Economic Calendar - Week of 11/16/09 to 11/20/09

We would like to provide a concise overview of the economic releases which are on the agenda for this week. It is important for investors of all types to be aware of the fundamental conditions of the economy, especially if you are deciding to make any investments close to the time of a major economic news release.

This awareness you must have about the economic news release calendar becomes greater the more active you are in investing, because when economic health conditions are released there is often a large spike, or movement in the markets. Due to this spike, which is often market noise, it is important for you to be aware of the dates of major releases. When you are aware of these releases you can avoid large price shocks that can occur in asset classes around the release time of important economic figures.

Here is a summary of the United States, moderate to major ranking, economic releases for this coming week:

November, 17 Tuesday:

1. US Producer Prices (Expected to DROP by -1.7% for the month of October YoY) - Measures changes in the selling prices producers charge for goods and services, and well as tracks how prices feed through the production process  
2. US Net Long-Term TIC Flows (Expected to be $30Billion for the month of September) - Measures Capital Flow into U.S. Denominated Assets and summarizes the flow of stocks, bonds, and money market funds to and from the United States . The headline figure is the difference in value between American purchases of foreign securities and foreign purchases of American securities, expressed in millions of dollars.
3. US Industrial Production (Expected to RISE .4% for the month of October) - Measures changes in the volume of output produced by the manufacturing, mining, and utility sectors.

November 18, Wednesday:

1. US Consumer Prices (Expected to drop -0.3% for the month of October) - CPI assesses changes in the cost of living by measuring changes consumer pay for a set of items. CPI serves as the headline figure for inflation. 
2. US Housing Starts - (Expected to be 600,000 for the month of October) -Gauges the number of new houses built in the United States. Housing Starts are one of the earliest indicators of the housing market, only trailing Building Permits in timeliness.

November 19, Thursday:

*Only minor ranking releases, which have very little or no effect at all on the markets.

November 20, Friday: 

*No US economic releases for this day, and very minor Japan and European Union releases.

Technical Analysis Indicates These ETF's Are Aligning For You To Profit:

 
A moving average is one of the most popular indicators used on chart analysis. Some investors and traders utilize moving averages because they do a great job of smoothing out irrelevant moves in price and presenting a visual representation of an assets trend. A moving average is the average price over a specified number of trading days. While there are many values and settings that traders can use, some of the most common values used are the 20 period (short-term trend), 50 period (medium-term trend), and 200 period (long-term trend) moving averages. 

Investors should pay particular attention to a moving average's slope and its position relative to other moving averages. When a faster moving average crosses above (or below) a slower moving average, it reveals that an assets trend has been higher (or lower) in the near term than over the longer term average. While it may seem that a simple technique like this would offer limited value, trading or investing with the trend ONLY has been proven to produce spectacular investing/trading results (400%, 500%, 600% annual returns have been produced using moving averages only).

Below we have some analysis using the 20-period and 50-period moving averages. These Exchange Traded Funds below are at some defining periods in their trends, suggesting possible trend following buy points for you or time to take some profits if you have gotten in these specific ETF's  at lower profits. Most of these ETF's have their 20-period moving average touching, or just above, their 50-period moving average, which suggests great buying points as financial instruments, such as stocks, often bounce and turn around in direction when these two moving averages touch or approach each other.

The Financial Select Sector SPDR (NYSE:XLF) ETF is an example of a sector ETF that has started to show some weakness and has its 20-day moving average crossing below the 50-day moving average. XLF broke under its 50-day moving average nearly one month ago, and has been consolidating underneath the average since, with very little progress. Often, a stock will resume the breakdown when the moving averages catch up to the trading price. One thing to keep in mind is that the crossover is not a magic signal to short a stock; in fact, the last crossover in XLF back in July signaled a decent buying opportunity. However, it does show objectively that a stock is experiencing weakness, and as such should be monitored.



Semiconductors HOLDRs (NYSE:SMH) is another ETF that recently broke under its 50-day moving average and under a recent base. It is about to cross the 20- and 50-day moving averages as well, just as SMH bounces back into this resistance area. The semiconductors were leading the markets for much of the summer. They have now set a lower low, and are in danger of failing on this bounce higher. One key level to watch is to see if SMH can close back above its 50-day moving average and begin to consolidate above this level. This would eventually negate the negative crossover, and possibly set up a bear trap.



Utilities Select Sector SPDR (NYSE:XLU) is another ETF that has the 20-day moving average crossing below the 50. It is also in the process of bouncing back into this moving average cluster after testing a major support level near $28. The key level to watch here is how XLU deals with the moving averages as resistance, as a move back above the cluster could be a sign of strength. However, if XLU rolls over in this area, it could be a prelude to a much larger breakdown.



The iShares Dow Jones Transportation Average (NYSE:IYT) is another example of an ETF bouncing back into resistance formed by the 20-day moving average crossing below the 50-day moving average. IYT also set a lower low in the recent pullback in early November, which hints at weakness. IYT is currently at a critical juncture, and needs to hold up in this area in order to avoid a failure and possibly setting a lower high.



What Does This Technical Analysis Mean For You?
 
While a moving average crossover is not a definite signal to enter a trade, it provides an objective view into the trending nature of a particular asset. It is worth paying attention to the direction, slope and order of the moving averages, as it not only measures the average price of a stock, but the behavior of traders. When a cluster of moving averages is headed lower, it often signals that traders are selling into rallies, and thus the moving averages can act as resistance. With several sector ETFs in this situation, it bears watching to see how they react at these critical levels. The result could not only offer a good trading opportunity, but also a clue into the next move for the markets.

Medium to Long Term Gold Outlook

Gold has been really on the move recently within the last couple of months. A few months ago my analysis revealed that once gold broke $980/ounce, it would be in for a great rally. At that time I suggested to others a $980/ounce break would be a great buy signal and time for them to increase their gold exposure. It did break the $980 level a few weeks after I said that and it is now a large 14% higher, $1,119/ounce, only months later with barely any signs of slowing.

Many of the worlds greatest investors and fund managers have been increasing their exposure to gold, mainly earlier this year is when they were adding to their gold positions. These guys are the best, Billionaires, whom I am referring to, and I applaud them for getting into gold earlier this year before its big rally.

So with these hedge fund managers and I calling this big rally of recent in gold earlier this year, where do we stand now?

Gold may have a little further to rise in the short to medium term, but in our view not much further. It is time for you to start taking some profits on any of your exposure to Gold, or begin scaling out of your Gold holdings, EVEN if you are a long term investor. It would be wise for you to at least take some profits soon and buy Gold back at a better price you will certainly see as soon as next year.

I know that many of these fund managers I was referring to have their targets on Gold not much higher from here, very near $1200/ounce or only several percent higher from here. From our proprietary research, we know why these fund managers have their targets close to the current gold prices.

With both a combination of technical analysis and fundamental analysis we have set our medium to long term outlook on gold as BEARISH, meaning that we believe gold will be lower by Mid-2010 and head even lower from there, and its drop should start within a couple of months. In the end, if you are a medium term, or even a long-term buy and hold investor we advise you to take the majority of your gains on any gold holdings, or gold related (stocks, etf's, etc...)holdings by the end of 2009. ONLY if you are a short term investor/trader, less than a couple of months time frame, should you be buying gold at these levels of $1119/ounce.

MEDIUM - LONG TERM GOLD OUTLOOK: We are bearish, gold should head DOWN. Our analysis is that gold should drop at least 20% lower, or to $900/ounce, in the medium-long term.

We view the recent price action in the chart below as a clear BUBBLE, be prepared early for its inevitable pop:

(click on picture to enlarge)

Retirement Plans For the Self-Employed

SEP IRA:

With a SEP IRA in 2009 there is a $49,000 maximum contribution. This IRA is easy to set up and requires minimal administrative responsibilities. Disadvantages of this option begin with the fact that contribution limits are smaller than the limits of an Individual 401k at the same income level. This IRA does not have a catch-up plan provision like the Individual 401k, and loans are not permitted.

Main advantages of SEP IRA are that annual contribution is based on a percentage of W-2 wages if your business is incorporated and a percentage of personal income if your business is a sole proprietorship. If your business is an S or C corporation, or a LLC taxed as a corporation, up to 25% of W-2 wages can be contributed into a SEP IRA.

If your business is a Sole proprietorship, partnership or a LLC taxed as a sole proprietorship you are allowed annual contributions up to 20% of your net adjusted self employment income (or net adjusted business profits) which can be contributed into a SEP IRA.

The SEP IRA is a great choice for self employed business owners who would like to contribute up to 25% of their W-2 wages or 20% of net self employment income. A SEP IRA has broad appeal due to its high maximum contribution limits and its ease to set up and maintain.

INDIVIDUAL IRA:

Main features of an individual IRA is that in 2009 there is a $49,000 maximum contribution ($54,500 if age 50+ due to a "catch-up" provision), tax free loans are permitted, and loans are permitted up to 1/2 of the total value of the Individual 401k up to a maximum of $50,000. Another feature of an individual IRA is that there is an option to make Roth 401k contributions with the salary deferral portion of the Individual 401k. Contributions into an Individual Roth 401k are not tax deductible, but withdrawals are tax free after age 59 ½.

One disadvantage of an individual IRA is potentially greater administrative responsibilities and administrative fees compared to other self employed retirement plans.

Advantages of this option are high contribution limits and completely discretionary annual funding requirements. An Individual 401k may allow a greater contribution at the same income level due to the way the contribution is calculated. Another important distinction between this self employed retirement plan and others is a loan provision.

DEFINED BENEFITS PLANS:

Features of this plan are that, depending on the age and income of the business owner, annual contributions can exceed $100,000 or more. Also, loans may be permitted, however this may increase annual funding requirements.

Main disadvantages of defined benefits plans are that they can be more expensive to set up and to maintain, along with having rigid annual funding requirements.

Main advantages of this plan option are that you can contribute more than the contribution limits allowed by the SEP IRA or Individual 401k. Defined Benefit Plans also offer substantial tax deductible retirement contributions and significant future retirement income. Depending on your age and income the annual contribution to a Defined Benefit Plan can exceed $100,000. Lastly, defined benefits plan may be ideal for business owners who wish to shelter the largest percentage of their income and/or who want to make the largest retirement plan contribution permitted by IRS rules.

SIMPLE IRA:

A Simple IRA is easy to set up and has low administrative responsibilities. With a simple IRA self employed individuals can elect to defer up to 100% of their income up to a maximum of $11,500 for the 2009 year or $14,000 if age 50+. In addition there is a maximum 3% employer contribution.

A disadvantage of this plan is relatively low maximum annual contribution limits, and loans are not permitted.

In conclusion if you are self-employed and looking for a retirement plan take into consideration the amount you believe you will contribute, and leave room for a potential increase in your contribution that you may decide to make. Also, review the tax implications of each plan, and keep in mind the set up and administrative aspect.

Oil Hedging, It Is Not Only For Energy "Hedge Funds"

Hedging strategies can often be complex, which usually scares a lot of investors away from utilizing the strategy. Most average investors have not even heard of a "hedge" for investing. You may believe hedging is more for active investors, or those who make their living from investing, or those who are trader, or other reasons. In reality, hedging is a great tool when done properly for investors of all types.

So what is a hedge?

A hedge as an investment strategy is when you open separate positions in different markets in a way so that the two positions offset the risk of each other. Usually, they involve the use of different financial instruments such as derivatives and futures.


How can you employ a hedging strategy to the oil markets?

There are a variety of ways, here are some which we have tried to explain in simple terms:

Hedging Strategy #1- If you believe oil prices rise:

• Buy a put option on oil, do this through an account which permits and has options trading such as CBOE, OptionsXpress, or NYMEX
  

• Second, you will want to buy a little smaller oil future contract. 

Now, if oil rises in value you will money on your oil future and just let your oil option contract expire, losing no money on the options contract (except for the small fee). If oil drops in value you will lose money on your oil future, but then you will close your future and exercise your option and make the amount you lost on the future back, plus a little more (since you opened a slightly larger option contract)

Hedging Strategy #2 - If you believe oil will decrease in value:

• Buy a call option on oil,

• Sell short an oil future,

Now if oil drops you will make money on your oil future, and let your option expire. If oil rises in value you will lose money on your future, but then close your future and exercise your option.

Hedging Strategy #3 - If you believe oil prices will rise:

• Buy an oil swap (you pay a fixed rate, while you receive the floating rate)

• Buy an oil put option

Here if oil rises in value you will make money on your swap, but not lose any money on the put because you will not exercise it, but instead let the put expire. If oil prices drop in value you will lose money on the swap, but exercise the put option and make money on the option.

Hedging Strategy #4 - If you believe oil will decrease in value:

• Sell short an oil future,
  

• Buy a swaption at the same price

Here if oil decrease in value you will make money on your short oil future, but not lose any money on the swaption because you will not exercise it, but instead let the swaption expire. If oil prices rise you will lose money on the oil future, but exercise your swaption so you will then make money on your swaption.
 
These are the basic outlines of several hedging strategies you can implement to decrease risk and become exposed to the oil market. Any of these strategies when implemented properly will work excellent, but it is important you understand what you are doing fully.

If you would like to open a hedged position on oil, or would like to know more about other oil hedging strategies then please give us a call at 262-939-8885. Thank you for reading and have a great weekend!

Say NO To Letting Rising Oil Prices Choose Your Wallet, And Choose A Good Oil Stock, Here's How:

Now that we have covered how to choose oil index and mutual funds in our other post, we will move on to oil stock picking and hedging strategies. Both of these investment methods require their own due diligence and different analysis techniques.

When choosing oil stocks understand that their are 3 major categories: refineries/production, shipping/transportation, and maintenance/rig servicing companies. Therefore, you must consider all the fundamental factors that will affect each category and decide which has the best prospects moving forward, and for your time frame.

Choose the category that will have their margins affected the least by current market conditions. If you are a very conservative investor you may want to consider choosing a stock from each category to be truly diversified among oil, but otherwise we suggest sticking with one category. Your investment allocation in oil as part of your total portfolio is already being diversified, so there is no need to be diversified among several oil categories, also in general there is a high correlation among all oil stocks so being diversified will not reduce the systemic risk.

Once you have narrowed down a category of oil stocks, now you must choose what size of company to invest in: small cap, mid cap, or large cap. Remember, that volatility (risk) will decrease in general as the company is larger along with returns; so small caps generally are the highest returning and most risky, while large caps are usually the lowest returning and the least risky. So if you are a conservative - moderately conservative investor you should choose large cap stocks among the category you choose, mid-cap stocks if you are a moderate investor, and small cap stocks if you are moderately aggressive - aggressive investor.

Lastly, we will move on to exactly which stock to choose among your specific oil business category and size.
You have to decide whether you are a fundamental or technical investor, or maybe a little of each. Fundamentalist's observe micro-economic conditions affecting the company, its financial statements, news, management, and competitors. Technical investors look at charts only, price action, and chart indicators  such as trend-lines, support/resistance, pivot points, and hundreds of other chart/price only elements.

If you decide to choose fundamentally, look for a few stocks with good ratios compared to the industry; industry comparisons and stats. can be viewed on websites such as TheStreet.com, MoneyCentral.com and others. Analyze the management and make sure their have been no recent legal issues and discrepancies with the company. Also, areas that most fundamentalist's miss when choosing oil stocks  that can give you an advantage is the companies market price as share of oil reserve value, oil reserve replacement cost per barrel.

If you choose the technical route look for oil stocks with well defined trends, and easily drawable trend lines. (we are considering most of our readers our medium-long term investors so stocks in a range would not be a good choice for anyone other than short-term "traders") Also look for a stock that has pullback to a upward sloping trend-line or support level and become familiar with indicators such as the RSI, MACD, and Stochastics; divergence in these 3 indicators are good early warning signals of large reversals.

We have now gone over beginner to intermediate techniques of how you can go about choosing an oil stock to profit from our view on oil prices rising in the near- medium term. Both of these areas can be highly advanced. Stick with a simple and proven strategy that you can implement in an understandable manner. For example, following trend-lines ONLY is a technical strategy that has been proven to work very successfully, but mathematical algorithms that literally are 5 pages long and have to be designed by PhD. mathematicians and input into computers by advanced programmers (complex) is also another technical strategy that has been proven to work consistently.

Due to the this post long already, we will cover hedging strategies in our next post. If you need any help at all with choosing an oil stock, deciding which strategy to use, please call us at (262) 939-8885. Thank you for reading, and we hope that this post has helped you some with your oil investment endeavors.

Oil Mutual and Index Fund Galore, What to Do?

Following up on our post below, we would like to give you an idea on how exactly to choose mutual and index funds so you can benefit from rising oil prices. With literally hundreds of oil exposed funds, you have a great array of unique fund characteristics to choose from and that need to be taken in to consideration.

Before making your final decision to invest in a specific fund, you should become familiar with, and observe the following unique fund characteristics:

1. Holdings & Diversification - To really benefit from rising oil prices you should choose a fund with the majority of it's stock holdings in direct oil/petrolium refinery and gasoline companies (Exxon, Shell, etc..), preferably greater than 75%. A fund's holdings can be viewed by examining its prospectus, website, or through almost any other financial website such as Yahoo Finance, Bloomberg, MoneyCentral, and others. We suggest choosing a fund with less than 10 seperate oil stocks, because above 10 the benefits and risk-reward ratio from diversification greatly decreases, and therefore the systematic risk increases.

2. Turnover - This is another area were you need to be aware of your risk tolerance. A funds turnover is simply the amount of times its holdings change throughout the year. A higher turnover in general means the fund is more active, seeking higher gains, and is thus more risky. A lower turnover ratio (index funds) means the fund is more passive, and less risky.

So what is high and low turnover?

For index funds anything above 10% can be considered high and 5% should be considered low. Mutual funds are different than index funds because their turnover ratios can vary greatly, depending on how active they are and the fund's size.

For a small cap mutual fund, anything greater than a 200% turnover ratio should be considered high and 50% low. For mid and large cap mutual funds, 150% should be considere a high turnover ratio and 20-30% a low ratio. Also, if you would like to go by the average, the average turnver ratio for a mutual fund is 90% and the average for an index fund is near 5%.

3. Expense Ratio - Fees are among the most important of these 4 fund aspects. For a mutual fund you should be willing to accept higher fees than an index fund, because mutual funds on average are more active and outperform index funds. For a mutual fund an acceptable fee rate would be 1% or lower, and it should be .5% or lower for an index fund.

4. Minimum Investment - Mutual and Index Funds can have many different minimum investments. Therefore, be sure to find a fund with a minimum investment you are comfortable with and this minimum investment conforms to your overall investment strategy and portfolio diversification. For example, say your total portfolio of all your investments is $50,000, you are a conservative investor and may want to have 5% exposure to oil, so therefore you would find a fund with a minimum investment not greater than $2,500.

You should first start with finding a group of funds that would accept your investment size, weed out the funds which have too large of a minimum investment. No need to waist your time analyzing a fund which will not accept your investment size. Second, check the expense ratio, then holdings and turnover ratio.

Be sure you are always aware of your investor profile and to choose a fund only if its characteristics match your investor profile. In brief, when choosing an oil index or mutual fund you should look for a low expense ratio in general, a relatively low turnover ratio if you are a conservative investor and a little higher turnover ratio if you are moderate to aggressive. Also, look for a fund which has the majority of its holdings exposed to direct oil refining and gasoline companies.

Harvesting Profits From Black Gold

In our other post we stated that oil should head upwards in nearly all time frames, especially in the medium term and longer. Due to our bullish outlook, and blossoming prospects for better and sooner than expected worldwide growth, it is time for you to reconsider your energy investment allocation.

Volatility is another aspect of oil that will sure come into play, and there are no reasons that volatility in oil should subdue any time soon. Volatility in oil is surely likely to increase with the price due to OPEC meeting uncertainty, higher trading volume, profit taking, shifts in federal reserve policy, and for other reasons.

So how can one take advantage of the many oil market dynamics?

1. Buy An Oil Index Fund -An oil index fund attempts to mirror or replicate the returns of the overall oil market, so if oil prices rise by 20% an oil index fund should be very close to a 20% gain for the same period.
Oil index funds attempt to provide a better risk-return payoff than mutual funds, so in turn they are more risky (volatile) than mutual funds, but less risky than individual oil stocks. A good choice for the moderately conservative to moderately aggressive investor.

2. Buy An Oil/Energy Mutual Fund- In general a minimal risk oil investment can be made through mutual funds which invest in oil and energy on an international scope. Mutual funds provide a nice, simple opportunity for you to take advantage of rising oil prices on a diversified basis, in general they are more suitable for conservative to moderate investors.

3. Buy Oil Stocks- The most widely used strategy of investing in oil, but however it may be the most widely misused, as there are numerous factors to be considered when investing in oil stocks. When choosing stocks in an individual sector such as oil, the "stay diversified" strategy does not provide good returns since there is a large, positive correlation, between all of the stocks in the sector.

4.  Oil Hedge - A more complex strategy, which when done right, greatly decreases you risk for a loss and should give you one of the best risk-return ratios. Hedging strategies involve the use of different financial instruments at concurrent times, usually derivatives (swaps, options, futures, and others). Some hedging strategies attempt to take a position in such a way that when the value of one derivative declines, the value of the other increases. Other hedging strategies can be used as a volatility play, as they profit when there is significant movement in a security regardless of the direction.

All of these strategies are meant for you to be able to profit from rising oil prices, and all deserve special attention and research in their own rights. When choosing one of these strategies to invest in oil it is important for you to know your investor profile like you know if the sun is out or not. You should consider re-evaluating your investor profile and tolerance for risk as that will give you a nice idea for which of these strategies to use.

In our next post's we will elaborate on each of these strategies. We will start by giving you an idea of how to choose some oil index and mutual funds; then we will give you some insight on specific names of what we believe are appealing funds. Oil sector stock picking and hedging strategies will also be discussed in further post's. In the end we hope to help you have a better understanding of how to put the oil market in your favor.