Wheat in the Markets Chaff

In This Issue: Wheat in the Market's Chaff An Action-Packed Autumn The Defensive Hedge We Trade Just Once a Week… And we win 8 out of 10 option trades. We rake in gains of $2,300… $1,150… and $4,550… week in and week out. The average trade lasts just 134 days. Our put spreads do even better – winning 9 out of 10 times! What's our secret? Simple. We NEVER BUY a single option. Find out our winning trade secret here. Wheat in the Market's Chaff 10/17/2014 By Benjamin Shepherd While we haven't quite entered official territory yet for a correction, the S&P 500 has plunged a stomach-churning 6.9%. Though the slide seems to be stabilizing, I don't think I've heard so much talk of recession since the last real market correction -- a decline of 10% or more -- in the summer of 2011 when the S&P dropped just more than 20%. As tough as this latest dip has been for us investors, it's been even harder on companies for which the market is their business. Shares of T. Rowe Price Group (NSDQ: TROW), one of America's largest mutual fund houses and discount brokerage services with more than $738 billion in total assets under management (AUM), has dived nearly 10% since early July. Not only has the company gotten caught up in the market decline, some of its larger institutional clients like pension funds and endowments have been pulling money out over the past few quarters. Institutional investors pulled about $3.8 billion of assets out of T. Rowe price in the second quarter alone, causing the company to miss analyst's revenue growth forecast for the period. Zeroing in on revenue growth alone is like missing the forest for the trees. It is true that net revenue in the second quarter was only $984.3 million rather than the $991 million the analysts expected. But at $983 million, net revenue was still up by 15.2% compared to the same period last year. Quarterly earnings were also up from $0.92 in the second quarter of 2013 to $1.13, actually beating analyst estimates and AUM hit a new record high despite the institutional outflows. It doesn't sound to me like there's much to actually worry about there. There's also a lot to like about T. Rowe Price. For one thing, more than half of the company's managed assets are in retirement accounts and variable annuities portfolios, making them very sticky and unlikely to move. Most of us have our retirement plans through our employers, so we don't have much choice in the matter and employers typically set those plans up where they can get the best deal. There are also often penalties involved in closing variable annuities, making investors loath to move them unless there are very good reasons. Good reasons for investors to leave T. Rowe Price are pretty hard to find, considering that more than three quarters of the company's mutual funds are being their peers on 1-, 3-, 5- and even 10-year periods. Mutual fund investors can be quick to dump a dog, but they rarely dump a winner. The company is also working to expand its presence in international markets, deploying a growing salesforce to Europe in order to attract more institutional clients in the region. That's a nascent effort that will likely take a few years to pay off, but it is promising, especially if the region's economy turns around soon. Aside from that, T. Rowe Price also offers an extremely popular line of target-date retirement funds. Since you're reading this, you probably know a little something about investing. But there are a lot of other folks that, while they know they should be saving for retirement, don't have the foggiest idea of what they're doing. Target-date funds have proven extremely popular with that latter set of investors, offering one-stop parking places for retirement money. Investors pick the target-date fund which most closely matches their expected retirement date, then the fund manager adjusts the fund's investments to match the expected risk profile of people working towards retirement. Over the past five years, T. Rowe's target-date funds have grown from about $33 billion of AUM to more than $140 billion. The popularity of those funds has helped to drive the company's 5-year average revenue growth of 5.5% while pushing earnings per share up by 16.5% over the same period. While earnings growth is likely to slow somewhat in the coming years, analysts still forecast average growth of better than 10% over the next five years. At the same time, this recent sell-off has pushed shares of T. Rowe Price down to an almost 52-week low even as their PE ratio has fallen to 17.5, well below their average of 23.6. The company's PE-to-growth ratio, which is basically the PE ratio dividend by forecast annual EPS growth, is also 0.97, implying that its shares are undervalued at the moment. T. Rowe Price also pays a modest but growing quarterly dividend of $0.44, for a yield of 2.3%, having increased it in each of the last 10 years. Despite the recent stumbles, T. Rowe Price Group continues to turn in strong growth on all fronts and is a great buy up to $83. Google, Apple and Microsoft are investing in this… you should, too! $3 billion is a lot of money. Even for Google. Yet they didn't flinch this past year when they invested that much in a new technology that's creating a $600 billion market. That's twice the GDP of Singapore! It's bold, calculated moves like these that have made Google arguably the most successful company of the past decade while its competition shriveled up and died. Apple and Microsoft are also making investments to grab their share of this massive new market. Don't sit on the sidelines and watch others get rich. Grab your share of the pie by going here. An Action-Packed Autumn 10/17/2014 By David Dittman October will soon give way to November. This year, that means saying goodbye to another fraught 10th month. October is the month of the 1987 crash. And the onset of the Great Depression is popularly traced to "Black Tuesday," Oct. 29, 1929. According to Ned Davis Research, of the "69 major trend changes since 1900, nine took place in October." But the Stock Trader's Almanac notes that the six months that follow October are, on average, the best half of the year for equities. November will also usher in the last midterm election of the Obama presidency. That event--voting for all 435 seats in the US House of Representatives and the full terms for 33 of the 100 seats in the US Senate along with 38 state and territorial governorships, 46 state legislatures (all except Louisiana, Mississippi, New Jersey and Virginia), and numerous state and local races--will generate a lot of noise and little signal. The most likely outcome at the federal level--based on recent polling trends as well as the forecast of a senior member of a sitting US Senator's staff (a Democrat, not on the ballot this year)--is Republican control of both houses of Congress. There is a zero percent chance of the House flipping Democratic, a function of gerrymandered congressional districts in the aftermath of the 2010 census. We will endure two more years of divided government, though the balance of power will have shifted rightward. With a Democratic Senate no longer in place to block legislation passed in the Republican-controlled House of Representatives, President Obama will have to either sign or veto bills passed by Congress. There are mutual interests that could drive passage and signature of meaningful legislation on such matters as free trade, corporate tax reform, federal highway funding and the basis of US military operations in the Middle East. There are also areas where Republicans will very likely be able to pick up sufficient support across the aisle to pass bills. Such areas include energy policy, where regulators could be pressured to expedite the process for granting export licenses for liquefied natural gas and to make it easier to drill for oil on federal lands. The GOP will likely want to pass a formal federal budget, and it seems highly unlikely they'll make the mistake of playing politics with the debt ceiling, which must be raised in 2015, and risk a catastrophic default. It's also highly likely that a Republican-controlled Congress will pass a bill mandating approval of TransCanada Corp's (TSX: TRP, NYSE: TRP) Keystone XL pipeline project, which would put Mr. Obama in the position of either cowing to left-wing environmentalists or signing off on a jobs-creating infrastructure project. Republicans will want to demonstrate their ability to govern responsibly ahead of the 2016 presidential cycle, while Mr. Obama's eyes will no doubt turn to his legacy in his last years in office. Kentucky Republican Mitch McConnell--who, according to my senior Senate staffer friend, is on track to survive a stiff reelection challenge from Democratic nominee Alison Lundergan Grimes and become Senate Majority Leader--noted in a recent speech to donors, "We own the budget." That will allow Republicans to use riders on spending bills to restrict the federal bureaucracy. No money will be budgeted to fund federal health care programs, for example, or the Environmental Protection Agency (EPA). This, of course, is a critical issue for electric utilities and their investors. But outcomes on Tuesday, Nov. 4, will likely have very little impact on EPA's proposed Existing Source Performance Standards for electric generating units, its "Clean Power Plan." It takes 60 votes in the Senate to attach riders to normal spending bills. And that means, based on the Republicans eking out a slim majority, Mr. McConnell will need to pick up Democratic votes to impede implementation of the rule on carbon emissions. In any event, the Clean Power Plan represents mostly business as usual for the sector. Persistent low natural gas prices are already pushing industry away from coal. At the same time, the proposal likely faces substantial implementation and litigation hurdles before the compliance period begins next decade. State governments, even those friendly to the rule, have complained about difficult timelines and concerns that the rule doesn't give enough credit to low-emitting sources including existing nuclear plants. EPA extended the comment period on the rule until Dec. 1, 2014, but still hopes to finalize it by June 2015. Approval of state plans required for the rule and ultimate implementation will be a job for the next president's administration. New Nukes Speaking of nuclear power, on Sept. 30, 2014, the US Dept of Energy (DoE) announced that as much as $12.6 billion in loan guarantees could be extended to help finance the next generation of nuclear energy technologies. According to the DoE, such guarantees are necessary to help commercialize advanced nuclear projects that are often unable to secure traditional financing because of their scale and use of innovative technologies. The proposal has yet to be finalized is open to public comment. It's another move designed to help diversify the country's clean energy portfolio. It comes as competition from cheap natural gas and subsidized wind power, along with high operating and maintenance costs at aging nuclear reactors, have led operators such as Dominion Resources Inc (NYSE: D) and Entergy Corp (NYSE: ETR) to retire nuclear power plants early. Generation of nuclear power doesn't lead to carbon dioxide or other greenhouse gas emissions. As such nuclear must be part of a serious effort to address climate change. The DoE has identified four "key technology areas of interest" for the loan guarantees, including small modular nuclear reactors that are typically 300 megawatts or less in size and can be manufactured in factories rather than built onsite. The agency is also interested in projects involving advanced nuclear reactors with "evolutionary, state-of-the-art design improvements" in areas of fuel technology, thermal efficiency and safety systems. The Doe will also consider funding improvements and upgrades to existing reactors to increase efficiency or capacity, and "front-end" nuclear projects, such as uranium conversion or enrichment. The draft solicitation follows the DoE's $6.5 billion loan guarantee for the construction of two nuclear reactors at Southern Company's (NYSE: SO) Vogtle plant near Waynesboro, Georgia, the first new reactors to be built in the US in 30 years. Income-Starved? Whether you're building a nest egg for retirement or are already retired, you need income now. But it's tough finding high-quality, long-term income investments, what with interest rates scraping the bottom of the barrel. Here's good news… I've discovered a new, secret weapon for pinpointing low-risk, high-income investments. It's like a secret blueprint for nabbing big dividends. How does a 10.32% dividend sound? That's just one of them – I have 4 more! Here's what you need to know to get in NOW. The Defensive Hedge 10/17/2014 By Ari Charney If you're a relative newcomer to investing in the energy sector, then the sharp selloff in crude oil since late September has been an understandable shock. Although North American crude oil benchmark West Texas Intermediate (WTI) has risen slightly from its recent low, it's still down about 9.1 percent since the end of September. Over that same period, the S&P/TSX Energy Index has essentially mirrored this decline, falling by about 9.4 percent in US dollar terms. Of course, recent downward momentum in crude oil prices exacerbated a trend that had already been underway since midyear. The price per barrel of WTI crude peaked near USD104 in late June before beginning the protracted swoon that culminated in the recent selloff. Over that period, WTI is down about 20.2 percent. Meanwhile, Canadian heavy crude benchmark Western Canada Select (WCS) has fallen by about 20.7 percent in US dollar terms since its mid-June high. Owing to the fact that WCS is a heavier grade of crude than light WTI and therefore costlier to refine, the former tends to trade at a persistent discount to the latter. Transportation bottlenecks at key pipelines have also contributed to pricing differentials between the two commodities in recent years. But over the past year, that differential has narrowed considerably, from USD42 per barrel in November 2013 to USD13.65 per barrel as of today. That improvement came about in part because pipeline traffic eased somewhat, while producers found novel ways to get their energy products to market, including mostly crude by rail, but also crude by truck and barge among other modes. Weakness in the Canadian dollar has also helped, with the exchange rate falling in sympathy with crude the past few weeks due to the perception that the loonie is a resource-backed currency. Earlier this week, the exchange rate hit a five-year low of USD0.8852 and is only slightly up from that level at present. That's a slide of nearly 6 percent from the currency's interim high at the beginning of July. In addition to the aforementioned narrowing differential, a weaker currency should provide some aid to producers' bottom lines. Most commodities, including crude, are priced in US dollars when traded in the global marketplace, so that will give Canadian energy companies a modest bump when foreign sales are translated back into Canadian dollars. Nevertheless, Canadian energy stocks have collectively fallen by nearly 20 percent in US dollar terms since their mid-June highs. There are a number of factors weighing on oil prices, including weakening global demand coupled with uncertainty about near-term economic growth, as well as the glut of production from prolific US shale plays and Canadian oil sands. The thing to remember is that we've been here before, as have most of the publicly traded energy producers whose shares have been punished these past few months. While the recent surge in unconventional production is a relatively new feature of the North American energy landscape, volatile commodity prices are not. And since management teams have been bloodied by past boom-and-bust cycles, most attempt to mitigate at least some risk by hedging their production. Although hedging programs typically involve the use of financial derivatives, these are not intended as speculative investments. Instead, the goal of these hedges is to set a ceiling and floor for a meaningful percentage of production. The ceiling allows for some participation in crude's upside during a bull run for the commodity, while the floor limits downside risk during an extended swoon. No company has a crystal ball, but at the very least this approach helps stabilize cash flows in the near to medium term, which not only smooths out earnings, but also enables management to more effectively allocate capital. We reviewed the hedging programs of the five buy-rated crude oil producers in the Canadian Edge Portfolio. All aim to pursue hedges that cover about 50 percent of production, with 45 percent to 68 percent of second-half crude production hedged as of the end of the second quarter. And some have already hedged a portion of their expected production in 2015. WTI is the benchmark commodity for these hedging programs, and the average price per barrel is locked in around USD95 for the remainder of the year, which compares quite favorably to WTI's recent price near USD83. So how do oil company executives go about structuring their hedging programs? According to energy sector experts with the consultancy Deloitte, oil producers typically undertake a qualitative and quantitative risk assessment that examines their exposure to underlying commodity prices. Then, companies will review historical pricing and other data and evaluate hedging strategies for various scenarios, including stress tests. Based on the results from such modeling, management can determine the appropriate level of hedging in accordance with their appetite for risk, along with meeting objectives such as greater clarity on near-term financial performance and managing analyst expectations. In simpler terms, as Deloitte principal Paul Campbell put it, an oil producer might set its hedging goals by first asking, "What margin do I need per barrel of oil over the next five years to continue operations and meet my growth plans?" With WTI trading near USD83, up from an intra-day low of USD79.78 on Oct. 16, in-place hedges could prove more critical than ever if oil continues to trade near these levels for the remainder of the fourth quarter. That's because many Canadian oil projects have a breakeven point of around USD80 per barrel, according to economists with CIBC World Markets. For global oil prices, the next important date to watch is Nov. 27, when the Organization of the Petroleum Exporting Countries (OPEC) has its next meeting. Though a cut in production could bolster oil prices, The Wall Street Journal reports that for now OPEC members seem willing to continue production at current levels to maintain market share while undercutting higher-cost producers in North America and elsewhere. This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email. The medical buy that will mint millionaires Arthritis continues to disable millions of Americans… Advances in medical technology have made joint replacement a viable solution. But the existing companies can barely keep up with the growing demand. We've found a small orthopedics company that's scaling up to conquer an expanding market. Investors will earn billions as America is rehabilitated. This is the best medical buy we've seen in years… Click here to learn more. You are receiving this email at benjamart.ss.stock@blogger.com as part of your subscription to Investing Daily's Stocks To Watch, published by Investing Daily. To ensure delivery directly to your inbox, please add postoffice@investingdaily.com to your address book today. Email Preferences | About Us | Premium Services | Contact Us | Privacy Policy Copyright 2014 Investing Daily. All rights reserved. Investing Daily, a division of Capitol Information Group, Inc. 7600A Leesburg Pike West Building, Suite 300 Falls Church, VA 22043-2004 U.S.A.