Introduction


The Exit Cafe is dedicated to helping investors and professionals of all experience levels be more aware of changes to their risk exposure and the importance of using an intelligent exit strategy to control and act upon risk.

The editorial manager and a frequent contributor to our blog is Chuck LeBeau, an industry leader in the application of technical analysis for risk management. We hope you find our blog enjoyable, educational and valuable. Please feel free to chime in on any stories or analysis posted.

Jul 27, 2009

COULD THE ECONOMIC DOWNTURN FINALLY BE OVER

By Kevin Grewal, Editorial Director at www.SmartStops.net

As most agree that there are two major economic indicators that will determine whether or not we are bouncing back from the worst economic downturn since the 1930’s, namely the rate of consumer discretionary spending and unemployment rates. So, how are we faring up?

In regards to consumer discretionary spending, the retail sector seems to be in an upward trend. Most recently, Coca-Cola (KO) announced a 43% increase in quarterly earnings, driven primarily by increases in global demand. Additionally, the Atlanta-based beverage maker has rallied from its March low of $38.75 to close a July 22 close of $49.13, a jump of 27%.

To add to the retail sector’s rally, Starbucks (SBUX) beat analyst quarterly earnings expectations and increased its forecast for cost savings. The Seattle based coffee powerhouse has been meaningfully belt tightening and has done a great job cutting costs through the closing of stores and renegotiating with suppliers. The company’s stock has more than doubled since witnessing a March low of $8.27 to close at $17.39 on July 22.

From a more diverse perspective, the Retail HOLDRs (RTH) ETF has gained 32% since hitting a $61.26 March low to close at $80.64 on July 22. Additionally, the SPDR S&P Retail (XRT) has rallied to a July 22 close of $29.53 from a March low of $18.27, an increase of 62%.

In regards to unemployment numbers, the employed labor force just keeps diminishing. However, it appears that the declines are starting to soften a bit and fewer pink slips are being handed out. So in a nutshell, the retail sector is in an uptrend and unemployment numbers are starting to get a bit better, two indicators that our economy is heading in the right direction.

When considering the aforementioned equities, always remember that they come with risks. To alleviate some of this risk, it is important to implement an exit strategy. According to the latest data from SmartStops.net, the upward trend in the previously mentioned stocks and ETFs will be coming to an end at the following price points: KO at $48.04; SBUX at $15.27; RTH at $78.36; XRT at $26.95. Keep in mind that these triggers change as the markets fluctuate and updated data is available at www.SmartStops.net.

Has The Tech Bubble Burst

By Kevin Grewal, Editorial Director at www.SmartStops.net

As two the most tech savvy companies miss Wall Street’s earnings expectations, is the most recent rally in technology coming to an end?

Software giant Microsoft (MSFT) reported quarterly earnings of $0.36/share terribly missing Wall Street’s forecasts as it witnessed its first ever quarter of declining sales of its Windows operating systems. Global demand for the intangible product was deeply hurt by the recession and some think that businesses and individuals are holding off on upgrading systems until Microsoft releases its 7.0 version of the software. Regardless, the stock has been in an uptrend and has bounced back from a $15.15 close in March to a July 23 close of $25.56, a jump of 69%.

To add to the disappointing earnings report, the largest Internet retailer Amazon (AMZN) missed analyst expectations by posting a decline in profits of 10%. Experts suggest that its enticing deals including low-cost products and free shipping promotions have started to eat away at profits. However, it too has been in an upward trend posting a gain of 94% after witnessing a January low of $48.44 to close at $93.87 on July 23.

On the other hand, innovation tycoon Apple (AAPL) continues to outperform analyst expectations as it smashed Wall Street’s expectation, much driven by an increase in demand for its signature iPhone and Mac products. Many say that the surge in demand for the iPhone has been caused by a cut in prices and can’t be sustained. The company’s stock has rebounded nicely, more than doubling from its January low of $78.20 to close at $157.82 on July 23.

The most recent rallies have been caused by cost-cutting measures and not necessarily increases in revenues. One must wonder, can these companies continue to implement lean measures. After all, increases in revenue are probably not likely to occur anytime soon. The Reuters/University of Michigan index of consumer sentiment decreased in July, indicating that consumers are still wary of the health of the economy and will continue to think twice before purchasing that new piece of technology.

When investing in the previously mentioned equities, keep in mind they come with risks. To mitigate these risks, implementing an exit strategy is vital. According to the most recent data from www.SmartStops.net an upward trend in these equities will be coming to an end at the following price points: MSFT at $23.58; AMZN at $ 85.01; AAPL at $146.21. These triggers change as the markets fluctuate and updated data is available at www.SmartStops.net.

Jul 17, 2009

IS IT TIME TO PLAY THE FINANCIALS

By Kevin Grewal, editorial director at www.SmartStops.net

Three of the nation’s largest banks have released second quarter earnings reports and all three have outperformed Wall Street’s expectations. Does this mean that the financial sector has emerged from its woes and is on the verge of prosperity?

Some believe so. Advocates suggest that the sector has already hit rock bottom and really can’t do anything but go up. Signs of strength have also been seen in the ability of some banks to pay back TARP loans and raise capital. Lastly, some investors are saying that banks are relatively cheap, so could possibly be a good buy.

On the other hand, the basic fundamentals of the sector are weak and from a technical perspective the sector does not seem too healthy. As companies continue to implement lean measures, unemployment numbers continue to rise and consumer confidence remains shaky, the sector will remain weak. Additionally, most of the prominent banks believe that consumer credit is still in trouble which will hinder the overall performance of the industry.

If one does consider playing the financials, keep in mind the risk involved with them. To mitigate these risks, an exit strategy utilizing stop losses is key. Take a look at www.SmartStops.net which will give you a trigger indicating that an upward trend in your financial equity might be coming to an end. Keep in mind that these triggers change as the markets fluctuate and updated data is available at www.SmartStops.net.

Here are some banks that have outperformed and have stirred up the question of whether or not to consider financials and their relative SmartStops:

Bank of America (BAC) which reported earnings of $0.33/share outperforming the $0.28/share expected by analysts. The large bank has performed well since seeing a March low of $3.14 to close at $13.17 on July 16, a jump of 319%. The SmartStop is at $11.51.

Goldman Sachs (GS) which reported a 33% increase in earnings and smashed analyst’s expectations by reporting net income of $4.93/share. The largest surviving investment bank is up 165% since witnessing a March low of $59.20 to close on July 16 at $156.84; its SmartStop is set at $142.14

JP Morgan Chase (JPM) who reported second-quarter earnings of $0.28/share, crushing Wall Street’s expectations of $0.04/share. The financial giant’s stock has more than doubled to close at $34.70 on July 16 after hitting a low of $15.90 in March; a SmartStop trigger is set at $33.88

Citigroup (C) surprised many by reporting earnings of $0.49/share and beating Wall Street’s forecast of a loss of $0.37/share for the second quarter. The company’s stock has rebounded nicely to a July 16 close of $3.03, a 197% jump from its March low of $1.02; Citigroup’s SmartStop is set at $2.76.

Jul 16, 2009

Why The Base Metal Rally Is Not Sustainable

By Kevin Grewal, Editorial Director at www.SmartStops.net

The second quarter of the year has turned out to be astonishing for base metals, but can they sustain their gains or will they slowly diminish away?

Stockpiling by the Chinese, stimulus plans, both domestically and internationally, that were heavily concentrated on infrastructure, and a drop in production helped base metals utilize basic both macro and microeconomic principles to enable a rally.

This recent rally is hardly sustainable and is most likely short-lived. The gains that have been seen in aluminum, copper, and other industrial metals have been caused by the phenomenon of reverting back to the mean; after all, the industry was badly battered due to the global economic meltdown.

Both producing and consuming companies around the globe continue to suffer from the economic woes brought on by the global financial crisis. As stated in an earlier article, corporate America is beating Wall Street’s expectations primarily due to cost-cutting factors and not revenue growth and expansion. So until the economy rebounds, corporations start outperforming due to growth and not lean measures and jobs are created, the industrial sector will continue to suffer.

Some equities that have benefited from the most recent “revert back to the mean” are the following:

The PowerShares DB Metals Fund (DBB), up from its March low of $10.95 to close at $15.42 on July 15, an increase of 41%.

Freeport-McMoRan Copper & Gold (FCX), closing at $50.91 on July 15, up 92% from a $26.49 March low.

Southern Copper (PCU), rebounding nicely from a March low of $12.74 to close at $21.83 on July 15, a jump of 71%.

Rio Tinto (RTP) up 52% after witnessing a March low of $91.91 to close at $138.96 on July 15

Alcoa (AA), almost doubling and closing at $10.15 on July 15 after hitting a March low of $5.22.

When investing in the aforementioned equities, one must keep in mind the risks that are involved. To help moderate these risks implementing an exit strategy and identifying when the upward trend is coming to an end is vital.

According to the latest data from www.SmartStops.net, an upward trend in these stocks and
ETFs would be over at the following price levels: DBB at $14.77; FCX at $47.05; PCU at $20.05; RTP at $128.01; AA at $8.97. These levels change daily and updated data is free at www.SmartStops.net.

Jul 15, 2009

A Plan for Shy Investors

By Kevin Grewal, Editorial Director at www.SmartStops.net

The Associated Press has continuously been flooding news channels with indicators that economic woes around the globe may finally be starting to ease and investment opportunities are starting to ignite. However, many wealthy investors are reluctant to jump back into the markets and are remaining on the sidelines. Why?

The underlying answer is FEAR. A recent survey conducted and released by Barclay’s Wealth indicated that 88% of wealthy investors are aware that these opportunities exist, but 68% of them are staying away from them due to fear that the markets will take another dive.
So how does one overcome this fear? It is actually quite simple. Investors should stay diversified, perform due diligence on all of their investments, and have a strategy that they stick to.

In regards to diversification, utilizing exchange traded funds, ETFs, is a good low cost way to diversify. They offer exposure to hard to reach markets and sectors, in addition to offering transparency which enables investors to perform their due diligence.

The key in mitigating risk and overcoming fear is having a good exit strategy. Not only do exit strategies stop the bleeding when the markets take a tumble like the one witnessed last year, but they enable investors to sleep better at night and effectively manage their own portfolios.

The bread and butter behind a good exit strategy is the utilization of stop-losses. Stop-losses minimize portfolio losses, act as a backstop for gains, and can be easily implemented to an existing portfolio by going to www.SmartStops.net. Not only does www.SmartStops.net offer a service which provides investors with triggers on when to get out of a position, but this data is updated daily to reflect market fluctuations.

How To Read Earnings Reports

By Kevin Grewal, Editorial Director at www.SmartStops.net

Now that the second quarter of the year is over and earnings season is in full force, could the results of publicly traded companies indicate if we are on the road to an economic recovery?

Some believe so. After all, it is corporate America that drives the economic health of our nation and history has indicated that a recovery on Wall Street generally occurs before a recovery on Main Street. On the other hand, it appears that many companies have been implementing lean measures and merely cutting costs to survive as opposed to generating higher revenues and expanding business. At the end of the day, most believe that the two driving forces behind an economic recovery are numbers and consumer confidence.

Let’s take a look at some of the companies that have released earnings and see what they may indicate. Transportation giant CSX Corporation (CSX) beat Wall Street’s expectations, however showed a decline in second-quarter earnings of nearly 20%. This performance primarily came from cost cutting measures and not any increases in revenue. In fact, the nation’s third largest railroad stated that it expects shipping demand to sink by double digits in the upcoming quarter. The company has performed very well since witnessing a March low to gain 56% and close at $32.54 on July 13. In regards to the overall economy, this means that CSX doesn’t expect business to get any busier and suggests that the economy will continue to struggle.

Financial giant Goldman Sachs Group (GS) released earnings and smashed Wall Street’s expectations. The nation’s largest surviving investment bank reported earnings of $4.93/share as compared to the $3.49 anticipated by analysts. This jump in profits can be accounted for by strong trading results, improving markets and an upswing in advisory fees. The company’s stock has more than doubled to a July 13 close of $142.54 from its January low. So what does this mean for the overall health of the economy- the worst of the financial crisis could be behind us and investor confidence may be emerging indicating that the economy could be in rebound mode.

Low cost alternative, Family Dollar Stores (FDO) reported earnings 36% higher than a year ago and 5% better than Wall Street anticipated. The company’s stock has gained 14% from its March low to close at $30.12 on July 13. This is indicative that consumer confidence is still low and consumers are still wary of the future of the economy. The average consumer is still in cost cutting and saving mode, is reluctant to spring an extra dollar if he can avoid it, and is waiting desperately for more jobs to be created and fewer jobs to be slashed.

Diversified healthcare giant Johnson & Johnson (JNJ), up 24% from a March low to close at $57.72 on July 13, beat Wall Street’s expectations as well. However, the company reported a drop in second quarter earnings by 5% to $1.15/share. JNJ stated that the decline in earnings was primarily caused by a drop in demand for their products which resulted in lower revenues. On the positive side, consumer sales were relatively strong indicating that there may be some life left in the economy.

As companies continue to beat Wall Street’s expectations, investor confidence should start to increase and this confidence should trickle down to the consumer. Additionally, as profits continue to remain healthy, corporations will have the ability to hire more employees and expand operations. In a nutshell, it seems like we are heading in the right direction, but we won’t be in the clear until consumers are confident in the economy and start spending a bit more and employers start increasing and not decreasing their work forces.

Keep in mind, if you want to play the earnings game, that they come with risks. An excellent way to mitigate these risks is to have and implement an exit strategy. According to the latest data from www.SmartStops.net here are the price levels where the uptrend of these stocks would be over: CSX at $29.36; GS at $140.67; FDO at $28.74; JNJ at $54.62. These levels change daily and updated data is free at www.SmartStops.net.

Gold Losing Its Luster

By Kevin Grewal, Editorial Director at www.SmartStops.net

As second quarter earnings reports continue to beat Wall Street expectations and encouraging economic news floods the Associated Press, the economy seems to be on then mend and gold seems to be losing its luster.

Four factors are behind the brighter market outlook.

Earnings Reports- Chipmaker Intel (INTC) reported better than expected earnings on Tuesday afternoon on an increase in sales revenues suggesting that consumer are spending more on personal computers than what analysts had expected. Additionally, it bumped up its third-quarter revenue forecasts to a range higher than what technology analysts anticipated. So what does this mean? As we all know, consumer spending is one of the major driving forces behind an economic recovery and this “bottoming out” in the personal computer industry could potentially be the start of an upward trend in consumer spending. INTC has seen a nice rally from its March low of $12.08 to close at $16.83 on July 14, a jump of 39%.

Not only are better-than-expected earnings reports logging gains in U.S. markets, but have trickled down to global markets as well.

Retail Sales- In the month of June, retail sales increased by 0.6% marking a second consecutive increase for the sector. Most experts agree that this surge in the retail sector was primarily driven by the hikes in energy prices and gasoline, but other retail sectors saw healthy gains as well. Similar to the earnings report argument, this tend indicates that consumers are starting to let go of the tight grip they have on their wallets and spending a bit extra. The Retail HOLDRs (RTH) has seen a nice rebound of nearly 26% after witnessing a March low to close at $77.19 on July 14.

Consumer Prices- Consumer prices rose by 0.7% in June marking its biggest one month gain in nearly a year, however, most experts think that this was a bump in the road and inflation really isn’t much of a concern. To further support this notion, prices are actually down by 1.4% in June compared to a year ago. Inflation is becoming less of a worry because the recession is keeping a lid on wage pressures.

Industrial Production- Granted industrial production continues to suffer, but companies are cutting back production at lower rates than expected. In June, production at America’s factories, mines and utilities fell by 0.4%, smaller than the 0.6% decline that was anticipated and a far cry from the 1.2% contraction seen the month prior. The Industrials Select Sector SPDR (XLI) has gained nearly 40% from its March low to close at $21.56 on July 14.

These four factors have painted a much shinier outlook for the future of the global economy. As a result, the demand for gold and other bullion as started to taper off and slowly diminish. Holdings in the SPDR Gold Trust (GLD), the largest ETF backed by bullion, have fallen to 1,094.54 metric tons. Additionally, India’s gold purchases in the six months to June 30 have plunged to 63.8 metric tons, less than half of the 139 tons the emerging nation purchased a year earlier.

In a nutshell, as long as corporate America continues to outperform Wall Street, making equity attractive, consumer confidence continues to climb and inflationary worries are nipped in the bud, demand for gold and other bullion will continue to diminish.

When investing in the aforementioned equities, one must keep in mind the risks that are involved. To help moderate these risks implementing an exit strategy and identifying when the upward trend is coming to an end is vital. According to the latest data from SmartStops.net, an upward trend in these stocks and ETFs would be over at the following price levels: INTC at $15.91; RTH at $74.30; XLI at $20.70. These levels change daily and updated data is free at www.SmartStops.net.

Why Mutual Funds Need To Feel Threatened

By Kevin Grewal, Editorial Director at www.SmartStops.net

The exchange traded fund (ETF) world has emerged with full force and continues to put pressure on the mutual fund industry.

ETFs are so attractive because they have opened up a new panorama of investment opportunities for all types of investors. They enable investors to grab broad exposure to stock markets of different countries, emerging markets, sectors and styles as well as fixed income and commodity indices with relative ease on a real-time basis and at a much lower cost than other forms of investing. They can be traded intraday while enabling investors to remain diversified and have full transparency. Additionally, they are so versatile that they can be bought on margin, are lendable, can be bought and sold at market, limit or as stop orders. They don’t have any sales loads and carry expense ratios in the range of 0.05% to 1.60%.

ETFs have a unique daily creation and redemption process which enables them to keep their market price in line with its underlying Net Asset Value. They can only be redeemed “in-kind” which is beneficial because it doesn’t create a taxable event.

Just to get an idea of how the ETF world has emerged here is a brief landscape of the industry. There are over 1,677 global ETFs with over 3,000 listings from 90 providers on 43 exchanges around the globe. Additionally there have been 109 new ETFs that have came to market this year and plans to launch an additional 756 new ETFs are in the making.

So why should mutual funds feel threatened? A study done by New-York based research and consulting firm Novarica indicates the following predictions for the investment industry:

· The number of mutual funds will decline from 8,022 in 2008 to 4,237 in 2015 with assets declining from $9.0 trillion to $6.75 trillion over the same period
· The number of ETFs is expected to increase to 2,618 by 2015, with assets more than doubling to $1.15 trillion
· The number of actively managed ETFs will increase to 325 by 2015, currently there are ahandful of them offered by ProShares and Grail Advisors.

To add to these predictions mutual funds have continuously been seeing outflows of assets while ETFs have been witnessing an inflow of assets. Additionally, as investors become more educated about the markets and the plethora of investment tools at their disposal, ETFs will continue to grow and remain attractive. Lastly, ETFs are finally starting to make their way into the 401(k) world, which will just be icing on the cake.

To conclude, as investors become more active in managing their portfolios and seek ways to protect themselves from market downfalls and cut risks, the underlying characteristics of ETFs will continue to enable them to grow.

A good way to cut risk out of one’s portfolio is to have an exit strategy. The way to implement an exit strategy with a portfolio of ETFs is to utilize stop-losses, which can be easily implemented by going to www.SmartStops.net. Not only does www.SmartStops.net offer a service which provides investors with triggers on when an upward trend of an ETF is coming to an end, but it is updated daily to reflect market fluctuations.