How We Made 20.5% In 3 Months With Carl Icahn

The Bank of America Merrill Lynch RIC Report is out and they?ve got ten themes for 2014. As one of these ten ideas, the Research Investment Committee picks up on something that I think is long overdue ? the possibility of a shift away from consumer-driven recovery stocks into something more industrial or commercial.

If they?re right, there?s a huge swathe of the market that has been left in the dust by all the consumer spending plays this year?

6. Warehouses over townhouses
The stock market is in the early stages of a change in leadership from
domestic/consumer-oriented sectors to more global and cyclical/industrial ones,
in our opinion. And, relative performance is shifting away from sectors such as
Consumer Discretionary, Health Care, and Financials that have been significant forces
behind market gains for much of the last two years.

Instead, we expect performance to be driven by areas like Technology, Energy, Industrials, and Materials.
If revenue growth continues to accelerate as we expect, corporations are likely to
invest in their businesses by spending some of the cash accumulated on their
balance sheets. This capex cycle, combined with improving global economic
growth, is likely to benefit stocks in more industrial and cyclical parts of the
economy over those that are more dependent on the consumer. In our view, this
has already started, but probably is in its early stages (Table 5).

Getting in shape is no longer just a New Year's resolution.

In its annual Topline Report, the Physical Activity Council, a coalition of sports-related trade groups, found that more than 60% of Americans frequently engaged in fitness sports in 2012. That growing interest in health and fitness has led to a huge surge in the number of people joining fitness clubs.
According to the International Health, Racquet and Sportsclub Association, health club and gym memberships jumped to 51 million in 2012, up from 41 million in 2005.

And looking forward, with Americans increasingly fighting back against obesity and diabetes, and with baby boomers focused on staying in shape as they retire, the $21 billion domestic health and fitness industry is growing quickly.

That's one of the reasons I'm bullish on an industry-leading fitness club company. With 106 locations and more than 800,000 members, it's already a juggernaut. But with plans to double its expansion rate in the next two years, it's in a great position to capitalize on America's growing interest in health and fitness. That has shares up nearly 300% in the past five years.

Random Thoughts




Thanks to all who attended my Introduction To Stock Selection webinar last night. We had a good show if I say so myself. Click here to watch.

I can't emphasis enough the importance of doing your homework. As I preach, looking through thousands of stocks daily really gives you a feel for what's really going on. Yes, it's a lot of work. For me though, it's like being on a treasure hunt. I grab a big cup of coffee and dive in. <begin pimping> Spend Saturday with me and I'll show you how </end pimping>.

Considering the above, it seems like the indices are catching up to the internal weakness that I've been seeing lately. This is especially true in the Rusty (IWM) which lost nearly 1% of its value on Tuesday.

The Ps are just shy of all-time highs and the Quack is just shy of multi-year highs. So, it's not the end of the world. The market has lost a little steam though. Net net, the Ps haven't made any forward progress in nearly a month. The Quack looks much better but it too has lost a little steam as of late too.

Foreign shares (EFA) haven't made any forward progress in nearly 3-months.

Back home, internally, the market remains mixed.

Areas like Retail and Restaurants haven't made much forward progress as of late.

Regional Banks appear to be failing to rally out of their recent pullbacks.

Drugs remain at high levels but appear to be losing momentum.

Metals & Mining, especially Gold & Silver had a decent bounce, gaining over 4%. So far though, this only appears to be a dead cat bounce. Remember, the cat was already dead and was accidently dropped so no live animals were hurt during this locution.

Chemicals and the Semis have been sideways intermediate-term but they are hanging out towards the top of their ranges.

On the bright side, Internet broke out to new highs decisively.

I can go on and on. To sum things up, the market remains mixed.

There's no need to get crazy bearish just yet. The indices and many sectors remain near new highs. Therefore, a few big up days can make all the difference in the world. Until and unless that happens, remain in show me mode.

So what do we do? When things are mixed it is important not to make any big picture bets. Don't label yourself as a bull or a bear. Just wait. Be Switzerland. Do become selective on new positions. If you really like a setup and would be very bummed if the stock took off without you, then take it. Just make sure you really like it and as usual, be willing to live with the fact that even the greatest looking setups can sometimes fail.

Futures are flat pre-market.

Buying value is an investment philosophy that works. To benefit from a value strategy, investors have to decide on a definition for value.

There are numerous ways to decide when a stock offers value, and many of these methods work well as long as they are applied with discipline. For deciding when a stock market in general offers value, we prefer to use the CAPE ratio defined by Robert Shiller.

The CAPE ratio -- which stands for cyclically adjusted price-to-earnings (P/E) -- is calculated with inflation-adjusted earnings over the past 10 years. This smoothes out the sudden spikes in earnings seen in recessions and at the beginning of an economic expansion, and provides a way to judge a market's value based on a full economic cycle.

In the past, when the CAPE ratio has been high, stock prices have delivered below-average returns over the next few years. Low CAPE ratios highlight long-term buying opportunities.

Shiller's CAPE can be applied to any stock market in the world. Investors looking at CAPE to make investment decisions a year ago may have bought stocks in Greece where the CAPE ratio was 2.6, the lowest of any global stock market. Investors willing to buy Greek stocks have been well rewarded. Global X FTSE Greece 20 ETF (NYSE: GREK) is up about 23% since the beginning of the year.

Irish stocks were also cheap with a CAPE ratio of 5 in December 2012. The iShares MSCI Ireland Capped (NYSE: EIRL) ETF is up nearly 40% year to date.

Other ETFs that would have been buys based on low CAPE ratios are Global X FTSE Argentina 20 ETF (NYSE: ARGT) and iShares MSCI Italy Capped (NYSE: EWI), which both started the year with CAPE ratios below 8 and have delivered double-digit gains. Market Vectors Russia ETF (NYSE: RSX) is the only one of the nine countries with the lowest CAPE ratios and a tradable ETF that shows a loss in 2013.

Looking ahead to next year, several of the countries with low CAPE ratios cannot be bought with ETFs. We have listed the lowest country CAPEs below and noted an ETF when it is available.

The Chart of the Day is Smith & Nephew (SNN). I found the stock by sorting the New High List for the most frequent new highs in the last month and except for other stocks that have recently been a Chart of the Day this stock was right near the top of the list. Since the last Trend Spotter buy signal on 10/14 the stock has gained 17.17%

The company markets clinically superior products, principally in orthopedics, endoscopy and wound management to deliver cost-effective solutions, significant physician advantage and real patient benefits. A continuous process of supplying new and innovative products is supported by substantial R&D investment to deliver new levels of healing to patients throughout the world.

Barchart's Opinion trading systems are listed below. Please note that the Barchart Opinion indicators are updated live during the session every 10 minutes and can therefore change during the day as the market fluctuates. The indicator numbers shown below therefore may not match what you see live on the Barchart.com web site when you read this report.

Barchart technical indicators:

100% Barchart technical buy signals
Trend Spotter buy signal
Above its 20, 50 and 100 day moving averages
17 new highs and up 8.45% in the last month
Relative Strength Index 86.89%
Barchart computes a technical support level at 69.37
Recently traded at 70.23 with a 50 day moving average of 64.79

Stuff I?m Reading this Morning?

Morgan Stanley: Stop with the taper talk already! (BusinessInsider)

BlackRock?s big 2014 Outlook piece is up, loaded with interesting info. (BlackRock)

Alibaba is pushing back its IPO. (Reuters)

Bond Kings Bill Gross and Dan Fuss are blowing out of their long-term debt holdings ahead of the taper. (Bloomberg)

Citi: ?The business of hedge funds is caught between rising costs and falling management fees, holding little profit for managers who don?t perform.? (WSJ)

JPMorgan just filed a patent for its own crypto-currency. God, I hope they call them Dimondollars or Whale Bucks. (FT)

By the way, 927 people own half of all the Bitcoins in the world. (BusinessInsider)

Wall Street strategists are always missing it by this much. (AboveTheMarket)

?see also Barry?s ?Why Do Forecasters Keep Forecasting?? (BloombergView)

Okay seriously ? is there any hope for emerging market stocks within our lifetime? (Morningstar)

Mark Hulbert: Portfolio tune-up for 2014. (MarketWatch)

Cullen Roche: The balance sheet recession is over. (PragCap)

Charlie Gasparino on the five year anniversary of the Madoff bust. (NYP)

The Most Important Economic Stories of 2013 (I?m in this one) (TheAtltantic)

These were the hottest new ETF launches of 2013. (ETFdb)

Human beings operate based on the line of least resistance. (Smashing)

"'Average' is officially over?, said columnist, Tom Freidman, of the New York Times.



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When I rode Amtrak?s California Zephyr service from Chicago to San Francisco last year, I passed countless trains heading west hauling hoppers full of coal for shipment to China. This year I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.

Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.

In two short years, the big railroads have completely changed their spots, magically morphing from coal plays to natural gas ones. Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a few months ago, displacing crude the formerly came from Alaska.

Look at the share prices of the major listed railroads, and it is clear they have been chugging right along to produce one of the best performances of 2013. These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), and Canadian Pacific (CP). In the meantime, coal shares, like Arch Coal (ACI) have been one of the worst performing this year

Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service. A friend of mine taking a passenger train from New Mexico to Los Angeles found his car abandoned on a siding for 24 hours, where he froze and starved until discovered.

New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy. The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government owned Amtrak passenger service was created out of the ashes. I know all of this because my late uncle was the treasurer of Penn Central.

Fast forward nearly half a century, and what you find is not your father?s railroad. While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and roads were reorganized and consolidated.

The government provided a major assist with a sweeping deregulation. It became tremendously concentrated, with just four roads dominating the country, down from hundreds a century ago, giving you a great oligopoly play. The quality of management improved dramatically.

Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from west coast ports. A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.

All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment. The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.

Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa. Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double-stacked sea containers.

Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic. Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.

I have some firsthand knowledge of this expansion. Every October 1, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in. There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.

During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad. I can guide my guests through that tunnel today with flashlights because (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.

While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing) and Canada (natural resources) promise to boost rail traffic with the US.

The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, all great cargo for railroads.

And who knew? Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four times more energy efficient than competing trucks.

Corporate earnings are up big! Great! Buy! No wait! The economy is going down the toilet! Sell! Buy! Sell! Buy! Sell! Help! Anyone would be forgiven for thinking that the stock market has become bipolar.

There is, in fact, an explanation for this madness. According to the Commerce Department?s Bureau of Economic Analysis, the answer is that corporate profits accounts for only a small part of the economy. Using the income method of calculating GDP, corporate profits account for only 15% of the reported GDP figure. The remaining components are doing poorly, or are too small to have much of an impact.

Wages and salaries are in a three decade long decline. Interest and investment income is falling, because of the low level of interest rates and the collapse of the housing market. Farm incomes are up, but are a small proportion of the total. Income from non-farm unincorporated business, mostly small business, is unimpressive.

It gets more complicated than that. A disproportionate share of corporate profits are being earned overseas. So multinationals with a big foreign presence, like Apple (AAPL), Intel (INTC), Oracle (ORCL), Caterpillar (CAT), and IBM (IBM), have the most rapidly growing profits and pay the least amount in taxes. They really get to have their cake, and eat it too.

Many of their business activities are contributing to foreign GDP?s, like China?s, much more than they are here. Those with large domestic businesses, like retailers, earn far less, but pay more in tax, as they lack the offshore entities in which to park profits.

The message here is to not put all your faith in the headlines, but to look at the numbers behind the numbers. Those who bought in anticipation of good corporate profits last month, got those earnings, and then got slaughtered in the marketplace.

Don?t bother taking an apple to school to give your favorite teacher, unless you want to leave it in front of a machine. The schoolteacher is about to join the sorry ranks of the service station attendant, the elevator operator, and the telephone operators whose professions have been rendered useless by technology.

The next big social trend in this country will be to replace teachers with computers. It is being forced by the financial crisis afflicting states and municipalities, which are facing red ink as far as the eye can see. From a fiscal point of view, of the 50 US states, we really have 30 Portugals, 10 Italys, 10 Irelands, 5 Greeces, and 5 Spains.

The painful cost cutting, layoffs, and downsizing that has swept the corporate area for the past 30 years is now being jammed down the throat of the public sector, the last refuge of slothful management and indifferent employees. Some 60% of high school students are already exposed to online educational programs, which enable teachers to handle far larger class sizes than the 40 students now common in California.

It makes it far easier to impose pay for productivity incentives on teachers, like linking teacher pay to student test scores, as a performance review is only a few mouse clicks away. These programs also qualify for government funding programs, like ?Race to the Top.? Costly textbooks can be dispensed with.

The alternative is to bump classroom sizes up to 80, or close down schools altogether. State deficits are so enormous that I can see public schools shutting down, privatizing their sports programs, and sending everyone home with a laptop. The cost savings would be huge. No more pep rallies, prom nights, or hanging around your girlfriend?s locker. Of course, our kids may turn out a little different, but they appear to be at the bottom of our current list of priorities.