Accelerate Returns by Controlling Risk

Accelerate Return-to-Risk Ratios with Higher Betas

Modern portfolio theory is based on the premise that volatility is the best definition of risk. However, like many popular assumptions, that may not be entirely true. This article will demonstrate how increased volatility, as measured by Beta, can be harnessed to provide higher returns without a commensurate increase in risk.

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Instead of Modeling Risk, Why Not Control It?

The volatility investors faced within the equity markets in 2008 and 2009 led me to think about the changes I've seen as an equity trader and manager over many years. The basic principles of investing have remained constant throughout history. Successful investing is all about risk and reward; it always has been and always will be.

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What Retail Tells Us About the Economy and Consumers

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

The month of August was no real shocker to the retail sector. Lower-priced U.S. retailers posted better-than-expected earnings while higher-end stores continues to suffer, indicating that consumers are still wary of spending which will continue to put a damper on the overall health of the U.S. economy.

Overall, retailers reported lower sales, as same-store sales fell an average of 2.9% at the 30 retailers tracked by Thomson Reuters. Although this decline was better than the 3.5% expected by analysts, half of the tracked stores missed analysts' expectations. It appears that consumers are still holding onto their wallets, shopping at discount outfits like the Gap Inc. (GAP) and TJX Co.'s (TJX) TJ Maxx, and only purchasing the essentials.

In fact, wholesale giant, Costco (COST), which is up 32% from a March low of $38.44 to close at $50.65 on Wednesday, reported a decline in same-store sales of 2% and said food and sundries were its best sellers. Additionally, higher-end stores, like the Childrens' Place Retail Store Inc. (PLCE), which was expected to see a boost in sales driven from back-to-school shopping, reported a worse than expected 8% decline in sales and much higher than analysts expections of a decline of 3.3%.

This further supports the notion that consumers are only spending on essentials and trying to perserve their disposable income. As this trend continues, it will be difficult for the economy to show a singnifcant recovery. After all, consumer spending is the bread and butter of the U.S. economy. From an investor's perspective, the SPDR Consumer Staples Select ETF (XLP), which has gained nearly 26% from its March low of $19.41 to close at $24.61 on Wednesday, is a good place to look. Additionally, the SPDR S&P Retail (XRT), which closed at $31.20 on Wednesday, up 71% from its March low of $18.27, is another good way to gain exposure to discounted retailers.

When investing in these equities, one must keep in mind the inherent risks involved. To help mitigate these risks, using an exit strategy is important. According to the latest data from www.SmartStops.net, an upward trend in the mentioned equities could come to an end at the following price levels: COST at $48.47; XLP at $24.21; XRT at $29.92. These price levels change on a daily basis and updated data can be accessed at www.SmartStops.net.

WHY BASE METALS COULD SUSTAIN FAVORABLE UPTREND

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

Base metals have witnessed a favorable uptrend and are most likely going to sustain this trend due to an uptick in demand and signs of a global economic recovery.

Most recently, the National Association of Realtors has released data indicating that the housing market could potentially be rebounding indicating that the number of homes being built is increasing. Additionally, the Labor Department has stated that unemployment levels are starting to soften illustrated by the drop in the overall unemployment rate from 9.5% to 9.4% and global demand for base metals is strengthening.

To add to this, the federal government’s “cash for clunkers” program has been a hit with consumers and has driven the demand for new vehicles up which has indirectly driven up the demand for base metals. Lastly, from a manufacturing perspective new orders and production hit their highest levels since the summer of 2007 and a private index measuring U.S. manufacturing activity rose indicating that manufacturing is heading in the right direction.

As long as the global economy continues to grow and recover and employment numbers continue to show some sorts of prosperity, base metals should continue to shine.

The upward trend in base metals can be seen through the following equities:

SPDR S&P Metals & Mining (XME), up 98% after witnessing a March low of $20.81 to close at 41.29 on Monday

iShares Dow Jones US Basic Materials (IYM) closing at $50.78 on Monday, up 79% from a March low of $28.36

PowerShares DB Base Metals (DBB) rebounding nicely from its March close of $10.95 to close at $18.24 on Monday, an increase of 67%

Freeport-McMoRan (FCX), more than doubling from a January low of $22.14 to close at $62.38 on Monday

When investing in equities, investors must keep in mind that inherent risks are involved. To mitigate these risks, utilizing an exit strategy with up-to-date price data is vital. According to the latest data from www.SmartStops.net, the upward trend in the aforementioned equities could potentially come to an end at the following price levels: XME at $37.17; IYM at $47.08; DBB at $17.20; FCX at $56.08. This price levels change on a daily basis and updated data can be found at www.SmartStops.net.

Can Sugar Remain Sweet

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

Over the past few weeks, sugar has been in an upward rally pushing the commodity to a 28-year high, but can this sweetness be sustained or is it all speculation?

From a global supply perspective, sugar is in trouble and many think that the supply shortfall will extend through 2010. India, the world’s second largest sugar producing nation, is witnessing weak monsoon rains, which are the main source for irrigation for the nation’s farmers, resulting in drought-like conditions and damaged sugar cane crop.

In Latin America, Brazil, the world’s largest sugar producing nation, is having the opposite problem where excessive rainfall is hampering harvest and creating problems for sugar crop. To put it into perspective, the International Sugar Organization has stated that global demand will exceed output by as much as 5 million tons in the year through September 2010. This demand will remain intact, if not even increase, as populations in emerging markets continue to increase and demand food.

Opponents of the rally suggest that prices will not be sustained because these sugar producing nation’s will most likely boost production of sugar, due to its current price levels, which inevitably will result in more sugar on the market in future years.

In a nutshell, for the near future, the fundamentals of the sweet commodity look appealing and it appears that supply and demand pressures should enable sugar to sustain its price levels. As for the long-term, only time will tell if production will outpace demand and influence the overall health of the commodity.

Some equities that have rallied as a result of the most recent surge in sugar are the following:

PowerShares Agriculture ETF (DBA), which is composed of sugar, wheat, soybeans and corn, is up 15.6% from a $22.50 close in March to close at $26.02 on Tuesday.

iShares MSCI Brazil Index (EWZ) closed at $59.51 on Tuesday after witnessing a $31.75 low in March, an increase of 87%.

iPath MSCI India Index ETN (INP), more than doubling from a March close of $24.13 to close at $51.00 on Tuesday

Imperial Sugar Company (IPSU), jumping 173% from its March low of $5.15 to close at 14.08 on Tuesday

One thing to keep in mind is that sugar is a commodity and commodities are known to be volatile and come with risks. To help mitigate these risks, an exit strategy is important. According to the latest data from www.SmartStops.net, an upward trend in the previously mentioned equities could potentially come to an end at the following price points: DBA at $25.30; EWZ at $55.50; INP at $49.75; IPSU at $12.78. These price levels change on a daily basis as the markets fluctuate and updated data can be accessed at www.SmartStops.net.

Three Red Flags For REITs

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

Over the past week or two, real estate investment trusts (REITs) have been the talk of the Street as many earnings reports beat analyst expectations, injecting even more optimism to a sector that has already been fired up.
As a result of relatively cheap property prices, low interest rates, and the ability to withstand the downfall of the real estate sector, many REITs have faced the threat of bankruptcy head on and beat it by selling stock and taking out additional loans. In addition to this, many prominent economists believe that the recession is coming to an end and consumers are going to start spending once again, making REITs attractive.
Although the entire sector has been in an uptrend since their lows in March when the S&P 500 hit a 12 year low, there are indicators that an uphill battle is still ahead. Unemployment rates are still unstable, as the Labor Department recently reported that initial jobless claims for this past week increased to a seasonally adjusted 558,000, higher than expected. Retail sales surprised economists by posting a decline of 0.1%, when they were expected to increase by 0.7%, marking the first setback following two months of modest gains. Lastly, home sales have been increasing but many believe this has been fueled by tax incentives, the massive surplus of foreclosures and favorable lending rates, three things that probably can’t be sustained.
Until more jobs are created than are lost, which will provide consumers with the income to spend, and businesses outperform Wall Street’s expectations through growth and revenue expansion as opposed to cost-cutting measures, which will drive the demand for office space, REITs are not in the free and clear.
Here are a few equities that illustrate the sector’s uptrend:
The Vanguard REIT Vipers (VNQ), closing at $38.40 on Wednesday, a gain of 82% from its March low of $21.15
SPDR Dow Jones REIT (RWR), rebounding nicely from a March low of $22.97 to close at $42 on Wednesday, an increase of 83%.
When dealing with these REITs, they have the same inherent risks as other equities, therefore, having an exit strategy can help mitigate these risks and preserve returns. According to the latest data from www.SmartStops.net, the price levels at which the upward trend in these equities could be in trouble are at the following: VNQ at $36.19 and RWR at $39.63. Keep in mind that these price levels change on a daily basis and updated data can be found at www.SmartStops.net

U.S.-China Energy Alliance Needed

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

As global warming advocates take center stage, governmental administrations preach clean energy reform and clean energy has become an integral part of a nation’s success, an alliance between China and the United States will create an environment where clean energy can thrive.
China and the United States are the world’s two largest producers of carbon emissions and have already adopted various programs to reduce a heavy reliance on crude oil, create new cleaner energy and improve the overall health of the environment. However, a recent study conducted by McKinsey & Company suggests that unless the two work in unison, their efforts to curb the global warming issue could potentially be stalled resulting in neither nation maximizing the its desired end results.
Although both nations, in conjunction with private investors are pursuing electrified vehicles, carbon capture and storage (CCS) and concentrated solar power, these technologies are expensive and need massive infrastructure and research which will make more sense and have amplified effects with the proper scale, standards and technology transfer that can be provided through a partnership between the two nations.
Although the emergence of electrified vehicles and CCS can, and probably will, emerge in both nations, imagine the scale and global impact that it will emerge if both worked simultaneously together. Currently, nearly 80% of oil consumed in the United States and 50% of the oil consumed in China are used to fuel vehicles. If both nations made the switch to electric vehicles, the consumption of oil would take a big hit and the momentum would likely force other nations to compete in the electrified-vehicle industry.
As for CCS, capturing green house gases is expensive and neither nation is pursuing the technology aggressively, however, this could change if both pooled their resources together.
The study also indicates that concentrated solar power may not even have a future if the two nations don’t come together, set common standards, coinvest in projects and R&D and undertake other joint initiatives.
In addition to the obvious advantages that this partnership could potentially have on the environment, from a political aspect it could bring the nation’s closer together and improve overall relations. Working together to make these technologies real will not be an easy thing to do, but will be good for the overall health of the globe.
From an investor’s perspective, some equities that could potentially benefit from the aforementioned partnership are the following:
The PowerShares Global Clean Energy ETF (PBD), which has already rebounded nicely from a March low of $8.73 to close at $16.03 on Thursday, an increase of 84%.
The iShares S&P Global Energy (IXC), up 39% from a March low of $23.11 to close at $32.17 on Thursday.
When investing in energy equities, there are various risks involved and to help mitigate these risks utilizing an exit strategy is important. According to the latest data from www.SmartStops.net, the uptrend in the previously mentioned ETFs could be in trouble at the following price points: PBD at $15.20; IXC at $30.77. These price levels change on a daily basis as the markets fluctuate and updated data can be found at www.SmartStops.net

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.