility stay under $14 for any appreciable amount of time.

If you are a trader you can buy the (VIX) somewhere under $14 and expect an easy double sometime in the coming year. If we get another 10% correction somewhere along that way, that would do it.

If you are a long-term investor, pick up some (VIX) for downside protection of your long-term core holdings. A bet that euphoria doesn?t go on forever and that someday something bad will happen somewhere in the world seems like a good idea here.

If you don?t want to buy the (VIX) futures or options outright, then you can always buy the iPath S&P 500 VIX Short Term Futures ETN (VXX).

If you lose money on this trade, it will only be because you have made a fortune on everything else you made. No one who buys fire insurance ever complains when their house doesn?t burn down.

Market tops and bottoms are always a popular topic of conversation. There are a number of theories about how to forecast key turning points in advance, but, in reality, those theories rarely work.

While it does seem like an exercise in futility to forecast the day and price of tops and bottoms, there is valuable information to learn from studying the general nature of market turning points. This knowledge will help us understand what to look for and how to react to the market as it develops rather than provide a false sense of comfort about what we should see.

In the stock market, we tend to see tops build slowly and bottoms appear unexpectedly. This can be seen in the chart below, which shows the 2007 market top on the left and the March 2009 bottom on the right.



SPDR S&P 500 ETF (NYSE: SPY) built a top slowly, over a period of several months. The bottom, on the other hand, came unexpectedly and was greeted with disbelief.

This pattern has been seen at other significant stock market turning points. The bottom that occurred in 2002 was also unexpected and sudden, while the top in 2000 had been formed over several months. While the top was forming, stocks moved within a relatively narrow range as the transition from bull market to bear market was completed.

This behavior can be explained with investor sentiment. In a bull market, investors become conditioned to buying dips. They respond to price drops by buying, and this is why we see prices trade in a consolidation pattern at a top. Buying the dips shows up as support on a chart, and excessive valuation levels prove to be resistance levels.

Bottoms in stocks begin when sentiment is negative and selling has reached a peak. When the selling pressure is exhausted, prices rebound suddenly.

Gold and other commodities tend to behave differently, as the next chart shows.

Market tops and bottoms are always a popular topic of conversation. There are a number of theories about how to forecast key turning points in advance, but, in reality, those theories rarely work.

While it does seem like an exercise in futility to forecast the day and price of tops and bottoms, there is valuable information to learn from studying the general nature of market turning points. This knowledge will help us understand what to look for and how to react to the market as it develops rather than provide a false sense of comfort about what we should see.

In the stock market, we tend to see tops build slowly and bottoms appear unexpectedly. This can be seen in the chart below, which shows the 2007 market top on the left and the March 2009 bottom on the right.

Chase Van Der Rhoer, a Bloomberg application specialist, makes the case for an investment bubble in this morning?s Bloomberg brief:

Bubbles don?t exist without investment funds crowding into the same trades relative to liquidity. Researchers will often construct measures of market-crowding such as the ratio of the Nasdaq Composite Index price to the relative amount of volume. This ratio has increased 238% since 2009 ? showing cause for concern.

And here?s his chart:

After eight consecutive weeks of gains, it is time to consider when strength becomes exhaustion in the stock market.

Overbought Eventually Means Overbought
SPDR S&P 500 (NYSE: SPY) closed up 0.11% in a holiday-shortened trading week. This was the eighth time in a row SPY posted a weekly gain. It was also the smallest weekly gain in the winning streak and the second week in a row the rate of change has declined.

The concept of overbought is a challenging one, and traders have spent countless hours trying to understand it. Many indicators, such as stochastics and Relative Strength Index (RSI), are used to define an overbought market, but they all share a common flaw. At the beginning of a very strong up move, markets become overbought and stay overbought.

The chart below demonstrates the challenge of defining when a market is overbought. SPY is shown with the stochastics indicator. The monthly chart is used to decrease the sensitivity of the indicator, but similar patterns can be seen on weekly and daily charts.

Stochastics became overbought in 2003 and remained overbought until the end of 2007. Bollinger Bands(r) confirm that SPY was overbought throughout that time as prices stayed close to the upper Band throughout the advance.

Markets were up slightly after Thanksgiving weekend. Many stores were open on Thanksgiving Day for the first time in history and it seems like consumers enjoyed it. Several firms reported that between Thanksgiving and Black Friday, sales were estimated at $12.3 billion. Traffic on Thanksgiving Day was up 27%; this is nearly one-third of the holiday weekend shoppers, according to the National Retail Federation. Bill Martin, founder of ShopperTrak, said, ?Probably the most interesting is the amount of energy the consumer put into Thursday shopping. The retailers did a good job getting them up from the dinner table and into stores.? Analysts expect sales for the entire weekend to come in around $57.4 billion, with the average shopper spending roughly $407.02. This is down from last year?s $59.1 billion. The National Retail Federation said that there were more than 141 million shoppers throughout the course of the entire weekend. This estimate is higher than last year?s 139 million shoppers.

Online retail sales were up for the weekend as well. The Retail Federation said that there were 92 million people that shopped during the weekend. This was up from last year?s 89 million. ComScore, an analytics firm, said that online sales were up 17.3% over last year on Thanksgiving and Black Friday. Popular online purchases were tablets and big-screen TVs. Vice president of Offers.com, Howard Schaffer, said, ?Tablets were super-hot this year, which is really no surprise to anybody. Obviously the iPad did extremely well.

Bank of America (BAC) announced that they have reached an agreement to settle all outstanding claims with Freddie Mac. This will cover all of the mortgages that were sold to Freddie Mac through the end of 2009. The settlement amount? A grand total of $404 million. This agreement will cover all past losses and future losses connected to the loans. The company already has reserve money on hand to cover this amount. In November, the government urged Bank of America to pay nearly $863.6 million in damages once the federal court found them at fault for fraud over faulty mortgages sold by their Countrywide unit. In September of this year, Freddie Mac was awarded funds from Wells Fargo, $780 million, and Citigroup, $395 million, to settle repurchase claims. Freddie Mac?s Chief Executive, Donald Layton, said, ?We continue to make very good progress in recovering funds that are due to the American taxpayer, as well as resolving Freddie Mac?s legacy repurchase issues.?

That?s all for the day.
All the best,

Being prepared for a bear market takes many forms. In some cases, it can become an obsession.

Some investors always seem to be looking for a market top and forecasting a major decline only days away. While there have been two significant bear markets since 2000, these investors have been mostly wrong for many years.

Investors worried about the next bear market should remember that SPDR S&P 500 (NYSE: SPY) has only suffered three drops of 20% or more since it began trading 20 years ago. There have only been five declines of 20% or more since 1982 in the S&P 500. Bear markets are rare, and always preparing for a rare event can be very costly.

Rather than making investments right now to prepare for the next decline, you could simply make plans for what you will do to protect wealth when the market starts to fall. There are a number of indicators to define a bear market, but I think the simple 10-month moving average (MA) is an effective tool. (See This Chart Shows Where the Bull Market Will End.)

That indicator gave a sell signal less than 7% below the high in 2007, and 7.3% below the high in 2000. I don't know whether the next signal will be that accurate, but I know prices will move below the 10-month MA in a deep bear market.

I believe selling options is an appropriate income strategy in any market environment, but it will become even more important in a bear market.

A put option gives the buyer the right to sell 100 shares of a stock at the option's strike price before the expiration date. Put options go up in value when stock prices fall.

When selling puts, the trader generates immediate income, known as a premium, for taking on the obligation to buy the stock if it falls below the option's strike price before expiration.

Selling put options can provide a disciplined approach to buying stocks as prices fall, something many investors become too paralyzed with fear to do. While prices are rising, it is a good idea to make a list of stocks that would be good buys at lower prices. When SPY falls below the 10-month MA, it would be a good time to sell some holdings and put that cash aside for buys at lower prices. Then sell put options to ensure you buy when prices fall.

Selling puts is also a way to generate income that offsets the losses of a bear market. As an example, consider hypothetical stock ABC trading at $100 a share. You could sell puts 10% below the market price that expire in one month for about $1 a share.

If ABC falls below $90, the put will be exercised and put sellers will buy the stock at $90 a share. With that put sale, the actual cost would be $89 since you have the $1 a share from selling the put to reduce the cost of the stock.

If the price doesn't fall 10% in one month, which will be the outcome most of the time, the put option expires worthless, you keep the $1 per share in income, and you can sell another put option.

This process can be repeated over and over again. If the market drops slowly, the stock price might never be below the strike price at expiration, and that means the options will never be exercised. In that case, you generate monthly income from selling puts.

To recap, selling puts helps investors in two ways during a bear market.

1. They generate immediate income, which offsets losses in other positions.

2. They can be forced to buy high-quality stocks at low prices.

Many investors fail to take advantage of low prices in a bear market, waiting for even lower prices. Selling puts could force you to buy when stocks offer bargains, an action that should be rewarded with large gains in the bull market that inevitably follows a bear market.

This article was originally published at ProfitableTrading.com:
A Bear Market Defense Strategy That Works

- Amber Hestla Barnhart

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One of my favorite scenes from the classic movie "Wall Street" is the boardroom scene when Bud Fox realizes that Gordon Gekko is going to dismantle Blue Star Airlines piece by piece. A portly, bespectacled investment banker glibly says: "No sweat. We sell the gates and pawn the planes off on the Mexicans. Do we have a deal or what?"

Sure, there are more action-packed parts of the flick. But to me, that particular scene helps explain what investing is all about: buying an asset and watching as the value is realized or unlocked.

I've found a stock that fits that scenario that, coincidentally, is also in the airplane business: Fly Leasing (NYSE: FLY).

Based in Dublin, Fly Leasing is in the commercial aircraft leasing business. Airlines are increasingly turning to operating leases to supply their fleets. In fact, over one third of the world's airline fleet is leased.

Basically, the companies are renting the planes to avoid having a gigantic, swiftly depreciating asset sitting on its balance sheet. Firms like Fly assume the risk. Why? As that portly investment banker implied, you can always find someone who needs a plane.

Chart o? the Day: Stock vs Bond Yields Around the World

The one thing that should jump out at you immediately from this BlackRock chart is that the US is the only developed market in which stock dividend yields are lower than the interest rates being offered by that country?s bonds.

Over the weekend tragedy struck as movie star Paul Walker (of ?The Fast and the Furious? franchise) was killed in a car crash after which the vehicle was engulfed in flames. Both the driver and Walker, who was the passenger, are dead. There is chatter that there was a street race involved and police are investigating.

Walker was 40 years old.

This is obviously all very horrible. And peculiar, given that the driver of the car was a wealth manager at Merrill Lynch. Roger Rodas (Brightscope profile here), who was heavily involved in the street racing scene in real life, was Walker?s good friend and business partner in an auto parts business. He was also the star?s financial advisor and a 20-year veteran of Merrill.

I call this peculiar because it is not very often you encounter a financial advisor with such a high-stakes, heavy adrenaline, life-endangering hobby. Most FA types I?ve ever met or have heard of are the kinds of people who would be talking clients out of reckless hobbies and behaviors. We are all fully versed in the actuarial tables, as we must be, in order to plan retirements for people.

Here?s some information about the relationship (via Heavy.com):

An online profile states that Rodas was, ?one of America?s top wealth management advisors and portfolio managers, with an impressive list of clients,? this was in addition to his role with Always Evolving. Rodas and Walker?s friendship evolved over a shared passion for cars, it eventually morphed into a professional relationship where Rodas became Walker?s financial adviser.

A Merrill Lynch profile of the pair says:
?The two struck up a conversation when Walker noticed Rodas driving a Porsche GT3 he had previously owned. Soon the two were racing side by side, as when they teamed recently with two professional drivers in a pro-am 25-hour endurance race in Thunder Hill, Calif. As their friendship developed, Walker occasionally asked Rodas for financial advice, and they began working together formally as client and Financial Advisor in 2007. The first item on their agenda was reorganizing Walker?s portfolio, a hodgepodge of personal investments. Rodas suggested a diversified, relatively conservative portfolio of stocks, bonds, cash and alternative investments, aimed mostly at preserving capital. And because an actor?s income is sporadic, each time Walker completes another film, he and Rodas meet to re-evaluate his financial strategy to help make sure his long-term goals stay on track.?

The same profile states that Rodas had worked at Merrill Lynch/Bank of America for 20 years (the profile is undated) and has been named on a list of America?s Top 1000 Financial Advisers in 2010, 2011 and in 2012.

It?s not been my experience that Fast and Furious is typical trait of planners and wealth managers. Most of my colleagues in the business are cautious and patient by nature, content to leave the short-term thrills to others while focusing on the overarching well-being and lifelong happiness hat comes from preparation and rationality.

But who knows, perhaps the advice Rodas was giving his friend professionally was the opposite of the lifestyle the two were purportedly living on circuit.

In any event, this is sad news. Godspeed, Roger and Paul.

The world is about to suffer an acute shortage of equity capital over the next eight years, which could total $12.3 trillion. That is the conclusion of the McKinsey Global Institute, an affiliate of McKinsey &Co., a great well of long-term economic thinking which I have been drawing from for the last 40 years.

The cause of the coming debacle is quite simple. Investable assets in the emerging world with minimal experience in equity investment are growing four times faster than those in the developed world. While developed countries own 80% of the world?s $196 trillion in assets today, that share is expected to decline to 64% by 2020. This means that, by far, the greatest growth in assets will be in countries where managers have the least experience in equity investment.

Aging populations wind down equity investment as they get older, shifting an ever-larger share of their assets into bonds and cash. The rise of defined contribution plans shifts a greater focus on fixed income investments. More money is going into hedge funds and private equities. The regulatory burden of Dodd-Frank is scaring many banks out of the stock brokerage into safer managed alternatives. When stocks aren?t being ?sold?, no one buys them.

Anyone who has ever tried to sell equities to emerging market investors, like myself, can tell you the challenges they run up against. Much of the region?s assets are controlled by quasi-governmental institutions with a much greater debt orientation. Equity issuance is very expensive and tightly regulated. Corporate transparency and government oversight is a joke. No one believes the figures that are coming out of China.

Minority shareholders have no say and few rights, with annual meetings often over in an hour. There also is a long cultural tradition of keeping your wealth tied up in gold and silver instead of paper assets. No surprise then, that most emerging market investors view equities as riskier and more speculative than they are in the West and would rather keep their money elsewhere.

A long-term shortage of equity capital will force companies to use more leverage, which will create greater volatility in earnings and share prices. A smaller equity cushion will lead to a higher frequency of bankruptcies during hard times. High growth companies, such as in technology, will have a particularly hard time raising capital, and IPO markets could dry up from the lack of money.

The net result of these anti-equity trends is that yields will have to rise substantially to become more competitive with bonds. Companies can achieve this by either raising dividends or buying back shares. This, they seem to be doing in spades these days.

This may be the reason behind soaring dividend yields globally over the last several years. The price of admission for equity capital hungry corporations is going up, big time. The $1 trillion plus equity requirements of troubled European banks only exacerbate this situation.

The only way around this crisis is for investment banks to greatly step up their marketing efforts in the emerging markets, especially in China. The Middle Kingdom?s investable assets are expected to soar 328% from $19.8 trillion to $65 trillion by 2020. That will make it one of the world?s largest markets for investment products in a very short time. Major firms, like Morgan Stanley, Goldman Sachs, JP Morgan, Sogen, and UBS have already made massive investments in the region to boost business there.

To read the McKinsey piece in full, please click here.

Better start learning Mandarin if you want to stay in the brokerage business.

Sometimes, great investments are found in the most unusual places. Regions that most investors avoid -- due to fear, misinformation or a general lack of knowledge -- can harbor overlooked stock gems.

One such location is Russia. This former Soviet state is home to an extremely successful company that investors everywhere should know about.

There is no question that the transition to a capitalistic society has been difficult for Russia. However, there are signs of improvement. According to research by Deloitte, private consumption expanded by over 6% in each of this year's first two quarters. A strong summer harvest has eased food prices, providing consumers greater discretionary income, and inflation has been slipping lower this year. In addition, retail sales climbed more than 4% in July from the same month last year.

Most interesting is the fact that the Bank of Russia is expected to continue a policy of interest rate cuts through 2014. Lower borrowing costs are one key factor in economic growth, and the Bank of Russia is on the right track in this regard.

Not only is the central bank staying with the policy of lowering interest rates, it's also clamping down on unfettered consumer lending policies. Annual interest rates as high as 60% for unsecured consumer loans are common in Russia. The Central

Bank is combating this practice by requiring banks to set aside 300% of the loan's principal in a reserve fund. There is also talk of the Bank of Russia potentially setting a maximum rate for consumer loans and credit cards.

This increasingly consumer-friendly environment is what triggered my search for a consumer-oriented investment. I was amazed by the investment potential of one Moscow-based company in particular. This company operates electronic payment services and kiosks in the Russian Federation, Kazakhstan, Moldova, Belarus, Romania, the United Arab Emirates and even the United States. The share price has soared over 300% since June, and the uptrend shows no signs of ending.

Boasting the unusual name Qiwi (Nasdaq: QIWI), this company is among the largest providers of non-bank self-service payment locations in the former Soviet Republic.

Qiwi just reported third-quarter results, crushing estimates and adding fuel to the already sharp uptrend in price. In the third quarter, Qiwi's revenue was reported at more than $50 million, which beat the $40 million consensus estimate and was up nearly 50% from a year ago. Earnings per share jumped 39%, to $0.35, excluding certain items.

Stuff I?m Reading this Morning?

Supposedly the Fed is done moving the goal posts, will seek to normalize policy sooner rather than later. (Reuters)

Gold is dropping again, because the market is open. (BuisnessInsider)

The National Retail Federation is talking down Black Friday sales estimates. (FT) and (Bloomberg)

Goldman trading idea for 2014: short copper / long Chinese equities. (ZeroHedge)

Morgan Stanley?s big macro themes for next year. (BusinessInsider)

ICYMI: Bank of America Merrill?s quants say The Street is still not bullish enough for this to be a top. (TRB)

Citigroup?s new CEO sets the tone for a quieter, more anonymous Wall Street. (DealBook)

Lil Weezy flips bullish on Bitcoin. (BusinessInsider)

Gawker?s king of viral content shares his traffic secrets. (WSJ)

Jeff Bezos wants to send helicopter drones out into the world as Amazon deliverymen. Keep your head down. (BusinessInsider)

My book, Backstage Wall Street, available at Amazon

Savita Subramanian (BofA Merrill Quant Strategy) is out with her latest look at the Sell Side Indicator, which is a measure of how bullish or bearish Wall Street firms are on the stock market.

Historically, it?s been an incredibly good contrarian indicator. While it does not catch every bottom or top, the indicator has a higher r-squared (28%) than just about any other you can think of in terms of predicting subsequent 12-month returns for the S&P 500. Anecdotally, this pessimism-as-base-case on Wall Street has been one of the best tells to stay long (here?s me in the summer of 2012 highlighting it).

And here?s how the Sell Side Indicator stacks up versus the other tricks and treats your favorite Chief Strategist likes to pepper his monthly outlook pieces with:



So where are we on the sentiment scale relative to the past? Subramanian notes that, while the Sell Side Sentiment index now sits at a 19-month high (up 12 of the last 15 months), we are still in ?Buy? territory with stocks still way too forsaken and close to their 2009 sentiment lows. The strategist says ?Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive more than 95% of the time, with median 12-month returns of +27%.? The indicator?s current level would indicate an expected return for the S&P 500 of 18% in the next 12 months, based on the report.

Here?s what it looks like:

When it comes to a brand new industry or invention, it?s common to hear pundits hype them as ?paradigm-shifting? or ?category killers.? In the case of 3-D printing, it may not be possible to hype this new technology enough, as it?s already proving to be a game-changer across a surprisingly wide variety of industries. That?s why I want to bring your attention to a new company in the 3-D printing game?Makism 3D Corp.?trading over-the-counter under the symbol MDDD (Get it? Three D?s!)

First of all, if you?re not familiar with 3-D printing, it?s important to understand both its current applications and why it holds out so much promise. Also known as ?additive manufacturing,? 3-D printing refers to the process of making a solid three-dimensional object from a digital model. The object is created using an additive process in which successive layers of material are laid down in different shapes to form the final product.

Although the technology has been available since the 1980?s, it wasn?t until earlier this decade, around 2010, that 3D printers started to become widely available commercially, gaining the attention of the financial markets in the process. According to Wohlers Associates, a consultancy firm, the market for 3D printers and services was worth $2.2 billion worldwide in 2012, up 29% from 2011. Because the technology has such a wide-range of applications?including industrial design and production of all stripes, engineering and healthcare, just to name a few?the size of the 3-D printing market could continue to grow exponentially going forward.

Enter Makism Corp., a 3D printing start-up based in the United Kingdom whose goal is to bring 3D printing to the mass consumer marketplace?part of what?s called the ?Maker Movement.? In late-November, the company announced that it was about to launch its flagship line of home and office 3D printers, which the company has dubbed the ?Wideboy.? Ready to use out of the box, the Wideboy is being designed to ?empower organizations and individuals to affordably create high quality individually manufactured prototypes, parts, and objects, rapidly and with a high degree of precision,? the company said.

The flagship model Wideboy is a large A4 format dual extruder 3D printer optimized for the reliable utilization of common PLA and PVA support material. Its features include large A4 format build areas, multiple extruders, a 3 year parts warranty, and pre-calibrated functionality in an attractively designed package. The Wideboy provides many of the features of the larger printers in the company?s product line-up, which include the Wideboy Pro and Mega models. The projected price for the Wideboy is $1,499.

According to Makism management, the larger Wideboy Pro and Mega models offer the same high quality components as the Wideboy, but with advanced professional features such as temperature controlled enclosures, heated build platforms, and carbon filtration which enables users to safely and reliably employ a wider range of fabrication materials. All printers come with USB and Wi-Fi connectivity, dual extruders (the Mega offers up to four extruders as an option), high-precision 2 and 5 phase stepper motors, a user-friendly interface, and 3 year parts warranty.

In reference to the launch announcement, Makism CEO Luke Ruffell stated, ?We anticipate that the first Wideboy will be available in February and we are aiming for the Pro and Mega models to respectively roll out in March and April. We are currently taking email addresses at our website (www.makism3d.com) from consumers who wish to get on our pre-order advisory list, and will be in touch with further information including purchasing options as soon as they can be made available. The interest to-date has been exceptional.?

As you might imagine given the recent concentration of attention on 3-D printing, and investors? enthusiasm for the shares of industry-leader 3-D Systems (DDD), MDDD shares have begun to attract a fair share of interest themselves

Dasan was one of the original members of the financial Twitter gang and had also been one of the better early investment bloggers. He doesn?t write very often these days but when he does it?s typically because he has something insightful to pass along.

Back in the day, Dasan had spent a bunch of time with portfolio managers from SAC Capital during the interview process. While he didn?t end up joining the firm, he did come away with several important notions about running money like a hedge fund.

Here is one of those lessons, on the right and wrong ways to utilize the short-selling toolkit:

4. SHORTING INDICES. Many fund managers think they are great stock pickers. Actually, we all do, by definition, because we are charging people for our great skills- otherwise they could cheaply invest in an unmanaged index. But these same managers decide they will pick the longs in the fund and then use an ETF to short against the longs, as a ?hedge.? WTF kind of backward thinking is this? So you can pick what stocks will go up, and not the stocks that can go down? Does this make any sense? Then the clever among this group will argue with you that because the market goes up over time, it?s important to spend time on longs and ?hedges always lose money.? NONSENSE. Even in a bull market there are stocks that are going down. (Do you need examples? IBM, ?Big Blue,? the bluest of the blue chip techs, is down 8.5% as I write this, versus the NASDAQ up 33% for the year.) I?ll tell you what- if you want to play with indices, and you tell me the market goes up most of the time, I will suggest that you LONG the index and spend all your time finding individual name shorts instead. Did your brain just blow a fuse? Let me suggest the best approach and that is pick longs and shorts and never short an index. If you don?t have enough shorts, because ?Shorting is hard? and all that, then go re-read RULE NUMBER ONE.

The above-referenced RULE NUMBER ONE and the rest of his takeaways can be found at the author?s blog, linked below.

Source:
Idea Velocity, what I learned from SAC (Dasan)

Now is the time to check out cool stuff for the holidays including: Chris Hadfield?s An Astronaut?s Guide to Life on Earth.

Quote of the day

Jeffrey Gundlach, ?Look at the dichotomy this year between high-yield bonds and emerging-market bonds. High-yield bonds are up 6% or 7%, but emerging-market bonds are down 6% or 7%. That?s a pretty large swing in the value proposition.? (Barron?s)

Chart of the day

Top clicks this week on Abnormal Returns

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 30th, 2013. The description reads as it does in the relevant linkfest:

Another bear throws in the towel. (The Reformed Broker)
Big TV wants to get even bigger. (AllThingsD)
The case for REITs. (John Authers)
Retail investors are back. What next? (The Reformed Broker)
Why it is hard to beat the market?s own asset allocation. (Capital Spectator)
William Bernstein, ?When the intelligent investor does some trimming back, he usually feels like a dummy for the next year or two.? (IndexUniverse)
At least someone is making money on the short side. (Zero Hedge)
A long-term positive signal for equities. (Charts etc.)
How to buy gold and silver at a discount. (The Short Side of Long)
Howard Marks says markets are rich but not bubbly. (Pragmatic Capitalism)


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.


Abnormal Returns

I talked to a friend of mine this past week who?s nailed just about all of the hottest trades and the best-performing stocks of the year so far. But his returns are far below what you would think they?d be given the names he?s involved with (LNKD, FB, TSLA, GMCR, Z, CELG etc). He thinks the main reason for the drag on his performance is because of the mind-boggling amounts of entries and exits. His resolution for 2014 is to react to less inbound information and to be a bit more tolerant of short-term fluctuations.

After chatting, I was reminded of this Warren Buffett gem from the 2005 Berkshire Hathaway Letter to Shareholders:

?Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac?s talents didn?t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ?I can calculate the movement of the stars, but not the madness of men.? If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.?

No doubt about it.

It?s rare to encounter an investment environment in which more is more and an increase in decision-making is of any benefit to the decider.

Don?t let the sound of your own wheels drive you crazy.

A long holiday weekend is a great time to catch up on some items that we passed up on during the week. Also check out this holiday deal on a Google Chromecast including a $6 credit for use on Google Play. Thanks for checking in.

Investing

The latest memo from Oaktree Capital ($OAK) chairman Howard Marks. (Oaktree Capital)

An interesting paper: US Inflation and Returns in Global Stock and Bond Markets. (DFA via IndexUniverse)

An interview with Jon Stein of online money manager Betterment. (RIABiz)

Finance

Does Nanex get it right on the flaws of high frequency trading? (Bloomberg)

Under what conditions are markets efficient? (China Financial Markets)
A history of the first real options trade. (Turnkey Analyst)

Economics

Joel Mokyr talks with Russ Roberts on the fallacy of economic stagnation. (EconTalk)

Insight into why the poor tend to make poor choices could lead to a more robust economics. (FT Alphaville)

Business

How the Pritzker famliy broke up its vast holdings in an orderly way. (WSJ)

Italian candy maker Ferrero SpA has no plans to go public any time soon. (WSJ)

Startups

What have we learned from 23andMe? (Pando Daily)

Priceonomics and the business of ?structured data crawling.? (TechCrunch)

On the great unbundling of venture capital. (Dave Lerner)

An interview with Marc Andreesssen. (Fortune)

Technology

The triumph and tragedy of IBM?s ($IBM) OS/2. (ArsTechnica via @fmanjoo)

How Yahoo ($YHOO) went from technology-leader to laggard. (GigaOM)

Meet the Amazon ($AMZN) whisperer. (Fast Company)

Food

Skim milk is awful. (The Atlantic)

The technological search for an egg substitute. (WSJ)

Booze

Some surprising innovations in beer can design. (Quartz)

America loves really expensive bourbon. (Businessweek)

Young Americans are on the margin drinking less alcohol. (The Atlantic)

Health

The power of a daily dose of exercise. (Well)

Sleep therapy could play a role in helping ease depression. (NYTimes)

Psychology

Why are first-person shooter games such ?absorbing experiences?? (New Yorker)

Good luck if you think you are immune to advertising. (Aeon)

How to raise thankful kids. (Slate, Motherlode)

When superstition works. (WSJ)

Higher education

College is not just another ?consumer purchase.? (Big Think)

How academia behaves like a drug cartel. (Slate)

Sports

Will Tim Tebow ever play in the NFL again? (SI)

All hail the new world chess champion. (Time)

Why top golf recruits are choosing to go to cold-weather universities. (WSJ)

Grooming secrets of the NBA. (WSJ)

Now former hockey players are suing the NHL over head injuries. (NYTimes, Grantland)

Books

An excerpt from Gregory Zuckerman?s The Frackers: The Outrageous Inside Story of New Billionaire Wildcatters. (WSJ)

For investors looking to buy stock in a clothing retailer, it would normally be a no-brainer to consider stalwarts like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), well-known dollar stores, or other discount merchandisers.

But things aren't normal, and they haven't been for years.

Since the economy just can't seem to shift into a higher gear, I'd avoid Wal-Mart and the other types of clothing outlets I just mentioned. Their sales come mainly from middle- and lower-income consumers, the people who have suffered most in the years since the financial crisis and who continue to see their spending power dwindle.

Rising costs, stagnant or shrinking wages, and lousy or non-existent benefits are squeezing these groups hard, Wal-Mart and other discounters could well be facing years of erosion in revenue and earnings growth rates.

At this point, for example, Wal-Mart's sales are growing at only about 3% a year, from around $406 billion in 2009 to just over $473 billion now. That's pretty anemic compared with 2004 through 2008, when sales rose at a healthy 7.9% clip. The way things are going, I wouldn't be surprised if annual sales and profits at Wal-Mart and a lot of other discounters stagnated completely or even began to contract.

In this economy, I'm much more optimistic about a far smaller but well-established and more specialized apparel outlet with more-profitable customers. At this company, sales have actually accelerated since the financial crisis, climbing almost 8% a year from about $8.6 billion in 2009 to nearly $12.5 billion currently. That's even better than the solid 6% growth rate of 2004 through 2008.

A key reason this company has been doing so much better is that it caters to higher-end customers who base their purchasing decisions mainly on quality, fashion and service -- not price. And they can shop that way because, well, they're generally better off than middle- and lower-income consumers.

The company I'm referring to is Nordstrom (NYSE: JWN), which began as a shoe retailer in Seattle in 1901. Today, it positions itself as a provider of "affordable luxury" -- high quality without too much extravagance.

Random Thoughts


The market had a little pre-holiday cheer.

The S&P didn't set the world on fire but did manage to close at all-time highs.

The Quack looked better. It gained well over ?% to close at multi-year highs.

The Rusty also managed to tack on over ?%. It closed at all-time highs.

Internally things looked pretty good. This isn't a shocker with strong Rusty. Many areas remain in trends and at or near new highs such as Defense, Regional Banks, Conglomerates, and Health Services.

The sideways Semis put in a decent rally. They appear to be trying to break free from their range.

Once again, selected Solar did well on Tuesday (we are long TAN).

I tried to come up with something new to say but then realized with the market continuing to make new highs, there's not much new to say. With that said, it's a cntrl-a, cntrl-c, and a cntrl-v:

So, things are looking pretty good. Should we buy with both fists? Well, since the methodology requires a pullback and the indices and most sectors are right at new highs, I'm not seeing a lot of meaningful longs for this cycle (yet). On follow through and a pullback we will. When markets are banging out new highs, it's a get ready to get ready for me. In the meantime, you want to manage existing longs. Take partial profits as offered (see Layman's for money & position management planning) just in case the market does not follow through. On the short side, I'm still seeing a few that are setting up. Avoid getting too bearish but if you really really like a setup, then take it. See my 11/26/13 column for a philosophical discussion on this.

Futures are firm pre-market.

Shortened session today which is notorious for being then and choppy. So, pick your spots carefully.

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

Best of luck with your trading today!

Dave

I have a large number of readers who have been with me since the launch of my premium advisory, The Daily Paycheck, back in January 2010. They watched as I slowly transformed the $200,000 cash stake from my company into the $291,776 portfolio it is today.

New subscribers are now greeted with a portfolio of more than 50 securities. And the questions I get asked most are 1) How do I get started? and 2) Can I use this strategy if I have less than $200,000 to invest?

The short answers to those questions are: slowly and absolutely.

But I want to spend a little time today explaining the "science" behind The Daily Paycheck strategy and how you can use this strategy to meet your individual needs.

It was as much a surprise to StreetAuthority co-founder Paul Tracy as it was to me. As an experiment, Paul tried to build a personal portfolio of dividend paying stocks to see if he could get 30 dividend checks in a month. But he achieved far more than the joy of receiving dividends every day. Paul enrolled all his securities in an automatic reinvestment program through his online brokerage account. And before long, Paul's experiment was beating the market.

Both Paul and I were familiar with the power of compounding growth from dividend reinvestment. As you can see from the chart below, if you invested $20,000 in securities paying a 7% yield, after 10 years your portfolio would be worth $39,343 with reinvested dividends.

And if your holdings happened to boost their dividends by just 5% annually -- something even a giant blue chip like AT&T (NYSE: T) has been able to beat -- your portfolio would be sitting at $46,475. That's an increase of 132.4%. And that's assuming zero capital gains. That isn't bad, especially when you consider the S&P 500 Index lost 26.5% in the ten-year period ended in 2009.

You can see for yourself in the chart below...

Not a Bubble, Just the Old Normal

Watch as Eric D. Nelson, CFA, of Servo Wealth Management demolishes the bubble meme in a new post at his blog this week?

Probably the best method of ?bubble detection?, to the extent such a thing is even possible, is to simply observe an investment?s recent past performance history to measure how far in excess of the long-term average it has been. For example, Gold experienced a ten-year run starting in 1971 where it returned almost 32% per year. US small cap stocks earned 27% per year for the decade ending in 1984. And Japanese stocks produced over 28% per year returns in the 1980s. All of these results were well above long-term expectations and unsustainable, as each market eventually ?reverted to the mean.? Have we reached this point again?

Table 1 looks at three different investment portfolios: a traditional US total stock index, followed by two more diversified asset class mixes?an all-stock allocation (?Equity?) and a balanced stock and bond combination (?Balanced?).

For the recent ten-year period, investment returns have been healthy despite the debilitating setback in 2008. The US Total Stock Index earned almost 8% per year. But this is far from an alarming rise in prices, as the average over the previous 75 years was 1.7% higher, at +9.6% per year. So far, so good. If lower-than-average returns have created a market bubble, that would certainly be the first time.

Josh here ? Stocks are supposed to go up over 10-year periods and they almost always do ? 88% of rolling 10-year periods over the last 89 years have shown a positive return for the US market. Looking at the last ten years, even with the inclusion two mega rallies and a massive bear market, we?re just now getting back to historical return averages.

Shall we pause here and reverse or shoot all the way through to a real bubble? That?s the more important question.

Source:

Quote of the day

Albert Edwards, ?I have never seen the sell-side predict a recession. There are a number of reasons for that but key among them is the personal career risk of calling a recession and being wrong.? (Buttonwood?s notebook)

Chart of the day

This week?s must-read is the latest memo from Oaktree?s Howard Marks, in which the investing legend ruminates on the current state of risky behavior in the markets.

The executive summary is that he?s seeing a lot of the same activities/products that made him cautious in 2006-2007 ? notably a large rise in debt to fund buybacks/dividends and the return of covenant-lite lending (the debt market equivalent of ?Don?t worry, I?m sure you?re good for it.?).

With that said, it could still be early enough in the cycle to remain constructive on the big picture. There are plenty of ways in which market participants are acting more chastely than seven years ago ? notably the absence of banks building out new derivatives and the overall subdued totals in leverage built up in the system?so far.

Marks doesn?t claim an ability to pinpoint the beginnings and ends of these credit cycles ? but the exact timing is less important to him than just having an overall awareness of their inevitability.

Without further ado, I send you over:
The Race is On (Oaktree Capital)

Selling puts in your investment account can be a tremendous strategy for generating reliable income while taking on less risk than more traditional income strategies like buying and holding dividend stocks. The trading approach is made possible by selling a put option to speculators who either:

1. Think that the underlying stock or exchange-traded fund (ETF) is headed lower, or
2. Want to hedge their current exposure.

From our perspective as option sellers, one of the most important decisions is what types of securities to sell puts against. Specifically, some traders struggle with the decision of whether to sell puts against individual stocks (which give them a risk/return profile that is affected by the individual company dynamics), or against broad indexes or ETFs (which offer more diversification).

To determine where you should put your capital to work, let's look at the driving forces for both risk and returns based on both of these approaches.

Volatility And Diversification
One of the primary benefits of investing in an ETF as opposed to individual stock positions is that the ETF gives you instant diversification.
However, keep in mind that not all ETFs are as diversified as you might think. For instance, the top three holdings might make up 25% of the ETF. But, as a general rule, ETFs can help to smooth out the risk of individual company performance for investors.

From an academic standpoint, this risk is associated with volatility. Since volatility can be measured in statistical terms, it has become industry practice for risk managers to look at volatility (along with other issues, such as correlation) to measure the level of risk in individual portfolios.

This measure of volatility is important to us as put sellers because option prices are heavily influenced by the level of volatility in the underlying stock or ETF. The higher the level of volatility, the higher the price of the individual option contract.

Now think about this pricing dynamic in relation to our put selling strategy for a moment. Higher volatility means more risk to investors, but it also means more option premium, which is responsible for generating income in our own portfolio.

Of course, our strategy is not immune to the volatility risks that individual investors face. This is because when we sell a put option, we are essentially guaranteeing that we will buy the underlying stock or ETF if it is below the strike price when the put option expires. So this means that we will be at risk if the ETF or individual stock continues to fall.

As with most investing strategies, the more volatility (or risk) you are willing to accept, the higher your expected returns will be. Traders who are willing to sell put options on individual stocks are therefore more likely to receive a higher rate of income than those who are selling puts against an index or ETF. There are exceptions, but this is true most of the time.

A Real-World Example
To illustrate this point, let's take a look at some one-month put option contracts for SPDR Dow Jones Industrial Average (NYSE: DIA) and Chevron (NYSE: CVX).

(Note: I picked Chevron because it is a widely held Dow component, and it was recently trading just above a popular strike price, which gives us a good comparison to DIA. Prices will no doubt have changed by the time you are reading this, but this is purely for illustrative purposes.)

At the time of writing, DIA was trading at $159.30 -- or just above the $159 strike put contract. Chevron was trading at $120.06, or just above the popular $120 strike put contract. I'm going to run the numbers for traders who decide to sell the DIA puts versus traders who sell the CVX puts.
For DIA, the $159 puts expiring one month from now can be sold for $2. This means that an investor would need to set aside $157 per share of his or her own money, along with the $2 in premium received in order to cover his obligation to buy DIA if assigned.

If the stock remains above $159, the put will expire worthless and the trader will keep the $2. This represents a 1.3% return over roughly a month's time, or a 16% per-year rate of return. (Click here to learn more about calculating returns for put selling trades.)

For CVX, the $120 puts expiring in a month can be sold for $1.78. This means that an investor would need to set aside $118.22 per share of his own money, along with the $1.78 in premium he received, in order to cover his obligation to buy CVX if assigned.

If the stock remains above $120, the put will expire worthless and the trader will keep the $1.78. This represents a 1.5% return over roughly a month's time, or an 18% annual rate of return.

The Mad Hedge Fund Trader is taking a much-needed break for the next few days to take Turkey with the expanded family in Portland, Oregon. The Trade Alerts have been going out so fast and furious that it is all starting to become a blur to me. I am going to draw the line at 70 alerts for November.

A 28-pound bird made the ultimate sacrifice, and will be accompanied with mashed potatoes, gravy, stuffing, potato salad, mince pie, and a fine Yamhill Chardonnay. I ate an entire pumpkin pie last night just to give my digestive system an early warning that some heavy lifting was on its way.

I am the oldest of seven of the most fractious and divided siblings on the planet, so attending these affairs is always a bit of an emotional and physical challenge. I bet many of my readers are faced with the same dilemma, and they all have my sympathy.

Suffice it to say, that we?ll be talking a lot about the only two safe subjects there are, sports and the weather. Go Niners! I can only say this much because Portland doesn?t have a football team.

I will learn that my brother who runs a trading desk at Goldman Sachs has put his new Bentley Turbo R into storage. It seems some Occupy Wall Street types have been keying it whenever he parks on the street. There is talk that the firm will go private again to dodge all of the onerous regulation of Dodd-Frank and the Volker rule.

My born again Christian sister was thrilled with the Tea Party shutdown of the federal government, and is hoping for even better things next year. I am banned from mentioning President Obama?s name in her house, or I face having to wash the roasting pan by hand.

My gay rights activist sister will be assertively arguing the case for same sex marriage and celebrating the recent victories in New York and New Jersey. For me, that means conference facilities for my strategy lunches and seminars have suddenly become abundantly available in San Francisco, now that the gay wedding business has decamped for the east coast.

A third sister married to a very pleasant fellow in Big Oil will be making the long trip from Borneo, where he is involved in offshore exploration. No doubt I will get a big serving of ?peak oil? theory with my salad, along with arguments on why we should deregulate our way to more offshore energy supplies here and in Alaska. Hopefully, the local headhunters haven?t taken a trophy yet. And I mean real headhunters, not the recruiting kind.

Sister no. 4, who is making a killing in commodities in Australia, and is up to her eyeballs in iron ore, will grace us with a rare visit. She has been investing her profits in leveraged real estate holdings. Every year I tell her to dump everything because a crash is coming, and every year I am proven wrong. But past experience has taught me that the relatives who insist that real estate can never go down eventually end up moving into my basement and borrowing money from me.

My poor youngest sister, no. 5, took it on the nose in the subprime derivatives market during the crash. Fortunately, she followed my advice to hang on instead of dumping everything at the bottom for pennies. The worst of the toxic waste from those days is now selling for big premiums to investors hungry for any kind of yield.

She is the only member of the family I was not able to convince to sell her house in 2005 to duck the coming real estate collapse because she thought the nirvana would last forever. At least that is what her broker told her. Thanks to this year?s real estate boom, she is almost back up to her cost, while several refi?s have taken her cost of carry down by half.

My two Arabic speaking nephews in Army Intelligence will again delight in telling me that they can?t talk about their work or they?d have to kill me. One is about to cash out and will join thousands of other veterans looking for a civilian job. Does anyone need an Arabic speaking math major? The other one is shifting his focus away from Iraq and towards Iran. I told them their language skills will be worth a fortune in the private sector.

Another nephew returned from his third tour in Iraq with the First Marine Division without a scratch. I told him not to ?re-up? this time around, as there is no future in his business.

My oldest son is now an English language professor at a government university in China. He spends his free time polishing up his Japanese, Russian, and Korean. At night, he trades the markets for his own account. Where do these kids get their interest in foreign languages anyway? Beats me. It?s true that the apple doesn?t fall far from the tree.

My oldest daughter landed a middle school teaching job in Oakland, the murder capital of the US. The school has a 12-foot chain link fence around it, and the kids show up with fresh horror stories about their neighborhoods every day. If they get slain in the next gang war, at least they?ll go to their grave speaking proper grammar. I banned her from late night overtime, if such a thing is possible with a 28 year old.

Reading the riot act to this unruly crowd will be my spritely, but hardnosed mother, who gave up taking any crap from us a long time ago. At 85 she can still prop herself up on a cane well enough to knock down 14 out of 15 skeet with a shotgun, although we have had to move her down from a 12 gauge to a 410 because the recoil threatened brittle bones.

I am looking forward to my annual Scrabble tournament with her, paging my way through old family photo albums between turns. And yes, ?Jo? is a word (a 19th century term for a young girl).

My next new research pieces will appear in the Monday, December 2 letter. That is, if I survive my relatives.

Today, I want to show you a chart every investor in America needs to be aware of.

Not only does this simple graph answer one of the biggest questions facing U.S. investors today, but it could also be painting a picture regarding the state of the U.S. stock market right now.

It's our hope that after seeing this chart, you'll have a better understanding of what the investing future might look like... and how you can start preparing your portfolio for it.

Take a look...



The chart above shows the yield on Japanese Government 10-Year bonds since 1986. As you can see, after falling sharply in the 90s, bond yields haven't topped 3% since 1995 in Japan.

What do Japanese bond yields have to do with the U.S. stock market? Let me explain...
Like the U.S., Japan has seen its share of "asset bubbles."

In the late 1980s, a bubble in the Japanese housing market caused real estate prices in Tokyo to surge 180%. Stocks also soared, with the Nikkei 225 (Japan's equivalent to the S&P 500) rising 132% in five years.

But shortly thereafter, the Japanese economy came crashing down. Between 1989 and 1992, Japanese stocks fell 60%, property values plunged and GDP growth grinded to a meager 1.0% a year.

In response to the crash, the Bank of Japan (BOJ) slashed interest rates to zero in 1992 to lower borrowing costs and boost economic activity. When their efforts failed to pull the country out of its slump, the BOJ tried to push rates even lower by printing money and purchasing assets like government bonds.

Yet despite flooding the market with liquidity, economic growth in Japan remains non-existent to this day. According to recent government data, Japan's economy grew at an average rate of 0.5% in the most recent quarter -- significantly below the 2.9% average for the rest of the world.

Meanwhile, the BOJ's low-rate policies have rattled the country's savers. The interest rate situation has gotten so bad that most households don't even own a savings account because it's not worth the time to open it.

If Japan's story sounds familiar, it should.

As you know, Federal Reserve Chairman Ben Bernanke lowered U.S. interest rates in late 2008 in an effort to get the economy firing on all cylinders. When those efforts fell flat, the Fed began pumping billions of dollars into the money supply in order to further stimulate growth.

Five years later, these policies have done little to help the U.S. economy. And the U.S. central bank has kept interest rates low for a lot longer than anyone originally anticipated.

The biggest question facing U.S investors has become: How much longer can rates remain depressed?

For the answer, look at Japan...
Scores of investors have lost their shirts trying to "guess" when Japanese interest rates were going to rise for the past 20 years. At first they thought it would take five years... then they said 10... now we're hearing it may happen as soon as next year.

While they could be right, up to this point betting against Japanese bonds has proven wildly unprofitable. This trade has become so notorious for creating devastating losses that many simply call it the "widowmaker" trade.

In other words, don't assume rates are to going to rise in the U.S. just because "interest rates can't stay low forever..." If Japan is any indicator, they can stay low for a long, long time...

That means investors are going to have to look off the beaten path if they want to earn higher returns... especially from their income investments. Gone are the days when you can earn a 5.0% return on a savings account or an 8.5% yield on corporate debt. Today, you'd be lucky to get 0.1% from a savings account or 3% from AAA-rated bond fund.

The Best Way To Earn More Income In Today's Market
While there are plenty of ways you can protect yourself in a perennial low rate environment (and we've discussed many of them here and here), one of our favorites comes courtesy of Amber Hestla, Chief Investment Strategist for Income Trader.

Simply put, Amber collects extra investment income by selling put options on stocks she thinks are undervalued. These "Instant Income" checks, as she calls them, usually range anywhere from $100... to $150 ... to even $200 per contract. (Many of her readers scale up to collect $2,000 or more in income per trade).

So far this strategy has worked well. Since Amber launched her premium income and options newsletter, Income Trader, earlier this year, all 32 of her closed trades have been profitable... giving her subscribers an average gain of 8.6% every 48 days.

The secret to this strategy is Amber's investing philosophy behind each and every one of her options recommendations. Specifically, she only sells puts on undervalued stocks that she wouldn't mind owning.

By sticking to these two criteria, Amber is maximizing the possibility that the put she sells will expire worthless (when a put expires worthless, the seller keeps the premium they collected from selling the option as a profit).

Take one of Amber's most recent recommendations, the November put options on ICICI Bank (NYSE: IBN) -- the largest bank in India -- for example.

Amber originally recommended this trade in October. At the time, the stock was trading close to $33 a share... but Amber thought the stock deserved a higher price point. As she told her subscribers:

Only one Wall Street analyst has a price target on IBN, and that target is $46, more than 40% above the recent price. I believe that target could be underestimating the potential of IBN. Based on expected earnings growth, I believe that IBN is worth at least $60 a share. The stock is a buy at current prices and is also a great income trade.

In other words, at $32 a share, Amber thought the company was undervalued by 53%. As a result, she told her Income Trader subscribers to sell November puts on IBN with a $28 strike. Given the company's discounted valuation, Amber believed there was strong chance the price of the stock would not trade below $28 by November 15 -- the day the option expired.
Her assessment was spot on. Last Friday, IBN closed over $34 a share -- 21% above Amber's recommended strike price. As a result, Amber got to keep the $50 in "Instant Income" she collected from selling the puts as pure profit.

But even if the stock had fallen below the strike price and Amber would have had to buy the shares... she would only have to pay $28 for them -- $32 (Amber's $60 estimate - the $28 strike price) below her long-term target price.

That's the benefit of selling puts on stocks you think are undervalued. Even if the price of the underlying stock falls below the strike price and you have to buy the stock, you're simply buying shares of a great company you already think is trading at a discounted valuation.

So if this low-rate environment really is the new normal, then investors may have no choice but to get creative in order to boost their returns. If that's the case, then consider selling put options... it's clearly one of the easiest ways to earn more income -- regardless of what happens with interest rates.

- Austin Hatley

Black Friday, Nov. 29, is less than a week away. The iconic day can be described as one of numbers:

Millions of bargain hunters will spend hours upon hours waiting in lines to spend billions to walk away with the best deals. This year, U.S. Black Friday sales are expected to total about $13.6 billion, a 3.9% increase from last year, according to IbisWorld research.

There's one sure winner to emerge from this buying frenzy. And no, it's not necessarily Wal-Mart (NYSE: WMT) or Target (NYSE: TGT). In my mind, it's the credit card companies who really benefit.

In 2011, the National Retail Federation found Americans primarily use credit cards to fuel their Black Friday buying binges. In 2012, MasterCard (NYSE: MA) reported a 26.2% increase in retail transactions compared to the previous year tied to Black Friday purchases.

With tight budgets prevailing again this year, MA may receive another boost as consumers choose to hoard their cash and put purchases on their cards.

But it's not just Black Friday, or even U.S. retail sales, that is driving MA higher. Currently, over 1.9 billion people worldwide use a MasterCard, and the card is accepted at over 35.9 million locations around the planet. These numbers are rising as the payment processor expands internationally.

For its third quarter, MasterCard reported its card holders made over 10 billion transactions, spending a total of $1 trillion. Credit card transactions accounted for $590 billion while debit card transactions reached $454 billion.

According to MasterCard president and CEO, Ajay Banga, the company is seeing "growth across all geographies," due to increased acceptance of mobile payments.

Through its Simplify Commerce program, the company is focused on providing secure mobile and e-commerce payment solutions to help make customer transactions simpler and more convenient.

MasterCard is also fixed on bringing its mobile payment solutions to emerging markets, like Bangladesh, where electronic payments are expected to increase 20-fold, from $500 million to $10 billion, by 2018.

As MasterCard expands its foray into emerging markets, it should continue to fuel the company's growth.

The technical picture certainly appears bullish. Shares have been on a major uptrend for the past two years and show no sign of slowing.