Learn about – How to invest or get paid in oil stocks now, Oil seems to be breaking out of its bear market and ending 2017 at its highest level in two years. In part, the gains could be the result of unrest in the Middle East. In particular, the protests in Iran reminded investors that turmoil is possible and almost any political problem could disrupt the supply of oil.

Saudi Arabia also remains focused on supply issues in the oil markets. That country has been driving production cuts that other OPEC nations have agreed to. Saudi Arabia is also expected to bring its national oil company to the market this year and is likely to maintain production cuts to support that.

The initial public offering (IPO) of Saudi Aramco is expected to raise billions for the country. The 5% sale of the company in an IPO is a centerpiece of Vision 2030, a plan intended to reduce the dependence of the Saudi economy on oil. The plan is championed by Saudi crown Prince Mohammad bin Salman.

To prepare for the IPO, last week, Saudi Aramco converted to a joint stock company, establishing the framework to allow future investors to hold shares in the company alongside its shareholder, the government.

Sources noted the conversion was an important step in the IPO process. The deal is expected to be the largest public offering in history and could raise up to $100 billion for the Saudi government. Given the high stakes, it’s not surprising to see the country enforcing discipline on OPEC members that is intended to move the price of oil higher.

Potential Gains from Oil Without Buying Oil

For many investors, the question is where to invest money for gains as they watch the price of oil seemingly recover from its steep selloff. They could buy oil in the futures market, but many individual investors lack a way to access the futures markets.

Futures markets are leveraged markets which offer the potential for large gains. These markets also carry the risks of large losses and it is possible to lose more than you invested in the futures market. This is not usually possible in the stock market unless traders use margin accounts or exotic strategies.

Without access to the futures market, many individual investors choose to buy oil companies. This offers exposure to the price of oil, but other factors can affect the best return on investment. For example, it is possible that management errors could destroy share holder value even if oil prices rise sharply.

To limit the risk investors can build a diversified portfolio of oil companies, owning several different companies to reduce the risk of management errors in one company leading to losses. This could require a large amount of capital.

An option for smaller investors that lack capital to diversify broadly or larger investors who choose not to dedicate large amounts of capital to the sector is to buy an exchange traded fund or ETF. An ETF generally tracks an index of companies providing low cost access to a diversified portfolio.

For exposure to the oil industry, investors could buy the VanEck Vectors Oil Services ETF (NYSE: OIH) or the Energy Select Sector SPDR ETF (NYSE: XLE). These ETFs hold companies involved in the sector and offer yields of 2% and 3%, respectively.

Oil Industry Exposure and Income

Another ETF, Alerian MLP ETF (NYSE: AMLP), also offers exposure to the oil industry. The next chart shows the relationship between the price of crude oil and the price of the ETF. Notice that both tend to move in the same direction and have a high degree of correlation.

AMLP delivers exposure to the Alerian MLP Infrastructure Index which is a capitalization-weighted composite of energy infrastructure Master Limited Partnerships (MLPs) that earn the majority of their cash flow from the transportation, storage, and processing of energy commodities.

According to the fund manager, thematically, MLPs represent an investment in the build out of the US energy infrastructure, a process that is expected to unfold over the next few decades. MLPs own, operate, and build energy infrastructure assets such as pipelines, storage facilities, and processing plants.

The fund manager notes that, “Energy renaissance drives growth. Billions of investment dollars are required for infrastructure to keep pace with the boom in domestic production of natural gas and oil.” This spending will benefit the MLPs.

MLPs follow a toll road business model. They charge a fee to use their infrastructure rather than take the risk of searching for oil and gas or producing or refining the output from wells. MLPs usually have regional monopoly footprints and benefit from inflation-hedged contracts and inelastic energy demand.

This business model is summarized in the chart below.

Source: ALPS

This toll road structure creates an income opportunity for investors. The MLP structure is designed to maximize the benefits of share holders.

An MLP is a type of business venture that exists in the form of a publicly traded limited partnership. As such, it combines the tax benefits of a partnership where profits are taxed only when investors actually receive distributions with the liquidity of a public company.

A unique aspect of MLPS is that they are required to distribute all available cash to investors. MLPs can help reduce the cost of capital in capital-intensive businesses, such as the energy sector, and provide high levels of income to investors.

What is the Best Investment in Oil for Income Investors?

The characteristics of MLPs make them attractive to income investors. However, the income is dependent upon the skill of management which generates the need to diversify. AMLP offers instant diversification and could be the investment of choice for investors in this sector.

AMLP currently offers investors a yield of about 7.9%. This high level of income is not guaranteed and could vary with the business conditions of the underlying companies. However, the yield has been higher than 7.6% for the past five years as shown in the next chart.

An additional factor to consider before buying AMLP is that MLPs can require the filing of additional forms for income taxes.

An MLP is treated as a limited partnership for tax purposes.  A limited partnership has a pass-through, or flow-through, tax structure, meaning that all profits and losses are passed through to the limited partners.

This offers a significant tax advantage; profits are not subject to the double taxation scenario in which corporations pay corporate income taxes, and then shareholders must also pay personal taxes on the income from their stocks. Further, deductions such as depreciation and depletion are also passed on to the limited partners. Limited partners can use these deductions to reduce their taxable income.

Share holders in MLPs will have to file the Schedule K-1 form. This is a more complicated form than most other tax forms. K-1 forms will often arrive late in the tax season which means filing later and could require the filing of an extension or amended return.

Overall, investors should consider the tax implications before they buy AMLP or any limited partnership.

 

 

Weatherford Divests US Oil-Well Unit to Schlumberger

Weatherford International, Ltd. (NYSE: WFT) has divested U.S. oil-well business to a subsidiary of Schlumberger NV SLB for $430 million in cash, scrapping the plan of a joint venture.

In March 2017, Weatherford decided to put its North American pressure pumping and well completions operations into a venture with Schlumberger for $535 million in cash and a 30% stake in the new business — OneStim. This was an attempt to be more competitive against market leader Halliburton Company HAL and fast-emerging companies such as Keane Group Inc.

Weatherford will retain the entire leading multistage completions portfolio, manufacturing capability and supply chain and will continue to take part in the growing completions markets in Canada and the United States as well as globally.

Source: Yahoo Finance

Why this news matters to traders: The stock is in a steep bear market.

Cash can buy the company time and the stock is trading near support. Now could be an ideal time for aggressive investors to take a position in the company.

Peter Thiel’s Founders Fund Goes Big on Bitcoin

The PayPal co-founder and other Founders Fund partners bought $15 million to $20 million worth of the cryptocurrency that’s now worth hundreds of millions of dollars, according to a Wall Street Journal report on Tuesday that cites unnamed sources.

The report didn’t say exactly when Thiel or his VC firm first bought Bitcoin, whose value has fluctuated from record highs to dramatic declines in recent months. The volatility has alarmed some economists, who worry of a bubble.

Thiel and the Founders Fund, however, don’t appear to share those concerns, and are instead pitching Bitcoin to their investors as “a high-risk, high-reward wager similar to its other venture bets,” the report said.

Source: Fortune

Why this news matters to traders: Bitcoin is increasingly attracting the interest of institutional investors and hedge funds. It’s now possible to track the prices with an index maintained by the New York Stock Exchange.

It’s increasingly difficult to ignore bitcoin and investors could consider exposure through futures.

Microsoft, Google invest in precision medicine startup DNAnexus

Microsoft and GV (formerly Google Ventures) have invested in DNAnexus, which closed on a $58 million financing round with investments on Tuesday. The DNAnexus platform makes it possible for a network of enterprises to effectively gain insight from large genomic and biomedical datasets.

The investment comes as more and more major technology vendors are making moves into genomics, bioinformatics and precision medicine and hospitals IT shops are increasingly being tasked with incorporating those into the clinician workflow. 

“The financing enables further development and the launch of our translational medicine solutions, as well as expanding our footprint in cloud-based management of genomic data in clinical trials,” DNAnexus CEO Richard Daly said in a statement. “The next wave of biomedical insights is coming from cross-institutional collaborations that produce rapidly increasing amounts of multi-omics data.”

Source: Healthcare Finance

Why this news matters to traders: It’s easy to lose sight of Microsoft as investors focus on the FANG stocks which include Facebook, Amazon, Apple, Netflix and Google (whose parent company is Alphabet). But shares of MSFT have been in an up trend as well.

MSFT has proven that it will stay relevant over the past thirty years. The stock began trading in 1986 and moved from PC operating systems to the invention of the Office suite of products to the internet and now the cloud. MSFT is likely to maintain an industry leading position in the future.

Apple Just Bought This Canadian Software Startup

Apple just bought a Canadian startup that specializes in creating software development tools for coders.

Buddybuild, which disclosed the acquisition on Tuesday in a blog post, said its staff will join Apple’s Xcode engineering group. Xcode is the name of Apple’s suite of software development tools used by third-party coders to build apps for Apple products like the iPhone, Mac computers, and Apple Watch.

Financial terms of the deal were not disclosed.

Buddybuild was founded in 2015 and has about 40 employees, according to the startup’s LinkedIn page. The Vancouver-based startup raised nearly $7.6 million, and its advisors include fellow Canadian Stewart Butterfield, the founder and CEO of the popular workplace chat service Slack, according to financial tracking service PitchBook.

Source: Yahoo Finance

Why this news matters to traders: Apple is also a company that has adapted to changes in the industry since it began trading in 1980, even before Microsoft’s initial public offering.

AAPL has shown a pattern of attracting negative headlines and rallying. The recent battery problem is providing negative headlines. The acquisition of Buddybuild demonstrates the company is maintaining its focus.

MoneyGram plunges after US denies a proposed merger with a bank controlled by Alibaba

Shares of MoneyGram (MGI) tumbled Tuesday after the U.S. government failed to approve a multimillion-dollar merger with Ant Financial, an affiliate of Alibaba (BABA) controlled by its founder, Jack Ma. Ant Financial will pay a $30 million termination fee for the breakup of the deal, in which Ant Financial agreed to buy MoneyGram for $18 a share.

“The geopolitical environment has changed considerably since we first announced the proposed transaction with Ant Financial nearly a year ago,” MoneyGram CEO Alex Holmes said in a statement. “Despite our best efforts to work cooperatively with the U.S. government, it has now become clear that [the Committee on Foreign Investment in the United States] will not approve this merger.” Alibaba and MoneyGram will instead form a “new strategic business cooperation” to expand their remittance and digital payments services internationally.

Source: Yahoo Finance

Why this news matters to traders: This news had a large impact on MGI.

But, the New York Times highlighted the matter’s importance and presented a list of “who should be worried” about this news. That list included:

• Foreign companies, particularly Chinese ones, seeking to buy American counterparts. (Think also of Broadcom, which is legally headquartered in Singapore and which is pursuing Qualcomm — and has assiduously courted Mr. Trump.)
• Domestic companies looking to merge in contested situations, despite having unofficial support from the president. (Think Disney and Fox, whose proposed transaction raised antitrust concerns but garnered praise from Mr. Trump.)
• American companies looking to do business in China, who may now face retaliatory blowback.

Traders should understand this means no deal can be guaranteed and demand a higher risk premium on merger arbitrage investment opportunities.

 

Please visit our blog at InvestingSecrets.com for more market related news and services.

 

Value investing has an appealing logic to many investors. The idea is simple. Value investing generally involves searching for stocks trading at discounts to their fair value. These stocks can be bought and held until they trade at or above their fair value.

These ideas were first put forth by Benjamin Graham, a business school professor who counted Warren Buffett among his students. Graham is widely considered to be the father of value investing and he wrote widely on the topic. His work includes descriptions of strategies that he found to be successful.

Graham developed and tested the net current asset value (NCAV) approach between 1930 and 1932. He later reported that the average best return on investment, over a 30-year period, on diversified portfolios of NCAV stocks was about 20%. An independent study showed that from 1970 to 1983, the strategy gained an average of 29.4% a year.

What Is NCAV?

Graham defined NCAV in the 1934 edition of Security Analysis, the book he cowrote with David Dodd. He said NCAV is equal to “current assets alone, minus all liabilities and claims ahead of the issue.” In accounting terms this is current assets minus the sum of total liabilities and preferred stock.

Current assets are cash and cash equivalents, receivables, and inventories. They are already cash or are convertible into cash within a relatively short period of time (usually less than a year). Net current assets exclude intangible assets along with the fixed and miscellaneous assets of a firm.

Some readers may see a similarity between NCAV and working capital which is defined as current assets minus current liabilities. The difference is that NCAV deducts total liabilities (current and long-term) from current assets. 

Compared to book value, the NCAV method is a more rigorous standard. Book value can include intangible assets, which can be overstated in value. Book value includes land, property and equipment which can take considerable time to convert to cash.

In their book, Graham and Dodd pointed out that when stocks trade below the company’s NCAV they are, most likely, trading below the company’s liquidating value. This means that it is reasonable to assume that most companies can be sold off for at least the value of these assets.

They also noted there was a margin of safety in the company’s remaining assets, fixed assets like plant, property and equipment. These assets could, in time, be sold to offset any loss incurred when converting the current assets into cash.

Graham and Dodd created an investment strategy based on NCAV. When they found companies trading well below their liquidating values, they bought them.

Screening on NCAV

In the 1949 edition of his book, “The Intelligent Investor,” Graham explained exactly how to screen for buy candidates. He wrote, “…if a common stock can be bought at no more than two-thirds of the working-capital alone—disregarding all other assets—and if the earnings record and prospects are reasonably satisfactory, there is strong reason to believe that the investor is getting substantially more than his money’s worth.”

To find a reasonably satisfactory earnings record, we required companies to have positive earnings per share from continuing operations for the past12 months.

Earnings can hide operational difficulties since there can be accounting assumptions that generate earnings for some companies. To minimize this risk, we required that companies also have positive operating cash flow over the last 12 months. Cash from operations is defined as revenues less all operating expenses.

Graham also believed low debt levels would help these companies survive. Therefore, we screened for companies that have total-liabilities-to-total-assets ratio below 50%. This confirmed companies have more assets than liabilities.

We then screened for low prices, less than $2 a share. However, these stocks can be illiquid with low trading volume. Despite the risks, this can be a useful approach, again, in the long run. As Graham wrote in the 1973 edition of “The Intelligent Investor”:

“It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone—after deducting all prior claims, and counting as zero the fixed and other assets—the results should be quite satisfactory.”

Current NCAV Buy Candidates

These stocks can carry risks and to minimize the risks Graham suggested the need to follow this strategy over the long term and to own all companies that offer buy signals. Just three companies passed our rigorous screen.

Appliance Recycling Centers of America, Inc. (Nasdaq: ARCI) sells and recycles household appliances through a chain of company-owned retail stores under the ApplianceSmart name. The company operates in two segments, Retail and Recycling. Its stores offer new appliances; affordable value-priced, niche offerings, such as close-outs, factory overruns, and discontinued models, as well as special-buy appliances.

The company operates 18 ApplianceSmart stores. It also provides turnkey appliance recycling and replacement services for electric utilities and other sponsors of energy efficiency programs. This is a low priced and risky stock.

Impreso, Inc. (Other OTC: ZCOM) manufactures and distributes various paper and film products for commercial and home use in the United States and internationally. Its products include engineering rolls, wide format ink jet media, desk top ink jet media, computer paper, jumbo laser rolls, laser cut sheets, thermal fax paper, copy paper, POS, add rolls, ribbons, cleaning cards, and laser and inkjet cartridges, as well as labels, tags, and tickets. 

The company also produces custom private label bottled water; and operates an online web reference directory. It manufactures and distributes its products under the Alliance label, Impreso label, OEM brands, and other private labels. Impreso, Inc. markets its products to dealers and other resellers.

The stock’s long term downtrend can be seen in the chart below.

Rock Ridge Resources, Inc. (Other OTC: RRRI) engages in the oil and gas factoring activities. The company is also involved in the investment, exploration, and production of oil and gas; and provision of alcohol-drug treatment services.

In addition, it engages in the commercial and residential real estate investment and development activities. This is a very low priced stock that carries a great deal of risk.

A profit taking order could be used to capture a gain if this stock moves up.

Any of these stocks could be a potential winner and all worth further research. If you are uncomfortable doing your own research, there is a trading tips trading service, Triple-Digit Returns, which uses a very specific system for choosing the right stocks to trade.

Triple-Digit Returns looks for companies that are misunderstood and potentially undervalued, lost darlings, mergers or spinoffs that could benefit share holders, or companies that show signs of strong interest by insiders who know the company best and see value.

This service provides a recommendation once a week. It could be used for trading or learning how to analyze stocks since each recommendation includes a detailed explanation of the company. To learn more, you can click here.

 

 

Teva Pharmaceutical Industries Ltd (ADR) Exclusively Launches Generic Version of Reyataz Capsules in U.S. HIV Market

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has been hit with recent negative sentiment on its home front in Israel, as the company deals with protests from a workforce none too pleased that under the helm of new Danish CEO Kare Schultz, 14,000 employees of the beleaguered biotech giant around the world and 1,700 within Israel are facing layoffs.

Yet, perhaps the Israeli pharma company hopes its news today will center the media buzz around something a little more positive: the forthcoming exclusive launch of a generic version of Reyataz (atazanavir) capsules in the U.S.

Atazanavir sulfate capsules are a protease inhibitor indicated for use in combination with other antiretroviral agents for the treatment of HIV-1 infection for patients 6 years and older weighing at least 15 kg.

“The exclusive launch of our generic version of Reyataz marks our fifth generic product offering for the treatment of HIV-1 infection,” said Brendan O’Grady, Executive Vice President, North America Commercial at Teva. “Antiviral medications continue to be a focus for Teva Generics, and this is an important addition to our portfolio.”

Source: Yahoo Finance

Why this news matters to traders: With nearly 600 generic medicines available, Teva has the largest portfolio of FDA-approved generic products on the market and holds the leading position in first-to-file opportunities, with over 100 pending first-to-files in the U.S. Currently, one in seven generic prescriptions dispensed in the U.S. is filled with a Teva generic product.

The stock has been in a strong down trend but is challenging resistance.

A break out the up side could be the beginning of a significant rally in the stock from a technical perspective.

Yeti sues Walmart — again — for allegedly selling knockoff products

Yeti Coolers LLC filed a lawsuit against Arkansas-based Wal-Mart Stores Inc., IPWatchdog reports. It alleges patent, trademark and copyright violations. Yeti claims Wal-Mart is selling products that look strikingly similar to its own but are actually knockoffs.

The suit, filed in the Western District of Texas, continues an earlier legal skirmish: Yeti had sued Wal-Mart in 2016 alleging intellectual property infringement but the two sides settled in March of this year.

Now Yeti says Wal-Mart has breached the settlement agreement by continuing to sell the similar products. The products include 20- and 30-ounce Rambler cups as well as a Koozie that keeps canned drinks insulated. Go here to download a copy of the suit.

Wal-Mart (NYSE: WMT) has not yet responded to the latest suit but the two sides agreed to dismiss all of Yeti’s claims against the giant retailer in the March settlement, as long as Wal-Mart stopped selling the infringing products and provided proof to Yeti by Nov. 15. Yeti claims in the new suit those conditions have not been met.

Source: Biz Journals

Why this news matters to traders: WMT has been in a strong up trend as it challenges Amazon for retail dominance.

But, this lawsuit illustrates an important difference between the two companies. Wal-Mart can face liabilities that Amazon doesn’t, since Amazon often serves as a market place rather than a traditional retailer. Although the lawsuit is unlikely to have a material impact on Wal-Mart’s finances, it is worth watching to see if the retailer is able to break bonds with suppliers that create these issues.

Oil hits $60 a barrel for the first time in 2.5 years

Libya’s state-run National Oil Corporation said the explosion jeopardized output by up to 100,000 barrels a day. The cause of the blast was unclear, the agency said. U.S. crude oil prices spiked up to 2.5% Tuesday to more than $60 a barrel, the highest level since June of 2015. Last month, oil prices jumped after the Keystone pipeline shut down following an oil spill.

Still, prices remain low compared with $100-a-barrel prices three years ago. There’s been a glut of oil in recent years, forcing the Saudi-led OPEC cartel to cut production to lower supply. Oil crashed in 2014 and 2015 and reached a low of $26 a barrel in 2016. Prices slowly rebounded after the 14-member OPEC group agreed to limit production. OPEC agreed in November to extend those cuts until the end of 2018.

Libya is one of two countries in OPEC that doesn’t have a cap on oil production because of unrest.

OPEC originally tried to flood the market with cheap oil in the face of the U.S. shale boom, but backpedaled on the strategy as it became clear it was waging a losing battle.

Source: CNN Money

Why this news matters to traders: Saudi Arabia is targeting a price of $75 a barrel and the news from Libya demonstrates the fragile nature of the market makes that target possible.

Higher oil prices could slow global economic growth and choke off market rallies around the world. A decisive breakout to the up side should be considered a warning for stock market investors.

Is the iPhone X a disappointment? Investors think so

Shares of Apple and its suppliers tumbled this week after multiple industry analysts predicted weak demand for the new flagship iPhone. Apple’s (Nasdaq: AAPL) stock sold off on the reports/

The radically redesigned iPhone X was supposed to give Apple a boost following a couple years of sinking sales. Early sales reports were positive, and Morgan Stanley reported last week that the iPhone X is especially hot in China.

But the first wave of demand among Apple fanatics seems to have passed, and analysts are skeptical that more casual iPhone customers will upgrade to the iPhone X. Citing the iPhone X’s super-high $1,000 price and confusing features, a Sinolink Securities analyst predicted that Apple will ship just 35 million iPhone X devices in the first three months of 2018, roughly 10 million fewer than previously expected.

JL Warren Capital now estimates Apple will deliver just 25 million iPhone Xs. Jefferies is slightly more bullish, expecting Apple to ship 40 million.

Source: CNN Money

Why this news matters to traders: Apple is the largest stock in the market and an important component in major indexes. A breakdown in the stock could doom the bull market.

Traders should watch for a recovery in AAPL or be prepared to take defensive measures of resistance holds for the stock.

Workhorse Group Announces Intention to Spin Off SureFly Business

Workhorse Group Inc. (Nasdaq: WKHS), an American technology company focused on providing sustainable and cost-effective electric mobility solutions to the transportation sector, has announced its intention to spin off its aviation division, which includes its SureFlyTM personal helicopter, into a separate publicly traded company named SureFly, Inc.

SureFly, Inc. is currently an indirect wholly owned subsidiary of Workhorse. In conjunction with the overall spin-off plan, Workhorse expects to retain a portion of SureFly, Inc. common stock and will distribute a portion of such common stock pursuant to a dividend to existing Workhorse shareholders.

Third party investors, bringing new capital, will likely constitute the balance of the ownership of SureFly, Inc. 

Source: Yahoo Finance

Why this news matters to traders: WKHS has struggled since going public nearly two years ago.

But, spinoffs can unlock value and this initiative could push the stock out of the bottoming formation seen in the chart for most of 2017.

RBS to pay $125 million to settle California mortgage bond claims

Royal Bank of Scotland Group will pay $125 million to resolve claims that it made misrepresentations while selling mortgage-backed securities to two large California pension funds, the state’s attorney general has announced.

The settlement announced on Friday by California Attorney General Xavier Becerra was the latest by RBS aimed at resolving claims stemming from its sale of mortgage-backed securities, which were at the heart of the 2008 financial crisis.

Becerra’s office said those securities were typically backed by thousands of mortgage loans of varying quality in which the buyer relied on the assurance that those mortgages were carefully screened and were not overly risky.

Source: CNBC

Why this news matters to traders: Settlements continue to lift the outlook for bank stocks.

RBS is a potentially cheap play on Brexit and the ongoing recovery in Europe.

 

Please visit our blog at InvestingSecrets.com for more stock related news and services.

 

When searching for the best return on investment as the Federal Reserve raises interest rates, fixed income investors will get both good news and bad news. Because interest rates are so low, let’s start with the bad news first.

Investments with high rates of return in the current market environment are also most likely to be the investments that carry the greatest risks as interest rates rise. This is because of the fact that the price of fixed income investments moves in the opposite direction of interest rates.

The Relationship Between Prices and Interest Rates

We often hear that when rates rise, prices fall. But, we rarely see an explanation of why that is so. Consider a bond that is issued by a high quality company that will pay investors an interest rate of 4% for the next ten years. Each bond costs $1,000.

The interest rate on the bond will compensate investors for lending the corporation money. The interest rate will also include compensation for inflation and compensation against the risk of default. The first factor is often called the real interest rate and won’t change for the life of the bond.

We will ignore the risk of default for now and focus solely on the part of the interest rate that is compensating investors for the risk of inflation. If inflation rises, the purchasing power of the interest payments received by the investor will decline.

Let’s say when the bond was issued, the rate of inflation was just 0.5% a year. But, two years later, inflation rises to 5%. That means the 4% that the bond currently pays has fallen below the rate of inflation and the holder of the bond is losing purchasing power by holding the bond.

Rather than continue falling behind as inflation rises, the investor decides to sell. But, what is the bond worth now that inflation has increased? The simple answer is less.

Source: Securities and Exchange Commission

The longer answer is that the bond will be priced to be competitive with new bonds that were issued. There are now eight years left to maturity for this bond. Companies issuing bonds now will be paying interest rates that reflect the higher rate of inflation.

So, another high quality company might issue a bond with eight years to maturity with an interest rate of 8.5%. In order to entice another investor to buy the bond that pays 4% interest, the seller will need to lower the price so it is more appealing.

If the price falls to $470, the $40 in annual interest payments will provide a yield of 8.5%. That 4% bond that was bought just 2 years earlier lost more than half of its value because interest rates rose.

That is the bad news for investors in fixed income investments as interest rates rise. The value of their investments will fall. The more rates rise, the more the value of their investments will decline.

Inflation Is Just One Factor in the Price Decline

Earlier, we noted that investments with high rates of return in the current market environment are also most likely to be the investments that carry the greatest risks as interest rates rise. This is true because of the risk of default.

Companies that pay a higher than average interest rate will generally be the companies that have higher than average operating risks. For example, the bonds of a company that offers auto loans to subprime customers will be riskier than the bonds of a company that finances prime credit risks.

This is because as interest rates rise, the cost of servicing debt can become more expensive. The subprime lender may need to borrow at higher and higher rates and then try to pass those costs on to their customers. Eventually rates will get too high and customers will stop borrowing.

As that happens, the company will start to pare back its staff. This will result in layoffs at that company. But, that is just one company. The same process will be playing out at thousands of other companies and the result will be an increase in unemployment.

Increased unemployment is likely to leave some customers of the subprime lending firm unable to make their payments. They default, and as the number of defaulting customers rises the company finds it difficult to pay its lenders. This leads to the potential default of the company’s bonds.

Investors in bonds understand this risk and they price that risk into the prices of bonds. As defaults rise, the risk premium rises. That bond that saw its price fall from $1,000 to $470 could fall even further as default risks increase. It might be worth just $350 in the market, leaving investors with large losses.

The Good News Is New Bonds Deliver More Income

As rates rise, newly issued fixed income investments will offer higher yields. One way to benefit from this is with exchange traded funds (ETFs) that are rapidly buying new fixed income investments as they are issued. These will often be ETFs that focus on short term investments tips.

Holdings of these funds will include fixed income securities like Treasury bills maturing within days or weeks, overnight loans to banks or other products that carry relatively little interest rate risk since they are exposed to the market for a short period of time. They also manage default risk by limiting most investments to high quality instruments.

The chart of one of those ETFs is shown below. This is a weekly chart of PIMCO Enhanced Short Maturity Active ETF (NYSE: MINT).

As you can see, the ETF has been steadily rising in value since the Fed began raising rates two years ago. The actual gains have been small, however. The total return of MINT over the past two years has been just about 3.8%.

For investors willing to accept more volatility in pursuit of the best return on investment, the VanEck Vectors Investment Grade Floating Rate ETF (NYSE FLTR) could be an alternative.

FLTR has gained about 6.3% since the Fed began raising short term rates.

These ETFs are an example of floating rate bond ETFs that are generally composed of floating rate securities. A floating rate security is one that has interest payments that change periodically. These rates will reset to a higher level quickly as interest rates continue to rise.

For the past two years, floating rate ETFs have been moving up in price slowly, in line with the slow pace of interest rate policy changes of the Federal Reserve. However, the Fed is expected to accelerate the pace of its increases in 2018.

Analysts currently expect three rate hikes in the next year. The Fed also told the market to expect three hikes in its most recent forecast. There have only been five increases over the past two years. The faster pace could boost returns on short term rates.

Short term funds like MINT or FLTR hold investments that mature quickly. They are often holding investments that mature in days. In many ways, these funds will be the first to react to changes in Fed policy and that makes them ideal to, in effect, invest alongside the Fed.

Another benefit of these short term funds is that they offer a relatively high degree of safety. Losses, if any, should be expected to be small if the Fed unexpectedly reverse course. This means these could be the ideal place for investors to place cash as they search for investments with high returns.

 

For more investment opportunities tips, you can follow our weekly blog here. 

 

 

 

 

White House, GOP celebrate passing sweeping tax bill

Republican lawmakers joined President Donald Trump on Wednesday afternoon to celebrate their largest legislative achievement of 2017, in a public ceremony spotlighting the most sweeping overhaul of the US tax system in more than 30 years.

“It’s always a lot of fun when you win,” Trump said at the ceremony on the White House lawn, after thanking congressional leaders including Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan.

Why this news matters to traders: Many analysts attribute the market rally this year to hope of tax reform. Now that we have reform, it’s likely analysts will begin increasing estimates in companies set to benefit from lower rates.

This is the largest reform package in more than 30 years and the last reform package in 1986 was followed by an extended bull market.

That rally was followed by the October 1987 crash but the crash was not related to tax reform. If history repeats, the rally following tax reform could be significant.

Airbnb Apartment Complexes Could Soon be Coming to the U.S.—Thanks to a $200 Million Investment

Airbnb has announced a $200 million investment that it says will help bring the home-sharing company’s branded apartment project to cities across the U.S. Airbnb recently teamed up with Miami-based developer Newgard Development Group to launch a brand of residential complexes called ‘Niido Powered by Airbnb’ that are specifically designed for home sharing.

Niido received the cash injection from real estate investor Brookfield Property Partners and the first $20 million is committed toward a 423-unit building in Kissimmee, Florida, which is already under construction.

“This is going to be part of the future of housing, not only in Florida, but also across the country,” Chris Lehane, Airbnb’s global head of policy and public affairs told Mercury News.

Source: Fortune

Why this news matters to traders: Airbnb is simply reacting to demand in the market place. Traders wanting to follow the company into apartments could buy Apartment Investment and Management (NYSE: AIV), a real estate investment trust or REIT.

AIV offers a yield of more than 3.2%.

SEC suspends trading of red-hot bitcoin stock

The Securities and Exchange Commission suspended trading Tuesday of The Crypto Company until January 3, citing “concerns regarding the accuracy and adequacy of information” about compensation paid to promote the firm and plans for insider sales.

Shares of The Crypto Company (CRCW) have surged nearly 160% in the past five days, more than 1,800% in the past month and 17,000% in the past three months, as investors and traders have bid up the price of bitcoin (XBT) higher and higher.

That stunning rise has lifted the company’s market value to more than $11 billion. To put that in perspective, that’s higher than the market value of well-known brand name companies like Macy’s (M), The New York Times (NYT)and Under Armour (UAA).

Source: CNN Money

Why this news matters to traders: Crypocurrencies remain a hot market but the SEC is beginning to take an interest in the industry. New regulations are a risk that investors need to consider. Penny stocks seeking to benefit from the trend could accelerate regulatory efforts.

Brexit: UK plans to soften impact on European banks

The Bank of England is to unveil plans allowing European banks to operate in the UK as normal post-Brexit. The BBC has learned that banks offering wholesale finance – money and services provided to businesses and each other – would operate under existing rules.

It means EU banks operating through branches can continue without creating subsidiaries – an expensive process. Branches offer an easy way for banks to move money around their international operations.

But they present the risk that, in the event of a financial crisis, funds are quickly repatriated to the foreign bank’s headquarters – leaving customers of the UK branch out of pocket. Subsidiaries are forced to hold their own shock-absorbing capital which can’t cut and run – they essentially become UK companies.

Changing from a branch to a subsidiary could cost billions for a bank like Deutsche Bank, for example, which employs 9,000 people in the UK. Currently, banks based anywhere in the EU can sell services to anywhere else in the EU thanks to an instrument known as a financial services passport. Now, that will stay the same after Brexit.

Source: BBC News

Why this news matters to traders: Lower costs could entice banks to remain in Britain. This could help boost shares of banks like Deutsche Bank (NYSE: DB) which seems to be bottoming.

As risks of Brexit diminish, new buys could emerge among banks and other sectors.

Regulators approve big banks’ living wills — with a warning

Federal regulators approved the resolution plans of the eight largest U.S. banks on Tuesday, but faulted half of them for areas that need improvement.

The Dodd-Frank Act required banks with more than $50 billion of assets to provide a detailed plan, known as a living will, of how they could be dismantled without government help if they began to fail. The plans must be signed off on by regulators.

In its latest evaluation, the regulators said the plans of the eight biggest institutions passed muster, but cited areas of improvement for Bank of America, Goldman Sachs, Morgan Stanley and Wells Fargo. All four must revise their resolution plans when they make their next submission in 2019.

Source: American Banker

Why this news matters to traders: As the banks address the issues, their stocks could rally. For example, “the agencies criticized Morgan Stanley’s legal entity structure, which it said “contains 27 material entities,” and could increase “the inherent risk of misallocating resources.”

The agencies said that structure “raises questions about the firm’s ability to execute its strategy across a range of scenarios.” The firm was instructed to “include consideration of the risk of misallocating resources to [material entities] within its complex ownership structure and identify mitigants to that risk” in their 2019 submission.

Announcing progress related to this issue could prompt a rally in the stock.

Other banks could get similar boosts and could be considered for investment opportunities.

Intel CEO promises the company will ‘take more risks’ in 2018

In a year-end memo to employees this week, Intel Corp. CEO Brian Krzanich promised that 2018 would be a year of change for the company, as it aggressively explores new growth markets.

“It’s almost impossible to perfectly predict the future, but if there’s one thing about the future I am 100% sure of, it is the role of data,” Krzanich wrote, according to CNBC. “Data is becoming the most valuable asset for any company. … Anything that produces data, anything that requires a lot of computing, the vision is, we’re there.”

Intel is “just inches away” from becoming what Krzanich called a “50/50 company,” meaning that half of its revenue comes from traditional legacy products, like PC microprocessors, and the other half comes from growth markets, like artificial intelligence and self-driving cars.

“The new normal for Intel is that we are going to take more risks,” he wrote. “The new normal is that we will continue to make bold moves and try new things.”

Source: Silicon Valley Business Journal

Why this news matters to traders: Intel has been delivering gains to investors and the company’s renewed energy could allow that trend to continue.

Nebraska Sticks To Keystone XL Decision

The Nebraska Public Service Commission upheld its November decision to allow the construction of the controversial Keystone XL crude oil pipeline, although it demanded a change of its route. Now the watchdog has upheld its decision in the face of opposition from the project developer, TransCanada, which wanted to build the pipeline along a shorter route.

However, Nebraska landowners who had challenged the original route considered the regulator’s decision to be a victory. Lawyers for these landowners told media after the decision was announced that it was the worst possible one for TransCanada.

Still, the Canadian company said the change of route will not have an impact on the project costs and they will remain around US$6.3 billion.

Keystone XL is planned to carry Albertan crude through Montana and South Dakota, ending in Nebraska, where it would connect to the existing pipeline network that goes on to the Gulf Coast.

The company has yet to make the final investment decision on Keystone XL, after it spent four months in open season to see if there is sufficient interest from potential buyers of the crude the pipeline will transport.

Source: OilPrice.com

Why this news matters to traders: Transcanada Pipeline is under increasing pressure to make a decision and the stock is near an important break out.

A decision would lift uncertainty from the stock and potentially spark a rally, no matter what the decision is.

 

Please visit our blog at InvestingSecrets.com for more stock related news and services.

As the end of the year approaches, many investors are reviewing their portfolios. They are deciding how to allocate their funds in the year ahead and where new investment funds should be placed. This is especially important at this time of year as many retirement accounts should be assessed at least annually.

While investors should review their investment options from time to time, at least some fail to do so. This can create large risks when it is time to retire. Failing to plan for retirement as it approaches could lead to working longer, a penalty no investor wants to pay.

First, Determine Risk Tolerance

Many investment advisers use standardized risk assessment forms to identify the tolerance of their clients. An example of part of one firm’s questionnaire is shown below.

Source: Raymond James

These questions are useful and firms have developed algorithms to interpret the answers. But, the forms have an important limitation in that the questions are theoretical. Investors are asked to assess how they would feel about certain events.

In reality, when the events occur, investors have different feelings than they expected. This leads to problems and could lead to decisions that act against their long term interests.

One way to think of risk is to consider the time left to retirement. This could be the most important factor in determining the best investment options for you as an individual.

Time to Recovery Could Be a Tool to Manage Risk

One recent research report considered how often market declines of various depth occurred and, perhaps more importantly how long it takes, on average, to recover from the decline. Average recovery times are shown in the next chart.

Source: AAII.com

Recovery times provide a different and important way to look at the risk of the stock market. Usually, risk is reduced to numbers like the standard of volatility of returns or the largest historic loss in percentage terms. These are important values but difficult to use when planning your best investment options.

Time to recovery shows the length of time it took, on average, for the stock market to recover after making a low.

The author of this research, the noted analyst Sam Stovall, explained:

“The 56 pullbacks since December 31, 1945, dragged down the market by an average of 7%, taking about one month to go from peak to trough. However, the S&P 500 then took an average of only two months to recover all that was lost during these declines.

What’s more, the market took only about four months to recover fully from declines of 10.0% to 19.9%. So in greater than 85% of all declines of 5% or more since World War II, the market got back to breakeven in an average of only four months or fewer!

Finally, the S&P 500 took an average of only 14 months to recover from the more typical “garden-variety” bear market (declines of 20% to 39.9%), causing one to conclude that if an investor can’t wait a year, then they probably have no business investing in equities!”

His last point is emphasized because of its importance. If an investor can’t wait a year for a recovery, they should not accept the risk of a decline. The cost is just too high.

Now, this way of thinking offers information related to your best investment options as you approach retirement. Notice that the steepest bear markets last an average of 23 months and require an additional 58 months to recover.

In total, this time period covers 81 months, or just under 7 years.

If you are within 7 years of retirement, you need to be less risk tolerant. Prior to that time, on average, you have time to recover from a bear market. After that time, the risks could exceed the potential best return on investments.

Your Best Investment Options for Next Year

Assuming you can tolerate the risk of the stock market, your best investment options in 2018 most likely lie in the stock markets.

But, consider looking outside the United States in the next year. Many investors in the US dedicate an excessive allocation to their home country. This isn’t a concern limited to US investors.

According to data from the IMF’s Coordinated Portfolio Investment Survey, US investors allocated over 70% of their equity assets to the US even though based on market capitalization the US represents less than 50% of the opportunity set.

Canadian and Australian investors exhibit similar levels of concentration of equity exposures (60%-70%) in their domestic markets despite these markets representing only 3.3% and 2.4% of the global opportunity set based on their respective weights in the MSCI ACWI index.

Looking ahead, long term charts indicate Japan could be among the best investment options in the future.

The Nikkei 225 Index, a benchmark index for the stock market in Japan, peaked in 1989. The index recently broke above its 1996 high. This is a bullish indicator for technical analysts.

Based solely on chart analysis, the Nikkei could gain more than 20% in the next year. This is based on the measured move from the breakout point, a common technique applied in technical analysis.

Outside of the stock markets, there are many investment options available although few are screaming buys as we enter 2018.

Bonds and Commodities Raise Caution Flags

Bonds have been in an extended bull market for more than 35 years. But, the Federal Reserve has now been raising rates for two years. This could be a problem for the bond markets.

Bond prices fall as interest rates rise. This means bonds may fall as central banks around the world raise rates or pursue quantitative tightening policies. Quantitative easing, the central bank policy of buying other asserts rather than changing interest rates to effect policy changes, has been an experiment.

By many measures quantitative policies have been successful. However, there is no precedent for how markets or the economies of different nations will react to an end of these policies. There are theories and there are risks. Investors looking to avoid risk may find short term fixed income instruments are their best investment options.

Short term instruments will offer low yields. This may be disappointing but for investors approaching retirement, return of capital may be more important than return on capital.

Risks related to loss of capital also extend to commodity markets. The chart of gold is shown below.

This is also a long term chart and shows a multiyear trading range for the metal. Many commodities show similar chart patterns. One problem for these markets is bitcoin.

While bitcoin is a new investment, it appears to be perceived as, at least in part, a store of value. This is one of the functions of gold, and by extension, other commodities or commodity indexes held. For now, bitcoin represents a threat to that role and could be weighing down the price of gold and commodities.

Avoiding the risks of bonds and commodities reinforces the emphasis on the equity markets as the best investment option.

However, there are concerns that stocks, particularly in the US, are overvalued. That indicates now is an ideal time to consider overcoming the home country bias and increasing the amount of investment allocations to overseas markets.

Looking abroad, Japan could be one of the best investment options in 2018. The country appears to be breaking out of a multiyear bear market that dates back to 1989 and could be among the best performing markets for years to come.

 

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Western Digital and Toshiba to reportedly call a truce

Western Digital Corp. (Nasdaq: WDC) and Toshiba Corp. will reportedly call a truce as the Japanese company battles to sell its $18 billion chip unit. Toshiba’s board on Wednesday approved a framework for a settlement, according to Reuters sources. San Jose-based Western Digital has been the primary hindrance between Toshiba and a planned sale to a group of bidders led by Bain Capital.

Apple also participated in the Bain bid, with an estimated $3 billion stake, as did Dell Technologies. The new settlement requires Western Digital to abandon arbitration claims seeking to stop the sale, per the report. In return, Toshiba will allow Western Digital to invest in a new production line for advanced flash memory chips scheduled for 2018.

As part of the settlement, Toshiba and Western Digital would also extend existing agreements for joint chip ventures in central Japan — the current agreements are set expire starting in 2021. Western Digital would also invest in a new chip plant Toshiba plans to build in northern Japan in 2018.

Source: Silicon Valley Business Journal

Why this news matters to traders:  WDC was in an up trend prior to Toshiba’s efforts to sell the division. The stock has been under pressure since then.

News that the issue will be resolved could lift the share price of WDC.

Disney-Fox Combination Would Create Formidable Rival For Netflix

Internet television network Netflix (Nasdaq: NFLX) has gotten so big in streaming video that it would take a company with deep resources to give it a run for its money. Enter the rumored merger of Walt Disney (NYSE: DIS) and 21st Century Fox (Nasdaq: FOXA) assets.

Disney reportedly is interested in acquiring certain entertainment assets from 21st Century Fox, including movie studio Twentieth Century Fox, cable networks FX and National Geographic, as well as Fox’s stake in UK-based Sky and India’s Star TV. Fox would keep its sports, news and broadcast networks, according to media reports.

CNBC said Tuesday that a purchase agreement worth about $60 billion could be announced as soon as next week. “The acquisition of the Fox entertainment assets and a controlling stake of Hulu would make Disney a much more formidable and dangerous competitor down the road on streaming,” GBH Insights analyst Daniel Ives said in a report Thursday.

The addition of the Fox assets would create a “content rich competitor” to Netflix as Disney prepares to launch a direct-to-consumer streaming video service in 2019, Ives said.

Source: Investor’s Business Daily

Why this news matters to traders: Walt Disney has struggled for almost two years, since the time that investors realized the company’s cash cow, ESPN, was under siege.

This acquisition could provide a long term boost to Disney’s earnings, pushing the company into the top tier of streaming video and allowing the company to overcome the problems at ESPN.

Lululemon Stretches the Right Muscles

You don’t have to look too hard these days for signs trouble is brewing in the athletic apparel business.  

So is it time for Lululemon Athletica Inc. — poster child of the now-waning “athleisure” fashion trend — to start sweating?

The company delivered upbeat quarterly results on Wednesday, including an 8 percent increase in comparable sales from a year earlier. It’s that there is much to like about Lululemon’s position in the marketplace relative to its competitors.

For one, Lululemon (Nasdaq: LULU) is apparently sitting out of an expensive marketing arms race seen elsewhere in the sector. Simeon Siegel, a retail analyst at Nomura Instinet, found in a 2016 analysis that Nike, Adidas AG and Under Armour each maintain rather hefty marketing budgets, spending 10 to 11 percent of total sales. By comparison, Siegel found the non-athletic companies he covered tend to spend about 3.5 percent of annual sales on marketing.

Source: Bloomberg

Why this news matters to traders: LULU is a standout in a sector that is struggling. As Bloomberg notes, “Dick’s Sporting Goods Inc. is cranking up the discounts to lure shoppers back to its struggling stores. Nike Inc. is scrambling to offer more innovative products and reduce its dependence on “mediocre” retailers. The stock prices of Under Armour Inc., Foot Locker Inc., and Finish Line Inc. have been slammed this year, each tumbling precipitously in response to disappointing sales.”

LULU on the other hand could be prepared to challenge its all time highs.

LULU has been delivering financially and as long as it continues to do so, the stock price should remain in an up trend.

UnitedHealth‘s Splish Beats CVS-Aetna’s Splash

UnitedHealth (NYSE: UNH), a $214 billion company recently announced  that it’s buying DaVita Inc.’s physician-network business for $4.9 billion. It’s just the latest step in UnitedHealth’s push to diversify its revenue. Thanks to deals over the past few years, the company isn’t just the largest private U.S. health insurer, it’s also a pharmacy-benefit manager, a health care analytics company and increasingly a provider of medical care through physician clinics, outpatient services and urgent care centers. 

UnitedHealth has proven that diversification does more than just create new revenue streams — it also offers cost, information, and convenience advantages that can in turn bolster the appeal and performance of the insurance unit.  The problem for CVS-Aetna is that UnitedHealth had the idea first, and the DaVita deal is a reminder that it has no intention of slowing down.

Source: Bloomberg

Why this news matters to traders: UNH has been moving nearly straight up for most of the past three years.

The stock could get a boost from this deal and continue its dramatic up trend.

UK to lose 10,500 City jobs as 30 per cent of firms flag plans to move staff

The UK will have lost 10,500 finance jobs to other European cities by day one of Brexit, according to new research. The number of City firms planning to shift jobs to the Continent has doubled since last year, professional services company EY said on Monday.

It tracked 222 City firms and found that almost a third of banks, brokers and asset managers had confirmed or said they are considering plans to move staff or open up new offices in centers such as Dublin, Amsterdam and Frankfurt.

However, the number of jobs estimated to be moving has dropped by 2,000 from a year ago, EY said. Many of the jobs set to go are front-office jobs rather than support functions. The latest estimate is in line with that of Bank of England Deputy Governor Sam Woods who predicted 10,000 jobs would go by the time Britain officially departs the single market and customs union in March 2019. However, a senior figure at the BoE believes around 75,000 jobs could be lost in the longer term because of Brexit, according to sources cited by the BBC.

Source: Yahoo Finance

Why this news matters to traders: As London’s losses mount, other countries are gaining. Among the winners is Germany which can be accessed by US investors through the iShares Germany Index ETF (NYSE: EWG).

Germany will continue to be a powerhouse in the European Union and EWG could be considered a long term trade on that trend.

Brexit Secretary Downplays Importance of His Role

David Davis believes he doesn’t have to be “clever” or “know that much” in order to be Brexit Secretary.

The Brexit Secretary, who last week told MPs that his department had not commissioned a single Brexit impact assessment, told Ferrari that he did not believe in attempting to judge how Brexit would impact the economy.

Davis was also pressed on comments he made on Sunday that the Brexit deal agreed last week was merely “a statement of intent” and not legally enforceable. The comments on the BBC, led to a warning from the Irish government, that they could still block the deal from ratification at the EU summit this week. Davis downplayed the row, saying that his words at the weekend had been “twisted” out of context.

Source: Business Insider

Why this news matters to traders: As noted above, ETFs can provide exposure to international markets. iShares MSCI United Kingdom (NYSE: EWU) is an ETF that tracks stocks in the UK.

 

The ETF is at resistance and could stall as traders wait for news on how issues related to Brexit will be resolved. Put options on EWU could provide significant gains if EWU pulls back from this level.

 

Please visit our blog at InvestingSecrets.com for more stock related news and services.

 

 

Investors are constantly faced with a question. Every time they consider their investments, they need to ask, “what is the best investment now?” Ideally, they ask this question in an objective manner, ignoring what they have already invested in and focused solely on the future.

But, investors often have biases that affect their answer to this question. Some biases prevent investors from looking far from home for investment opportunities. This has been extensively documented by economists specializing in behavioral finance and is known as the home country bias.

According to data from the International Monetary Fund’s Coordinated Portfolio Investment Survey, for example, investors in the United States dedicate more than 70% of their stock market investments to the US.

Experts believe this could be a mistake because the U.S. represents less than 50% of the total global stock market capitalization. That means there are other opportunities many investors are ignoring. The IMF data shows that this is not a problem limited to investors in the US.

Canadian and Australian investors exhibit similar levels of concentration of equity exposures (60%-70%) in their domestic markets despite these markets representing only 3.3% and 2.4% of the global opportunity set based on their respective weights in the MSCI ACWI index.

The MSCI ACWI index includes markets in 23 developed markets and 24 emerging markets. The IMF study used that index as a benchmark and identified the worst offenders of the home country bias based on the index.

 

Source: IMF Coordinated Portfolio Investment Survey

Home Country Bias Can Lead to Missed Value Opportunities

Investors in the US should consider looking beyond their country when considering where to invest money now. This is because the US is among the most overvalued stock markets in the world right now.

When considering how to measure value for global comparisons, it is important to recognize that different countries will experience different business conditions at different times. For example, one country could be in a recession while another is booming.

Stock market valuations can, and do, differ as business conditions change. One indicator that adapts to business conditions is the cyclically adjusted price to earnings ratio, more commonly known as the CAPE. This indicator was developed by Nobel Prize winning economist Dr. Robert Shiller.

CAPE is found by dividing the price of a stock market average by the average of ten years of earnings. It is cyclically adjusted by adjusting for inflation. Using the long term (10 year) average of earnings and adjusting for inflation smooths the ups and downs of the business cycle, in theory.

These characteristics make the CAPE ratio an excellent indicator to compare global stock markets. When deciding where to invest money now, investors can use the CAPE ratio to spot value. This can help them avoid the home country bias which can be especially important right now.

The current CAPE ratio for US stocks is 29. The only other times US equities have been this expensive on this measure include 1929, the peak of the internet bubble in 1999, and in 2008, just before the financial crisis.

There are only two markets in the world with higher CAPE ratios. Stocks in Ireland and Denmark are both priced at 36.8 times cyclically adjusted earnings.

There are some investors who believe CAPE is consistently overvalued and should be ignored because of this. But, other valuation metrics including the tradition price to earnings (P/E) ratio, the price to book (P/B) and price to sales (P/S) ratios and dividend yields confirm US stocks are overvalued.

US stocks rank near the top of global stock markets in all of these indicators and others. For individual investors based in the US, now is an ideal time to consider overcoming the home country bias and searching for value in international stock markets.

Finding Value in a Generally Overvalued World

The average CAPE ratio among global stock markets is 24.3 for developed markets and 16.5 for emerging markets. Emerging markets generally carry more risk than developed markets, so they should trade at some discount to developed markets based on CAPE.

One best way to invest is to allocate investments is to develop a strategy that moves to the most undervalued stock markets every year. This strategy would be relatively simple to implement using exchange traded funds or ETFs that offer a low cost Best way to invest in overseas stock markets.

ETFs generally track indexes in a stock market. There are hundreds of ETFs available and many track indexes and sector in foreign markets. ETFs trade just like stocks and carry low transaction and management fees making them ideal for individual investors.

One strategy that can be used is to invest in the cheapest countries (that is those with the lowest CAPE ratios) and switch every year. In one study, this strategy was shown to significantly outperform a buy and hold investor with extreme home country bias who owns an index fund tracking the S&P 500.

Source: MebFaber.com

The chart above shows the Global CAPE strategy delivered an average annual return of 14.5% from 1993 through 2015. Over that time, the S&P 500 gained an average of 9% a year. The Global CAPE strategy also had less risk.

The Global CAPE is a diversified strategy. It invests in the cheapest 25% of countries, using the 25% of country indexes that have the lowest CAPE ratios. This could involve investing opportunities in about 10 countries and that can be replicated by individual investors.

There are two other strategies shown in the chart. Neither did better than the Global CAPE. The rules for those strategies is being provided for completeness so that readers know how the chart was constructed.

Both strategies involve switching to bonds when stocks become overvalued. In these tests, the strategy is invested in stocks when the CAPE is less than 20 and in bonds when the ratio is over 20. This switching system is tested with both 10-year bonds and 30-year bonds.

CAPE Switch 30 Year shows the results of switching between the S&P 500 and 30 year Treasury bonds. The CAPE Switch 10 Year strategy uses 10 year Treasury notes. Both strategies follow the same rules.

Risk can be measured in a number of ways. One of the simplest and most practical ways is to consider the largest loss in the test period. This allows an investor to understand how the worst period would have affected them personally.

The worst loss for the S&P 500 in the test period was 50.95%. This could have affected retirement plans for many individuals. The worst loss for the Global CAPE strategy was 39.62%. This could still delay retirement but is less than the S&P 500 which means a complete recovery should come quicker.

Where to Invest Money Now, Based on Value

For investors pursuing the largest gains possible, it can pay to invest outside of their home country. The chart below shows the ten countries with the lowest CAPE ratios.

Source: Star Capital

This strategy would need to be updated just once a year and could be implemented with ETFs. VanEck Vectors Russia ETF (NYSE: RSX), for example, is readily available and offers exposure to Russia. Other ETFs can be selected to obtain exposure to the other countries listed.

This portfolio could be rebalanced once a year, selling ETFs of countries that no longer appear on the list of the stock markets with the lowest CAPE ratios.

Smaller investors could start with just a few ETFs and add additional ones each year as their account size grows. This would be an efficient way to build stock market exposure and to overcome the home country bias.

For more investing tips, you can follow our weekly blog here.