Tag Archives: pro

Staying Level-Headed In The Face Of Fed Uncertainty

By John P. Calamos, Sr. As we know, uncertainty about the Fed’s plans for raising short-term rates remains a key driver of market volatility. It’s understandable that investors are afraid to be in the markets and at the same time, afraid to be out. Whenever rates do rise (probably before the end of the year), there’s every reason to expect continued heightened equity market volatility. Even so, I view a more normal interest-rate environment as long-term positive – for the economy and for the equity market. Here are some points to keep in mind. Higher short-term rates should be viewed as an affirmation of U.S. economic health. The Fed has consistently expressed its commitment to a patient, globally-informed, data-driven approach. It will raise rates when it believes the U.S. economy is strong enough to continue growing without artificially low rates. The “path” of short-term rate increases is likely to be slow and shallow. In other words, I don’t believe we’ll see the Fed move to raise rates significantly and many times, provided that the overall economic landscape remains consistent with what we’ve seen over recent years – slow growth, low inflation. A more normal interest rate environment can support continued economic growth, particularly among smaller businesses. When interest rates are higher, lenders can earn more from borrowing activities. This should provide an increased incentive to lend to small businesses, especially against the supportive backdrop of continued economic growth. With increased access to capital, small businesses can grow and hire more people, contributing to better overall economic growth. Higher short-term rates don’t signal that we’ve entered a bear market. Earlier, I noted that markets are likely to remain volatile when rates rise, but that doesn’t mean there won’t be opportunities, especially for long-term investors who take an active approach. Historically, stocks tend to perform well during periods of economic growth (see point #1). Stocks have continued to advance after the onset of an interest rate increase, as Figure 1 shows. Moreover, as our Co-CIO David Kalis explained in his recent video interview , the prospects for U.S. growth stocks look especially attractive. (click to enlarge) Past performance is no guarantee of future results. Source: Cornerstone Macro. “Positioning For A Fed Tightening Cycle,” September 16, 2015. Convertible allocations may be particularly effective in this sort of environment. Because they have fixed income characteristics, convertibles may be able to mitigate the impact of short-term equity downside. And because they have equity characteristics, convertible securities generally demonstrate less vulnerability to interest rate increases than investment grade bonds. That means that when rates do rise, allocations to convertibles may prove more resilient. (Co-CIO Eli Pars outlines more of these potential benefits in this video interview .) It’s been observed time and again that markets hate uncertainty. That’s not likely to change. More importantly, what’s also not likely to change is this: volatility creates opportunity for those who can tune out the short-term noise and take a long-term view. Share this article with a colleague

Larry Williams’ Principals And Insight Into Becoming A Better Trader

Larry Williams is a well-known trader and newsletter writer in the stock trading space. He has over 40 years of experience in the market and has written numerous books including Trade Stocks and Commodities with the Insiders: Secrets of the COT Report and How I Made One Million Dollars … Last Year … Trading Commodities . There is something to be learned from someone who has been in the markets for 40 years and been extremely successful. We were extremely lucky to be privy to a recent interview Larry Williams was a part of. Below are some notes we’ve gathered from the conversation: 1) Fundamental and technical analysis both work, however they will only work under the right market conditions whether it be a bull or bear market. For example, in the latter stages of a bullish market, as a buyer, you might find companies with low P/E ratio to be few and far between. Therefore, if you stick with fundamental analysis, you will most probably miss out on buying opportunities you’d otherwise find through technical analysis. In technical analysis, your focus is more on supply and demand in what is most likely a shorter time frame versus how well a company is fundamentally performing over the long haul. 2) For commodities, retail traders like to buy strength, but commercials like to buy weakness because the cost is less. Our interpretation of this is that most successful traders buy strength because of human behavior. People see an underlying asset like a derivative of oil go up, they jump on it for fear of missing out even if the prices jump and then more people jump on it. Until of course the prices become too ridiculously high and then people try and sell to lock in their profits. Commercial companies that use commodities like to buy at low prices because it keep their cost of goods sold lower. If revenues are constant and you reduce costs then you’d have better margins. 3) Most indicators are redundant, RSI (Relative Strength Index) and STO (Stochastic Oscillator) are essentially the same. There are a lot of things to look at, but when using an indicator understand the purpose of the indicator you are using. There are a lot indicators out there that essentially do the same thing. Both the RSI and STO both help to determine overbought and oversold conditions. While there are evidently cases when regardless of whether or not a stock or index is overbought, prices continue to print higher. The key is not to have too many, keep it simple, and don’t use the same overlapping indicators. 4) Trade your personality, find the system that fits you and lifestyle. Can you trade during work or at home? Do a personality check. One thing I’ve learned through trading in the stock markets for about 10 years now is that you have to trade your personality. Take someone else’s trading plan and trying to trade against that typically doesn’t work out unless the both of you have the same personality. Each of us have different risk tolerance and financial needs. You should only trade with what you are willing to lose and not only that but you have to be comfortable with actually losing that amount. Market Related Information When interest rates go up, stocks have historically been hit hard in the short term, but you’ll want to buy that weakness. The logic behind this is that when rates begin to go up, more people will feel goosed into borrowing and that leveraged money will go into consumption and production. Market tops are typically well formed and structured thereby also taking a long time to develop. On the other hand, market bottoms are based on crashes and plummet on panic. How many positions should you hold? Any more than 4 positions is a lot of multi-tasking. For Larry Williams, 3-4 positions is plenty. Any more than that require too much multi-tasking. In addition, he typically puts on a 2%-4% risk of total trading capital on each trade . Losing four consecutive trades at 4% risk would be a 16% drawdown. What is the biggest lesson Larry has learned from trading? He learned to be humble when you are winning and learning from other people. All highly successful traders are a little unsure of themselves, so they never bet big. None of these successful individuals have had high levels of emotional response to things and therefore don’t get emotionally rattled. What are the four steps to making a trade? Find condition, find the entry, set your target, create trailing stops. What are some other interesting tips and tidbits? 1) Conditional traders look at conditions, seasonality and overlay technicals. 2) Trading should be like combo lock where you need to get a number of factors going your way.

Price And Return Study On Class I Railroads

Summary In our ongoing efforts to point out the value of buying the least expensive stock, we have reviewed the price performance of the Class I railroads over fifteen years. We found that the most expensive stock outperforms about 50% of the time. The more relevant finding, though, is the powerful relative performance of the “cheap group” versus the “expensive group.” We offer this (non-scientific) study as the basis for discussion. We thought we’d take a break from talking about operating yields, the value of avoiding optimism and the fact that most expensive stocks disappoint over time to talk about the value of cheap investing as it relates to railroad investing. Although this short study was in the aid of our railroad obsession, we believe the findings are relevant to many sectors and stocks. We decided to review the price performance of the six Class I railroads for which we have data available for the period 2000-2014. We looked at which company was the least and most expensive on a PE basis at the beginning of each year from 2000 to 2014 inclusive. We then calculated the subsequent yearly returns for the cheapest and the most expensive railroads. The results are interesting (to us, anyway….we know…get a hobby). Results We found that “buying expensive” in some sense beat “buying cheap.” Specifically, buying the most expensive railroad at the beginning of the year was as likely as not to generate higher returns than the cheapest railroad over that year. Before concluding that there’s no value in buying cheap, though, consider that the mean return for cheap was much greater than buying expensive. Over the past fifteen years, on average, buying the cheapest railroad has produced a return of 23.56%, while the return for buying the most expensive railroad generated only an 18.25% return on average. We include the raw data at the end of this document. Source: Gurufocus Although buying expensive may beat buying cheap in any given year, over time, buying cheap has crushed the returns of the positive railroads. In our view, there was less risk associated with these cheaper stock returns also. We acknowledge that this is not a scientifically sound study. We will expand the study to include total returns from dividends. In future, we’ll review the tax consequences of this approach relative to a buy and hold approach. We will compare these returns to a benchmark (perhaps the transportation index). Before that, though, we believe that something need not be scientifically robust to be true. Although we’ll refine the work, this is sufficient evidence that buying cheaper railroads produces higher returns at lower risk than the alternative. Conclusion Although this short study looked only at the Class I railroads, we believe there’s a wider lesson here. Although expensively priced stocks may outperform in a given year, they will perform less well over time. Given that they’re coming from a much less expensive base, cheaper stocks almost inevitably outperform over time. (click to enlarge) Source: Gurufocus Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.