Intelligent Speculator

After spending an amazing weekend spent relaxing, skiing, and enjoying the cold winter (for once it was enjoyable), I am ready for a new week but before we get started, here are some of the best readings I enjoyed during the past week, one of bloodiest ones in a while with most indexes tumbling.

Is the market doomed in 2010 because of a poor January @ MarketWatch
Options Strategy: Protective Put @ TheFinancialBlogger
S&P500 pullback 2nd biggest since March09 @ Vixandmore
The old question: work or stay home? @ GatherLittlebyLittle
China leading global race towards clean energy @ NY Times
Rethinking the Latte factor @ MillionDollarJourney
Best performing stocks of 2009 in the S&P500 @ BuyMyStockPicks
Obama State of the Union 2010 @ FourPillars
Central banks getting ready for next gold move? @ ZeroHedge

We are not even a month into 2010 and already looking at what has and has not been working so far in 2010. We have been asked about oil stocks and ETF’s and at the start of the year we did a brief intro into the best alternatives. Then, earlier this week we looked into the best performing oil stocks so far in 2010.  I received a few emails from readers who wanted the same information for oil ETF’s. Here it is! First off, to kick things off, here are the main oil related ETF’s as well as their YTD (year to date) returns, price, if they are leveraged or not and finally their expense ratio.

As with most such graphs, it is not a surprise to have leveraged ETF’s with the top returns. Now if I had done this table just a few days ago, I think the results would have been very different but the truth is that Crude Oil has taken quite a hit in the past week (as have many other commodities and assets) which has meant that the top picks so far have been those that return the inverse of crude oil.

Take a look at SCO from Pro-Shares which returns -200% of the return of crude oil.

Personally, I would be very surprised to see this trend continue but I guess everything is possible given the uncertainty in the world. What are your top picks among this list???

Leveraged ETF’s have many pros and cons but the main problem around them, especially when they were first introductedto the market was the misunderstanding of how they worked by the investors and traders. Since then, we have learned a lot about how they work, their good and bad sides. One of the most important characteristics of course is that these are generally created for short term trading rather than long term investing.

The main reason behind it is that volatility can have an important impact on the return of the ETF and as time goes by, the return will not be correlated as much with the underlying index it is intended to track. A product that had been discussed for some time is about to be introduced as Direxion will be launching leveraged ETF’s with a monthly rebalancing (instead of the traditional daily rebalancing that is currently offered).

You can see the names of the different ETF’s that are being launched in the SEC filing made by Direxion here.

This will diminish significantly the impact of the daily rebalancings which is most often named when investors or the media criticize leveraged ETF’s.

But there are other consequences:

#1-An ETF that returns 3x the leverage of an index could lose almost all of its value in one month.

Example: Imagine you invested in an ETF that returns 3x Crude Oil returns. If Crude oil were to return -30% (which is a big movement but something that has been seen in the near past), your ETF would return a crazy -90%! Of course, it could also be the opposite.

#2-Also, like the daily leveraged ETF’s, it is important to consider the product specifications when entering a trade. When you have a position at the start of the month, you can expect to track the index correctly. But the later you enter in the month, the less true that is.

I think these ETF’s will certainly attract their shares of investors. Are they better than daily leveraged ETF’s? No. They are simply different and should attract a different type of investor. Paul Justice, ETF strategist at Morningstar, said the funds were a better option for longer term investors. “It allows investors to invest in a sector over a 30-day time frame and get a more accurate return if they buy at the beginning of the month. If you’re a long-term investor, you still shouldn’t expect to earn the two or three times leverage,” he said. It will be very interesting to see

Last summer, news broke that Google (GOOG) had complained to the FTC because its “Google Voice” application had been rejected by Apple. Why reject it? There are many reasons. But the main thing is that Google Voice gives users a way to “bypass” many of the advantages of a traditional carrier. It offers users a voicemail, a number that they can then redirect to mobile or traditional phones, free text messaging, etc, etc. All of these services are bound to create lost revenues for phone carriers and indirectly to Apple.

How so??

Apple makes a very large portion of its revenues not through selling the actual phone but through a revenue split agreement with the carriers (currently AT&T in the US), so removing profit from those carriers is not in Apple’s interest. But before even hearing back from FTC about its complaint, Google found another way to make it happen.

How did Google find a way??

They announced today that Google Voice would now work from a web browser, instead of an application. Iphone users now have a way to use the powerful service. Of course, Apple could probably block it out, but this would anger users and makes it a lot trickier. It will be very interesting to see Apple’s answer to this workaround. And thanks to the internet, Google has the power to bypass many other such “systems”

Who’s next????

It might not happen today but the next victims of Google could well be cable TV/satellite providers. How? The idea of having TV’s being able to connect to the internet can of course help users to surf the web or find specific information but it also makes it possible for users to view content on websites such as Youtube. Yes, yes, I know… Youtube is not anything like what your cable provider has? But wait a second

-Youtube has started providing HD quality – this could very well be part of its move to give users the ability to get a high quality image even on high def TV’s

-Youtube has gained exclusive rights to broadcast Indian cricket this year. Sure, it is Cricket and apart from a few Europeans and many many Indians, few will even notice. But imagine if this became a trend. Would you still be paying your cable provider if you could get access to live sports and your favourite TV shows for a much lower price on your TV through Youtube? What if the next show like 24 or “Lost” appeared only on Youtube?

Of course, this will not happen overnight, but if I was a cable provider, I would start looking ahead at this possible competition because Google will be able to find a way to do this, I don’t think anyone should doubt this by now. There is a lot of potential money in such a strategy for Google and technology to get it done is catching up very quickly.

Oil is back in the news as it went back up to 75$ in yesterday’s trading. Not too long ago, I had gone into the top oil stock picks for 2010 and it is now already a good time to see what is working and what isn’t. It might be early but this provides with opportunities to look at what has been working and what hasn’t in this first month of 2010. The good plays have not been around the major players as both Exxon (XOM) and Chevron (CVX) have negative returns so far in 2010.

One of the interesting trends in my opinion is that the best performers have generally been local US companies instead of those major international ones. Exxon has been awarded a contract in Iraq but there continues to be so much uncertainty involved when dealing in such regions that investors have preferred buying companies that are exploring in or close to the continental United States.



With oil at 75$ or so, there have been some good opportunities and that is especially true for McMoran Exploration Company (MMR) which explores and produces oil and natural gas offshore in the Gulf of Mexico and onshore in theGulf Coast area. The stock is up over 90% so far this year after new oil discoveries in the Gulf of Mexico.

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As much of a fan as I am of Baidu, I think that these two stocks moved two far given the recent news. The major movements by Baidu(BIDU) came off of news that Google might be pulling out of the Chinese markets as it announced it would no longer tolerate the Chinese internet policies even if that ends up meaning the company has to pull out of the largest internet market (measured in terms of users not dollars). And yes, that could help Baidu, especially in the short term, but the impact on Google’s profitability is not as obvious.

Baidu’s rise justified???

Baidu had been stable in recent weeks until the news of Google’s possible pulling out of China was announced. When that happened, Baidu(BIDU) quickly jumped from 386.49$ to 464.23$ in 2 days, a 20% rise based only on possible action against Google(GOOG). The stock has since backed off a bit but it continues to look a bit overvalued. Baidu(BIDU) continues to trade at a P/E ratio over 70 and I simply do not see enough growth to justify such a ratio.

No need to say that shorting such a fast growing company does have risk involved but I do believe that there is more upside in this trade.

Google is the real play here

All of that having been said about Baidu(BIDU), this trade is mostly about Google(GOOG) and its recent fall. There have been a few tougher moments for Google including the episode with the Chinese government but also earnings that although they were higher than expected, still came as a disappointment to many investors. Google’s launch of its phone, the Nexus One, has also not impressed investors. And finally, the announcement by former founders Sergey Brin and Larry Page that they will be selling a portion of their shares and giving up more voting power to investors has depressed the stock.

But in my opinion, Google still has a lot of growth in its future and is as well positionned as anyone (with Apple) in the mobile internet. That is one of the reasons why I picked Google among my 4 picks in the 2010 stock picks competition.

So, do you have any thoughts on this trade? I would imagine many investors being very reluctant to go short on Baidu(BIDU), we’ll see how it turns out!

Disclaimer: No return is guaranteed and each recommendation should be considered within the investor’s individual situation. As with any financial investment, there are risks involved.

I’ve been discussing the Apple tablet and its impact for a few months now and some were probably getting tired of the speculation. Well, that is coming to an end as the tablet should be released in a few days (rumor date is January 26th)

1-The Future of ETF’s @ MoneyUnder30
2-This is what I own right now @ MyTradersJournal
3-A look into options strategies: Covered call @ TheFinancialBlogger
4-The $700 billion deficit, how will it be funded @ ZeroHedge
5-Hedging with volatility ETF’s @ ETFExpert
6-A case to buy Gold @ Moolanomy
7-Ishares launches 5 new International ETF’s @ ETFDB
8-China’s economy may surpass Japan’s @ Reuters
9-Apple gets ready for the launch of the tablet @ Forbes
10-Investing baby steps #1 – Know who you are @ GatherLittlebyLittle

It’s no surprise to regular readers of this blog but I have a strong positive opinion about ETF’s and a strong negative one about mutual funds. And yes, I did write about why ETF’s are superior to mutual funds. Some would argue and some points are a bit tougher to debate but in general, I do not see how owning mutual funds and paying excessive fees for decades can be a good thing, I just don’t.

Will it really happen???

Having said that, I do know that mutual funds will resist their extinction. How??? Because they have an army of salesmen that want to keep them alive. You know those financial reps who get a portion of your annual fees? When you have a decent size book, those fees add up very quickly. Make your clients pay 1% more but get .50% of that more in commission? It’s a good deal to many.

Since most of the population does not have enough knowledge to challenge their financial planners or to manage their portfolio themselves, they generally do not even hear about the possible option.

Not all ETF’s are good, as I had written about when discussing things to look for in an ETF, but I’d say it’s not even close in most cases. And it looks like the money flows are now starting to reflect this. Take a look at the net flows into ETF’s and mutual funds. Three straight down months for mutual funds, that is quite impressive.

Any thoughts for you? I know that personally, I find this very encouraging. The other good sign is to have mutual fund companies starting to launch ETF’s. They are finally admitting that mutual funds with excessive fees are not the future and that they cannot build their business solely on mutual funds.

A few weeks ago, I wrote about gold and since then, it has continued to go up and there continues to be a lot of hype about gold for many different reasons. There are economists, such as Peter Schiff, who have been very vocal about his beliefs that gold will skyrocket. And given he was right in many regards about the recession and the housing collapse, his views are getting a lot of attention. As well, right wing media (i.e. Fox) has been very active in associating the current economic crisis with the depression era and putting up the message that gold will be the best (and sometimes only way) to espcae personal financial collapse.I see these right wing scare tactics as very suspect and it does not help seeing those Gold vendors who are Fox sponsors. There are a lot of conflicts in this “Gold story”. And so seeing all this gold bulls go mainstream is certainly worrying for anyone considering diving in.

Why gold could go up

With that being said, I do still think there are many reasons to like gold as an investment for a few reasons:

-There continues to be a lot of speculation and evidence of foreign governments diversifying away from the US dollar as there continues to be a lot of worry about its medium to long term direction. As that happens, governments are buying foreign currencies such as the Euro but also gold. A few of the emerging economies (India being one of the more public ones) have been stacking up on gold. This has contributed to increasing gold demand.

-Inflation Hedge: There is a lot of debate over this but gold still remains to this day one of the more efficient inflation hedges. And with the money that continues to be issued by the US and foreign governments to fund their deficits, inflation worries do remain and if that happens, TIPS bonds and gold would be the two logical safe heavens.

-And finally, another debate is about the possible major drop of the economy/stock market. There continues to be many analysts who believe that the markets went up too fast compared to the economy and that a major decline is still a possibility. Not sure I would say I’m a big believer in those theories, but if you are, gold would be a good investment option.

Physical gold or not?

Going along the line of a collapse, many believe that owning physical gold is the only way to go. Their arguments are generally that in case of a complete collapse, the system could break down and even those ETF’s that replicated gold returns or who are supposed to own physical gold, might not be able to fulfill their obligations and so owning gold is the best way to keep your “hedge” for this “End of world” type scenario. I’m not a big believer in this theory as I generally do believe in the financial system as well as the fact that it will be saved if hell breaks loose. As well, you generally end up paying a lot of fees when buying physical gold.

One such place is Goldline where you can buy actual gold coins. You will end up paying a lot more but if that is what you are looking for, go ahead:)

For others, gold investments can be done in many ways, but the two easiest ones are:

Gold ETF’s

Here is a list of the Best Gold ETF’s as well as their descriptions, fees, etc.

Miner stocks

And finally, if you wish to invest in a miner stocks, the main ones are Canadian companies, I have a list that includes only the non-penny stocks that have revenues for the past year and a large enough market cap. Most of these are also listed on US exchanges.

Let me know if you have any questions regarding these stocks!

I am one of those who has always been fascinated by airplanes and I can’t imagine ever getting tired of getting onboard of one. But investing in a commercial airline is a whole other story. There are so many reasons to avoid getting involved and yet hope always remains. These companies struggle to remain profitable but there are always believers that now is the right time and that eventually they will get a break.

The problem of course is that airline stocks depend on many factors that are outside of their control, namely:

-Terrorism: Attacks like September 11 or even smaller ones such as the Detroit Christmas scare are enough to scare away some consumers which has a direct impact on prices

-Economy: As the economy goes, so do airlines. Why? Yes sure people travel more and further away for vacations when they have more money and confidence but what is even more true is that business class passengers (those who bring up the big bucks right?) tend to pay a lot more attention to money spent when things are tougher. That 8,000$ last minute flight to Paris will likely just not happen if things are going badly and shareholders are breathing down the board’s neck!

-Oil prices: On the expense side, we’ve already seen the impact that oil prices can have on airlines. The decision to hedge prices or not can be a killer in one sense or another. Lock in a 100$/barrell oil when prices go up to 150$ and you will be laughing as competitors struggle to keep up with your prices. But if you do that and prices dip down to 50$.. You might want to get ready for Chapter 11.

And so yes, it is an unprofitable industry (in general, there are exceptions) and one that could raplidly find itself in need of a bailout if things went badly (i.e. another September 11). But there are some smaller and younger companies that have been doing very well in recent years. Take a look below at the graph of Southwest Airlines, one of the more efficient companies around.

And so here you have it, the table of the US airlines, and you can quickly notice that the majority do not even have a P/E ratio. That is of course because they are not making profits! But find the right airline and you might just make a great investment.

Which one would you consider owning?