Barchart.com's Chart of the Day - Power Solutions International (PSIX) for Nov 12, 20

[Thierry Martin]

Stocks were heading lower on Tuesday morning on fears that the Federal Reserve may began tapering off on their stimulus. The $85 billion-per-month bond buying program has been going strong, but some fear that the cutting back may begin following the recent strong jobs data and the rise in Treasury yields. The Atlanta Fed President, Dennis Lockhart, and Minneapolis President, Narayana Kocherlakota, are due to make comments later this afternoon. Richard Fisher, President of the Federal Reserve Bank of Dallas, said, ?We?ve changed and impacted the markets because of our intervention and I understand there?s a sensitivity, but markets should also bear in mind that this program cannot go on forever. The balance sheet is $4 trillion and there are limits to what the Federal Reserve can do.?

Shares of BP were up slightly higher after the company announced that they reached a fuel supply deal with Russian oil firm Rosneft. The deal totals nearly $6 billion on refined products. This deal comes on the coattails of a deal made earlier this year for BP to purchase $5.3 billion in crude oil. That deal also followed the hiring of BP?s former senior trader, Marcus Cooper, to Rosneft as head of their trading business in Geneva. In the last year, Rosneft has been selling large amounts of crude oil to trading houses like Glencore, Vitol and Trafigura. The filing that went through today said that Rosneft agreed to sell up to 3.2 million metric tons of fuel, totaling nearly $2.6 billion, to BP Singapore between November 2013 and December 2014. They will also sell 1.44 million metric tons of diesel for $1.77 billion from the Black Sea port of Tuapse. Marcus Cooper, who took over the trading operations position in Geneva at Rosneft, said, ?BP will have a bigger trading presence in the straight-run fuel oil market in China. BP is taking a view on the straight-run market next year.?

Shares of Dendreon Corp (DNDN) were up over 7% after the company announced their plans to cut nearly 15% of their workforce. The company missed analysts?s sales expectations of their prostate-cancer drug and will slash 150 jobs to eliminate operating expenses. By cutting these jobs, Dendreon will save roughly $125 million in expenses, after the company takes a $7.5 million charge tied to severance pay this quarter and the following. The prostate-cancer drug Provenge came in with third-quarter revenue around $68 million, missing the $75 million analysts?s were expecting. This was down 13% from this same time last year. Mark Schoenebaun, an analyst with ISI Group, said, ?Despite the restructuring to save cash and runway, we believe the negative sales trajectory will put pressure back on the stock today.?

That?s all for the day.
All the best,
Jack Aubrey, Oakshire Financial

[Thierry Martin]

If you missed the news last week, U.S. GDP rose a reported 2.8% in the third quarter instead of the 2% economists expected. This was framed as bad news in many news stories because the jump resulted from businesses holding larger-than-expected inventories.

Just over a week earlier, the U.S. Census Bureau released a report on the inventory-to-sales ratio showing inventories weren't really a problem.

When a business sees sales rising, it will often increase its inventory to meet the higher demand. The relationship between inventory and sales can be summarized in a ratio that shows how many days' worth of inventory is available based on the amount of sales recorded in a day.

The inventory-to-sales ratio was 1.29 in the most recent report, which used data from August, down from 1.3 a year ago. Inventories rose 3.1% from a year ago, while sales increased 4.2% over that time. We would expect to see inventories increase if sales are rising, and the decline in the ratio shows that sales are rising faster than inventories.

News reports seem to reflect the mood of the market, and that is the basis for the "magazine cover indicator." According to this indicator, when the media develops a consensus, the market moves the other way. In other words, popular media can be a contrary indicator of the markets.

The magazine cover indicator has been the subject of academic research that supports its efficacy. One study, a 2007 University of Richmond paper titled "Are Cover Stories Effective Contrarian Indicators?" looked at feature stories in Businessweek, Fortune and Forbes over a 20-year period to determine whether positive stories are associated with superior future performance and negative stories are associated with inferior future performance for the featured company.

The paper's authors concluded that there is "a statistically significant correlation between the appearance on the cover of one of the magazines and the subsequent performance of the company's stock."

Over the years, it has been applied not only to stocks, but to the market as a whole.

In addition to bullish cover stories, there is constant media coverage of the markets, and in our opinion, that coverage has taken on a bearish tone. The GDP report is one example. The Twitter (NYSE: TWTR) IPO is another.

Many articles compared Twitter's first day of trading to the 1999 Internet bubble. Twitter may be overvalued, but one example is not enough to demonstrate a bubble. The 1999 stock market was unique, and the media coverage of the time was uniformly bullish, as day traders became media stars. The magazine cover indicator worked in 1999 as that market turned lower while the news was bullish.

[Thierry Martin]

The nature of capitalism is both competitive and evolutionary. When entrepreneurs strike upon a bold new idea like social media and begin to profit from it, it?s just a matter of time before that idea spawns legions of competitors. As that industry matures, only the fittest ultimately survive and prosper, with companies like Facebook (FB) and Twitter (TWTR) currently dominating the public equity space. Intriguingly, one small but unique over-the-counter concern, Quint Media, Inc. (QUNI) recently arrived on the social media scene with a singular goal: to render these other established social media sites obsolete.

Quint Media, Inc., operates as a digital and social media company in the United States. It focuses on connecting people with content relating to their passions, interests, and each other. The company?s Quint Media network is engineered with a digital ecosystem, matching content that is customized to user-interests. It primarily focuses on brands relating to lifestyle, entertainment, and fashion.

On Monday, Quint unveiled its flagship product, the Exley digital entertainment news platform?designed to be the ?TMZ? of smartphones worldwide. In case you?re not familiar with TMZ, it?s currently television?s premier celebrity news, gossip and video site, which also has an online presence. Exley is just the first of many entities that Quint plans to roll out as part of its strategy to become a global media network.

Specifically, Quint is aiming to get the drop on TMZ and established ?old school? social media entities by optimizing Exley?s content, along with all of the company?s subsequent social media endeavors?for smartphones. In fact, Quint management is operating under the fundamental premise that social media first-movers like YouTube and Facebook are at a fundamental disadvantage when it comes to exploiting the power and immediacy of smartphones. That?s because the smartphone revolution occurred well after these companies initially drew up their business plans?with those heavy-hitters initially focused on lap-top based advertising models.

Looking at the chart below, you don?t have to be business major or statistician to fully appreciate the remarkable growth story that smartphones have become.

[Thierry Martin]

Change is the only constant in the world.

This is particularly true when it comes to the Internet. It was only in 1989 when the first commercial dial-up Internet service provider (ISP) was launched. Few realized that this ISP, named The World, would spark a radical global revolution.

Visionary companies jumped on board as the public started using the Internet as a means of shopping, information and entertainment. Many companies took to the stock markets to raise capital for a foray into the Internet frontier. If your company name included "dot-com," investment banks were probably clamoring to take it public. Companies that were little more than an idea and some rented office space were able to raise millions quickly and easily.

Not since the Dutch tulip mania of the 1600s had the world seen such an investment frenzy, but the vast majority of these companies failed to gain traction after the initial hype. Names like Webvan, eToys.com, Flooz.com and Kozmo.com, plus hundreds of others, have been relegated to the dustbin of history despite massive funding and the leadership of aggressive, intelligent entrepreneurs. Many of these firms were simply before their time, as consumers and businesses just weren't ready to use the products and services offered.

The Internet craze cumulated in the bursting of the dot-com bubble in 2000. Billions of dollars were lost by investors and the first wave of Internet companies. Most folded, never to be heard from again -- but a few survived the debacle and are with us to this day.

One of these dinosaur companies is among the earliest ISPs. Promoting itself with the relentless mailing of disks offering free Internet access trials, this company was soon part of the largest corporate merger in history.

This dinosaur, of course, is none other than AOL (NYSE: AOL).

This iconic ISP launched its IPO in 1992 at $11.50. Shares rocketed more than 680% by 1999, and after a series of acquisitions, old-school media empire Time Warner (NYSE: TWX) agreed to merge with AOL, creating the biggest media company on the planet.

Since that time, the company has struggled to find its footing. By 2003, shares of AOL Time Warner closed at just $15, and AOL now seems torn between its role as a once-leading Internet portal and its current role as a media company.

A decade later, AOL is still struggling, but the future looks bright for investors. Although net income plummeted 90% in the third quarter from a year ago, revenue increased 6%, to more than $560 million. The drop in net income was due to a write-down of AOL's troubled local news segment, Patch. AOL's shares could continue to climb higher if the company focuses on its primary competencies and cuts costs rather than throwing good money into ill-suited ventures.

One of the primary reasons for my optimism is the growth of real-time bidding and digital display advertising. Spending on automated ads is forecast to grow nearly 74% to more than $3.3 billion this year, according to eMarketer. AOL has an AdTech unit that specializes in targeting high-end, cutting-edge digital advertisers. It is this market that will serve as the catalyst to improve AOL's bottom line. The company recently launched a sell-side platform called Marketplace, which helps advertisers maximize their value. AOL has positioned itself to capture this next wave of advertising revenue.

A look at the technical picture shows shares have spiked from a low in the $33 range in mid-October to a high just above $43 before recently hitting resistance.

Risks to Consider: Despite the recent upswing, AOL is still struggling. Massive cost cutting is needed to keep the company on track for increased profits. Always use stop-loss orders and diversify when investing.

Action to Take --> I am a firm believer in the future of digital display advertising and real-time buying platforms. AOL is positioned to capture a share of this rapidly growing market. Buying on a breakout close above $43 with an 18-month target price of $65 and a $38 initial stop level makes solid technical and fundamental sense right now.

- David Goodboy

[Thierry Martin]

Stuff I'm Reading this Morning...

The Japanese Bull Market turns one. (CassandraDoesTokyo)

How Wall Street sees the world in one slide. (BusinessInsider)

All of a sudden iron ore shipments to China are exploding. (Bloomberg)

John Hussman: All the classic signs of a crash are manifesting themselves, so why will this time be different? (ZeroHedge)

Greggy: If there's going to be a crash, it'll be in the Treasury market. (DragonflyCapital)

Yes, the equal-weight S&P 500 ETF generates significant alpha - but hold up, wait a minute! (IndexUniverse)

LOL, the average private equity investor merely breaks even. (FocusOnFunds)

Time to slay some of these zombie hedge funds and put them out of everyone's misery. (Hedgeweek)

Matt Levine: Financial innovation is depressing. (Bloomberg)

Just how crowded is the "low volatility anomaly" trade right now? Craig Lazarra of S&P Dow Jones Indexes weighs in. (ETFTrends)

Finra is surprisingly candid in its report on the inherent conflicts of the brokerage industry (spoiler alert: the whole f*cking thing is one giant conflict): (NerdsEyeView)

Lockheed Martin working on a terrifying new vehicle that can fly, swim and drive on land. (FloatingPath)

Meet David Merrell, the financial advisor who located his office inside a fitness gym. (WSJ)

REMINDER: Backstage Wall Street is now on Kindle!


The Reformed Broker

[Thierry Martin]

Income investors often set a minimum dividend yield as a requirement for their buy decisions. That eliminates a number of stocks from consideration. This requirement could also increase market risk since it tends to limit investments to just a few sectors.

A diversified portfolio should hold more than large drug companies and big-name tech stocks that are no longer growing rapidly but are paying large dividends. Covered calls can increase the number of stocks that income investors can select from and help them diversify their portfolio without sacrificing income.

A covered-call strategy involves selling call options on a stock you own. Selling calls generates instant income known as a premium.

A covered call allows you to participate in the upside of the stock, while the income will help offset any downside. This is an excellent strategy for income investors to consider, and I want to use an example of a trade I like right now to illustrate the amount of income that is possible.

Arkansas Best (Nasdaq: ABFS) is a trucking company that has been around since 1935. It operates about 3,700 tractors and 20,000 trailers in long-haul and local pickup delivery operations. Arkansas Best also provides logistics support to its customers, using its IT systems to help companies manage inventory and schedule deliveries and pickups. Additionally, it leverages its internal processes and infrastructure to provide emergency roadside assistance to other trucking companies.

Revenue grew 25% last year and 45% in the first quarter of 2013. For the full year, analysts expect 9.4% revenue growth.

The company is stable but has been unprofitable for several years. Analysts expect a return to profitability this year with earnings per share (EPS) of $0.21 and a significant jump in profits to $1.70 a share in 2014. If they are right, now would be an ideal time to invest in ABFS.

Income investors, however, might not like the low dividend of $0.12 a year, a yield of just 0.4%. But the company has demonstrated its commitment to rewarding shareholders

[Thierry Martin]

During bull markets, often the best way to trade is to go with the momentum. That's usually the route I like to take, but there's another way to trade that can also net you big results.

That is to identify sectors that have come under fire that have the potential to move much higher -- that is, value trades. The multi-national industrial mining sector fits this bill.

One great way to invest in this sector is with iShares MSCI Global Metals & Mining Producers (NYSE: PICK). This exchange-traded fund (ETF) holds the biggest industrial mining companies, including BHP Billiton (NYSE: BHP), Freeport-McMoRan Copper & Gold (NYSE: FCX) and Rio Tinto (NYSE: RIO).

Although PICK is down 12% year to date, the fund has seen some strong buying during the past four months, rising 27% since its July 5 low.

[Thierry Martin]

There are only 4 days left until the equity option expiration on November 15. My short dated November expiration play turned out to be wildly successful, with all nine of these trades quickly turning profitable. Including the six positions we now have on board, the last 14 consecutive Trade Alerts have been profitable, raising the success rate of our service to a stunning 85%.

The Mad Hedge Fund Trader?s model trade portfolio has three remaining positions that are deep in-the-money that expire that day. So, it is important that we tread carefully to get the full benefit.

I received a few emails from readers whose option holdings have already been exercised against them, and have asked me for advice on how best to proceed. So, here we go.

The options traded on US exchanges and referred to in my Trade Alerts are American style, meaning that they can be exercised at any time by the owner. This is in contrast to European style options, which can only be exercised on the expiration day.

The call option spreads that I have been recommending for the past year are composed of a deep out-of-the-money long strike price plus a short portion at a near money strike price.

When stocks have high dividends, there is a chance that the near money option you are short gets exercised against you by the owner. This requires you to deliver the stock equivalent of the option you are short, plus any quarterly dividends that are due. Don?t worry, because your long position perfectly hedges you against this possibility.

You usually get notice of this assignment in an email after the close. You then need to email or call your broker back immediately informing him that you want to exercise your remaining long option position to meet your assigned short position.

This is a gift, as it means that you can realize the entire maximum theoretical profit of the position without having to take the risk of running it all the way into expiration. You can either keep the cash, or pile on another short dated option spread position and make even more money.

This should completely close out your position and leave you with a nice profit. This is not an automatic process and requires action on your part!
Assignments are made on a random basis by an exchange computer, and can happen any day. Exercise means the owner of the option that you are short completely loses all of the premium on his call.

Dividends have to be pretty high to make such a move economic, usually at least over 3% on an annual rate. But these days, markets are so efficient that traders, or their machines, will exercise options for a single penny profit.

Surprise assignments create a risk for option spread owners in a couple of ways. If you don?t check your email every day after the close, you might not be aware that you have been assigned. Alternatively, such emails sometimes get lost, or hung up in local servers or spam filters, which occasionally happens to readers of my own letter.

Then, you are left with the long side deep out-of-the-money call alone, which will have a substantially higher margin requirement. This is equivalent to going outright long the stock in large size.

This is a totally unhedged position now, and suddenly, you are playing a totally different game. If the stock then rises, you could be in for a windfall profit. But if it falls, you could take a big hit. Better to completely avoid this situation at all cost and not take the chance. You are probably not set up to do this type of trading.

If you don?t have the cash in your account to cover this, you could get a margin call. If you ignore this call as well, your broker will close out your position at market without your permission.

It could produce some disconcerting communications from your broker. They generally hate issuing margin calls, and could well close your account if it is too small to bother with, as they create regulatory issues.

In order to get belt and braces coverage on this issue, it is best to call your broker and find out exactly what are their assignment policies and procedures. Believe it or not, some are still in the Stone Age, and have yet to automate the assignment process or give notice by email. An ounce of prevention could be worth a pound of cure here. You can?t believe how irresponsible some of these people can be.

Consider all this a cost of doing business, or a frictional execution cost. In-the-money options are still a great strategy. But you should be aware of all the ins and outs to get the most benefit.

[Thierry Martin]

Many investors look to buy and sell stocks based solely on near-term business conditions. If management raises guidance for the next quarter, shares rally. And if management takes note of some near-term headwinds, investors flee.

A great example: Shares of insurance giant American International Group (NYSE: AIG) fell 6.5% on the day of its earnings release in late October when CEO Robert Benmosche noted that the company's property and casualty insurance businesses were far healthier than a few years ago but still not generating the returns that they should.

Investors were also disappointed that a planned asset sale of its aircraft lease finance business may not happen. AIG could instead sell part of that business in an IPO and retain a majority stake.

[Thierry Martin]

With stocks continuing to deliver gains week after week, the question is: Which ones should be the strongest over the short term? According to the charts, tech stocks might have an edge.

Economic News Keeps Fed on Hold
SPDR S&P 500 (NYSE: SPY) gained 0.61% last week, closing higher for the fifth week in a row. The gain was due to a 1.35% rally on Friday that reversed losses for the week.
SPY has now closed higher in 16 of the past 22 days (73%) since bottoming in early October. This is an unusually strong market. Over the past 1,000 trading days, there has been an average of 12 up closes over 22 days (54.5%). Strength in the stock market is often followed by more strength, and I expect to see more gains in the stock market in the next few weeks.

Friday's gains could show that traders are getting comfortable with economic growth. GDP could grow as it did in the third quarter while unemployment remains high, a combination that should keep Fed policy on hold. This is bullish for the stock market.

Friday's reversal came after GDP beat expectations and stock prices fell on Thursday. On Friday, the employment report showed that a strong economy will not be enough to lower unemployment and force the Federal Reserve's hand.

One of the Fed's objectives for quantitative easing is to reduce unemployment. October data showed there were a significant number of jobs created, but the percentage of the population in the workforce fell to a 35-year low. The report also showed an unusually high percentage of part-time jobs in the economy.

These two facts indicate that the unemployment rate might not drop even as thousands of jobs are created. Potential workers that have left the labor force could reenter the workforce when they believe jobs are available. Employers might also be able to expand their businesses without hiring by converting part-time jobs to full-time jobs, which will not impact the overall unemployment rate.

This is a difficult employment environment for the Fed to tackle, and it has tied the end of QE to lower unemployment.

If stocks continue higher, as they should for at least the next month or so, PowerShares QQQ (Nasdaq: QQQ) could be the leader into the end of the year.
The chart below shows QQQ with the KST indicator. This indicator was developed by Martin Pring, who explained its name as follows:

"Tired of hearing market forecasters talking about their indicators as if they were guaranteed to make the user rich, I called it the KST, because it stands for 'K'now 'S'ure 'T'hing. I've learned after all my years trading that nothing is a sure thing, but the indicator does offer a good charting rendition of the economic growth path that revolves around the business cycle."