Daily Gains Letter

risk management


How to Protect Your Portfolio from Fluctuations and Profit from Rising Oil Prices

By for Daily Gains Letter | Aug 20, 2013

Protect Your Portfolio from Fluctuations and Profit from Rising Oil PricesNot too long ago, the per-barrel price of oil was hovering close to $85.00. Now, a few months later, it trades above $107.00; this is an increase of roughly 25% in a fairly short period of time.

One may ask why this matters, and what it means for the overall U.S. economy.

At the most basic level, the price of oil has a very deep impact on consumer spending, which makes up 70% of the gross domestic product (GDP) of the U.S. economy. It impacts consumers in two ways.

First, let this be clear: while the average American Joe doesn’t use crude oil in raw form, he does use it in the form of gasoline in his car. Oil and gasoline prices have a direct relationship; together, they shrink the size of consumers’ pockets. When oil prices increase, consumers end up spending more at the pump and less on goods they want to buy. Note the black line in the chart below: it shows gasoline prices per gallon, and their movement along with oil prices.Take a look at the chart below to get a better idea about surging oil prices:

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

Second, when oil prices increase, they cause the transportation costs to go higher as well. Eventually, the increased costs are transferred to customers; this makes goods and services more expensive, and their dollar buys less than what it did before.

So how can investors profit from increasing oil prices?

When oil prices go up, different sectors react in different manners. This means some are highly affected, while others, not so much.

Consider the airline industry: what … Read More


Why Negativity Toward Gold Bullion Isn’t Affecting Physical Demand

By for Daily Gains Letter | Jul 30, 2013

gold bullion pricesGold bullion prices fell below $1,200 an ounce by the end of June; now, they are trading above $1,300, down from well above $1,600 in January. Looking at this price action in the gold bullion market, investors are asking if the recent surge after making lows is just a rally based on short covering—investors who were short-closing their positions—or if it’s due to fundamental reasons.

I stand in the camp that believes the rise in gold bullion prices we are seeing is due to fundamental reasons. That said, the sell-off we witnessed in the precious metal prices could take some time to recover.

In spite of the negativity and the notion that gold bullion isn’t useful in one’s portfolio, the physical demand continues to increase. Keep in mind that those who buy gold in physical form tend to have a long-term focus, compared to those in the paper market, who are there to speculate.

We are seeing demand increase here in the U.S. economy. For example, look at the demand for gold bullion coins sold at the U.S. Mint; Richard Peterson, acting director of the U.S. Mint, described it as “unprecedented.” (Source: Mason, J., “U.S. bullion coin demand still at ‘unprecedented’ levels: Mint,” Reuters, last accessed July 29, 2013.) But in the Far East, the demand is much higher.

Consider this: UBS AG (NYSE/UBS), one of the biggest gold-dealing banks in the global economy and based in Switzerland, announced that it will start to store gold bullion in Asia—specifically Singapore—for the first time.

What are the reasons for this move? “Notwithstanding the drop in gold prices, we are still receiving … Read More


Two Key Measures for Picking the Right Gold Producers

By for Daily Gains Letter | Jul 25, 2013

Two Key Measures for Picking the Right Gold ProducersMy good old friend, Mr. Speculator, is at it again. This time around, it’s not the housing market or technology stocks that he thinks will see significant gains—it’s the gold producers. His argument is very simple: gold prices are down, and if they bounce back, gold producers will be able to provide maximum gains to investors’ portfolios, compared to holding physical metal.

There’s some merit to Mr. Speculator’s argument. Gold producers’ stock prices can certainly profit heavily as gold prices increase, providing significant gains to an investor’s portfolio.

There is no rocket science behind it. If a gold producer is able to take out gold from the ground at $1,000 per ounce with all costs in, and if the price of gold is at $1,300 an ounce, then that gold producer will profit $300.00 per ounce, or 30%. Now suppose the price goes to $1,400; his profit will jump to 40%, a 10% increase, as the price of gold only goes up by 7.7%. The phenomenon eventually reflects the stock price.

Sadly, the biggest question haunting gold investors these days is if the gold prices have bottomed, or if they are headed for more scrutiny. Keep in mind that gold producers are highly correlated to gold prices.

Jim Rogers, one of the most famous commodity traders, said gold will see a “complicated bottoming process.” In his interview with Business Insider, he also said that the yellow metal may go down to $1,000, or even $900.00. (Source: Badkar, M., “JIM ROGERS: Gold Will Bottom When The Mystics Are In Despair, And It Could Take $900 Gold To Get There,” Business Insider, … Read More


Three Current Risks You Need to Be Aware of to Protect Your Portfolio Now

By for Daily Gains Letter | Jul 23, 2013

Aware of to Protect Your PortfolioKey stock indices are roaring higher—and this is making bulls happier, while bears are arguing the rise isn’t sustainable. Noise is at its peak. Regardless of this, investors shouldn’t lose sight of what is happening, and always manage their risk.

Since the beginning of the year, the S&P 500 has increased more than 18%. Other key stock indices, like the Dow Jones Industrial Average, have shown a similar pattern and have provided stock investors with profits.

Take a look at the chart of the S&P 500 below. At the very least it’s in a breakout mode. The S&P 500 broke above its long-term resistance, the price level where sellers dominate, around 1,550–1,575. It was tested twice—once in early 2000, and then in 2007—but failed to break above. Technical analysts would say what happened on the chart of the S&P 500 is simply bullish.

They would argue that when a resistance breaks, it becomes the support level—the price area where buyers dominate—and when the support breaks, it ends up becoming the resistance level.

S&P 500 Large Cap Index Chart

Chart Courtesy of www.StockCharts.com

I’m not saying key stock indices will decline from here and the S&P 500 will come crashing down. The path of least resistance seems to be towards the upside, while I focus on risk management—knowing what kind of risks are present and what kinds of events investors can expect.

The first and most important thing investors need to note is that the key stock indices rising upwards of 18% in the first half of the year—for a 36% yearly move—may be too much to handle.

It wouldn’t be a problem if the U.S. economy … Read More


How to Manage Your Risk in These Volatile Markets

By for Daily Gains Letter | Jul 1, 2013

Risk Management in Today’s Gold MarketDuring the financial crisis, investors saving for retirement were punished for staying in the stock markets. The key stock indices plummeted and took many investors’ wealth.

After seeing the crash taking a heavy toll on their portfolios, investors moved into safer asset classes. They rushed to bonds, gold, and gold miners because they thought that’s where the value was—and where they could make some of their lost savings back.

Things are different now. If investors are still tied to those asset classes, chances are they are feeling a pinch. Gold prices are down significantly from their peaks and bond prices appear to be in a freefall. Since the beginning of the year, gold has fallen nearly 30% in value, and bond yields—those of 30-year U.S. bonds—have soared more than 20%.

Sadly, even with all the financial innovation, there isn’t an investment instrument that protects an investor’s portfolio completely from market fluctuations. However, investors can minimize their downside risks significantly by managing their risk properly.

Managing risk may sound like an easy concept at first, but it’s far from it. It ultimately consists of three steps and requires a significant amount of research. The three risk-management steps are risk identification, risk evaluation, and risk reduction.

Risk Identification: This is the most important part in risk management. Investors need to find what kind of risks will affect their portfolio. For example, imagine a person heavily invested in one sector; even if he or she is diversified across different companies, troubles can take a chunk out of their portfolio. Take gold as it stands now: even if investors bought different gold miners when … Read More


Why Knowing the Currency Risk Can Pay Off

By for Daily Gains Letter | May 16, 2013

Knowing the Currency RiskPortfolio management is the key to growing savings over time. The implication behind this is that if an investor manages their portfolio regularly, adjusting asset classes based on market and economic conditions, they can reduce their risk and earn a decent rate of return, as well as peace of mind.

That said, investors need to look out for many different types of risks. To name a few, investors need to protect their portfolio from market fluctuations, reduce industry-specific risks, and keep in mind the rate of inflation.

While these risks may be known to investors—and they are very often quoted in the financial media—sometimes they may be exposed to currency fluctuation in hindsight. This type of risk is often referred to as “currency risk.”

Simply stated, currency risk is how the portfolio will react to the fluctuations in the exchange rates of currencies.

To say the very least, it can affect the rate of return investors earn on their portfolio, and without a doubt, investors need to be aware of this phenomenon.

For example, if an investor buys shares of a company that trades on a Canadian stock exchange, and their broker’s account is valued in U.S. dollars, upon buying the Canadian stock, investors will need to convert their U.S. dollars into Canadian dollars and buy the shares.

Now, let’s say if the stock goes up by five percent over a month and investors want to sell their position. But assume that, as the stock price appreciated, the value of the Canadian dollar went down by two percent compared to the U.S. dollar. As a result, investors’ actual gains would … Read More


Can the Eurozone Crisis Really Make a Dent in Your Portfolio?

By for Daily Gains Letter | May 8, 2013

Eurozone CrisisThe eurozone has sent waves of confusion through the global economy, and investors are concerned about what it could do to their portfolio. To say the very least, investors have all the right to be worried—bulls and bears are creating noise, making investment decisions even more difficult to make.

 

Bears’ Argument

The eurozone is in recession for the second time since 2009.

Back then, the problem was the debt-infested nations like Greece, Spain, and Portugal that swept the region with a slowdown, but now things appear to be different. The strongest nations like Germany and France are showing bleak performance. Similarly, other smaller nations that didn’t even make the news before are now in the headlines—just look at Slovenia and the Netherlands, for example.

Why is this a concern? The problem at the very core is that there are America-based companies that operate in the eurozone. If the region suffers through severe economic slowdown once again, the demand from consumers will decline due to high unemployment. As a result, the U.S. companies will see their sales decline, and eventually, their portfolio will deteriorate.

Bulls’ Argument

To fight this economic slowdown in the region, the European Central Bank (ECB) has taken some major steps. For example, to reduce the risks of the region dissolving, the ECB said it will “do whatever it takes” to save the region. (Source: “Verbatim of the Remarks Made by Mario Draghi,” European Central Bank web site, July 26, 2012, last accessed May 7, 2013.)

On May 2, the ECB announced a cut in its interest rates, lowering them to 0.50% from 0.75%. In addition, while … Read More


Two Simple Ways to Reduce Your Costs When Trading Stocks

By for Daily Gains Letter | Apr 10, 2013

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Hope for the best and prepare for the worst may be one of the best strategies an investor can employ, especially if they are in the world of investing for the long haul and want to preserve their capital. As I always say in these pages, fluctuations are part of the market—the market will move and react to different news, but you have to make sure that your assets are protected.

Investors can use asset allocation, diversification, and risk management to preserve what they have. But if you add the following types of orders to your investing arsenal, your returns can increase, and you can save a significant amount of money over time.

Limit Orders vs. Market Orders

Consider this: if you are trading a thinly traded or volatile stock and the spread between the selling price and the buying price is significant, what would you do? If you go ahead and buy with a market order, you will certainly get the stock, but the price you get may not be the price you wanted in the first place.

In situations like these, limit orders become very useful. Through this order type, investors provide instructions to the broker to buy or sell a stock at a certain price (or cheaper), rather than getting whatever price is available.

For example, Apple Inc (NASDAQ/AAPL) shares are trading at $425.10. If an investor places an order to buy 100 shares at market price, then they might not get the $425.10—the price could be higher or lower at the time of purchase. In contrast, if an investor places a limit order with a price … Read More


Stuck in a Declining Market? Use This Strategy for Portfolio Growth

By for Daily Gains Letter | Apr 8, 2013

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With financial media always talking about what to buy and where to buy, not a lot is said regarding the sell-high/buy-low strategy. Yes, I am talking about short selling—a way to make a profit in the falling market.

At the very basic level, short selling is the opposite of buying a stock—or “longing” a stock. When an investor longs a stock, their hope is that it will go higher in value, and eventually they can sell it for profit. In short selling, an investor sells the stock first and buys it a lower price—banking the difference between the two prices.

When an investor puts in an order for short selling shares of a company, they are essentially borrowing them, and selling them. Once the price reaches their perceived price, they buy them, and return those shares. Before going into further details, don’t worry; your broker will take care of this.

Short selling may be a familiar topic to many investors, but what you may not realize is that this strategy has many advantages that can help to grow your portfolio, even when the overall market is falling. Similarly, those who actively do short selling may not understand its underlying risks.

One of the biggest advantages of short selling is that investors don’t really have to wait for prices to drop for them to buy; rather, they can profit from them. In addition, it provides them with an alternative way of profiting—they can long when prices are going up, and short when prices are going down.

But while it has its advantages, short selling does have some disadvantages as well.

If … Read More


Two Ways to Counter Volatility’s Toll on Your Portfolio

By for Daily Gains Letter | Mar 27, 2013

270313_DL_zulfiqarSometimes, to evaluate their portfolio performance, investors might look at the starting and ending values of their portfolio, or the simple rate of return, but they forget about the most important part—the risk they took to get there.

The simple rate of return only gives investors a percentage change in their portfolio, and nothing more than that. If someone wants to be a better investor, they must consider the amount of risk they took in order to get that rate of return and how their portfolio reacts to swings in the overall market.

To better evaluate their portfolio, investors can look at a few other measures, aside from the simple rate of return, including portfolio standard deviation and the portfolio beta.

Portfolio Standard Deviation

The name “standard deviation” may sound very demanding at first, but at the very core, it gives investors an idea about the volatility in their portfolio or how much risk their portfolio holds. Investors can calculate this portfolio evaluation measure with a simple calculator or with the help of “Excel” within minutes.

If an investor finds that their portfolio has high standard deviation, then it means that their portfolio will have wild swings. Similarly, lower standard deviation means lower volatility in their portfolio.

Portfolio Beta

When an investor calculates the portfolio beta, they are evaluating the performance of their portfolio with the return of the overall market or a certain index. To calculate the beta of their portfolio, investors need the betas of the holdings in their portfolio and their returns. (The betas of stocks are available on financial web sites and the beta of the … Read More


Two Well-Known Stock Market Indicators You Shouldn’t Trust Anymore

By for Daily Gains Letter | Mar 25, 2013

250313_DL_zulfiqarInvesting isn’t easy, and trying to predict the next market move can be stressful. In recent days, the Dow Jones Industrial Average has broken its all-time high and is moving higher. Similarly, the S&P 500 is inching closer to the highs it made before the U.S. economy was hit by the Great Recession.

Now, the questions among investors remain: Where is the stock market headed next? Is the rally unsustainable? Will investors be able to profit in 2013? Or is there a sell-off coming?

To predict the direction of the key stock indices, many analysts and investors alike conduct rigorous amounts of research. They might look at different measures and leading indicators, such as economic activity, unemployment, government spending, and other such things.

In contrast, some might look into the uncanny indicators to predict the direction of the key stock indices. Consider two stock market indicators: the Super Bowl Indicator and the Boston Snow Indicator.

Super Bowl Indicator

The Super Bowl Indicator suggests that when a National Football League (NFL) team from the National Football Conference (NFC) wins the Super Bowl, the key stock indices rise for the year. On the contrary, if an NFL team from the American Football Conference (AFC) wins the Super Bowl, then the stock market declines.

Although this may sound a little surprising, the Super Bowl Indicator was correct 28 times between the years 1967 and 1997—that’s an accuracy rate of more than 90% in a 31-year period. (Source: Jaffe, C., “Super Bowl Indicator: Sillier than half-time show,” MarketWatch, February 1, 2013.)

As it stands, the indicator now has 75% accuracy. This year at Super … Read More