Today was definitely a crazy day with the stock market. The Dow was down almost 1,000 points at one point today. It ultimately closed down 347 points or 3.2%. I really think there is some sort of market manipulation going on. Several stocks traded down to $0 or pennies from it! Some of these include Boston Beer (SAM), Exelon Corp (EXC), CenterPoint Energy (CNP), Eagle Materials (EXP), Genpact (G), Brown and Brown (BRO), and Casey’s General Stores (CASY).

This sudden drop that happened today is the #1 reason why I have written at great lengths in the past as to why you should NEVER physically input stop loss or trailing stop loss orders. If you had input this such order for Boston Beer, for example, at a level of 10% below yesterday’s closing price, it could have blown right through this and actually sold your shares at near $0! So, never physically input a stop loss/stop limit order; but, rather, keep it in a spreadsheet or notebook or something else for quick viewing.

So, how did this happen? It’s complete crap in my opinion. Apparently, someone at Citigroup mistakenly typed a “B” for billion instead of an “M” for million on a trade. If this is true, that person better have been fired on the spot and the company fined big time. You can read more about it here.

Also, this is why I despise computer driven trading platforms at many of these hedge funds. It creates an unlevel playing field for retail versus institutional investors. For example, it will take a few to several minutes for you or me to input 5 trading orders. These same 5 orders plus a 10,000 more will take microseconds for these computer trading platforms to execute. It creates unnecessary volatility in the markets and decreases the confidence that folks, such as you and I, have in the markets. There needs to be legislation passed to prevent this or even eliminate these algorithm/computer driven platforms being used at many trading firms.

I would be interested in hearing your thoughts. Definitely, a frustrating day for many of us.

On a positive note, if you did buy EUO and some form of gold and/or silver since I have been recommending them over the past year, you are sitting on some nice profits. For example, EUO is up almost 25% since end of December 2009, which is when I started recommending it. Don’t be shy to take some profits off the table as nobody has ever gone broke taking a profit. With that said, I expect EUO to rise more over the near term and long term as the Euro should continue to break down due to continued troubles in Greece and inevitable problems to surface at other EU (European Union) member nations, such as Spain and Portugal.

As always, if you have any questions, don’t hesitate to post a comment or email me directly at customerservice@yajnikletter.com.

-Samir

If you are interested in trying to trade the potential for a change in volatility (increase or decrease), I would stay away from VIX options. The reason is because VIX options trade European style, which means they can only be exercised on the option expiration date. As a result, this eliminates the potential for arbitrage and makes profiting off the calls and puts very difficult. Keep in mind that much of the expected movement is already factored into the price of the options.

Instead, I suggest you take a look at VXX, which is a volatility based ETF (exchange traded fund). Actually, its an ETN (exchange traded note) but the difference is insignificant for our purposes. It’s designed to go up when the VIX moves higher and go down as volatility decreases. A sharp move up in the VIX could lead to fast gains for VXX.

However, there are no options on VXX. My point is that if you are interested in trading VIX movements, VXX is a good way to go.

-Samir

Ever had a stock promotion come into your mailbox or inbox sounding like it is too good to be true? I am going to tell you why you should run the other way.

According to these promotions, they will often site that some national agency has just made a major announcement such as a massive gold discovery of so many ounces worth so many trillions of dollars.

The thing here is that the tiny company in questions bought these land properties before anyone new of what exactly was underground. So, now that this national agency has made this announcement, this tiny company is all of a sudden sitting on a nice fortune. As a result, the promotion material might say something to the effect: “every share of ABCD company you buy today could jump as much as 1,500% in the next 24 months. Don’t wait – BUY TODAY!”

So, what should you do? I say you should definitely NOT BUY. Why? Generally, in these situations, the person sending this promo has taken a position in the stock and a fee to market it to simply create some hysteria and a jump in the price so they can exit from their positions at a nice profit.

If you were to take a look at the historical prices, you might see that the stock has already jumped 1,500% over the past year, which is when they probably started to mass market the company shares. If that’s the case, the promo worked.

Surprisingly enough this is legal because if you read at the bottom of the promo, you will see that the promoters have disclosed how much they paid for the advertisement, any fees they get from marketing these shares, and how many shares they own.

So, be wary of this type of research/marketing. They try to come across as legit equity research but they are simply marketing at its finest. Really, this is no different that Wall Street firms pushing out bullish research reports to lock in lucrative investment banking relationships or brokers using “buy” recommendations because they get extra commissions when they sell that particular stock.

With that said, I generally ignore most bulge bracket banking research reports because they is almost always an ulterior motive. I prefer independent research where there are no ties to banks or other business relationships.

I want you to be able to distinguish the difference between biased research and independent research. The easiest way to do this is to say to yourself whether the writer has anything to gain if you take his/her advice.

-Samir

Happy much belated New Year everyone! I hope 2010 has started off well for each of you. I have been traveling nonstop for potential new job opportunities and, as a result, have not been able to write. Now, I am back at it.

With that said, are you guys interested in a system that returns high risk-adjusted returns? In one of my investment letters, I came across some commentary on a young up and coming research analyst, Mebane Faber, and I would like to relay it to you. The details to his system are the following:

• It only takes you two hours a year (10 minutes a month) to implement.
• It’s only had one losing year since it started in 1973 (a tiny 0.59% loss in 2008).
• And it’s outperformed the stock market with much less volatility than stocks.

Mebane has just updated his numbers for 2009. The results over the last decade are what any of us would be willing to pay for. If you had invested $10,000 in his simple system in 2000, you would have gotten back nearly $26,000. Meanwhile, $10,000 invested in the stock market would have shrunk to less than $9,100…you know…the lost decade in stocks.

The focus is not losing money in the down years:
**********S&P 500           Meb’s System
2000            -9.1%                    +13.8%
2001             -11.9%                 +3.2%
2002             -22.1%                +3.4%
2003             +28.7%              +20.5%
2004             +10.9%              +15.1%
2005             +4.9%                 +8.2%
2006             +15.8%               +14.2%
2007             +5.5%                 +9.5%
2008              -37.0%               -0.6%
2009             +26.5%               +14.0%

Just looking at the last decade, you can see how much less volatile this system is than the overall stock market. The stock market’s annual return was about -1% per year. But the actual returns were usually way higher or way lower than that. Compare that to Mebane’s system, where the average annual return was about 10% a year. You can see the annual returns were always within about 10 percentage points of that average.

Here’s how his system works. There are only five holdings and there are two modes: in and out. The five asset classes are: U.S. stocks, foreign stocks, bonds, commodities, and real estate stocks. Your only decision each month is whether you own a fund that tracks that investment, or not. You want to be in when the asset is going up. And you want to be out when the asset is going down. This idea could hardly be any simpler. But, as you can in the above figures, it actually works.

First, you divide your portfolio into five pieces. You dedicate each piece to one of these five asset classes, and you are either in or out of each fund every month. So you might be only 40% invested one month, with the rest in cash (earning interest at the bank…interest?…funny one, right?).

To figure out whether you’re in or out, you just have to do some simple math. You can keep track of it by hand with a pencil and paper. You don’t need a computer or even a calculator. Yahoo Finance would even suffice.

Once a month, get the last 10 monthly closing prices of the five funds. You can get them from a service like Yahoo Finance. Then calculate the 10-month average. If the fund is above its 10-month average, keep 20% of your money in it. If the fund is below its 10-month average, sell the fund and move to cash. Repeat the next month, rebalancing existing positions back to 20% each if they’re buys. Never put more than 20% in a fund. For example, if only three are in buy mode, then you’re 60% invested with 40% in cash.

Remember, with the exception of a tiny loss in 2008, this system has never lost money, and it has delivered double-digit compound annual gains…compound is the key because this system reduces potential volatility. Higher returns with lower volatility (can you hear the angels signing?)! And this is in a portfolio of just five things that you have to manage for minutes a month.

If this seems interesting to you, check out his site at www.theivyportfolio.com. Keep in mind that the potential for making massive gains is heavily suppressed with this system. However, if there is anything I have learned in this depressing economy, SLOW AND STEADY DOES WIN THE RACE!!!

-Samir

There is uneasiness in the air, and that’s to be expected. Everyday something weird happens, it can be little things or it can be mysterious things like Dubai. Investors have been made to sweat, and yet through it all, another strong month goes into the books for the stock market. For all the periodic air pockets and pauses, stocks enjoyed their best month since June. However, toward the end of the month the market was clearly range-bound. After making a series of higher lows, the market hasn’t been able to generate the kind of momentum needed to breakout. The drag on the market has been financials, which led the parade until October when all of a sudden a deep freeze hit the sector. Yesterday, banks were up significantly after Abu Dhabi said that it would help Dubai World reorganize $26 billion in debt. The banks don’t have to be in front of the parade for the broad market to rally but it certainly can’t be an anchor.

An article in the Wall Street Journal today says to look for a spike in unemployment in the construction space as stimulus money for that niche of the economy is running out. According to the Association of General Contractors of America, the industry only received $27 billion of the $787 billion stimulus plan. Unemployment among construction workers is 19.1%, up from 10.7% a year ago, as 1.5 million have lost their job since the recession began. Remember, this article says that the economics in this sector should get worse. I agree with it.

It’s amazing how all of the major network stations can’t seem to get off the Tiger Woods story. As I would expect, many advertisers are standing by Tiger Woods, with Nike among those issuing public statements. The best statement is from Accenture, which is running an ad on the WSJ website that reads: “the road to perfection isn’t always paved” and pictures Tiger walking uphill. No word on if his wife was chasing him in the background…with an 8-iron that is.

November auto sales are beginning to roll in and so far, the numbers have left a little to be desired. Ford’s numbers were flat year over year, but it did improve its market share for the thirteenth time out of the past fourteen months. However, the momentum from the past few months (post cash for clunkers) has seemed to have run out. The Street was looking for sales to increase 8.5%, and the result came up short. This just shows that central governments can’t spend their way to prosperity.

-Samir

Here is an article, which I thought you would find interesting, from frugaldad.com. These concepts are very important given the current economic times and the fact that it may take some time for the global economy to regain solid footing.
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One could probably build a small library for the books written on the subject of financial independence. It’s a subject many of us like to fantasize about, but few of us will see materialize in our lifetimes. Why? Mostly because we allow competing priorities, egos and financial peer pressure dictate how we spend, and save, our money.

The good news is you don’t really need a book to learn about financial independence (though, if you do decide to read more on the subject, I highly recommend Your Money or Your Life). All you need to do is remember the seven secrets below.

Secrets to Financial Independence

1. Pay off debt. Yes, even the mortgage. I can hear the mathematicians screaming now – “PAY OFF YOUR MORTGAGE?” What about the tax deduction? What about all-time low interest rates. I don’t care about either one. To reach financial independence I’m all about reducing monthly expenses. A mortgage represents the highest monthly expense in most family budgets, and ours is no exception. Knock out credit card debt, car debt, student loans and the mortgage and you’ll owe a monthly payment to no one, which puts you on the fast-track to financial independence.

2. Quit buying crap. And while you’re at it, quit signing up for crap. The other day I sat down to try to tally our monthly expenses. Seems simple enough, doesn’t it? Problem is I kept forgetting little expenses we’ve signed up for. Oops, there’s the Netflix charge; then the gym membership fee. The other day the TiVo bill hit. I enjoy all three of these examples immensely, but altogether they represent about $50 a month. Talk about being nickel and dimed! Of course, there are other things I’m forgetting to list here. You can see how challenging it is to come up with a total monthly outgo figure these days!

3. Forget about trying to impress people. Do you have any idea how much money is wasted in a lifetime trying to impress other people? Just think of the things we buy, and the options we choose, for show rather than for practicality. Flashy cars, big houses and expensive jewelry matter little to those working towards financial independence, because we recognize you’ll be paying for that stuff long after we hang up the employee badge.

4. Make savings a top priority. If I had a financial do-over, I’d start saving half of my income from the very first day I started working. I can think of no faster way to accumulate wealth, build financial discipline, and expand your creatively frugal way of thinking to make things work on a meager income. Trouble is, very few of us ever thought to do this, so right out of the gate we needed more like 90% of our income just to pay for all the goodies we accumulated. To make it happen, talk to your payroll office and elect to have 50% of your paycheck deposited in an online savings account (I’ve reviewed a few of the best online banks in the past), separate from your primary checking account. Now, live on what’s left. Every year you pull this off you are essentially buying (saving) a year of freedom from earning an income.

5. Be aggressive early on. I’m a conservative person by nature. I don’t like to take big risks – with money, or life in general. But if I could talk to my 20 year-old self now I’d tell him to live a little. Invest a little money (10% of your portfolio or less) in that stock you just know in your gut will be a winner, because you know the quality of the people in management, or you believe in their product. Don’t be afraid to invest in that “aggressive” portfolio in your twenties, and early thirties. You’ve got time for ups and downs. You’ll win some, and you’ll lose some, but at least you won’t have any regrets.

6. Be conservative as you near financial independence. As passionate as I am about taking risks when you are still young, I am equally passionate about being conservative in the last few years leading up to reaching your “number.” That’s the time to start dumping the risky stuff, and start gearing down into low-risk investments. Some of your nest egg should be in cash, a little in bonds, or if you like simplicity, maybe something like a LifeStrategy Income Fund that takes the thinking (and emotions) out of investing your nest egg, or at least a portion of it. Be sure to check recent returns on such funds, as many billed as “conservative” lost their shirts in the recent downturn. At this point in your journey to financial independence you should be fairly immune to market swings, and more concerned with protecting the principal you’ve worked to accumulate.

7. Determine your own “number.” Speaking of your “number,” don’t let some financial egghead across a desk look down his nose and tell you that you need exactly $1.4 million to “maintain your style of living in retirement.” Garbage. Most of these guys immediately follow this with a sales pitch for an annuity, or a scare tactic about clients living to 90 years-old and running out of money. If you are dedicated to living frugal, paid off all your debts (see step 1), and built a comfortable nest egg based on your individual needs, you should be just fine.

Financial independence doesn’t have to be a mythical place we only visit in our day dreams. There are enough people out there living it, writing about it, and experiencing the joys of being free from the requirement to earn an income to survive. Learn from them. Model your behaviors after them. But be careful who you follow.

As author Thomas Stanley proved in his book, The Millionaire Next Door, most self-made millionaires look a lot different than the Paris Hiltons of the world. They probably drive a two year-old car (or older), shop where you shop, and live in a modest home. They don’t wear flashy jewelry, have a string of letters after their name earned from a decade of schooling in the Ivy League, and their idea of a fun family vacation probably looks like a week-long trip Disney World, not Paris or the Mediterranean.

The real secret to financial independence is to start living your life with that goal at the forefront of all your financial decisions. The longer you put it off, the worse your chances of ever succeeding will be. But for those who start early, and stay passionate about their dream, the payoff at the end is one of the more freeing experiences we can ever enjoy.
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-Samir

Recently, I read an article as to a first step in diversifying your assets overseas. This article alluded to a conference that took place at a beachside resort on the outskirts of one the world’s premier banking havens. It’s believed billions in laundered drug, arms, and hush money are parked in this country…a country that has been invaded several times by US troops in the last 100 years – the last time in 1989. The meeting, hosted by a publishing company called International Living, was titled “Live and Invest in Panama.”

I know it sounds paranoid or even crazy to say this, but I really believe the US government truly looks down on anyone that investigates strategies to minimize their taxes. That goes for Republicans or Democrats.

The US deficit is continuing to grow and it would be unimaginable that the US can pay off its debts in our lifetimes. If that’s the case and the US runs into problems paying it off and other countries continue to lose faith in the US dollar, then the only way to resolve this issue in my mind is to increase interest rates at some point and tax the bejeezus out of anyone with a few assets to his name.

Right now, the US government and several states are contemplating a wealth tax. Yep, people with more than a certain amount of assets could face a tax on their hard-earned stash (and that’s above and beyond anything you paid in income tax accumulating that “wealth”). In California, a petition is circulating that would hike taxes to 74% and claim 55% of your assets if you move out of the state. I doubt this will go through but the thought of it is alarming. Now, California is an interesting case because, to put it simply, the state is bankrupt and is unable to come current on its debts and bills.

So, potentially, this is not a problem just for the wealthy. This is a problem for anyone with a lifetime of savings. So here’s what you need to understand: income tax and reportable assets.

If you hold assets offshore, some are reportable to the government and some are not. If you make income while overseas, it is all reportable, although some of it is exempt (the first $87,600 a year plus a $14,000 housing allowance).

What you might not realize is there are ways to legally avoid both reporting assets and paying income taxes while your assets are overseas. The simplest way to start building your retirement lifeboat is to open a foreign bank account. If you open a foreign financial account with less than $10,000, you do not have to report the assets. This comes under the Foreign Bank and Financial Account Reporting (FBAR) regulations. The IRS states you only have to report a foreign bank account if you have financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

If you keep more than $10,000 in total overseas, you must report it or risk fines and jail time (50% of your assets and up to five years in prison, if a judge decides the oversight was willful).

Your account doesn’t have to be anywhere exotic or hard to visit. You can open one in Canada. Add a little bit at a time, but keep it at less than $10,000. Different banks have different rules under Canadian law. Find one that lets US citizens open one in Canada (you may have to do it in person). I’d start with TD Canada Trust, which is part of a giant Canadian banking firm.

Be careful about interest-earning accounts, too. Let’s say you put $9,990 in an account in January and you earn enough interest to take you over $10,000 by year-end. Well, guess what? Now, you must report the assets and the income.

Here is some more food for thought. Nothing prevents your spouse and other family members from doing the same. A family of six could keep about $59,000 in accounts overseas and not need to report it. Again, this is all legal and a great way to diversify your portfolio around the world.

Do understand that this idea is 100% legal and safe. If you’re considering creating a lifeboat overseas filled with assets for your retirement, at a very minimum, open an account in nearby Canada to get started protecting and diversifying your wealth and do it soon. Already there’s talk of Canadian banks not allowing US citizens to open accounts.

The US is already in debt to the tune of $140,000 a person and there’s no telling for sure what the government will do in order to pay it back.

Before you do this, you should have a chat with your accountant, advisor, or anyone you trust or who is currently managing at least some portion of your money.

-Samir

Generally when I hear of “averages,” I don’t put much weight into them. However, I do view them as rules of thumb and things to simply be aware of.

I had to rely on the internet to find data relating to the average retirement savings by age. Specifically, I used the Employee Benefit Research Institute’s latest report on Individual Account Retirement Plans (August 2009) to attain this data. So, take it for what it’s worth. Personally, I think it’s fairly accurate when you take into account how much we are able to to contribute to IRAs. Unfortunately, I doubt this is a very popular subject given the recent stock market nosedive.

This report has a plenty of detailed information on everything relating to retirement savings. For our interest right now, let’s take a look at the age breakdown (2007 figures adjusted to 2009):

• < 35: $6,306
• 35 – 44: $22,460
• 45 – 54: $43,797
• 55 – 64: $69,127
• 65 – 75: $56,212
• 75+: (sample size insufficient)

Some words of warning after you read this:

• Remember that this data is just data. So, it’s difficult to draw conclusions as to what’s right and wrong.
• Don’t feel bad if your retirement savings is below par. Simply looking at age does not take into account your lifestyle and where you are in life.
• Likewise, if you are above average, don’t get too excited. Keep saving as many things can change, such as quality of health which warrants more cost, as you get older.

It’s estimated that you should spend about 4% of your nest egg each year. At 4%, your nest egg should last long enough. How does that 4% figure translate to your estimated yearly expenses? Divide how much you think you’ll spend by 0.04 and you have your target (based on that rule of thumb) – $50,000 a year requires a nest egg of $1.25M.

As is the case with “averages,” it’s useful to know where you stand but don’t put too much stock in it.

Keep saving and try to live below your means. It will be one of many things to ensure a happy retirement.

-Samir

Today, I’ll show you a simple strategy many traders use to slash their number of losing trades.

If you chart the price of crude oil from early 2007 through late 2008, you will see a huge, sharp decline on the right-hand side. That’s a market in crash mode. Some traders call this kind of move a “falling knife” or a “falling safe.”

A market in such a sharp decline is nearly impossible to trade successfully. But that doesn’t stop lots of people from trying. Many see this kind of fall and think, “It’s getting cheap. It’s due for a big rebound… and I’m buying.”

Many traders get a thrill from trying to pick the exact bottom or top of a runaway market. They perform the fundamental analysis and find a market is cheap after a big fall or expensive after a big rise. Armed with this data, they head out to the “front lines” and go for glory. They usually get riddled with bullets.

If you never buy assets in freefall, your trading account will thank you and you’ll dramatically reduce your number of losing trades. Why? A huge move like that 2008 oil crash generates a lot of emotion in the marketplace. It catches most people off guard. It causes big swings in their account values…that being both up and down.

All that emotion produces a market about as rational as a 16-year-old in love. Whether an asset is overvalued or undervalued simply doesn’t matter during these moves. Saying things like, “This stock is just so cheap” is only going to get you and your money in trouble. It’s going to get you into risky trades.

Instead, take the advice the great Martin Zweig urged traders to adopt: Let that “falling safe” slam into the ground first. Wait for the market to form a bottom and even move just a bit higher. Then, walk over and pick up the money.

Look at the chart for crude oil from mid-2007 to its bottom in early 2009. This is a MUCH safer move to buy into. This is a market that has slammed into the ground, digested a ton of bad news, and actually moved a little higher.

Note how in early 2009, crude prices refused to sink to the December low despite the public’s legitimate worries about another Great Depression. Oil is an economically sensitive commodity, and a weak economy kills demand. But despite the terrible news involving job losses, foreclosures, and bankruptcies to name a few, the bears couldn’t push oil down to its December lows. When an asset rises in the face of bad news, it’s said to be “acting well.”

Remember that term: “acting well.” When an asset advances despite terrible news, it’s a big bullish sign. It’s a sign the trend has changed. Waiting for these tiny glimmers of light rather than rushing into a market in freefall will keep you out of a lot of risky trades over your lifetime.

Happy trading!

-Samir

From conversations I have had recently, it seems that many individuals are interested in how to trade the VIX (CBOE Volatility Index), which is the ticker symbol for the volatility index that the Chicago Board Options Exchange (CBOE) uses to calculate the implied volatility of options on the S&P 500 index (SPX) for the next 30 days. This question really boils down to two separate issues: strategies and trading vehicles.

Since I have talked about strategies in the past, I thought I would offer a quick summary of trading vehicles today.

First off, it is not possible to trade the VIX directly. Formally known as the CBOE Volatility Index, the VIX calculates market expectations of 30 day implied volatility for S&P 500 index options. The VIX (sometimes referred to as the cash or spot VIX) is a statistic that the CBOE calculates and disseminates every 15 seconds during the trading day. While widely disseminated, this statistic is not available for purchase.

Fortunately, there are a number of VIX derivatives that allow traders to take positions on the VIX without owning the underlying. In no particular order, they are:

1. VIX options – these include standard options as well as VIX binary options
2. VIX futures – standard VIX futures contracts have a contract size of 1000 times the VIX; the recently added mini-VIX futures have a contract size of 100 times the VIX
3. VIX ETNs – currently consists of two exchange traded notes: the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ). The former targets one month VIX futures and the latter targets five month VIX futures.

In addition to VIX products, one can always trade options on the SPX (or SPY). A long VIX position is very similar to a long SPX straddle (or strangle); a short VIX position is very similar to a short SPX straddle (or strangle.)

Hope this helps. As always, if you have any questions, don’t hesitate the post a comment or send me an e-mail to customerservice@yajnikletter.com. Also, check out the following articles that I came across today:

• Read here to understand Warren Buffet’s concerns over the future of the Greenback (aka US Dollar).
• So, what is Warren Buffet buying and selling these days? Check it out here.
• Has China entered bear market territory? Will it continue to drag the rest of Asia down with it? Read this article to get answers to these important questions.
• I am always looking for ways to improve my trading, whether it’s the mental or the physical aspects of it. Read these 10 rules which have been adapted from applied sports psychology.
• Read here how you can cash out of your IRA with zero penalty.
• “Dr. Doom” Roubini says we are headed for another recession. So, has the recent rally hit a wall? Read about it here.

-Samir