Derivatives are simply investments that trade based on the price of something else. In other words, the price of a derivative is “derived” from something else. #-ad_banner-# Often that something else is an index, a stock or an exchange-traded fund (ETF). While derivatives can be customized and complex, there are also “plain vanilla” derivatives, and this variety includes ordinary call options and put options on stocks and ETFs. An option is a derivative because the price of the option is based on the price of the underlying stock or ETF. Options give… Read More

Derivatives are simply investments that trade based on the price of something else. In other words, the price of a derivative is “derived” from something else. #-ad_banner-# Often that something else is an index, a stock or an exchange-traded fund (ETF). While derivatives can be customized and complex, there are also “plain vanilla” derivatives, and this variety includes ordinary call options and put options on stocks and ETFs. An option is a derivative because the price of the option is based on the price of the underlying stock or ETF. Options give buyers the right to buy (in the case of a call option) or sell (with puts) a stock or ETF at a predetermined price (the strike price) before the option expires. Options are typically used to leverage a move in an underlying stock or ETF, and they can potentially be used to provide portfolio insurance for individual investors. In order to understand the costs and potential benefits of portfolio insurance, we will use an example. Imagine an investor with an account worth $10,000 invested entirely in the stock market. If the investor believes that stocks are… Read More

The notion of a wide moat around your castle has been around for centuries. The early moats were designed to repel rivals and prevent them from invading and conquering. Today’s moats also keep rivals at bay. Companies that have built a solid moat around their business, limiting the threat of competition and price wars to some degree, tend to garner higher valuations from investors. How do we know that? Because the Market Vectors Wide Moat ETF (NYSE: MOAT) exchange-traded fund (ETF), which debuted in April 2012, is handily outperforming its benchmark, the S&P 500 Index. The question for… Read More

The notion of a wide moat around your castle has been around for centuries. The early moats were designed to repel rivals and prevent them from invading and conquering. Today’s moats also keep rivals at bay. Companies that have built a solid moat around their business, limiting the threat of competition and price wars to some degree, tend to garner higher valuations from investors. How do we know that? Because the Market Vectors Wide Moat ETF (NYSE: MOAT) exchange-traded fund (ETF), which debuted in April 2012, is handily outperforming its benchmark, the S&P 500 Index. The question for investors: Is it better to own this fund, or to try to find your own companies with solid moats? To answer this, let’s first look at how this ETF is constructed. Deep Concentration Unlike many ETFs that own a tiny slice of hundreds of companies, this ETF has a roughly 5% weighting in just 20 companies. In the portfolio, you’ll find household names such as Coca-Cola (NYSE: KO), Cisco Systems (Nasdaq: CSCO), eBay (Nasdaq: EBAY) and Bank of New York (NYSE: BNY). It’s immediately clear why companies like Cisco or eBay get the nod as they possess the products… Read More

Stocks closed up for the third week in a row. This could be the signal that a pullback is finally near. Look For More Gains Into Year End SPDR S&P 500 (NYSE: SPY) gained 0.89% last week and reached another new all-time high. This was the third week in a row that SPY closed higher. Market prices do not move randomly, and consecutive runs (periods of time when the market closes up or down for a number of weeks in a row) mean something.#-ad_banner-#​ In general, runs show the direction of the trend. If prices were random,… Read More

Stocks closed up for the third week in a row. This could be the signal that a pullback is finally near. Look For More Gains Into Year End SPDR S&P 500 (NYSE: SPY) gained 0.89% last week and reached another new all-time high. This was the third week in a row that SPY closed higher. Market prices do not move randomly, and consecutive runs (periods of time when the market closes up or down for a number of weeks in a row) mean something.#-ad_banner-#​ In general, runs show the direction of the trend. If prices were random, there should be a 50/50 chance that they will be up or down in any week. Testing shows that SPY has actually closed up in 56% of the weeks since 2001. Over the long term, stock markets have an upward bias, and this results in slightly more up weeks than expected from a random process. In the short term, markets tend to revert to mean. That means we would expect a pullback after a gain. If you had bought SPY after an up week and sold one week later, you would have enjoyed winning trades 50.2% of the time, but… Read More

Throughout the summer, investors were treated to a steady drumbeat of sobering news. Retail sales were flattening out. China and other emerging markets appeared set to consume less of our exports. The steady implementation of the budget sequester was leading to a drop in government spending on technology and services. And many companies showed a lot more interest in buybacks and dividends than capital spending, which is a sure a sign of CEO pessimism.#-ad_banner-# So how do you explain the surprisingly robust profit picture being delivered in the current earnings season?  With roughly 40% of… Read More

Throughout the summer, investors were treated to a steady drumbeat of sobering news. Retail sales were flattening out. China and other emerging markets appeared set to consume less of our exports. The steady implementation of the budget sequester was leading to a drop in government spending on technology and services. And many companies showed a lot more interest in buybacks and dividends than capital spending, which is a sure a sign of CEO pessimism.#-ad_banner-# So how do you explain the surprisingly robust profit picture being delivered in the current earnings season?  With roughly 40% of the S&P 500 weighing in thus far (and another 25% to go next week), 68% of all reporting companies have delivered a positive earnings surprise, according to Standard & Poor’s. That compares with just 18% of companies reporting negative surprises. Frankly, I wouldn’t have been shocked if those numbers were reversed. The odds against yet another stellar earnings season seemed quite long. Year-over-year comparisons tell the story. Among companies in the S&P 500 that have reported third-quarter results thus far, profits are up 8.4% from a year ago, more than triple the expectations of 2.5% for these… Read More

I have a “love-hate” relationship with LeBron James. I was turned off by “The Decision” — a crass July 2010 show in which he announced that he would be “taking his talents to South Beach” to play for the Miami Heat after years of playing for the Cleveland Cavaliers. And then came the 2013 NBA Finals. I’ve been a San Antonio Spurs fan for nearly 30 years, and LeBron and the Miami Heat ripped my heart out in winning one of the most compelling NBA Finals of all time.#-ad_banner-# Still, there’s a lot to like… Read More

I have a “love-hate” relationship with LeBron James. I was turned off by “The Decision” — a crass July 2010 show in which he announced that he would be “taking his talents to South Beach” to play for the Miami Heat after years of playing for the Cleveland Cavaliers. And then came the 2013 NBA Finals. I’ve been a San Antonio Spurs fan for nearly 30 years, and LeBron and the Miami Heat ripped my heart out in winning one of the most compelling NBA Finals of all time.#-ad_banner-# Still, there’s a lot to like about the guy. Over the years, I’ve admired the maturity LeBron has shown, “The Decision” notwithstanding. He has gone from impoverished kid and high-school phenom to NBA megastar and savvy businessman. That savvy has drawn the admiration of many outside the sports world — including one man who is as iconic in the business world as LeBron is when it comes to basketball. Who am I talking about? Warren Buffett. The Oracle of Omaha is a fan of King James? Yeah. “He’s savvy, Buffett told the Miami Herald in November 2012. He’s smart about financial matters. It’s amazing… Read More

Billionaires go to jail for it. Money managers have fled the country and faked suicides when it’s suggested. Hedge funds have paid billions in fines and been harassed by the Securities and Exchange Commission (SEC) on little more than a hint of its occurrence.  Flickr/DannyB ​Celebrity investor and high-tech titan Mark Cuban recently fought and secured a courtroom victory after being accused of violating insider trading laws. Most recently, celebrity investor and high-tech titan Mark Cuban fought and secured a courtroom victory when accused of violating this regulation. Famed entrepreneur and TV personality Martha… Read More

Billionaires go to jail for it. Money managers have fled the country and faked suicides when it’s suggested. Hedge funds have paid billions in fines and been harassed by the Securities and Exchange Commission (SEC) on little more than a hint of its occurrence.  Flickr/DannyB ​Celebrity investor and high-tech titan Mark Cuban recently fought and secured a courtroom victory after being accused of violating insider trading laws. Most recently, celebrity investor and high-tech titan Mark Cuban fought and secured a courtroom victory when accused of violating this regulation. Famed entrepreneur and TV personality Martha Stewart wasn’t as fortunate as Cuban — she spent time behind bars in 2004 for what amounted to be a relatively small amount of money. The strangest thing is, this action is considered a legitimate edge in the commodity markets. It’s only in the stock market where it’s considered a mortal sin. If you haven’t guessed, I am talking about insider trading.  Insider trading offers an unfair advantage to those with the information and capacity to profit from it. It is the desire to level the playing field that motivates the authorities to clamp down on insider trading. It truly… Read More

The finance department at Charles Schwab (Nasdaq: SCHW) has a very large problem. The firm has been so successful at attracting clients over the past half-decade that the cash Schwab holds for its clients has swelled nearly 190% from 2008, to a recent $86 billion. But in this era of low interest rates, the firm hasn’t been able to fully capitalize on that success.#-ad_banner-# Schwab’s net interest margin (which is the difference between the rate it pays to clients in their cash accounts and Schwab’s own interest income on those assets held)… Read More

The finance department at Charles Schwab (Nasdaq: SCHW) has a very large problem. The firm has been so successful at attracting clients over the past half-decade that the cash Schwab holds for its clients has swelled nearly 190% from 2008, to a recent $86 billion. But in this era of low interest rates, the firm hasn’t been able to fully capitalize on that success.#-ad_banner-# Schwab’s net interest margin (which is the difference between the rate it pays to clients in their cash accounts and Schwab’s own interest income on those assets held) has been squeezed to almost nothing. Yet good new lies ahead. As interest rates start to rise, so will Schwab’s net interest margins. It happens every cycle, and investors are only just beginning to warm up the profit boom yet to come. Shares of Schwab have already begun to move up in anticipation of this trend, moving back into the mid-$20s, right where they stood back in 2007. But investors shouldn’t think they’ve missed the boat. Schwab’s base of clients has more than doubled since 2007 (leading to assets under management that now exceeds $2 trillion). So as interest rates… Read More

For the past two months if you asked most investors what they feared most, they would have said the economic impact caused by political infighting. And why wouldn’t they? During a government shutdown, small businesses can’t apply for loans to expand. Clinical drug trials are put on hold. New oil and gas drilling permits don’t get approved. And both consumers and companies are reluctant to spend in periods of economic uncertainty.#-ad_banner-# Before Congress arrived at a last-minute deal, the impact of Washington’s dysfunction concerned me. But as an investor, it didn’t scare me out of the market. Maybe… Read More

For the past two months if you asked most investors what they feared most, they would have said the economic impact caused by political infighting. And why wouldn’t they? During a government shutdown, small businesses can’t apply for loans to expand. Clinical drug trials are put on hold. New oil and gas drilling permits don’t get approved. And both consumers and companies are reluctant to spend in periods of economic uncertainty.#-ad_banner-# Before Congress arrived at a last-minute deal, the impact of Washington’s dysfunction concerned me. But as an investor, it didn’t scare me out of the market. Maybe it’s because I’ve been investing for more than 30 years now. I’ve had money in the market through almost every conceivable economic and financial scenario — historically high and low interest rates, higher and lower tax rates, recessions and overheated economies. What I’ve learned is that there are always ways to minimize losses and maximize gains when conditions change. But there is one thing that does scare me: People aren’t investing for their retirement. The annual Wells Fargo Retirement Survey of middle class Americans almost always makes me nervous. Here are some highlights from the 2012 survey… — 30% of… Read More

Weekend headlines focused on new highs in the major market indexes. New highs in the fourth quarter are bullish, and any pullback should be treated as a buying opportunity. Tech Stocks At 13-Year Highs SPDR S&P 500 (NYSE: SPY) gained 2.43% last week and reached a new all-time high. PowerShares QQQ (Nasdaq: QQQ) gained 3.69% and closed at its highest price since November 2000. The monthly chart is shown below. Traders often focus on daily or weekly charts. Monthly charts also offer valuable insights, and the chart of QQQ shows an uptrend and… Read More

Weekend headlines focused on new highs in the major market indexes. New highs in the fourth quarter are bullish, and any pullback should be treated as a buying opportunity. Tech Stocks At 13-Year Highs SPDR S&P 500 (NYSE: SPY) gained 2.43% last week and reached a new all-time high. PowerShares QQQ (Nasdaq: QQQ) gained 3.69% and closed at its highest price since November 2000. The monthly chart is shown below. Traders often focus on daily or weekly charts. Monthly charts also offer valuable insights, and the chart of QQQ shows an uptrend and an upside breakout. I’ve added a few notations to the chart that support the argument for higher prices.#-ad_banner-# Going back to the 2000 high, I have added Fibonacci retracement levels. Common Fibonacci numbers are 38.2% and 61.8%. Once prices retrace 61.8% of the decline, a bullish trend is confirmed. Friday’s close of $82.15 is just above that level. In 2008, the bear market formed a pattern that could be called a rounding bottom. The name of the pattern is less significant than what a price pattern tells us. In general, technical analysts look at patterns because they expect… Read More

Here’s a not-so-bold prediction: IBM (NYSE: IBM) is likely to be the next company in the Dow Jones Industrial Average to replace its CEO.#-ad_banner-# Since its board of directors appointed Virginia Rometty to lead the company on Oct. 26, 2011, IBM has steadily morphed from a technology leader to a cash cow. Innovation has been replaced by financial engineering, and the company’s just-completed third-quarter conference call was an exercise in deep frustration as analysts fumed that Big Blue keeps delivering another set of missteps. It’s not Rometty’s fault. She inherited a… Read More

Here’s a not-so-bold prediction: IBM (NYSE: IBM) is likely to be the next company in the Dow Jones Industrial Average to replace its CEO.#-ad_banner-# Since its board of directors appointed Virginia Rometty to lead the company on Oct. 26, 2011, IBM has steadily morphed from a technology leader to a cash cow. Innovation has been replaced by financial engineering, and the company’s just-completed third-quarter conference call was an exercise in deep frustration as analysts fumed that Big Blue keeps delivering another set of missteps. It’s not Rometty’s fault. She inherited a bloated behemoth. But it’s hard to find any solid moves that might pave the way for a turnaround either. In the eyes of investors, Rometty got off to a good start. She immediately tasked her charges with finding every opportunity to squeeze out profits, which pushed shares above $200 in early 2012 for the first time in company history. That time held another, more dubious distinction: IBM posted a revenue decline in the first quarter of 2012 and has yet to show revenue growth since. At this point, analysts have moved their ratings to “neutral” or “hold,” with price targets… Read More