By CountingPips.com
June 7, 2011 – Economic News Reports – All Times GMT
02:30 Australia NAB Business Confidence
05:30 Australia RBA Interest Rate Decision
06:00 Japan Leading Indicator Index
06:00 Japan Coincident Index
08:15 Switzerland Consumer Price Index
19:00 United States Consumer Credit
19:45 United States Ben Bernanke Speech
23:50 Japan Trade Balance
23:50 Japan Current Account
By Carla Pasternak, DividendOpportunities.com
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| I know what income investors like. If I put a double-digit yield in the headline of an article, it will see thousands more reads than an article without a big headline yield. I can put “safety” in the headline. I can put in enormous capital gains. But yield is what really excites income investors. That’s one of the reasons I have a “10%-Plus” Portfolio in my High-Yield Investing advisory. To be included, a security has to pay double-digits at the time it’s added. No exceptions. But there’s a secret to those high yields I’d guess most income investors don’t know. Take a look below. I’ve shown the performance of my current holdings in the “10%-Plus” Portfolio (to be fair to High-Yield Investing subscribers I’ve redacted the ticker symbols). Why are the yields you see here below 10%? Nearly all the holdings in the portfolio have risen since I added them. That lowers the current yield, but those who bought when I highlighted the play are still earning 10% or more on the initial investment.
Sure, I have a losing position. No one can pick 100% winners. But I have one more list I want you to see. It’s the performance of my lower yielding “Dividend Optimizer” Portfolio. These are investments you can count on to deliver above-average income year-in and year-out, but they don’t pay out the juicy double-digit yields.
That performance is very good. But with the average returns between the two portfolios, there’s something odd happening. The “10%-Plus” Portfolio is showing an average gain of about four times the average yield. But the lower-yielding “Dividend Optimizer” Portfolio shows an average gain over five times the yield. Just a few weeks ago the average return was actually six times the yield. So despite one portfolio boasting double-digit yields (which should make the securities more attractive to investors), the performance of the two portfolios is roughly the same. My colleague Daniel Moser attributes this phenomenon to the “sweet spot” for yields — those in the 5-8% range. It’s the area where yields are not so low that they’re trivial and not so high that they make it tough for management to pay steadily increasing dividends. Most importantly, this little quirk shows you don’t want to always pass up lower-yielding securities simply because you’ve found something paying more. You can be rewarded just as handsomely by those sitting in the “sweet spot.”
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By Zac, CountingPips
The US dollar has failed to make any gains from the 80.00 level in today’s Forex trading against the Japanese yen.
In today’s action the USDJPY touched its lowest level since the May 5th lows at the 79.97 level and continues to currently sit around the 80.15 level.
Meet Albert Edwards, an investment strategist for Societe Generale (or “SocGen” for short).
Though SocGen is a French bank, Mr. Edwards is based in Britain. It is there he has developed a reputation as “the City of London’s best-known permabear” (via The New York Times).
Also via the NYT, Mr. Edwards has called for “a stock market collapse of at least 60 percent, followed by years of inflation of 20 to 30 percent as the persistent printing of money by central banks desperate to improve the situation sends prices soaring.”
Lately, though, the 60% target has been modified. Now Mr. Edwards, a friendly fellow known for his “sandals and chuckling demeanor,” is calling for an even larger drop.
The new downside target? A toe-curling 400 on the S&P, or roughly a 70% fall from recent levels.
Wild predictions aren’t meaningful in themselves, of course. With all the analysts out there hunting for press recognition, it isn’t hard to cherry-pick the extremes. Sometimes a big target is thrown out, bullish or bearish, simply for the sake of headlines. (Perhaps the most infamous call in history was “Dow 36,000,” in a book of the same name.)
The Albert Edwards case is intriguing, though, because of the logic behind his argument. The price target is not so important as getting the drivers right. If, for example, the S&P fell a mere 40% for the same reasons it was expected to fall 70%, would anyone quibble?
Mr. Edwards’ thesis could perhaps be summarized as “first deflation, then inflation.” That turn of events would be consistent with many elements pointed out in these pages.
For example, we have talked at length about how government “stimulus” does not really work, and in many instances makes the problem worse. If the economy stumbles again, we could find that all the previous money-printing has only resulted in an even bigger deflationary hangover than before (the side effect of trying to drink ourselves sober).
For another example, we have talked about the loud and clear warning message of the bond market. U.S. Treasuries have been going UP, not down, even as Washington fights over the debt ceiling. This is a counterintuitive turn of events for those who think Uncle Sam is a deadbeat. Investors have been buying bonds, not selling them, which in turn has driven interest rates lower.
Albert Edwards has been expecting this phenomenon of lower bond yields (and higher bond prices), because falling interest rates (bond yields) are a hallmark of deflation taking hold. As Edwards writes to clients:
Clearly the S&P falling to 400 destroys household balance sheets and consumption anew. And EM liquidity tightening could cause hard landings. (In China, for example, a recent calculation showed FX intervention accounted for around one-half of the country’s runaway money supply which has helped propel the boom.) My own view would be that despite the cessation of the EMs need to buy US Treasury debt as they curtail liquidity, weak economic fundamentals will drive US Treasury yields still lower in the near term. The printing presses being turned off will hit risk assets hard and that should boost Treasuries. So in my world, 400 on the S&P goes hand-in-hand with lower, not higher US bond yields. Ultimately I would concur that there is also going to be “The Great Reset” on US yields as well, but that will come after a frenzied orgy of balance sheet debauchment (both Fed and Federal) which will make events over the last three years look like an afternoon tea party with the Vestal Virgins.
In plainer terms, Edwards thinks that bond yields, already just below 3% on the 10-year note, could fall all the way down to 2%.
A move from 3% to 2% does not sound like a whole lot. But in the mammoth government bond market, that would be gigantic . Think of it like this: Going from “3.0” to “2.0” on the 10-year would mean cutting interest rates by a full third (thirty-three percent) from already depressed levels.
If that happened, we would be mimicking the experience of Japan. That is another unsettling thing: Via Japan, we can say that the Albert Edwards scenario is not unprecedented. In Japan, they saw a similar decline in interest rates from already depressed levels… and the Japanese Nikkei index lost more than 75% (three-quarters) of its value in result.
Ultimately, though, Edwards thinks out-of-control inflation still comes in the end. That is because the long-term costs of a deflationary downward spiral are too painful for any democracy to bear. Eventually the hurt gets so bad that furious voters become ready to sign on to ANY solution… anything to stop the torturous contraction.
It is at that point, when deflation pressures have become so strong that the populace is up in arms, that you get the risk of a “Weimar Germany” type scenario. Under these conditions, the economy gets worse and worse until a new crop of leaders strides forth with radical new ideas. (These ideas will not actually be “new,” of course, they will just feel new at the time.)
These “new” ideas will be seen as risky, but worth trying against a desperate backdrop as all other options are seen as failures. And that is when you get the truly “nuclear” all-in policy responses that turn the currency into confetti and send bonds crashing through the floor.
Want to know the simplest way to keep tabs on the Edwards “first deflation, then inflation” prediction? Keep an eye on bond yields.
Just this past week, the yield on the 10-Year U.S. Treasury fell below 3.0% for the first time this year. If that yield keeps falling (alongside falling stock prices), then deflationary slowdown fears are tightening their grip… and the Albert Edwards prediction may be coming true.
Written by Justice Litle for Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.
By Chris Vermeulen, thegoldandoilguy.com
Everyone knows people make mistakes when rushed to do something or if they are scared of something bad happening. We also know fear and greed is what moves the market each month, week, day and tick… So when the majority of investors are selling their shares at the same time you must recognize the psychology behind it and prepare for a low risk trading opportunity in the days that follow.
Stepping back and looking at the general vibe in the financial arena we hear about Quantitative Easing II coming to an end which should help the dollar gain strength again. A rising dollar means lower stock and commodity prices. Also keep in mind the United States is in so much trouble they will always have quantitative easing even if they are not calling it QE, that’s my opinion anyways…
In addition, everyone was talking about the saying “sell in May and go away”. Take a look at the chart of the SP500. The first session in May was the highest point and the SP500 has only gone down since then. The chart below shows my fear indicator and with the masses all selling in the month of May I have to think it’s getting ready to bottom and start another 5-6% rally from down here. Keep in mind I am more neutral on the overall market for the longer term. In the next month or two I figure we see higher prices from here but come August we could see the dollar bottom and stocks sell off in a more significant manner.
Last but not least, gold and silver…
Looking back in time and reviewing inter-market relationships with gold and silver I feel more and more investors are becoming bearish and moving their money into safe havens like gold and silver. Recently we saw a sharp pullback in both gold and silver. The price and volume action that took place was a clear sign of distribution selling meaning big money players taking money out of those investments. I see this pattern happen in stocks, indexes and commodities all the time and it generally warrants caution!
My trading buddy JW Jones over at OptionsTradingSignals.com has some very exciting ways to profit from these choppy market conditions with limited risk. If you are into options then check it out.
Typically we will see a few more new highs being reached which are quickly followed with strong selling. What happens is that the big money players allow the price to make a new high and that hits the headline news, CNBC, BNN etc…. drawing in new buyers and a surge of volume for the big money guys to sell into and exit their positions at the top. It also helps cover up their large volume selling.
Below is what I am thinking will take place in gold this summer.
Weekend Trend Conclusion:
In short, I feel the dollar will continue to slide lower, both stocks and commodities should have some strength over the next 1-2 months but after that all bets are off and it will be time to re-evaluate things.
The next week in the market will most likely make or break this outlook as the overall market is trading at a tipping point. Let’s see how this week pans out then take another look at the charts.
Chris Vermeulen
Article by JW Jones, optionstradingsignals.com
My most recent analysis regarding the S&P 500 has been proven to be inaccurate as a failed breakout has transpired on the S&P 500 this past week. While there is no such thing as a perfect analyst, I will openly admit that my most recent article proved to be wrong. After I watched as the S&P 500 broke out above the upper channel resistance area I was expecting continuation. What transpired the following day was absolute carnage in the marketplace.
Immediately after breaking out to the upside, the S&P 500 sold off sharply and by the end of the day on Wednesday a failed breakout was obvious. The failed breakout trapped momentum traders as well as those watching and waiting for the breakout to occur. The chart below illustrates the failed breakout and the subsequent sell off that transpired the rest of the week.
Most readers likely believe that I went long when the breakout was imminent before Tuesday’s close. However, over the years I rarely chase breakouts unless I see multiple days of price stabilization above breakout levels. Generally a consolidation zone above a key breakout level is bullish. However, in recent months it seems that standard technical patterns have not been working well. In fact, chasing breakouts over the past few years could have produced some ugly losses depending on the underlying and the timing of the breakout.
Armed with recent price action and concern for the S&P 500 giving back gains, I did not get long the S&P 500 for members of my service at OptionsTradingSignals.com. On Wednesday morning, I was leaning long because price action overnight was confirming the breakout. However, when preparing my morning post for members I noted the apathy in the financial complex.
I am constantly monitoring price action in the XLF and Wednesday morning was no exception. The ugly price action in XLF kept me from getting involved in a long S&P 500 trade for members. By late in the day Wednesday, the XLF ETF had proven to be accurate and prevented losses for myself and for members of my service. The chart of XLF at the close on Wednesday looked like this:
The point of the article is not to pat myself on the back for avoiding catastrophe, but to illustrate to readers how important it is to monitor various aspects of the marketplace. I generally focus on the S&P 500, the Volatility Index (VIX), the financial complex (XLF), Russell 2000 (IWM), and the Dow Jones Transports (IYT). Generally speaking a trader can learn a lot about the broad marketplace by monitoring the price action in the underlying assets mentioned above. Often times the Russell 2000 or the financial complex will throw off clues about which direction price action favors.
At first glance, we could see the S&P 500 bounce higher in coming days as it is coming into a key pivot low that dates back to April 18th. I am expecting some buying support to step in around that price level as it also corresponds with the lower bound of the recent descending channel the S&P 500 has been trading in.
While we may see further downside, the April 18th pivot low should offer a solid risk definition area for traders. If prices push lower, a short trade using a stop somewhere around or above the key 1,295 price level would make sense. Those looking to take the S&P 500 long could place a stop order below the key 1,295 price level to define risk.
Regardless of where one believes the S&P 500 is headed, using a key support/resistance level to place trades with limited risk makes a lot of sense currently. I will be patient and wait for the market to throw off clues as to which direction it favors before accepting additional risk. The primary focus for traders during periods of wild price action should be to concentrate on reducing risk and allowing others to do the heavy lifting. A trader or an investor can learn a lot about the strength of an underlying asset or index by simply watching the price action while sitting on the sidelines. The daily chart of the S&P 500 Index below illustrates the key pivot level:
Obviously the S&P 500 is coming into a key support zone, but another factor which cannot be ignored at this point in time is the U.S. Dollar Index. On Friday, the U.S. Dollar pushed significantly lower and most of the key commodities such as gold, silver, and oil all closed the day near day highs and well off of intraday lows. The U.S. Dollar Index looks vulnerable currently as its recent rally seems to be short lived and it appears to be poised to retest the recent lows. The daily chart of the U.S. Dollar ETF (UUP) is shown below:
The first 2 – 3 trading days of this week should provide us with clues in terms of price action in the S&P 500 and the U.S. Dollar. If the U.S. Dollar continues to weaken it should help support the S&P 500 and the commodity complex. For right now I’m going to sit on the sidelines and wait for the price action to setup before taking on additional risk. The key level to watch is the 1,295 level on the S&P 500 and recent lows on the U.S. Dollar Index.
With QE II winding down and price action starting off the month relatively ugly, June could shape up to be a very interesting month for investors and traders alike. I will be out later this week with an updated analysis after I see the price action the next few days. Until then, I would keep positions smaller than normal and protect capital using stop orders. Anything could happen, but this is the closest we have been to rolling over in the S&P 500 for months. I do not have my helmet on yet, but in a couple of weeks depending on price action I might have to wipe the dust off of it.
If you would like to be informed several times per week on SP 500, Volatility Index, Gold, and Silver intermediate direction and option trade alerts… take a look at www.OptionsTradingSignals.com/specials/index.php today for a 24 hour 66% off coupon, and/or sign up for our occasional free updates.
Do you trust your trading strategy?
If a trader does have trust in the method they intend on trading they will find it hard to stick to the system when hitting a period of drawdown.
If a belief is not established through the testing process – the trader may well be influenced to diverge from the system when going through a protracted drawdown.
Back-testing could help the trader become acquainted with the inescapable equity swings they will most likely meet and allows for fine tuning at an early stage of the system development life cycle.
What are the benefits of testing a system?
One benefit of manually testing a discretionary strategy is that, as referred to above, you will acquire a familiarity with the approach you mean to trade live.
Simulation testing can extend a good deal of useful statistical feedback related to a trading system and can be actioned on a mechanical or discretionary basis. There is validity in both approaches and the system you are intending to test will determine which method you utilise.
One benefit of manually testing a discretionary strategy is that, as mentioned above, you will gain a familiarity with the approach you intend on trading live.
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Please see this Forex strategy testing post for the entire article.
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The construct and initial principles of the system you intend on testing should be committed to paper before testing begins.
We will now look at a simple (example only) trading strategy to test:
• Test trade entry criteria. Inside day candle high is passed. Enter the trade if price has moved 10 points above the inside day.
• Test trade exit criteria. Exit when a 50 point trailing stop has been triggered.
• trade test hours between 07:00 – 13:00 GMT Monday – Wednesday.
The preceding simple rules could constitute the basis of testing.
Ensure you test the system on dissimilar market conditions including both ranging and trending periods.
Also test on several currency pairs as some strategies seem to test better than others on particular Forex currency pairs.
These are a few of the components I document when carrying out a manual testing session, in addition to the primary rules I specify as my trade entries and exits:
• What constituted the best exit from each trade? In other words how far did the trade ultimately go before reversing?
• Would this system bring better results, on a series of trades, with a bigger or smaller stop?
• How is the trading system affected if I remove periods of low liquidity i.e. no trading during US or European holiday periods?
• What was the maximum drawdown experienced?
• What was the biggest series of losses the system experienced?
• Does this trading strategy work well on some currency pairs and not on others?
• How did the method perform in ranging markets?
• How did the method perform in trending markets?
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For more posts:
June is going to be an interesting month… the Markets are shifting. The Dow ended lower in four of the past five weeks, and both gold and crude oil are back on the rise.
We hear bad news about jobs and the housing market. We see the government arguing about raising the debt ceiling.
And in the middle of it all, the Federal Reserve will be ending its second round of U.S. bond buying.
Last year the Fed announced a $600 billion program to buy up Treasury bonds. June is the last monthly installment. The big question is, “What will happen next?” Will the markets drop even more without the Fed’s support? Does that mean investors should be buying up gold like crazy now? Or will the U.S. dollar get an unexpected boost in value?
If you read the mainstream news wires, all of these things will happen.
Here are some headlines from the same website:
How are you supposed to act on this kind of variety? Who should you listen to?
Of course, different advisors believe in different strategies. And I’m sure your needs are very different from mine. That puts all the pressure on our shoulders to try and find the best way forward for our portfolio.
It gives you a lot of control, but also a lot of responsibility.
(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)
One management style might be able to help make things simple for you. I wrote about it in Barbarians of Wealth: Protecting Yourself from Today’s Financial Attilas, the book I co-authored with our executive publisher Sandy Franks.
It’s called the Permanent Investment Portfolio. This idea was created by Harry Browne. He wrote a book titled Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.
His Permanent Investment Portfolio strategy returned on average 9.7% a year between 1970 and 2003. That time frame includes a lot of ups and downs, like the dot-com bubble that Jared talked about on Friday.
This is what the Permanent Portfolio strategy looks like:
Now, for some time, we’ve been telling you to consider other types of investments besides long-term bonds. You can check back on our Smart Investing Daily article from mid-May for alternatives to investing in bonds.
But in general, these four areas are in perfect balance.
When the market gets confusing, and even the talking heads don’t know what kind of advice they should be giving, take a breath. This Permanent Investment Portfolio strategy can give you a good place to start and take stock of your portfolio.
Browne says, “When you depend upon one investment, one institution, or one person to see you through, you must constantly worry that your one source of security might fail. But when you diversify across investments and institutions — and keep things simple enough to manage yourself — you can relax, knowing that no one event can do you in.”
Need some proof? The biggest annual loss this method had between 1970 and 2003 was 6%.
If you’re a savvy investor who’s been around the block a time or two, then I’m sure this is the most boring investment portfolio strategy ever for you.
This is almost a “set it and forget it” plan that active investors and traders cringe at. I’m sure some of you might think this method is no better than investing in a mutual fund.
I can understand this point of view.
But I do think this strategy is valuable, even for the best and the brightest. When the markets start spinning — like we’re starting to see — this plan can be kind of like a new foundation.
It’s a chance to take a breath and prepare for whatever is next.
A balanced investment portfolio puts you in a position of strength to be able to find new investment opportunities… without being too overextended in any one area.
Poor economic reports are popping up like weeds. And part of the reason the mainstream financial media is putting out conflicting articles is that no one knows what’s next. Honestly, I don’t either. It’s one thing to believe the markets are headed lower… It’s another thing entirely to know how to pull your portfolio back up.
Bringing your investment portfolio into balance now means less work (and hopefully more profits) when the market finds solid ground.
Editor’s Note: Speaking of mutual funds, our friend Kent Lucas, editor of Safe Haven Investor, has found a way to stop paying all those high fees that cut into your annual returns. In times of inflation, which I believe we’re headed for, mutual fund gains really take a hit. Investors almost can’t afford to be paying those outrageous fees and still take home a gain for their retirement nest egg.
If you’re interested in how you can get out of forking over high mutual fund fees, read this letter from Kent.
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By Carla Pasterna, DividendOpportunities.com
This Pick Pays 6%… And Protects You From One of the Market’s Biggest Worries
As an income investor, should you be worried about inflation?
You bet.
On an annual basis, prices were up 2.7% in March. That’s the highest mark since December 2009.
Cotton prices are up more than 170% in about a year. Oil had increased by 40% through mid-April. Copper, corn and wheat prices registered double-digit gains in the first three months of 2011 alone.
In the past six months Kraft (NYSE: KFT), Kellogg’s (NYSE: K) and McDonald’s (NYSE: MCD) have all put through price increases to consumers. Nike (NYSE: NKE) and Whirlpool (NYSE: WHR) have done the same.
Walmart (NYSE: WMT) CEO Bill Simon has said he thinks inflation “is going to be serious.” He warned that recent transportation-related cost hikes will be passed through to shoppers.
That means the amount of income you’re earning may not keep pace with how much prices are rising — especially if you are retired and living on a fixed income.
If you own long-term bonds, such as 30-year U.S. Treasuries, you could see their prices fall dramatically as yields rise to keep pace with inflationary expectations.
This is what I’ve been telling my High-Yield Investing subscribers. I’ve also been telling them to look into what I think is the perfect solution if inflation rises… and a good place to keep your money, even if it doesn’t.
The Perfect Asset Class If Inflation Strikes — Or Not
That solution is an asset class known as bank loan funds. These funds buy pieces of loans made by major banks such as JP Morgan (NYSE: JPM) to large corporate borrowers.
The loans are issued at floating rates, which reset every 60 to 90 days. So if inflation increases and interest rates rise, you’ll benefit from earning higher rates. And even at current low interest rates, I’m finding securities, like the Eaton Vance Floating Rate Fund (NYSE: EFR), that invest in these floating rate bank loans and offer steady yields of around 6%.
But what if inflation isn’t a problem and interest rates don’t rise dramatically to battle it?
Worst case, you would be paid to wait, reaping high yields of 6% for your patience. At best, you would receive both high yields and capital gains as inflation expectations ramp up.
Are there risks to this strategy? Yes. A double-dip recession triggered, say, by oil prices rising to $150 per barrel, could lead to higher default rates and a decline in the price of bank loan funds. Still, this may be a risk worth taking while you can still find funds trading at a discount to their historical valuations.
Those valuations are creeping up as investors catch on to this sector. In just the first two months of this year, bank loan funds attracted $10 billion, according to Morningstar. That puts them on track to far surpass the record $16 billion of inflows for all of 2010. If inflation does accelerate, and rates increase, senior loan funds should only see more popularity.
If you invest now, you might be able to earn a nice capital gain in addition to a high yield and added safety from inflation.
Good Investing!
Carla Pasternak’s Dividend Opportunities
Disclosure: None
Much has been made of the heavy hitting political games that Democrats and Republicans have been playing in order to increase the debt ceiling and to reduce the fiscal deficit. The latest victim of the political gridlock is MIT Professor and Nobel Prize winning economist Peter Diamond.
Diamond was nominated by President Obama to fill one of two empty seats on the Federal Reserve Board of Governors. Yesterday Diamond withdrew his nomination after questions arose regarding the relevance of his background and his experience in crisis management. Diamond is an employment and behavioral economist. His appointment was opposed by Republicans last week. In response, Diamond penned an op-ed piece in the New York Times over his disappointment of the Senate Banking Committee and the confirmation process.
Read more forex trading news on our forex blog.
