How We Made 20.5% In 3 Months With Carl Icahn

[John Thomas]

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

Since he announced his purchase on Sept. 11, 2013, 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%.

[John Thomas]

2013 saw equity market volatility ebb. (Bespoke)

Markets

The case for reflationary assets. (Market Anthropology)

Wall Street?s best trades of 2013. (Quartz)

We are now in the historically best time of the year for the stock market. (Crossing Wall Street, Ryan Detrick)

There?s more to valuation than the Shiller CAPE ratio. (The Reformed Broker)

There is still plenty of room for global payout ratios to rise. (FT Alphaville)

Hedge funds are warming to the opportunity in CMBS. (NetNet)

[John Thomas]

The most successful investors on Earth all share a common trait: the ability to see and act on long-term trends.

While the majority of investors are focused on short-term results, the top investors are primarily concerned with being on the correct side of global economic growth patterns. Finding and investing in companies that are riding these global growth trends is a recipe for long-term investing success.

Right now, China is attracting substantial investor interest due to its demographic shift toward a consumer-driven economy. Following the emerging Chinese bull hasn't always been easy, thanks to the government's tight control over the economy. However, this situation is well on its way to changing as China's leaders are turning their formidable powers toward spurring the economy rather than being strictly focused on rigid controls.

Most importantly for investors, the government's focus on economic growth is combining with the power of the Internet to create one of the most exciting investment opportunities I've ever seen.

The goal of China's current five-year economic plan is to increase domestic demand and reduce the population's high rate of savings. They are accomplishing these goals by increasing incomes, improving social safety nets, altering the tax structure, and actively promoting a demographic shift from rural areas to cities. To support the creation of 45 million new urban jobs, the government is building 36 million low-cost housing units to help with moving workers into the cities and increasing the minimum wage.

Consulting firm McKinsey & Co. estimates that consumption will account for 43% of total Chinese GDP growth by 2020. In addition, household income is forecast to increase to just under RMB 56 trillion (more than $9 trillion) in 2015, an increase of more than 130% from 2010. The increase in disposable income means that more and more consumers will be turning to the Internet for commerce, socializing and other everyday activities. Add in the fact that over the past 10 years, the average yearly income of China's poor has grown from $1,430 to $6,100, and you can see the massive growth on the horizon.

As of June, 44% of China's 1.3 billion people had used the Internet. As you can see from this chart, Internet use in China is in a clear uptrend.

[John Thomas]

Random Thoughts


You can only predict the short-term when it comes to markets. As I preach, if someone is convinced that the market will be higher next year then they should sell all of their possessions and put that cash into the market. Obviously, that's a bad idea because all predictions are about the future and a lot of $#*! can happen between now and then. Again, only the short-term can be predicted.

My short-term time frame is the daily chart. My job is to figure out where the market(s) are likely headed near term and look to get aboard for a swing type trade-if and only if the opportunity presents itself. Then, if things work out, I'll stick around for a longer-term move. Although the money & position management often takes me out much sooner, sometimes positions will go weeks, months, and yes, occasionally years.

So, am I a shorter-term or longer-term trader? Yes!

With markets it is important not to be too close to them. Watching every tick can turn into an exercise in futility. Each tick seems to be much larger than it really is. You end up chasing your own tail.

Now, admittedly, when a market makes a large move like it did on Wednesday, I'll have a little peek intra-day. Remember, patterns are fractal. What works in one time frame, works in others. With that said, the Ps have formed an hourly Bowtie down (email me if you need the pattern and see my website for the chart). What's concerning is that this is the second signal coming off a double top. Further, the prior peak is at all-time highs. The "second mouse gets the cheese" often applies with transitional patterns-especially when the prior pattern came off of all-time highs.

It's not the end of the world. It's an hourly signal. It has to start somewhere though. Hopefully, (and I know hope in one hand and, well, you know) it doesn't work. Or, at the least, it doesn't work big.

Now, let's get back to the forest. The Ps got whacked on Wednesday, losing over 1%. This action puts them back to the top of their recent base, aka support-circa 1775. It is important for this level to hold.

When analyzing markets, it is vitally important not to forget to study things on a net net basis. Where is the market now? Where was it one week ago? Two weeks? and so forth. With that said, the Ps haven't made any forward progress in nearly a month. Draw your horizontal line at 1775.

I don't want to digress too far, but I'd venture to say that if all you did was study markets on a net net basis over a variety of periods and draw your arrows, you'd do much better than those who count bars/waves, trade the Baby With The Poopy Diaper Pattern, and/or use 15 oscillators.

Getting back to the markets, the Quack got whacked too. It lost nearly 1 ?%. This action also has it back to prior support, circa 4,000. It's important for this area of its prior breakout, 3,965 to 4,000 to hold.

I don't even want to talk about the Rusty. It got wacked for over 1 ?%. This action puts it well into its prior trading range. The net net thing here is nearly 2 months without forward progress.

As one would expect with the broad based Rusty ($IWM) down so much, the sector action was abysmal.

The baby pretty much got thrown out with the bathwater. I hate to see such liquidation markets where even bonds and precious metals sell off. No flight to safety. No place to run. No place to hide.

[John Thomas]

Another year in the books and I?ve updated my Investing Fads and Themes by Year guide accordingly.

It begins with 1996 because that was my first summer working on The Street and my earliest exposure to the market. I do this every December because I agree with the eminent philosopher Bob Marley when he reminds us ?If you know your history, then you would know where you?re coming from.? If we don?t keep tabs and learn from the lunacy that grips us from year to year, then how can we truly say that we?ve grown as investors?

By documenting this stuff, it becomes a permanent part of my knowledge base, a reference to draw from in times to come as we see similar trends play themselves out and the great wheel spins past an endless parade of fear and greed.
So what was 2013 about?

I would point to five different fads and themes that were very diverse but equally captivating for the investment community.

Elon Musk Stocks
First, let?s talk about Elon Musk, the man with not one publicly-traded rocket ship but two ? both Tesla Motors and Solar City were among the hottest stocks in the market in a year of very hot stocks overall. The trading action in Musk-related companies was more exciting than the Facebook rebirth, the Twitter IPO or the 3D Printing explosion.

TSLA began the year as a ?concept? stock with a handful of cars on the road and all kinds of doubt about its balance sheet, manufacturing capabilities, sales strategy and whether or not anyone would actually want a Model S to begin with. But boy did they ever. Other than a negative review in the New York Times, the news was pretty much all good and investors were quick to react. Tesla traded from $35 at the beginning of the year to as high as $180 a share, mostly in a straight line, and the chattering classes on The Street simply could not stop talking about. It?s gain year-to-date is a scorching 312% and it currently sports a market cap of $17 billion ? to put that into perspective, that?s 30% of GM?s market cap ($55 billion) and Tesla has sold less than 20,000 cars cumulatively since its incorporation!

Elon Musk?s other public company, Solar City, was also no slouch thanks to a new business model (solar panel leasing) and a resurgence in the solar sector in general. SCTY came public one year ago in the dead of December 2012. It is up 328% thus far this year, more than double the global solar stocks? index return of 142% over the same time frame.

To call Elon Musk-related stocks a major fad this year would be an understatement, the man literally became a real-life Tony Stark right before our eyes and everyone wanted in.

Smart Beta
Last year investors rediscovered index funds and passively managed investments ? but the problem with that is there?s no way for fund companies to really make money from it unless they?re part of the big three (iShares, State Street or Vanguard) and have massive scale. Enter the concept of Smart Beta. This is the idea that fundamentally-weighted indexes could be created and then ETF?d, the products themselves garnering a higher internal fee justified by historical outperformance vs plain-vanilla cap-weighted products like SPY or QQQ.

And so we saw dividend funds proliferate along with earnings-driven indexes and shareholder yield products (dividends plus buybacks) and ?AlphaDex? products and dividend growth indexes and quality screen indexes and equal-weight indexes and dozens of offerings based on just about any way you could slice or dice a passive basket of stocks. BlackRock?s suite of minimum-volatility index ETFs took in an astonishing $2.6 billion of new assets in the first half of 2013 versus just $745 million through all of 2012. According to Cogent Research, smart beta or non-market cap weighted ETFs have captured 25% of the equity ETF inflows year to date, despite representing only 12% of the industry?s assets.

The idea of fundamentally-weighted indexes is not new ? Rob Arnott?s Research Affiliates invented it years ago (whenever you see the term RAFI in the fund product, that?s them) and WisdomTree has essentially built its ETF empire based on the concept. But this year, thousands of professional portfolio managers became self-styled ?beta managers?. Rich Bernstein, a high visibility strategist and money manager who was in the vanguard of this trend, blew through the $1 billion AUM mark this past spring managing nothing but portfolios of smart beta allocations.

[John Thomas]

Is the S&P 500 cheap or expensive relative to historical valuation metrics? The bubble talk seems to be mostly subjective and depends mostly on who is doing the talking. Someone?s who?s missed the run-up is more likely to call it a bubble and someone who is first chasing and buying in now is more apt to dismiss the bubble talk out of hand. It?s funny how our opinions depend so much upon what suits our lives and careers best.

The bubble talk is also subjective according to what sector or corner of the market one might be looking at specifically. Pointing to Netflix and Tesla and all the IPOs and screaming ?STOCK MARKET BUBBLE? isn?t exactly rigorous. But ignoring the over-the-top sentiment bullish surrounding US stocks these days probably isn?t healthy either. I?m certainly not.

But let?s get back to concrete measures of valuation for a moment?

Savita Subramanian put out a Valuation Cheat Sheet yesterday looking at the sectors and industries individually and the overall market.

The best chart from the research piece looked at the S&P?s current valuation based on 15 popular measures. It found that on most of these, stocks are still cheaper than they?ve been historically?

S&P 500: cheap or expensive?
In addition to the metrics contained in this report, in August we examined the S&P
500 across every valuation metric we could think of?we found 15?to gauge
whether US stocks still looked cheap vs. history. Here we provide an update of this
analysis. Today, 12 of the 15 metrics suggest the S&P 500 is trading below
historical average levels, while the trailing P/E and P/OCF suggest the S&P 500 is
trading slightly above average levels. Only the Shiller P/E?which bases normalized
earnings on the last ten years, when we underwent the biggest profits recession in
history driven by excessive leverage?suggests the market looks very stretched.