The moving average is a simple tool designed to help you easily determine the underlying financial trend of a stock, bond, commodity, mutual fund, or any other financial instrument. According to Wikipedia a moving average is “commonly used with time series data to smooth out short-term fluctuations and highlight longer-term trends or cycles. The threshold between short-term and long-term depends on the application, and the parameters of the moving average will be set accordingly. For example, it is often used in technical analysis of financial data, like stock prices, returns or trading volumes.”

Moving Average

The moving average is often the first tool that budding forex traders encounter. Put simply, it is the average of an instrument’s price plotted over time. You will almost always find the moving average plotted alongside the price itself on a chart. You may find it useful for determining if the price is in a trend.

The first thing that you’re likely to notice about the price’s relation to the moving average is that it is always either above or below it. At first glance, this may seem incidental. However, you should not overlook it. If the price is above the moving average, then you know immediately that the price has been rising more than falling.

Conversely, if the price is below the moving average, it follows that the price has been falling more than rising. This alone does not tell you whether the price is in a trend, because it has a tendency to run flat at times. Still, you can use this relative position to immediately get a feel for price direction over the last several periods.

When a Moving Average Crosses Over

The primary signal that technical traders derive from the moving average occurs when the price crosses it from either above or below. If the price crosses the moving average from below (to above), it is thought to be shifting into a bullish, or upward mode. If it crosses from above (to below), it is said to be switching to a bearish or downward mode.

On the surface, this cross may appear to be a simple, elegant trading system. However, a moving average is a “lagging indicator”, and as such, should not be used on its own. As a lagging indicator, the moving average simply reacts to the price’s movements. Keep in mind that it is nothing more than the price’s average plotted over time. For instance, if you load a 10 period moving average on a one hour chart, you are looking at the average price of the last 10 hours.

The line that represents the moving average on the chart does, therefore, literally lag the price by 10 hours. This is why, as you watch it, you will notice that it moves much slower than the price itself. This is precisely why the price weaves above and below the moving average so frequently.

Moving Average- Whipsaw

These movements are, for the most part, random. If you attempt to trade them, you will inevitably run into a phenomenon known as “whipsaw.” Whipsaw occurs when the price closes above or below a moving average, triggering a trade, and then immediately moves in the opposite direction. Such losses quickly add up. Longer time frames are more stable than shorter time frames, so you can minimize the occurrence of whipsaws by trading them. Still, you can never completely avoid whipsaws. You can see, then, that trading on the impetus of the moving averages alone may be a haphazard strategy.

Determine the Long Term Trend

In order to see a more rewarding result from moving averages, you will want to first determine the direction of the long-term trend. To put it in perspective, imagine that you have been taking signals from a 20 period moving average on a 5 minute chart. Every time the price falls below the average, you sell, and every time it rises again, you buy.

Because you are using only one moving average, and because that moving average is rather short, you are exposing yourself to a great deal of potential loss in the form of whipsaws. However, if you simply add a longer moving average to the chart, say a 100 period moving average, you will gain immediate insight into the direction of the trend.

You will then have two moving averages, and you should be able to see that when the shorter moving average is above the longer, the price has been moving consistently higher. The same holds true for the other direction.

It follows then, that when the shorter moving average is above the longer, and is pointing up, that the price is in an uptrend, and vice-versa. You can take advantage of this situation by buying only when you determine that the price is in an uptrend, and it closes above the short-term moving average as well.

For more information see: Investing Using Moving Averages

Also : Elliott Wave International (EWI) has released a free 10-page trading eBook: How You Can Find High-Probability Trading Opportunities Using Moving Averages, by Senior Analyst Jeffrey Kennedy. Download Your Free eBook Here.

About the Author:

Chris Keenan, is a blogger for a new jersey immigration attorney, who writes on a variety of topics from family finances to outsourcing law.

Casey Research Summit Special Report Part II: Drilling Down into Oil and Gas Prices

The private panel that began with three key speakers at the April 27-29 Casey Research Recovery Reality Check Summit continues with a second installment in today’s Energy Report. This exclusive features Casey Energy Opportunities Senior Editor Marin Katusa, Global Resource Investments Founder and Chairman Rick Rule and Casey Research Senior Editor Louis James, turning their attention to oil and natural gas prices and opportunities in equities.

Source: Karen Roche and JT Long of The Energy Report (5/10/12)

The Energy Report: Since we last talked in November, oil went from $90–110 per barrel (bbl). Has it established a floor that will stick? Or, as Porter Stansberry predicted during the summit, is it getting ready to crash? He said that using the same sorts of technology that brought on the glut of natural gas will lead to finding too much oil and driving its price down.

Marin Katusa: Porter was basing his comments on the success of shale gas in North America, and with that you have natural gas liquids and some oil. In North America, gas became a victim of its own success, worsened by a warmer-than-expected winter. But understand that gas, in general, has very localized markets.

When it comes to the oil sector, people think Exxon Mobil Corp. (XOM:NYSE); Royal Dutch Shell Plc (RDS.NYSE.A/B) and ConocoPhillips (COP:NYSE) are the biggest players. The big players are actually the national oil companies (NOCs)—Saudi Aramco, Petróleos Mexicanos (Pemex) and Petróleos de Venezuela, which are not reinvesting in operations and exploration. Their production is decreasing as a result. Cantarell, in Mexico, is one of the greatest oilfields in the world, but it’s decreasing by 3.5% every year. The NOCs are distributing profits to fund massive social programs. For instance, more than 55% of Venezuela profits from oil-funded social programs.

By the way, America imports more than a million barrels of Venezuelan oil each day and pays a premium over what it pays for domestic oil. But that’s another story.

I don’t necessarily agree that the same reasons why natural gas in North America went under $2 per thousand cubic feet (Mcf) would apply globally. India is signing $14–$15/Mcf and more; Japan is at $15/Mcf-plus. It’s twice that in Europe. So North America is a unique case; the rest of the world is nowhere near that when it comes to shale exploration.

TER: Will that change when the U.S. starts exporting in 2015 or so?

MK: I think 2015 is a very aggressive timeline. Eventually, the market will fix itself. But to say that oil will go to $40/bbl by Christmas? I wouldn’t take that bet. That said, for two years we’ve been using $60/bbl oil for our equations. We publish the best netbacks in the business every quarter. So if a company can make money at $65/bbl oil, it will make a lot of money at $105/bbl oil. But if you invest in companies that need $90/bbl oil to break even, you’re not going to do so well.

TER: You said the market will fix itself. Will oil go down to, say, that $60/bbl you’ve been using?

MK: Everyone isn’t paying $103–105/bbl. Because of the massive differential for selling less, the Canadian oil sands producers are selling as low as $63/bbl. In the Bakken, they’re selling for $72/bbl. So it finds its equilibrium. In the Canadian oil sands, existing production can be profitable at $60/bbl, which we’ve been saying for a couple of years. New production, if it’s open pit, it needs $90/bbl oil to be economic due to the massive inflation in equipment, trucks, tires and people.

TER: Why do we quote oil at $105/bbl if it costs $63–72/bbl?

MK: A lot of people think that Suncor Energy Inc. (SU:TSX/NYSE) or any given oil producer is making $105/bbl for oil, but companies are selling their product for $63/bbl. It depends on the differential and Suncor’s selling price versus the West Texas Intermediate (WTI) crude oil price, which is the posted price. Gas producers in Edmonton are getting much lower prices than what’s quoted in the Henry Hub. The oil price in North America or the Brent price isn’t necessarily the same price a company is selling its oil for.

Rick Rule: It’s pretty complex. What people think of as the posted crude oil price comes from either WTI or Brent. That used to be the way the world worked, but we have localized differentials now. One of the differentials that Marin was speaking about is the differential between light sweet crude and heavy crude. And the differentials widen and tighten depending on a variety of factors.

For example, production efficiency in Venezuela, the traditional source of Gulf Coast sour crudes, is a factor. Transportation and infrastructure bottlenecks are factors. We’re now to the point where a critical pipeline from the Gulf Coast to the U.S. Midwest, which used to take imported crude into the Midwest, has been reversed because of production declines in Mexico and Venezuela, which encourage U.S. Gulf Coast refiners to take heavy crude out of Canada.

All of this is what creates localized markets in oil. The international light sweet crude markets are very stout. Nigerian bonny crude and Brent crude’s international trade is marked by tightness as a consequence of declining supplies in traditional frontier market exporters, such as Nigeria as well as Venezuela and Mexico.

The North American domestic market is ironically awash in oil as a consequence of three factors: The high price of gasoline has begun to destroy demand along with the weak economy. The incredible de-bottlenecking that’s gone on in the Athabasca tar sands has doubled tar sands production in four years. And the conjunction of technologies that Marin was talking about has produced a flood of shale oil, particularly in the Bakken.

TER: But when the gas at the pump is up, the excuse they give is that WTI is at $105/bbl. That’s the logic presented to consumers.

RR: I can’t speak to other parts of the country, but being an oil producer myself and a gasoline consumer, I’m certainly familiar with the California gasoline market. California municipalities constrain the construction of gas stations, so there are fewer and fewer outlets. Some communities that were really tough on how many gas stations they would permit have prices $0.25–0.30 per gallon higher than nearby communities that were more generous.

On top of that, all the margins for producers, refiners and distributors that are built into the price of gasoline go to the government in the form of taxes. California is a high-cost refining environment, with high taxes and constrained competition. Gasoline demand in the U.S. has grown 1.2–1.3%, compounded for 29 years, and the United States hasn’t permitted a new refinery for 29 years. Maybe no new refineries would have been built anyway because refinery and marketing margins are so lousy. But that’s the picture.

MK: Also, the older refineries need more downtime for maintenance. All these things factor into the equation, and that’s why you have high prices at the pump. In Canada, more than 50% of the price is taxes. Major global production is coming from these NOCs, which I call the New Seven Sisters.*

*[Before the rise of the OPEC cartel and NOCs, the original Seven Sisters included Anglo-Persian Oil Company (now BP), Gulf Oil, Standard Oil of California (Socal), Texaco (now Chevron), Royal Dutch Shell, Standard Oil of New Jersey (Esso) and Standard Oil Company of New York (Socony) (now ExxonMobil). The Seven Sisters dominated the global petroleum industry from the mid-1940s to the 1970s, and up until the oil crisis of 1973, controlled about 85% of the world's petroleum reserves – Editor.]

Look at the coming nationalization of resources. Look at what’s happened in Argentina. The private companies, the Exxons of the world, risk their capital and their shareholders’ capital. When they have success, the country nationalizes these resources. So there’s another factor to take into account if you want to understand how tight the oil markets really are.

TER: A number of people we’ve interviewed lately say the best bet now is to invest in the service companies—the drillers, pipeline builders and so forth.

MK: Part of our portfolio in The Energy Letter is geared toward service companies, and certainly Kinder Morgan (KMP:NYSE), which is one of North America’s largest pipeline transportation and energy storage companies, has been very generous to our portfolio. In five months, there’s been over a 30% gain.

But if you’re going to go into the service sector, you have to make sure about a company’s ability to cover its debt, because a lot of these services companies took on massive debt during the bull market and will blow up on it.

TER: Looking for other potential investments, Louis, you said that the secret is to figure out what real stuff people need, because it will retain value. When prices on valuable stuff go down ridiculously, it’s a godsend, because you can buy when it’s cheap and sell when it’s expensive. Is the stuff people need cheap now?

Is Economic Volatility Coming?

Source: Karen Roche and JT Long of The Gold Report (5/9/12).

One special session at the April 27–29 Casey Research Recovery Reality Check Summit wasn’t on the agenda—a private panel for The Gold Report readers with three of the premier summit speakers: Global Resource Investments Founder and Chairman Rick Rule, Casey Research Senior Editor Louis James and Casey Energy Opportunities Senior Editor Marin Katusa. You won’t pin them down to a timeframe, but they’re looking forward to a buyer’s market, as equity prices fall and volatility increases. As Rule puts it, “When the luster is off the sector, it’s off all parts of the sector, so in bad markets the best companies are cheap. When the best come cheap, you have to play.”

Casey Research Summit Special Report: Reality Check or Checkmate?

The Gold Report: When we talked last fall after the When Money Dies summit, Rick, you were looking forward to the volatility preceding the decline of paper currencies as an opportunity to take advantage of the liquidity crisis.

Rick Rule: The volatility I anticipated didn’t happen because the amount of quantitative easing—I would call it counterfeiting—was extraordinary. That cash coming into the system acted as a soporific, so the volatility I had hoped for did not in fact come to pass. People whose portfolios declined probably felt they experienced volatility, but I think it was the weight of the chronically overvalued junior resources sector. Probably 80% of the sector is nonviable and in a state of permanent decline, with the market occasionally punctuated by up moves driven by performance among the best companies.

TGR: So, you were disappointed.

RR: I was very disappointed. I expected a Volatility S&P 500 (^VIX) in the range of 30. For somebody who makes a living basically as a pawnbroker, there are no better circumstances than extraordinary volatility. I didn’t get to practice my trade.

TGR: Do you think it will change in the second half of 2012?

RR: I don’t know, but the disconnect between the way we in the West live and the way we can afford to live will be problematic, particularly because the productive part of society—the so-called one percenters—is being vilified. The conflict between good and bad news will create incredible volatility at some point, but I’d be pressed to tell you when.

***************

Inevitable is not the same as imminent – Rick Rule

***************

TGR: That sounds like more social than economic volatility.

RR: Social volatility manifests itself in the economy. We’ll see less productive investing if the politics of envy drive increasing taxes on capital. To raise workers’ real wages, the workers must employ more capital, and you can’t do that if the capital isn’t finding its way into the economy.

TGR: Last fall, Marin, you said quantitative easing was deflating equity valuations. “He who has cash will be king,” you said, “because he can afford to buy discounted stocks. If you do your homework and be sharp you’ll make a fortune in the next three years.” Is that still the case? Are we too late?

Marin Katusa: Not too late at all, and I still believe we’re in deflating equity prices. I’d say it’s going to get a lot worse, especially for the junior resource companies. Less money is flowing into the sector and it’s now a buyer’s market. This is the riskiest investment segment on the planet. Risk mitigation is the key to succeed, and any opportunity to reduce risk is the most important thing moving forward. By mitigating risk, being strategic, always taking Casey free rides—the portfolios for 2011 for both the Casey Energy Report and Casey Energy Confidential gained over 20%. And Q1/12 was over 20% for both newsletters also. So if you do your homework and buy good companies, you can do well.

TGR: Louis, you said that the secret is to figure out what real stuff people need because it will retain value. When prices on valuable stuff go down ridiculously it’s a godsend because you can buy when it’s cheap and sell when it’s expensive. Is the stuff people need cheap now?

Rick Rule’s Primer on Contrarian Speculation

In an interview with Louis James, Rick Rule provides an excellent summary of what contrarian speculation investment is and makes a powerful case that the current metals climate means gold stocks are the play to make.

[If you weren't present at this timely summit, you can still learn the details of Rick's current investment strategy, plus much, much more. Get the actionable advice and economic perspectives and insights of 31 financial luminaries to make sure you don't miss the opportunities ahead.]

Louis James: Ladies and gentlemen, welcome. Thank you very much for tuning in. We are at the Casey Research Summit – the reality check on the recovery of the economy. One of our luminary speakers who is always at our events, Rick Rule, is with us here now. We’d like you to give us the quick tour of your talk today and we’ll go from there.

Rick Rule: Sure. My role here wasn’t to do economics; that’s not what I am. I am a speculator, and so I talked about where we are in the context of where people are with their own portfolios – in particular portfolios that are junior-resource centric – which is what I think most of your audience was interested in.

Louis: Right.

Rick: And my point was that there were some good forces in the market: lots of cash on the sidelines; some good work being done; and basically a good market for resources as a consequence both of population growth and demographic growth at the bottom of the economic pyramid, and in terms of historical supply constraints. And there were some bad factors in the market: excessive debt in the system; way too much government interference; very large social takes on a global basis, beginning to impact extractive industries. And there were some truly ugly factors – the ugly factors in particular being poor corporate as opposed to share market performance, and the unfortunate truth that probably 80% of the junior resource stocks on a global basis are valueless. So the sector itself is in perma-decline. Although the performance – as you know from being affiliated with Casey – of the top 10% of the sector can be extraordinary. It often serves merely to focus attention on the worst companies in the sector. And then I went on to say: “This is the set of circumstances that exists, now what can we do with this?”

The fact that the market has fallen, by some estimates, by half suggests by other estimates that the market is approximately half as risky as it used to be. Price has taken care of some of the risk that existed in the market before.

The second factor that we need to take into account on a going-forward basis is the fact that the industry itself didn’t finance as aggressively last year as they did the year before, but although they didn’t raise new capital, they didn’t stop spending. I call this financial roulette. The issuers are engaged in this rather circular exercise, which is very risky: They’re spending money to attempt to get results, to generate excitement, to raise their share price, to raise money. So they’re spending money to raise money, which is a very, very risky strategy.

Most of the issuers will need to come back to market this year, and they’re coming into a market that’s in total disarray. The buyers that existed for the last 10 years – the small hedge funds and the open-ended hedge funds – are facing massive redemptions as we speak, so rather than being a source of new capital, they’re a source of the selling that you see weighing down the market. We are going to have to, as investors, invest with a view to a different buyer on a going-forward basis, and the companies who are issuing equity are going to have to find a different class of buyer for the new financing. So we’re in a time of real change and real turmoil – and hence a time of real opportunity.

My suspicion is that with so many issuers having to access the market and so few market participants that have the capability of differentiating between good and bad issuers, that just as the bad issuers were swept up with the good issuers in 2010, the good issuers are being swept out with the bad issuers in 2012. It’s my supposition that for investors who are willing to work hard, take advice, and segregate viciously in terms of allocation of capital, that this will be the best private-placement investment period that we have enjoyed since 2002.

Louis: Okay, so this is one of the key takeaways: This is the year for private placements. You put that quite eloquently. A more simple way of summarizing it is that there are going to be a lot of desperate guys out there and they’re going to be offering a lot more attractive terms – to people who are willing to wait for that to come to them. That’s a good thing.

For the nonqualified investor out there – for the more general person – can you talk a little bit about being a contrarian or being a victim? Because right now there are a lot of people out there that I am… I don’t fear a lot, but I’m afraid that a lot of good people are about to become victims just at the moment that they should be taking advantage of opportunities.

Rick: I think that’s accurate. I’ve been in the business now 35 years, and I have seen these periods several times. I guess this is going to be one of your first descents into one of these things; and it is tragic. Some very, very nice people use their heart rather than their head and sadly they buy in periods like 2010. They buy at the top and sell at the bottom. That’s the nature of things. There’s no requirement that that be the nature of things, and I suspect that your audience self-selects more towards better performers because they’ve chosen to invest the time and the money to get recommendations from Casey Research, and in fact, in many cases do further research themselves. So I suspect that the universe that you’re familiar with will be less victimized by this than others, but they certainly won’t be immune to it.

Emotions run through all of us, myself included. It is very important to bear in mind specifically what you said. I have said for many years that you’re either a contrarian or a victim. It’s a nice catch phrase, and it’s also true. This is a cyclical, capital-intensive business. There are long periods that are required to address supply-demand imbalances both ways; and so market declines last a long time. Market advances can also last a long time and be very, very dramatic.

What’s important is that good markets are for selling and bad markets are for buying; it’s counterintuitive. Your perception of how events will play out in the future is determined mostly by your experience in the immediate past; and if the last three investment decisions that you’ve made have rewarded you – if you feel good about your precepts – you begin to do something natural, which is confuse a bull market with brains, and you begin to become very aggressive. If your last three decisions – irrespective of whether they were well thought out – haven’t played out so well, you become cautious. What you need to do is teach your brain to overwhelm or overrule your heart and understand that cheaper is better and more expensive is less good. It’s difficult, but it must be done. Many things that are rewarding are difficult.

Louis: Very good. Okay, so resources are broad; are there any focuses within that? Are you more interested in metals, precious metals, oil and gas – what’s your favorite flavor right now?

Company Bonds

Company bonds have been a hot topic in many financial publications including the Wall Street Journal lately, though you might not be familiar with the term. Allow me to offer a brief primer on the topic.

Company bonds (aka corporate bonds) are a type of debt security issued by companies to raise capital. A related form of debt is a “debenture.” Debentures are corporate bonds that are NOT secured by any assets or line of income. Companies of varying sizes and states of profitability will issue bonds as a means to generate funds for any number of reasons pertaining to long term growth and investment.  For instance, investors might buy bonds from a start-up company with a solid business model but little capital so as to help grow the business. Company bonds are a critical source of funding for all companies from those in their infancy trying to finance projects, pay employees, or invest in long term plans for expansion, to well established corporations interested in updating a multimillion dollar plant or enter a new global market. Let’s take a closer look at the mechanics of company bonds and how they function within the greater financial market.

Basics: How a Company Bond Works

A company bond is essentially an IOU that a company issues to an investor. Bonds are issued at a “Par Value” aka. “Face Value”. Typically “Par Value” for a single company bond is $1,000. After the initial issue the bond can be sold from one investor to another at the “Market Value”.  The market value is based on the interest rate the bond pays (called “coupon Rate”) and the risk rating of the issuing company. Market value will fluctuate based on how the coupon rate compares to the interest rate offerred by government bonds which are considered “low risk”.

The bond then “matures” to its par value with interest over a set amount of time over the course of some years. Interest payments will usually occur in biyearly installments. The coupon rate offered by the company at the initial bond offering will vary depending on a wide array of factors, but it will ultimately determine how much you can expect to get back every year. For example, a 5% coupon on a $1,000 par value company bond will pay $50 a year.

If interest rates fall in the overall market to say 4% the company can not change their interest payment because they are contractually obligated to the “Coupon Rate”. So to adjust for this the market raises the value of the bond.  If the market value of the bond rises to $1250 (and the company is still paying $50/yr) the current yield on this company bond is now at 4% equivalent to the going market interest rate for a company with this particular risk profile. So as interest rates go down bond values go up. When they are selling above par value they are said to be trading at a “Premium”. If on the other hand market interest rates rise bonds will sell below par value called “selling at a discount”.

When a bond reaches its contratual end it is called “reaching maturity”.  This can take anywhere from a single year to over twenty years, depending on the initial contractual terms of the bond. At maturity the company must pay the current bond holders the Par or Face Value of the Bond. Most companies set up a “Sinking Fund” to have the money to pay this obligation. A sinking fund is simply setting aside a portion of the value each year. So if it is a 20 year bond the company will set aside 1/20th of the total amount of the bond issue each year so in the 20th year they can repay the bondholders. Interestingly, if you bought the bond at a premium you will receive back less than you paid. This loss of principal over time is taken into consideration when calculating the bond’s “Yield to Maturity”.

Stocks vs. Bonds

It’s a common mistake to confuse company bonds with stocks issued by a company. But the two investments are entirely different. As I’ve explained, a corporate bond is essentially a debt that a company owes an investor; they have a set amount of time to return your principal investment and will do so with interest. Stocks, on the other hand, are bought by investors who want a share of the company’s ownership. Someone with stock in a company won’t necessarily be guaranteed any money from that company but stockholders do own a fraction of the company with their shares. Thus they are entitled to a share of the profits which in a well run company should be a higher  percentage than they are paying bondholders. After all why would they borrow money unless they expected to be able to make more with it than what they are paying out? Profits can be returned to share holders via dividends or gains in the value of the shares. Somewhat paradoxically, a person with millions in corporate bonds will have less ownership over the company (none) than someone with a few stocks in the company.

Because company bonds are considered debt security (that is, a debt to be repaid to investors who bought the bonds), their repayment takes priority over anything given to stockholders.  In the event of bankruptcy, payments are made in the following order: (1) Wages, (2) Taxes, (3) Secured Creditors (including Secured Bond holders), (4) General Creditors (including Debenture holders), (5) Subordinate Creditors (including Subordinated Debenture holders), (6) Preferred Stockholders and (7) Common Stockholders.

Company Bonds Still Have Some Risk

Though company bonds are designed to be paid back by the company, if the business goes bankrupt it may fail to repay them in full.  Bonds from companies that are not on a secure financial footing are called, High risk bonds or “Junk Bonds” these pay higher rates of return but have a greater chance of default. The riskiness of a Bond is rated by companies like Standard & Poors and Moody’s.

Bonds come in all levels of riskiness from junk bonds to bonds of well established companies like IBM, and General Electric. The least risky bonds are considered to be government bonds because companies can’t just print money to repay their bonds. Cities also issue bonds called “Municipal Bonds” which may rely on taxes or income from specific programs to fund the repayment.

For more information see:

Invest in Structured Bonds?

Investing in a Mutual Fund

Have anything more to add?

Do you have anything that you’d like to add about company bonds? It’s a complex subject deserving of far more than a single post, but hopefully this gives some useful information to a reader who’s unfamiliar with the subject. Feel free to chime in in the comments below!

Author Bio:

This is a guest post by Nadia Jones who blogs at accredited online colleges about education, college, student, teacher, money saving, movie related topics. You can reach her at nadia.jones5 @ gmail.com.

 

 

Buy Rental Property or a REIT?

Although many individuals prefer rental units as additional income, one of the last things you probably want to do in your retirement is to find renters and deal with the drama that comes from having them rent for you.  You have to find tenants with reliable income, continue to provide maintenance and other support for them, and worry about potential problems with non-payment or other issues.

Buy REITS?

Traditionally, one of the best retirement investment options is a real estate investment trust (REIT).  According to Wikipedia:

 A REIT or “real estate investment trust” is a tax designation for a corporate entity investing in real estate. The purpose of this designation is to reduce or eliminate corporate tax. In return, REITs are required to distribute 90% of their taxable income into the hands of investors. The REIT structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks.

As opposed to buying rental homes or properties, REITs offer a lot of diversification and are very liquid.  It’s easy to sell REIT shares on the stock market and they are usually very stable.  On the other hand, houses can be difficult to liquidate and people are finicky, leaving landlords with a lot of potential risk.

Changing Interest Rates Can Affect Reits

Because REITS tend to use a lot of borrowing, when interest rates rise, that can affect REITs and make it not a good time to invest.  Currently interest rates are low so REITs have benefited. So how do you know whether now is a good time to make such an investment?  The key is whether interest rates will remain low.

Short Lease REITS vs. Long Lease REITS

When leases are short, cash flow can change more quickly, but longer leases create more stable investments.  Short lease REITs, like hotels, are usually on one end of the spectrum while longer leases, like health care facilities, are on the other.  Somewhere in the middle are multifamily housing, warehouses, and commercial space in malls or department stores.  Office space is in high demand, though the yields may be smaller.  Office space in cities is easily come by, and usually it doesn’t cost a lot up front.  This can make it a good choice when considering REIT investments.

 Where are REIT’s Headed Now?

REITs  bottomed out in 2009.  REITs purchased in late 2009 could be up as much as 60% now.  So, while the market continually fluctuates and the economy is not yet as stable as it was before the 2008 recession, REITs can still be a very good investment, offering a good chance to make up for losses incurred in the past.

Currently, REITs may offer a rate of return up to 3 or 4 percent higher than government bonds, which means the additional risks could be offset with extra compensation in yields.  Smart investors may find that now is the perfect time to make such investments, banking on the extra percentage paying off nicely in the future. The bottom line is that there is always a certain degree of risk.  Right now, it looks like wisely investing in REITs could be a risk that could reward the investor handsomely.  There’s a saying that, “it’s always a good time to buy something,” and it looks like now, REITs could be that thing.

About the Author:

Tyler Cook focuses his investment strategies on down-trodden investments, including REITS. He closely follows the real estate investment industry, from CDO residuals to mortgage refinance rates.

 

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Invest in Structured Bonds?

Today we have an interesting look at the trends in the European Financial Market from guest author Chris Ciovacco, Chief Investment Officer of Ciovacco Capital Management.

European Financial Market

As noted in the video below, the markets have little margin for error from a technical perspective, which means they have been in need of some good news.  Good news did come this morning from Europe in the form of better than expected factory orders in Germany. On Sunday night, S&P 500 futures hit a low of 1,342.  As of 8:30 a.m. EDT, they stood at 1,358 or 16 points above Sunday night’s low.

Why were the S&P 500 futures so weak on Sunday night? Elections were held over the weekend in France and Greece.   The markets knew there was going to be some political turnover, but the magnitude of the turnover, especially in Greece, was worse than anticipated.  Two key problems have surfaced:

1. It will be very difficult to form a new government in Greece with no clear majority party/coalition coming out the other side of the elections.  It is possible another round of elections will need to be held creating more fear, uncertainty, and doubt for market participants.
2. Nicolas Sarkozy was ousted by disgruntled voters in France.  The Sarkozy-Merkel tag team is no more, creating uncertainty relative to the direction of future debt crisis policy.

A third problem relates to the European market’s slowing momentum from a technical perspective.  Daily and weekly charts have little room for error as of Friday’s close.  Given the news from Europe over the weekend, it is unlikely the technicals will improve during Monday’s session.  The video below shows clear deterioration in trends and momentum; it also explores an excellent way to monitor the battle between “risk on” and “risk off”.

One thing we have noticed over the years while building financial models is markets that are on the edge technically can find their footing just as they appear to be ready to accelerate to the downside. That’s not a forecast for the current market, which remains on the edge technically, but it serves as a reminder to keep an open mind about where we go from here.

About the Author:

Chris Ciovacco, is Chief Investment Officer of Ciovacco Capital Management. Chris Ciovacco has been managing money and serving investors for over 16 years. He is a regular contributor to Financial Sense, Seeking Alpha, and Safehaven. Mr. Ciovacco has been quoted in several media outlets, including the Dow Jones Wire Service, MarketWatch, Fox Business News, the Atlanta-Journal Consitution, and Nasdaq.com.

By David Galland, Casey Research

If history has taught one certain lesson, it is that the less fettered an economy, the better humankind is able to do what it does best: run from trouble and run toward opportunity. In this way mistakes are quickly resolved and progress assured.

Conversely, the deeper the muck of regulation, mandates, taxes, subsidies and other bureaucratic meddling, the slower we humans are in following our natural instincts until the point that progress is slowed or even stopped.

It is said that history doesn’t repeat itself, but it often rhymes. In the current circumstances, it appears that enough time has passed that current generations have completely forgotten the critical connection between the ability of humans to freely pursue their aspirations and economic progress.

You can see this ignorance in the popular demand for even more, not less, meddling in the affairs of humankind. Should this trend continue – and for reasons I will touch on momentarily, I firmly believe it will – then the aspirations of the productive minority will soon be dampened by ever higher taxes and other attempts to “level the playing field” and the global economy, already in tatters, will fall off the edge.

There is no more timely nor acute example of this growing trend than what is currently going on in France. I refer, of course, to the first round of the presidential election process, scheduled for this weekend.

In France, if no candidate attracts no better than 50% of the vote, then the two leading candidates go to a decisive runoff vote, this time around to be held on May 6.

The current president, Nicolas Sarkozy, a conservative in name only, was running at a fairly steady gait toward re-election (thanks to the head start awarded all incumbents), when leading socialist candidate Francois Hollande came out with a proposal to tax anyone with an annual income of over one million euros at a rate of 75%. He also promised to add a tax on all financial transactions and increase taxes on France’s biggest companies to 35% – securing bragging rights as levying the world’s third-highest corporate taxes, the US being #1. This all on top of a 25% VAT, one of the world’s highest. By some calculations, the result of Hollande’s new taxes is that effectively 100% of all incomes over one million euros will now be stripped away by the state.

For good measure, Hollande also promised to reverse the recent modest increase in retirement age from 60 to 62 pushed through by Sarkozy. While I am sure it is mere coincidence, I found it noteworthy that Mssr. Hollande’s campaign slogan is “Change – Now!”

Remarkably, at least for those with some small understanding of economics, as a result of leaning into the microphone with these proposals Hollande has galloped ahead of all other potential contenders and is now projected to finish nose by nose with Sarkozy.

After which the also-rans will be removed from the race, freeing their supporters to share their affections elsewhere. Given that the leading contender for third place with an estimated 14% of the vote is one Jean-Luc Mélenchon – charitably categorized as “far left”, a label that can be applied to most of the other candidates – it is projected that the “conservative” Mssr. Sarkozy will go down in double-digit flames come May 6.

Bringing to mind the prophetic utterance of Louis XV: “Après moi, le déluge.”

The deluge in Louis’ case manifested as the murderous affair commonly known as the French Revolution. In the case of Mssr. Hollande taking up residence in the Palais de l’Élysée, the deluge is likely to manifest in the form of rising interest rates as investors look to protect against an acceleration in the country’s debt to GDP ratio, already projected to hit almost 90% this year, exacerbated by a flight of capital, investors, entrepreneurs and large businesses.

As is the nature of such things, because of the aforementioned predilection of humans to run from trouble, we likely won’t have to wait for Mssr. Hollande to be formally enshrined in the gilded halls for the trouble to start – it will begin within days and maybe even minutes of the handicappers concluding that his ascendency is a sure thing.

Given that France is the third-largest economy in the already-troubled Eurozone, one can expect the deluge to spread, with potentially devastating consequences. That the guillotines may soon be rolled out across Europe can be better understood by taking into account that the Eurozone sovereign deadbeats are on the hook for roughly nine trillion euros in debt, some significant percentage of which has to be rolled over to ready buyers over the next couple of years. Adding weight to the problem is that, according to the latest figures out of the IMF, Europe‘s banks may have to sell off up to 3.8 trillion euros in assets, many of them questionable, between now and the end of next year. At least, if they want to remain solvent.

Across the pond, the United States also has aggressive funding needs, given that the “change” we experienced ourselves in the last presidential election has left the government gasping for about $1.4 trillion in additional funding each year. Then there is Japan, officially the world‘s largest debtor in terms of debt to GDP, where the easy availability of local funding has dried up, requiring that nation to go to the international markets for funding as well.

The phrase “an awful lot of hogs at the trough” comes to mind.

My point is not just that these governments are broke and are about to get a lot more broke as interest rates rise on their many debts and financings, but rather that the global trend toward a resurgence in public demand for socialism in response to a worsening crisis is a certainty.

How could it be otherwise when for decades now the schooling of children has been delegated to functionaries of the state?

For evidence, look no further than the screen swipe here. It is a quote from an essay by a college student in the United States on role the government should play:

The writer of those words was a member of a Valencia University economics class. The professor, Jack Chandliss, asked the class to write an essay on what the American dream means to them, and what they want the federal government to do to help them achieve that dream. Out of 180 students participating, only about 10% wanted the government to leave them alone and not tax them too much, but a whopping 80% wanted the government to provide pretty much the whole dream thing wrapped in a tidy bow – including free college tuition and health care, jobs, even the down payment on their future homes, money for retirement and hard cash, taken in the form of taxes from rich people. Please take a moment to watch a worthwhile interview with the professor.

Pretty eye-opening, eh?

The point here is not complex, but it is important.

Mutual Funds

Even in the wake of the Great Recession, the mutual fund has proven itself a worthy investment for the average person. In fact, many people are actually looking towards mutual funds as their hedged bet into the world of variable investments.

In order to fully understand how to invest in a mutual fund, you must first understand exactly what a mutual fund is.

What Is A Mutual Fund?

A mutual fund is a basket of investments that is chosen by a management team for the profitability of the investors. This is why many financial investors actually say that when you are investing in a mutual fund, you are investing in the reputation of the managers as well as the reputation of the underlying businesses.

Mutual funds usually have some kind of theme that combines the investments in the basket. For instance, all of the investments may be related to the precious metals market. In this case, the title of the mutual fund would be something like “Bank X Precious Metals Growth Fund.” Although the title of the mutual fund can give insight as to the underlying investments, they may only represent the top percentage of holdings. We recommend that you check into the actual underlying investments that are currently being held in the mutual fund to be sure that it is actually investing in what you think it is.

How Mutual Funds Work

The main idea behind a mutual fund is to allow an investor to  instantly diversify their investments with a single purchase. The managers will spread out the total money collected from the investors into companies that are related to the theme of the mutual fund. Because of this, mutual funds are usually thought of as a relatively safe investment that is made for those of a lower risk tolerance. However, the rewards that accompany a mutual fund are usually not comparable to those of individual securities and short-term. They may be in the long-term depending on many variables.

Mutual funds have a scale of risk that is associated with a general view of the mutual fund market. If a mutual fund is marked as a “growth fund,” this means that investors should invest in this fund with the hopes of growing their investments over a certain time period. However, there is more risk and market volatility associated with a growth fund than with  some other types of funds.

 

Investing in an Index Mutual Fund

Those who are looking for a safer investment may want to invest in something known as an “index fund.” These are usually mutual funds that include a basket of investments that follow the performance of an entire index. Because an index is one of the most diversified investments that is possible, encompassing every company on the index, any mutual fund that follows the performance of an index will most likely be relatively conservative. However, a lot depends on which index you choose. You can choose a broad index comprised of large stocks like the NYSE or an index comprised of faster growing stocks like the NASDAQ or even an index of Gold Mining Stocks or even a Bond index. Generally, because mimicking an index doesn’t require the same level of management the fees associated with an index fund are lower.

3 Tips For The Average Investor Investing In Mutual Funds

There are many different types of mutual funds available based on risk tolerance and industry preference. Below are some of the tried and true methods of narrowing down the mutual funds that you should consider as an average investor.

1. Do you understand the industry that the mutual fund is associated with?

Although a mutual fund is diversified across a variety of companies if it is focused on one industry it is still highly risky. For instance, if you invest in a mutual fund that invests strictly in the airline industry it will probably hold shares of American, Delta, U.S Air, etc. it may even hold shares of Air France, and Lufthansa and Cathay Pacific this will help protect you from a specific airline going bankrupt but if the price of oil goes up all the Airlines expenses will rise and the industry as a whole may perform poorly. So although you won’t be exposes to as much risk from choosing a bad company you might still choose a bad industry. Financial experts advise that investors know about specific industry risks before investing in an industry specific mutual fund because the mutual fund still contains market risk, there is still a definite possibility of principal loss no matter how diversified the mutual fund is. The savvy investor counteracts this risk with knowledge of the industry or by sticking to mutual funds diversified over a variety of industries.

2. How well has this fund performed in the past?

Although past performance is no guarantee of future performance… a good track record is preferable to a bad track record (or no track record). Try to channel your investment money into the funds with with a long, strong track record.  This doesn’t mean to choose the best performing fund of last year. Typically, the best performing fund of last year might not do so well this year. Look at longer term performance as well. Also compare the performance of the fund to that of a comparable index or industry. Has the fund outperformed the industry or underperformed the industry. You are paying managers to choose the best stocks… if they can’t outperform the industy average find a fund that can.

3. What is the caliber of the management team?

Many investors are surprised to find out that the average age of the mutual fund manager is in the high 20s. This is much younger than the age of the average mutual fund investor. Since you will most likely have someone younger than you handling your investment income, it would behoove you to research them thoroughly. There are many mutual fund managers with years of experience and a good track record. Before buying a mutual fund be sure to check out the management team. Also beware of new management. If you’ve checked out the funds performance as suggested in #2 but the management team has changed the whole philosophy of management for the fund can change and so in this case past performance will have almost nothing to do with future performance.

Investing in a mutual fund can be a good way to spread the risk and deligate the job of managing your money. But you are still responsible for your choices. Choose wisely and you will do much better than the average investor.

Photo credit: Wonderwebby via Flicker Creative Commons

This is a guest post by Chris Keenan, a blogger for a new jersey home insurance company, who writes on a variety of family and finance topics.

Marin Katusa vs. Porter Stansberry on Oil Prices

At the latest Casey Research conference, respected investment analyst Porter Stansberry stood at the podium and predicted that the price of oil will fall below US$40 per barrel within the next 12 months. Part of his reasoning revolves around the impact that the shale gas revolution has had in the United States – he believes a similar thing will happen with oil.

Porter is a friend of mine and a very smart, successful individual… but I think not.

From my perspective, the pressures at play in the oil market are all pushing prices in the opposite direction: up. Global supplies are tightening, costs are rising, and demand is not falling. Prices are going to remain high, and then go higher. And there will not be a shale oil revolution anytime soon.

I’m the kind of guy who puts his money where his mouth is, so I challenge Porter to a bet. I bet Mr. Stansberry that the price of oil will stay above $40 a barrel over the next 12 months. The wager? 100 ounces of silver.

Porter has made a lot of good calls in his career. I highly recommend watching his video The End of America, an interesting and entertaining look at his prediction that the US will soon drown in its debts and cease to be a global economic powerhouse, a transition that will lead to riots across the country.

Porter and I agree on a lot of things, but on this one he’s wrong. Below are my top ten reasons that high oil prices are here to stay.

Reason 1: “The Big Pinch”

Oil production levels, as well as exports, have been falling in most of the world’s top ten supplier nations:

Top Global Oil Suppliers: Four-Year Production and Export Changes (thousand barrels per day)
Country	Production			Exports
	2006	2009	Change	2006	2009	Change
Saudi Arabia	9,152	8,250	-9.9%	7,036	6,274	-10.8%
Russia	9,247	9,495	2.7%	5,106	5,430	6.3%
Iran	4,028	4,037	0.2%	2,540	2,295	-9.6%
Nigeria	2,440	2,208	-9.5%	2,190	2,051	-6.4%
UAE	2,636	2,413	-8.5%	2,324	2,036	-12.4%
Iraq	1,996	2,391	19.8%	1,480	1,878	26.9%
Norway	2,491	2,067	-17.0%	2,176	1,759	-19.2%
Angola	1,413	1,907	34.9%	1,393	1,757	26.2%
Venezuela	2,511	2,239	-10.8%	2,349	1,691	-28.0%
Kuwait	2,535	2,350	-7.3%	1,760	1,365	-22.4%

 

The “Seven Sisters of Declining Exports” – Saudi Arabia, Iran, Nigeria, the UAE, Norway, Venezuela, and Kuwait – share one common characteristic: their oil fields are old. Oil fields don’t produce the same amount year after year. They decline significantly from one year to the next because each barrel of oil taken from a reservoir reduces the pressure within the field, leaving less force available to push the next barrel of oil up the well. But don’t take our word for it. The following chart shows production from Alaska’s North Slope oil field in the past 30 years:

(Click on image to enlarge)

Another example? The Cantarell field in Mexico, which produced 2.1 million barrels per day in 2003, produced just 400,000 barrels last month, a staggering decline of more than 80% in just nine years.

To maintain output levels, producers need to consistently invest huge amounts of money and time in exploration, development of new areas, and engineering and utilizing new technologies to extend oil field lifespans. All of this costs money, and lots of it. Of the Seven Sisters of Declining Exports, six are countries where the oil machine is run by a national oil firm. That means that revenues from oil exports belong to the government… and those governments are stuck between a rock and a hard place.

They know they need to direct the oil revenues back into their fields very soon, before they decline beyond the point of repair. In the meantime, production levels continue to fall. Compounding the problem of declining production is the fact that most of these countries have long relied on cheap domestic fuel prices to keep their citizens happy. This has spurred rising consumption in many oil-producing countries, including Saudi Arabia, Iran, Nigeria, United Arab Emirates, Venezuela, and Kuwait.

With domestic consumption climbing and production falling, these countries have less oil available for export every year. But here’s the hard place: oil export monies make up the vast majority of each government’s revenue. They need to sell oil on the international market in order to fund their day-to-day operating expenses. And their operating expenses are sky high: these governments constantly make new social-spending promises to appease their masses; and since their populations continue to grow, these commitments grow larger with each passing day.

Venezuela is a prime example. Hugo Chávez owes a big chunk of his popularity to the domestic fuel subsidies that render fuel prices in Venezuela among the lowest in the world – it costs just US$0.18 per gallon to fill up in Venezuela, and that’s ridiculously expensive compared to the US$0.05 per gallon it cost a year ago. Yes, that means you could have filled your car for $1 in Caracas.

Getting rid of these fuel subsidies would solve part of the problem, but it is simply not doable – it is not just political suicide, but a sure-fire way to incite riots and social unrest. Just a few months ago Nigeria’s government tried increasing domestic gas prices; the country rapidly descended into violence as protestors demanded a return to subsidized fuel. The government relented within days.

Fuel subsidies are not the only expensive item on many a government’s social-spending list. Housing, food, health care, education – these are all burdens that socialist-tending governments take on to cement support. Social spending is a great way to make yourself popular with your citizens, but it is also a great way to bankrupt your country… unless, of course, you can sell oil at high prices to other countries. According to our analysis, OPEC nations need the price of oil to stay above $60 per barrel to pay for all their social programs. In other words, they need $60+ oil to stay in power – and you can be certain they will do everything necessary to make sure this happens.

To sum it up: Governments in most of the world’s key oil export nations need more money from fewer barrels of oil, and it is a lot easier to hose your international customers than your own citizens. This results in “The Big Pinch.”

What is “The Big Pinch?” In simple terms: