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

[Thierry Martin]

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.

[Thierry Martin]

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

[Thierry Martin]

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...

[Thierry Martin]

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:

[Thierry Martin]

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

[Thierry Martin]

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)

[Thierry Martin]

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.

[Thierry Martin]

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.

[Thierry Martin]

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

[Thierry Martin]

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.