Rules for Investors with UNG and GLD

[Joshua Brown]

Insiders in the natural resource business often talk about "shopping season" this time of year.

But they're not referring to Christmas presents.

As I've discussed before (see "The Little-Known 'Glitch' That Could Lead To 53% Gains), this is the time of year when many natural resource investments can be had at bargain prices.

This is particularly true for the smaller firms that my premium natural resource newsletter, Junior Resource Advisor, was created to focus on -- the kind of companies that offer potential for double- or even triple-digit gains through the discovery of major mineral or petroleum deposits.

This month's buying opportunity is upon us -- ironically -- because 2013 has been a difficult year for many resource companies.

With commodities prices falling, a large number of firms have seen their share prices decline. Sentiment has in fact turned down to such a degree that many of these firms are selling for cash flow multiples lower than we've seen in decades.

I've been purchasing a number of these companies for my portfolio over the past few months. One such company I recently told my Junior Resource Advisor subscribers about is selling for less than twice its after-tax income.

The thing is, today we're seeing even better prices on these already-cheap companies.

That's because many holders of these stocks are dumping them indiscriminately right now.

Many of the junior resource companies I tend to follow are listed in Canada -- the center of the universe when it comes to raising capital for small mining and oil and gas companies.

And Canadian investors have some unique tax incentives that come into play this time of year, affecting not only Canadian-listed companies but also firms that have cross-listings on U.S. exchanges.

But let me be clear: You don't have to live in Canada to take advantage of the bargains created by this phenomenon.

Here's how it works.

This time of year, Canadian investors sitting on stocks that have seen losses will often sell them for one reason alone -- to book the investment loss and claim it against their taxes. In many cases, the same sellers will buy the exact same stocks after the New Year. They simply need to crystallize their losses during the current tax year.

The Year-End Insider 'Secret' That Could Make You 12.8% -- Or More

This means they can afford to sell at almost any cost. It's a phenomenon that leads to tremendous selling pressure -- temporarily driving stocks to unbelievably low levels without any regard for the business fundamentals or cash flows of these companies.

Buying this disconnect has been a money-making strategy among industry veterans for decades. During the past four years when the resource-heavy TSX Venture exchange finished with a loss, if you'd bought the index during the second week of December, you would have made an average 12.8% return over the next 30 days -- as beaten-down companies rebounded from temporary tax-loss selling pressure.

This year saw similar declines. The index came into 2013 at around 1,200 and today sits around 900 -- a loss of 25%. And many of the index's component companies have seen losses even deeper than that.

When investors are facing these kinds of losses at year-end, tax-loss selling usually sets in hard and fast. And this is creating great bargains for savvy buyers in the process.

This Year's Best Tax-Loss Buys
The biggest bargains for tax-loss season are in the mining sector this year.

This is simply because metals prices are down -- having dragged many of the stocks with them. Oil and gas, by contrast, have been buoyant. You can see from the chart below that the TSX Global Gold Index is down by 50% in 2013.

[Joshua Brown]

Markets were headed slightly higher on Friday morning despite U.S. producer prices dropping for the third straight month. The Labor Department announced that producer prices were down 0.1% for the month of November. This followed a slip of nearly 0.2% in October. Economists had been expecting the index to remain flat. Wholesale prices, when subtracting food and energy, crept up a mere 0.1% in November, following a 0.2% rise in October. In October there was a drop of 0.7% in gasoline prices, which accounted for 75% of of the decline in the energy index. There was a flat line of growth in November in wholesale food prices after a 0.8% gain in October. Jim O?Sullivan, chief U.S. economist at High Frequency Economics Ltd., said, ?Inflation remains quite tame. Over the course of the next year, the core numbers will drift up a little bit as the economy remains healthy and unemployment keeps falling.?

Shares of Boeing (BA) were up slightly after news was released that the Machinist union declined the second offer from the company to produce its new 777X jetliner. The company wants to start production of the jets in Washington state. The initial offer was made to the union in November, which they declined, offered a higher signing bonus, dropped plans to reduce the pace of wage increases for new workers, along with concessions and dental benefits. The Machinists union said they wanted better health care and pension plans. Bryan Corliss, a spokesman for the Association of Machinists District 751, said that Boeing took their offer off the table once the heads of the union declined to recommend it to members. He also said the second revision of the plan had no ?significant improvement? over the contract offer from last month. Boeing said that they currently have 22 states that have written proposals to host the production of their new jets. Boeing spokesman, Doug Alder, said that the new offer ?rests with the union leadership at this point.?

Shares of Amazon (AMZN) were trading higher after the company announced their plans for launching a new service called Amazon Pantry. This new venture will help the company become competitors in the warehouse club stores market with companies like Costco and Sam?s Club. The service will be available to members of the company?s Amazon Prime (AMZN) shipping program. They will start with roughly 2,000 new products per month like cleaning supplies, canned goods and dry grocery items at discounted prices. Then they will allow their Prime shoppers to place as many of these items as they can into a pre-set sized box and as long as it doesn?t go over in weight, they will ship for a small fee. Keith Anderson, who heads up RetailNet, said, ?Amazon has the clubs in their cross hairs. This will be a potential issue for Costco.?

That?s all for the day. Have a great weekend, loyal readers!

All the best,
Jack Aubrey, Oakshire Financial

[Joshua Brown]

On Sept. 24, I invested in one of the world's leading automakers.

I liked that its valuation was cheap, that the stock had been keeping up with the market while offering about 30% less volatility, and that future growth prospects looked well above average. At about 2%, the dividend yield was a nice bonus.

Of course, there are no guarantees with any stock, but I had hoped shares would at least continue pacing the market after I bought them. Well, if you invested when I did, you know that hasn't been the case. Since then, the stock has been disappointing, dropping about 7% versus about a 7% gain for the market.

I'm not worried, though, because the stock's problems are related to an ongoing concern management is perfectly capable of resolving. Once it does, I expect the stock's bullish run -- shares are up 31% this year and more than 17% a year for the past three years -- to resume.

I'm talking about Toyota (NYSE: TM), and the company's main issue now is recalls.

You probably know recalls have plagued Toyota for some time now. One of the most publicized episodes occurred between 2009 and 2010, when more than 14 million vehicles were recalled after reports of sudden, unexplained acceleration in several Toyota models. Toyota agreed in December 2012 to settle the suit for $1.1 billion.

[Joshua Brown]

Last night, for no discernible reason that even the savviest tech watchers can think of (okay fine, an illogical reason involving block retaliations), Twitter announced a change to their blocking policy that would allow blocked users to view and even interact with the tweets of those who had previously frozen them out.

While the blocker would not be able to see the tweets of the blockee, the change was essentially turning the block feature into more of a mute button rather than a tinted window. One user compared the change to a home security system that allowed intruders into your house, but put a blindfold over your eyes so you wouldn?t know they were there. Once the word spread, petitions went around immediately and the Twitterati could be seen flipping out all over the stream and around the blogosphere.

Upon learning of the new blocking functionality and witnessing the outrage, I had a hunch that this change in policy wouldn?t last long.

I predict Twitter reverses this Block Amnesty thing within 90 days.
? Downtown Josh Brown (@ReformedBroker) December 13, 2013

Turns out 90 days would be more like 90 minutes.

Within a couple of hours of the original announcement, Twitter said ?forget it? and changed the policy back to how it was.

This about-face was in direct response to the uproar amongst their users. As both a shareholder and a user of the service, I believe they did the right thing. The other alternative ? to dig in their heels defensively or to stall for time and measure what effect, if any, this would have on engagement, would have probably been a disaster. I?m glad that management was quick to respond to what their customers wanted; social media firms need to be social entities first and foremost, and that means empathy with the consumer of the service.

[Joshua Brown]

In any given year, you'll come across "no-brainer" investments that are universally loved by the crowd. Trouble is, these stocks can be loved too much, and no matter how sales trends develop, some disappointment will be inevitable.

Indeed, one of the most popular stocks of the past few years has lost its way, buried under a set of unrealistic growth expectations. Yet, as shares bounce just above multi-year lows, contrarian investors finally see an opening.

This "can't miss" stock is Westport Innovations (Nasdaq: WPRT), which appeared set to dominate the burgeoning market for truck engines that can run on natural gas.

The appeal is evident. Natural gas is far cheaper than crude oil, and truckers could save thousands of dollars a year by moving away from pricey diesel fuel.

Westport was also expected to benefit from legislation that provided huge subsidies for truckers to switch to natural gas. That legislation never arrived, and the company's most bullish supporters had to concede that the loftiest sales forecasts simply couldn't be met. As you can see in this chart, shares responded as you might expect.

[Joshua Brown]

Legendary investor Carl Icahn recently added a "sizable position" of Apple to his $16 billion holding company -- Icahn Enterprises.

Since he announced his purchase Sept. 11, Apple is up about 20%.

After making the purchase, Icahn was quoted saying it was a "no-brainer" investment, citing that the company's valuation was "extremely cheap" by the numbers.

Icahn should know, too. Unlike most of today's billionaires, he made his fortune entirely by investing in the stock market. Since he founded Icahn Enterprises less than 30 years ago, his company has enjoyed total returns in excess of 288,000%.

To put that in perspective, if you had invested $1,500 with him back in 1987, the size of your position would be worth over $4.3 million today
That kind of performance is one reason Chartered Market Technician Michael J. Carr recently designed a trading system to leverage the financial genius of investing gurus, like Icahn.

By applying his proprietary trading system to stocks that are held by the market's 20 most successful gurus -- including Warren Buffett, George Soros and David Einhorn -- Michael has earned big gains betting alongside the world's most renowned investors.

For example, on Sept. 12, Michael's system identified a buy on Netflix (NASDAQ: NFLX), one of Carl Icahn's top portfolio holdings. Just three months after his system gave the signal, Netflix is up over 20%.

[Joshua Brown]

As we close the books on 2013, one clear theme has emerged. Investors have flocked to developed economies and shunned emerging markets. The S&P 500 Index is on track for a nearly 30% gain this year, but many emerging markets have tumbled by double digits.

That kind of massive performance gap only emerges every decade or so, and for farsighted investors willing to look past near-term headwinds, emerging markets now represent tremendous relative value.

You don't need to tell that to the executives at major U.S. companies. They already know that emerging markets have generated -- and will continue to generate -- robust growth rates, thanks in large part to ever-rising middle classes. While developed economies are growing at a 2% pace, emerging-market economies are growing at a 4% to 5% pace. Asian emerging markets are rising an even more impressive 6%, according the International Monetary Fund (IMF).

The key takeaway: Even if you're wary of investing in volatile emerging markets directly, you can focus on the U.S. companies that are positioned to derive a rising level of sales and profits in these countries.

Thankfully, the strategists at Citigroup have already done the heavy lifting. In a recent report, Citi's Tobias Levkovich took a look at companies that already derive more than 20% of their revenue from emerging markets. These companies have invested millions of dollars to establish market dominance in these economies, and their first-mover advantage will reap rewards well into the future.

Which Industries Aren't Keeping Pace?
Levkovich has grouped these companies together in a portfolio he calls EMX, and not surprisingly, emerging-market exposure hasn't helped these stocks in 2013. The EMX basket has underperformed the S&P 500 by roughly 5 percentage points. Investors may be focusing on the fact that economic headwinds in 2013 are dampening the near-term financial performance for these companies.

The EMX portfolio holds a basket of 51 stocks, though I am most interested in the stocks that have notably underperformed the S&P 500 this year. Here are the EMX stocks that are up less than 10% in 2013.