Month: October 2013

By WallStreetDaily.com

Well, so much for tradition.

Historically, September is the worst month for the stock market.

Except for September this year, that is.

The S&P 500 didn’t decline, as is the norm. It rose by 3%, instead.

Does that mean it’s time to rejoice? Not quite…

Before we get to what are historically the “best six months” for the stock market (November through April), we have to live through October.

And you know what October is?

It’s officially known as the “crash” month. And deservedly so, too.

Precipitous declines occurred in October of 1929, 1978, 1979, 1987, 1989 (on Friday the 13th, no less), 1997 and 2008.

Given such a dreadful history, and the fact that some financial models suggest that it could even happen again…

(In fact, the highest probability of a “Flash Crash” will occur on Friday, October 18 at 2:04 PM EST.)

So should we hightail it into cash and call it quits for the next 30 days?

Not a chance! We should do this, instead…

Heed the Numbers, Not the Headlines

It’s no surprise that October gets a bad rap, given all the crashes that have occurred throughout history during that month.

But the truth is, October is not historically a bad month for stocks. Quite the opposite, actually.

Over the last 20, 50 and 100 years, the Dow has actually averaged positive returns. Take a look:

The takeaway? Stocks might be prone to sudden crashes in October. But they bounce back quickly.

That means we want to stay fully invested and simply ride out any selloffs – because ugly selloffs seldom last long.

And in the rare event that they do persist, our protective stops will limit our losses.

So am I saying the smartest trade for the next 30 days is to simply stay invested?

Well, that would be a tad anti-climactic, wouldn’t it?

So let’s proceed to the trade I want to share with you today…

A Volatile Situation

Aside from a higher frequency of stock market selloffs, October is also notorious for increased volatility. Perhaps it’s because everyone’s petrified of another 1987-style crash.

But whatever the cause, it doesn’t matter.

Even if stock prices end October higher than where they started, prices are going to swing wildly on a day-to-day basis. And that’s going to manifest itself in the VIX Volatility Index.

A CXO Advisory study on seasonal patterns of volatility found that October is, indeed, the peak month.

As you can see, the VIX spikes to an average level of about 23 in October. That compares to a long-term average for the entire year of about 20.

And herein lies our opportunity…

The Best Way to Profit From Market Volatility

Presently, the VIX trades at 16. So if this month pans out to be just an average October, we can expect the VIX to rally about 40% above its current level.

Given the government shutdown and looming debt ceiling debate, it’s perfectly reasonable to expect a sudden spike, too.

We can easily capture the majority of this upside by purchasing the iPath S&P 500 VIX Short Term Futures ETN (VXX).

Since 2009, this exchange-traded note has boasted an 88.5% correlation to the VIX, according to Russell Rhoads, an instructor with The Options Institute at the Chicago Board of Options Exchange.

This means that if the VIX spikes 40%, we can expect a roughly 35% profit.

Not bad for a one-month haul. But we can actually do better.

Since we’re making a short-term speculation on the VIX spiking, we might as well get a bigger bang for our buck, right?

Well, we can do that by putting the powers of leverage to work for us by buying options on the VXX. Specifically, the November 2013 $15 calls. They’re cheap, trading right around $100 per contract.

According to Rhoads, the VXX “offers a good short-term trading vehicle to gain exposure to a potential spike in volatility.” By extension then, options on the VXX are an even better bet.

Let me prove it:

Yesterday, the VIX spiked by 4.5% around midday to 16.22. But the November $15 calls shot up by over 15%.

So by going with the options on VXX, we’re talking about the possibility to make a couple of hundred percent if October is simply an average month, volatility-wise.

Bottom line: The smartest trade for the next 30 days is to bet on a sharp uptick in volatility. Consider this your call to action.

Ahead of the tape,

Louis Basenese

The post The Smartest Trade for the Next 30 Days appeared first on Wall Street Daily.

Article By WallStreetDaily.com

Original Article: The Smartest Trade for the Next 30 Days

By HY Markets Forex Blog

European stock futures were seen opening flat on Tuesday as the US government shutdown continues, while the PMI services reports are expected to be released later in the day.

The pan-European Euro Stoxx 50 futures declined to 2,910.56 at the time of writing, while the French CAC 40 futures lost 0.04% at 4,163.87. At the same time the UK FTSE 100 edged 0.01% lower, standing at 6,419.68 and the German DAX futures rose 0.03% higher at 8,638.54.

A string of Purchasing Managers’ Index (PMI) service reports are expected to be released from Italy, France, Spain, Germany and the whole of eurozone ,  between 7:00am GMT and 8:00am GMT.

European Stock Futures – ECB Announcement

The confidence indicators showed that the eurozone was recovering, as ECB announced that rates will remain unchanged or lower levels “for an extended period of time,” Mario Draghi, President of European Central Bank (ECB) said at the press conference on Wednesday.

The jobless claim figures in the eurozone remained higher, Draghi commented. Draghi also recapped that the bank’s monetary policy will remain unchanged for as long as necessary.

Italy

Over the weekend, five ministers from Silvio Berlusconi’s People of Freedom Party (PDL) resigned as the Prime Minister Enrico Letta won a confidence vote on Wednesday.

Victory of the vote was reached by the decision of the PDL members, as well as the resigning members.

Meanwhile, on Wednesday the former Italian Prime Minister Silvio Berlusconi joined members of the People of Freedom Party (PDL) and said he would support the coalition government to avoid another political turmoil for the country.

Visit www.hymarkets.com and find out how you can start trading in the European Market  today with only $50.

The post European Stock Futures Open Flat Ahead of PMIs appeared first on | HY Markets Official blog.

Article provided by HY Markets Forex Blog

By Profit Confidential

At the very core, this U.S. government shutdown means that about one million federal employees will be told to go home without pay. Non-essential services will be stopped until further notice. This will be mainly due to a lack of funds. (Source: Committee for a Responsible Federal Budget, September 24, 2013.) National parks will be closed; museums will be shut along with many other services.

What government services will be available? Social security and the Medicare payments will be sent out to those who already rely on it. For those who are applying for it during the U.S. government shutdown, they will not have their applications processed for the time being.

As bad as all of this may sound, this U.S. government shutdown isn’t the first one we’ve seen. Since 1976, there have been 17 instances when the U.S. government wasn’t able to come to a decision on funding. Mind you, many U.S. government shutdowns only lasted over the weekend, so their effects were minimal. The last two long U.S. government shutdowns were 17 years ago and they lasted a total of 27 days. (Source: Ibid.)

With all this, there are many different opinions. With so many people sent home, the U.S. government shutdown is an immediate money-saver. But on the other hand, those who aren’t getting paid are likely pulling back on spending and that will affect gross domestic product (GDP) growth for the U.S. economy.

As all this happens, I stay far away from making political predictions, as after all, that’s all we are dealing with here—two political parties pitted against each other resulting in a U.S. government shutdown.

But in the midst of all this “noise,” dear reader, we must not forget the big picture: the U.S. national debt has sky rocketed, the government continues to post a budget deficit year after year, and the national debt continues to rise.

The U.S. has been incurring a budget deficit for a number of years now. This year, the fiscal year of 2013, will be the same. Sure, the budget deficit isn’t going to be one trillion dollars like it was in the last four years, but it’s still close to a trillion dollars.

Over the year, I’ve made various economic forecasts in these pages that have generated strong responses from my readers. One such prediction (that I started making just a few months ago) has garnered more reader feedback than ever. That prediction: the U.S. national debt will double from its current $17.0 trillion to $34.0 trillion, or about 210% of GDP, where Japan’s debt-to-GDP multiple stands today.

How can this happen and what does it mean for the small investor? Follow on to today’s “Michael’s Personal Notes” (below) for the answer.

Michael’s Personal Notes:

I often write about the crisis faced by the municipalities, cities, and states across the U.S. as they continue to register budget deficits year after year. Cities like Detroit and others in California have already filed for bankruptcy. When all of this was happening, I kept asking: when will the U.S. government bail out the troubled cities?

Well, it’s started to happen…

The U.S. government will be giving the city of Detroit $150 million for “demolition and redevelopment purposes.” In addition, it will also provide the city with almost $140 million to better its transit system. Another $25.0 million will be granted to the city to assist in its streetcar project. (Source: Newsmax, September 27, 2013.)

The economic situation for “Motor City” has gone from bad to worse. But I ask one question: if the U.S. government “helps out” Detroit, won’t other cities struggling with a budget deficit feel shortchanged? After all, they are in dire need of money too!

Take San Jose, for example. The city has been posting a budget deficit since the 2002-2003 fiscal year. The cumulative budget deficit since then to now has accumulated to a total $680 million. (Source: San Jose’s Mayor Office web site, last accessed September 30, 2013.) And it just doesn’t end at the city level. States have also been caught in the same budget deficit trap.

Credit rating firm Fitch Ratings, in assigning a revised credit rating to Connecticut, said, “The Negative Outlook reflects the state’s reduced fiscal flexibility at a time of lingering economic and revenue uncertainty. The enacted budget for the new biennium delays repayment of deficit borrowing, adds to an already high debt load, and fails to rebuild the state’s financial cushion.” (Source: “Fitch Rates $900MM Connecticut GO Bonds ‘AA’; Outlook Negative,” Fitch Ratings, September 30, 2013.)

But back to my original concern and the theme of today’s issue of Profit Confidential: how can the U.S. national debt ever get under control if the U.S. government now starts helping municipalities, cities, and states that have budget deficits? The answer is it can’t.

What does it matter to you?

In upcoming issues of Profit Confidential, I will be writing about how the U.S. is following the exact path of the Japanese economy. Both countries experienced the biggest boom-bust cycle since the Great Depression. Both responded by aggressively lowering interest rates and printing more paper money.

Today, Japan’s debt-to-GDP is 210%, while that multiple stands at 105% to 110% for the U.S. (Japan’s bust happened 20 years before the U.S. bust.) I think by following what happened to Japan on the way to 210% debt-to-GDP, and seeing which investments did well during that period and which didn’t, will be of utmost importance to my readers—and that’s what my research team is working on right now. In upcoming issues, you’ll read about what individual investors can learn from Japan’s “example” to better profit and protect themselves from today’s debt-crazed U.S. government.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big [cap] stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Article by profitconfidential.com

By Profit Confidential

I often write about the crisis faced by the municipalities, cities, and states across the U.S. as they continue to register budget deficits year after year. Cities like Detroit and others in California have already filed for bankruptcy. When all of this was happening, I kept asking: when will the U.S. government bail out the troubled cities?

Well, it’s started to happen…

The U.S. government will be giving the city of Detroit $150 million for “demolition and redevelopment purposes.” In addition, it will also provide the city with almost $140 million to better its transit system. Another $25.0 million will be granted to the city to assist in its streetcar project. (Source: Newsmax, September 27, 2013.)

The economic situation for “Motor City” has gone from bad to worse. But I ask one question: if the U.S. government “helps out” Detroit, won’t other cities struggling with a budget deficit feel shortchanged? After all, they are in dire need of money too!

Take San Jose, for example. The city has been posting a budget deficit since the 2002-2003 fiscal year. The cumulative budget deficit since then to now has accumulated to a total $680 million. (Source: San Jose’s Mayor Office web site, last accessed September 30, 2013.) And it just doesn’t end at the city level. States have also been caught in the same budget deficit trap.

Credit rating firm Fitch Ratings, in assigning a revised credit rating to Connecticut, said, “The Negative Outlook reflects the state’s reduced fiscal flexibility at a time of lingering economic and revenue uncertainty. The enacted budget for the new biennium delays repayment of deficit borrowing, adds to an already high debt load, and fails to rebuild the state’s financial cushion.” (Source: “Fitch Rates $900MM Connecticut GO Bonds ‘AA’; Outlook Negative,” Fitch Ratings, September 30, 2013.)

But back to my original concern and the theme of today’s issue of Profit Confidential: how can the U.S. national debt ever get under control if the U.S. government now starts helping municipalities, cities, and states that have budget deficits? The answer is it can’t.

What does it matter to you?

In upcoming issues of Profit Confidential, I will be writing about how the U.S. is following the exact path of the Japanese economy. Both countries experienced the biggest boom-bust cycle since the Great Depression. Both responded by aggressively lowering interest rates and printing more paper money.

Today, Japan’s debt-to-GDP is 210%, while that multiple stands at 105% to 110% for the U.S. (Japan’s bust happened 20 years before the U.S. bust.) I think by following what happened to Japan on the way to 210% debt-to-GDP, and seeing which investments did well during that period and which didn’t, will be of utmost importance to my readers—and that’s what my research team is working on right now. In upcoming issues, you’ll read about what individual investors can learn from Japan’s “example” to better profit and protect themselves from today’s debt-crazed U.S. government.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big [cap] stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Article by profitconfidential.com

By Profit Confidential

In what can only be described as a repeat of so many earnings reports last quarter, Paychex, Inc. (PAYX) beat Wall Street consensus earnings but missed on revenues. It’s the same old story: very little real growth with strong cost-cutting padding earnings. The company’s full-year outlook remained unchanged.

In the 90s, Paychex was an outstanding wealth creator on the stock market, posting consistently strong revenue and earnings growth annually. For many companies, a business matures and competition becomes fierce. However, the payroll/benefits outsourcing business is a good one, even in a slow-growth economy. For Paychex, there still is top-line growth.

According to the company, its fiscal first quarter of 2014 saw revenues grow five percent to $597.9 million. Earnings grew six percent to $162.8 million, or $0.44 per share. Consensus average was revenues of $605.5 million and earnings of $0.43 per share.

Paychex said that total sales should grow between five and six percent this fiscal year with earnings growth between eight and nine percent. That’s not bad considering the company’s 3.5% current dividend yield.

One small thing I like about this company that should be mentioned is that it makes available its form 10-Q on the same day it reports its earnings results. The 10-Q is a much more informative financial document than a press release, and it would be very useful to investors if more companies released both documents on the same day—the more disclosure the better.

Most of Paychex’s business is in the U.S. The company has an operating subsidiary in Germany, but it represents less than one percent of its total revenues.

Shareholders’ equity actually fell in the most recent quarter, but the company reported that client satisfaction and retention are at record-high levels.

Payroll service revenues grew two percent to $395.2 million, while revenues from human resource services jumped 11% to $202.7 million. The company has lots of cash on the books and no debt, which is a big deal for such a large corporation.

Two months ago, Paychex increased its dividend six percent to $0.35 a share, up from $0.33. Back in October of last year, the company raised its dividend a penny from $0.32 a share. In its latest quarter, the company repurchased 2.1 million of its own shares for $83.9 million.

Practically, I view this stock as being fully valued with a forward price-to-earnings ratio of approximately 22. The position has been in consolidation for the last 10 years, but not because the company wasn’t growing its earnings. (See “As Expectations for 3Q Earnings Season Fall, What’s the Best Investment Strategy?”)

Like so many other stocks, this one became extremely overbought in 1999 and 2000. The position lost half its value on the stock market by 2002, mostly because it outperformed so strongly in the years of the technology bubble.

Paychex is ready for a new business cycle, but it makes more money when interest rates are higher. For income-seeking investors, this is a company to watch. The company’s earnings growth picture combined with dividends is attractive, though its current valuation is a concern. With a major retrenchment in the stock, Paychex would be an attractive income security.

Article by profitconfidential.com

By Profit Confidential

October is here. Halloween and heightened stock market volatility are just around the corner. We have the ongoing debate over the budget, as the government was shut down yesterday, halting non-essential services.

There’s also the upcoming third-quarter earnings season this month. (Read “How Easy Money Is Hiding the Real Problems in Corporate America.”) As I have said in previous commentaries, I’m not that positive about third-quarter revenue growth.

The S&P 500 and Dow Jones Industrial Average are down over two percent from their October 18 record-highs and could likely head lower on the charts. With the key stock indices up over 20% this year, you know that the fourth quarter will bring surprises and volatility to the stock market.

This is not a stock market to just watch and wait for things to happen. You need to be proactive in your investment strategy and make sure your capital is protected for the future.

So here’s what to do.

If you don’t like volatility, then you may want to cash out. While you maybe made some decent gains, when you have enough and are happy with your gains, then exiting the stock market makes perfect sense. Having excess investable cash would be welcomed if the stock market corrected.

In my view, the upside potential for the fourth quarter will likely be less than five percent. Of course, this is a rough estimate, but in my view, the downside risk in the stock market is higher based on the host of market uncertainties not only domestically but in Europe and China as well.

If you are sitting on the fence, not knowing which way to go, consider sitting on the sidelines and waiting for a possible stock market correction to re-enter and add to positions instead.

If you are familiar with stock market options, you could add put options to protect against downside weakness in your stocks or a segment of the stock market. The cost is what you paid or the premium for the option.

You can also add call options if you are weary of chasing stocks but at the same time don’t want to lose out if the market edges to new record-highs. The use of call options is manageable in the total maximum risk, but they allow you to take advantage of any upward moves in the market.

While there are many factors to consider heading into the fourth quarter, just be proactive in your investment strategy.

Article by profitconfidential.com

By Profit Confidential

Countless blue chips are in consolidation mode, which is completely normal before reporting—however, some of the stock market’s best-performing blue chips have been consolidating since May.

While expectations (including my own) were that the stock market would experience a full-blown correction after such a strong breakout at the beginning of the year, we got consolidation instead. It’s another small sign that there is still underlying strength to this market. With decent earnings from blue chips, the stock market can still advance further this year.

As usual, investor sentiment is easily derailed by geopolitical events and/or the unwillingness of policymakers to enact laws (the debt ceiling, for example) that foster certainty in the marketplace. History keeps repeating itself.

These factors are beyond your control as a stock market investor, but they really do take away from business. Capital markets and corporate planning require certainty. In the absence of it, business investment just dries up.

The Dow Jones Transportation Average is looking pretty good right now. This index has provided real leadership, especially compared to the Dow Jones Industrial Average. It’s an old-school, bullish signal for the rest of the stock market. I expect the upcoming earnings from its component companies to be decent.

Getting back to blue chips; countless brand names are waiting to advance further, but these corporations have to meet or beat consensus in order to do so. Institutional investors have been very accommodating the last few quarters. Even during second-quarter earnings season, investors still bid the shares of companies that didn’t meet or beat consensus in either revenues or earnings. (See “Another Earnings Season Suggests Another Quarter of Slow Growth Ahead.”)

The Walt Disney Company (DIS) was exceptionally strong on the stock market since the beginning of the year. But like so many other market-leading large-caps, the position’s been flat since May. The Procter & Gamble Company (PG), PepsiCo, Inc. (PEP), Wal-Mart Stores, Inc. (WMT), and Colgate-Palmolive Company (CL) have all traded in a virtually identical manner.

With decent earnings results, it’s likely that the consolidation among big brand-name companies will be over and a new uptrend could develop in these leading positions. The macroeconomic backdrop, with low interest rates and exceptional central bank support, is still favorable for equities.

The flipside is that with the key stock indices at or near their all-time record-highs, an expansion of valuations has resulted, instead of genuinely good revenue and earnings growth.

Investment risk remains high in the stock market, and there is no need for investors to rush into any positions. This market is very much a hold, with no particular catalyst as a standout for buying.

Dividend-paying blue chips have the attention of institutional investors, and they’ve been the place to be over the last three years. With exceptionally good balance sheets and growing cash positions, I see no reason why stock market leadership won’t stay in this group.

Article by profitconfidential.com

By Profit Confidential

Groupon, Inc. (NASDAQ/GRPN) is up a sizzling 368% from its 52-week low of $2.60 on November 12, 2012. Many in the market thought Groupon was dead. I was not one of them; I actually saw a possible short-covering opportunity due to the massive short-selling position on the stock. All the company needed was some good news to drive the shorts to cover. Of course, this happened as Groupon reported positives in its business and strong results. The current short-selling position is 5.6% of the float as of August 30, versus 15.3% in February.

I usually view these intensive short-selling buying opportunities as a contrarian play in a company that the stock market may have judged wrong.

The key to short-selling buying success is to look for companies that have strong fundamentals but may be struggling with some poor results that can be dealt with. Of course, you won’t always be correct, but if you minimize the losses and ride the gains, then you’ll get good results.

Facebook, Inc. (NASDAQ/FB) was another case of a company with some difficulties following its initial public offering. (Read “Why Social Media Stocks Are Back on Top, Getting Stronger.”) The company had to convince investors that it could monetize its one billion users. Facebook focused on the mobile advertising market and was able to turn things around. The stock, under heavy short-selling pressure, quickly reversed course from its $18.80 low in October 2012, moving above $50.00 on Thursday.

Electric-car maker Tesla Motors, Inc. (NASDAQ/TSLA) was also seen as a fad by Wall Street and investors, as short-selling swarmed the stock. Yet the company was able to generate some excitement with its sales and plans, and the stock took off from $26.00 in October 2012 to the current $190.00 range. And if the company can still deliver, I would expect more gains to come, as the current short position is at 34.5% of the float, or 21.56 million shares.

While short-selling buying opportunities like Groupon, Facebook, and Tesla may be rare, they do happen.

In the small-cap area, you may want to consider taking a look at Blyth, Inc. (NYSE/BTH), a seller of consumer goods via direct selling and catalogs. There could be a great contrarian opportunity here, with a major short interest of 5.41 million shares shorted as of August 30, 2013, or a whopping 56.8% of the float, according to Thomson Financial.

In the youth clothing segment, consider looking at Aeropostale, Inc. (NYSE/ARO), which had a short position of 25.4% of the float as of August 30, 2013, or 14.58 million shares, according to Thomson Financial. The stock could surge if it reports better results.

Article by profitconfidential.com

By MoneyMorning.com.au

More news emerges to show that we’ve got it spot on when it comes to interest rates.

A report from Bloomberg News quotes Bank of England chief economist Spencer Dale speaking in London:

‘“If the financial markets are pricing in a sharp rise [in interest rates] because they think in the past, every time the economy’s growing quickly the bank’s raised interest rates, I think they should think again,” Dale said at an event in London yesterday. “Our forward guidance says clearly that’s not the case.”‘

If you’re not prepared to take your editor’s word for it, perhaps you’ll take the word of the Bank of England’s (BoE) chief economist. You’d think he’s got a pretty good idea about what the BoE has in mind.

Of course, even though we’re convinced that interest rates are staying low for the foreseeable future, nothing is set in stone…

That’s why it pays to think about ways to play the market if interest rates do the opposite of what we expect. Yesterday our old pal Dan Denning showed subscribers of the Denning Report a neat little way to punt on the market if the worst happens.

He wrote:

‘What’s at stake for Australia is trillions of dollars in foreign capital that has been flowing into the country since 2003. That money from hedge funds and traders has propped up Aussie stock and property prices. If the core of the financial system – the engine which allows for so much credit expansion and borrowing – becomes engulfed in a serious crisis, then all the assets that have gone up since 2009 are at risk of falling.‘

When Dan says ‘all the assets‘, he means all the assets. That includes stocks, house prices, bond prices, commodity prices…everything.

The Most Opportunities in Seven Years

But like your editor, Dan isn’t 100% sure when the worst will happen.

The truth is no one knows when it will happen. All we know is it will happen, because it’s plainly obvious that a financial system can’t go on forever the way it is now.

The question is whether it will happen this year, next year or in 50 years.

As we’ve explained to you before, if you consider the creation of the US Federal Reserve in 1913 as the beginning of the current financial mess (which many do), it took 95 years before it finally wreaked havoc in 2008.

That’s a long time to wait.

Only, if it took 95 years for it to wreak havoc, it has only taken another five years for the stock market to gain back all the losses. After all, US stocks as measured by the Dow Jones Industrial Average and the S&P 500 are now trading near their all-time highs.

Even the NASDAQ index, which collapsed so spectacularly in 2001, now only needs to climb another 31% in order to take out the all-time high. And in the world of high technology and innovation, 31% isn’t that big a deal.

This is exactly why we choose to remain in stocks.

But don’t get us wrong. Don’t for a minute think that we’re trying to tell you all stocks are cheap. But some are, especially those at the small end of the market – small-cap stocks.

In fact, we’re constantly coming across so many cheap tiddlers that we almost can’t keep up with them. It helps to explain why we’ve now got 30 stocks on the Australian Small-Cap Investigator buy list – that’s the most we’ve had in play since launching the service more than seven years ago.

That should give you some idea of the amazing value and the speculative opportunities we see on the Australian market.

But as for blue-chip stocks, we’ll agree that it’s hard to find good value there…

A Bellwether for the Australian Market?

One stock that Dan has kept his eye on in recent months is Commonwealth Bank of Australia [ASX: CBA]. Dan sees CBA as something of a bellwether for the Australian market.

The stock price is down about 5% since hitting an all-time high of $75 in August:

Source: Google Finance

As far as buying a stock at a good price goes, it’s hard to make the case that CBA shares are good value…if you’re looking for capital gains that is.

If you’re looking for income, that could be a different story. If you held CBA shares before 19 August, today you’ll collect the latest dividend cheque of $2 per share. Add that to the $1.64 you could have received in April and that’s $3.64 or a yield of 5.1%.

Like it or not, that’s better than cash in the bank, plus you’ve got the potential for capital gains by holding shares.

Naturally, share investing is a double-edged sword, because there’s the potential to lose a bunch on your investment as well. CBA shares fell from $74 to $64 in May and June. And while we told investors not to sell stocks during that period, we know that many ignored our advice. They panicked and sold.

So not only did they lose by selling low and missing out on the recovery, but they’ve also missed out on a whopping $2 dividend.

Risks You Can’t Afford to Miss

Hopefully you’ve got the message. This is why we only recommend having 20-40% of your portfolio in dividend stocks.

That’s because they aren’t cheap…you’re paying a premium. But if you buy good quality and reliable dividend payers you should be able to ride out any short or medium term downturn.

As for the growth side, this is where small-caps (or even mid-caps) enter the picture. In some cases you’ll get dividends from small-cap stocks (almost half the Australian Small-Cap Investigator stock tips pay a dividend), but the main reason to buy small-cap and mid-cap stocks is the speculative gains.

If we’re right about the general direction of the Australian market – 6,000 points by early next year and 7,000 points by 2015 – we’re certain that the small-cap and mid-cap indices will clock up even bigger gains.

As we often warn, these gains won’t come without risks. But in a low interest rate environment where central banks force you to take risks, you simply can’t afford to just sit on the sidelines and stay in cash.

Cheers,
Kris

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Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years

By MoneyMorning.com.au

Shattered glass was everywhere.

After the sound of sirens and flashing police lights grew closer, I gave myself permission to leave…and tried to put it out of my mind. Obviously, that last part didn’t work.

I’ll never forget that 20-something-year-old woman, standing there in the middle of the highway…screaming and crying…phone in hand, shaking.

The front of her car was a crumpled monstrosity. To make matters worse, she had just slammed into a Porsche – the poor thing.

Fortunately, nobody was in critical condition.

As you probably know all too well, they’re not always so lucky.

The car accident I witnessed last Friday was one of about 5.5 million motor vehicle accidents that occur in the US every year. Using 2009 numbers, these accidents involve 9.5 million vehicles and result in 33,808 deaths, 2.2 million injuries and 240,000 hospitalizations.

So What is to Be Done?

Many blame the rise in smartphone usage to be the problem. ‘At least 28% of all traffic crashes,‘ says the National Safety Council, ‘or at least 1.6 million crashes each year – involve drivers using cellphones and texting.‘

While it’s certainly true that texting, e-mail, playing music or whatever is leading to more accidents, blaming that particular technology is missing the point.

I’m sure you’ve also seen people eating breakfast while driving. Some groom themselves. Some are just not paying attention or would rather not be – plain and simple. We’ve all been guilty of one of these human tendencies at some point…

More dead-worded laws can only do so much. But consider for a moment that technology can solve what most paper proclamations can’t. For example…

Have you ever seen those signs on the road that say ‘Caution: Slippery When Wet’?

How about taking the sign away and instead putting an abrasive in the road so it’s not slippery when wet. That’s a technological solution, rather than the current sorry excuse for problem solving.

To take a more futuristic example, why not build houses out of fireproof materials? It would certainly save a lot of water…and who knows, is it conceivable that one day in the far-off future, we wouldn’t need fire departments?

Getting back to cars…how about drunk driving? Why not put an oscillator in a car that measures how much a person swerves, and pulls over when it’s too much? Or a breathalyser that measures if it’s safe for them to drive? That would save people a lot of legal trouble, not to mention more car accidents.

The point is many of our problems are technical. And it’s entrepreneurs who need to get these innovations going. Laws like ‘no texting while driving’ are well intentioned. (How does that saying go? The road to hell is paved with good intentions?)

But if we want to address the root problem, we need to upgrade our technology so it’s in sync with our environment. It’s happening right now…and I’m not talking about hands-free Bluetooth headsets…

The No. 1 cause of all auto accidents is human error. So let’s upgrade the whole car so that it drives itself!

There’s a good chance that if you live in the US, you’ve passed a driverless car without even knowing it. Google fitted a Lexus with a complex array of lasers and sensors. A LIDAR (laser radar) system that sits atop the car scans 360 degrees around to identify other vehicles, pedestrians, road hazards, etc.

The Google Lexus has logged thousands of driverless miles. Likewise, a fleet of Google Priuses with the same tech has logged over 500,000 driverless miles.

Google’s driverless technology emerged through the mysterious doors of Google X Lab. But it only took a dozen engineers to produce. They spent perhaps $50 million on the project, or less than 0.0003% of Google’s revenue, throughout the course of the entire program.

That means any other large automaker can design these cars once the market realises how incredibly superior they are. The cost of Google’s driverless car project is ‘less than a third of what carmakers have spent on Super Bowl ads over the same period,‘ according to a Forbes article.

And indeed, Big Auto is paying attention… They’re salivating over a nearly $2 trillion pie. According to Google’s lead developer of the project, Sebastian Thrun, fully automated cars would achieve three monumental feats. They’d allow us to:

• Reduce traffic accidents by 90%
• Reduce wasted commute time and energy by 90%
• Reduce the number of cars by 90%.

‘Add up all the pieces,‘ say the authors of Driverless Cars: Trillions Are up for Grabs, ‘and what do you get?

‘$450 billion related to crashes, $600 billion of car sales, $200 billion in auto-insurance premiums, the hundreds of billions of dollars of health insurance that plausibly relate to car accidents and so on – and you pretty easily get to about $2 trillion in revenue associated with cars each year in the U.S. that the Google driverless car could eliminate.‘

 How is a Driverless Car Even Possible?

Most people don’t understand that the modern-day car is a powerful computer.

It has a multimedia system, satellite navigation or GPS, dashboard and engine. Almost a third of all computing cars do is just to tell you what’s going on. Check out any automaker’s production line and you’ll see the sensors, computers and millions of lines of computer code installed.

Mercedes Benz claims, for example, that their S-Class model has over 30 million lines of code for just the multimedia system. Compare that with the F-35 Joint Strike Fighter jets. Those planes use about 5.7 million lines of code to operate their onboard systems. In that respect, a Mercedes is more complex than a fighter jet!

And because your car is a computer, it follows the awesome reliability of Moore’s law.

Moore’s law, by the way, is one trend every tech investor must know. It’s proved reliable for 70 some years. Simply put, it states that computing power continues to double every 18 months. Now that driverless cars are becoming more of a computer, it’s almost a guarantee that they’ll be on our roads within the next decade.

Here’s where it gets really interesting…

The driverless car market is shaping up to look a lot like the smartphone market with respect to the emerging business models and profit opportunities.

Big Auto has begun to pick up speed, and it’s gaining mileage on Google.

But what’s this? Tesla Motors just pulled ahead in the race, with an estimated 90% driverless car ETA of just three years!

The Space Race of the global automotive market is heating up.

Josh Grasmick
Contributing Editor, Money Morning

Publisher’s Note: The Auto Industry’s $2 Trillion Breakthrough originally appeared in The Daily Reckoning USA.

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