Stock Trading Blog

Economic Red Flags That Indicate A Recession Could Be Near

bear market

It’s every investor’s worst fears come true – a market correction that turns out to the beginning of a larger bear market. If you saw the threat coming, you might not be surprised when it hits or even notice much of a change in your portfolio’s performance if you made preparations. But those that don’t see the warning signs could see their portfolio’s performing gut-wrenching dives.

Luckily, recessions don’t happen by random occurrence, except for certain rare black swan events such as an asteroid strike or something of that nature. For the most part, recessions give signals before their arrival giving investors who know what to look for time to adapt. By following the right line of data, you should be able to determine at the very least if market conditions are headed towards trouble.

Key indicators to watch out for

One of the most tried and true methods for forecasting recessions is by examining overall market margin levels. Historically, a rise in margin levels has preceded a recession making it one of the most accurate predictors investors have. Interestingly, margin levels at the moment are over $580 billion – a record high. With margin levels so high, there’s a lot of leverage in the markets. If a downturn happens, there could be a lot of selling to cover losses which could then trigger a deeper bear market.

Another good indicator is the average price-to-earnings value of companies listed on an exchange like the S&P 500. The mean P/E ratio comes out to be 15.70 so figures higher than that mean that the market is becoming overvalued. Right now the average P/E is 24.54, considerably higher than average. But the market can sustain high values for years before reversing course so while the P/E ratio is a good indicator of value, it doesn’t mean that a recession will happen tomorrow.

Another thing to watch for is a flattening of the yield curve. Normally, longer-term bond yields are higher than shorter term due to the time value of money. But when a recession nears, short-term yields can overtake longer-term ones indicating that investors are preparing for a possible market reversal.

Final considerations

The market is notoriously fickle, and trying to time a bearish reversal is far more difficult than simply identifying that the risk of one is higher than usual. Recessionary forces can stay high for long periods of time before it finally becomes enough that the economy enters a downturn. In practice, red flags should mean that investors take care to add defensive positions to their portfolio and avoid undue risks that could result in heavy losses if the market suddenly enters a corrective phase.

Easy Stock/Option Combination Strategies for any Investor

business-man

Sometimes holding a portfolio of stocks that you buy and sell just isn’t enough. Whether you’re looking for risk management, higher returns, or just something to add a little excitement to your investment activity, options are a great addition to your investment strategy.

By combining your stock portfolio with a few choice option trades, you can greatly reduce the overall risk to your investments or boost returns to a level that would be difficult to achieve with stocks alone. While many investors think of options as being risky profit-enhancing tools, in actuality they often help reduce risk by providing hedges or allowing speculation on a stock without committing a large amount of capital.

Getting started with option trading

Options come in two forms – calls and puts. A call gives investors the right, but not the obligation, to purchase 100 shares of a stock at a given strike price while a put is an obligation to sell 100 shares of a stock at a given strike price should the put be exercised. To simplify, you buy a call if you’re bullish and buy a put if you’re bearish.

Options can also be sold giving investors upfront cash from the sale. However, this action comes with an obligation for calls and puts. Selling a call means you must buy 100 shares of a stock at a given strike price if exercised and selling a put means you must buy 100 shares of a stock at a given strike price.

One of the first option strategies investors usually practice with is the covered call. In this type of strategy, you sell a call with a strike price higher than the current price of a stock that you already own 100 shares of. This gives you upfront cash but limits your total upside potential should the stock rise above the call’s strike price.

Using options can also make short-selling less risky by using a covered put. For this strategy, you short-sell a stock that you’re bearish on and sell a put at a lower strike price. The upfront cash helps hedge against risk but limits your total profit potential if the stock falls below the put strike price. If you want an even better hedge, you could also buy a call while shorting the stock to limit your losses if the stock moves higher unexpectedly, although this means your breakeven point will require the stock to drop below a certain price.

Final considerations

Not every option strategy requires you to actually own the underlying stock. Other combination strategies involve using just options as a way of speculating on a stock without having to buy 100 shares of it. Others are designed to profit from a stock that’s trading sideways – not moving up or down. Once you start to get comfortable with adding options to your stock investments, you’ll be ready for a more advanced kind of trading that gives you access to even more strategies.

How Economic Growth, Interest Rates, and Inflation Work Together

stock market interest

Three of the strongest forces to affect the markets, and subsequently your portfolio, are economic growth rates, interest rates, and the inflation rate. It’s relatively easy to track each of these separately by looking at GDP data, the yield on the 10-year treasury, or the latest CPI chart. But understanding how these interact with each other is the key to predicting market moves and protecting your portfolio.

After several years of stagnation, interest rates and inflation are back on the rise. Rates are at their highest level in four years and don’t look to slow down anytime soon. Inflation meanwhile is around 2.5% along with a global economy that appears to be growing healthy and strong. But these currents are what drive markets, and investors need to know how to navigate the waters if they want to keep their portfolios in the black.

A complex relationship

Nothing in the economy exists in a vacuum. A change in bond yields affects the value of the dollar which impacts stock prices that in turn can influence commodities. The market is a dynamic organism that expands and contracts during the business cycle on a fairly regular basis, but it’s not limited to just cyclical changes.

Many investors are under the false impression that bond yields and the economy have a strong positive correlation. That is, when yields rise, the economy must be growing. Unfortunately, there’s no evidence to suggest that this is true. Data from the Federal Reserve shows that since 1930, the actual correlation between the GDP and the yield on the 10-year treasury is effectively 0.

Anomalous years in which yields are high but growth is low and vice versa mean that there’s something going on. For example, in 1980 the yield on the 10-year was 12.8% but GDP growth was at 0%. And in 1950 GDP growth was an astounding 13.4% but yields were only at 2.4%.

It’s actually inflation that has the highest correlation with bond yields. As inflation rises, the Fed raises interest rates which in turn impact bond yields. In order to combat purchasing power parity, yields need to rise to create an equilibrium.

Inflation is the one commonality between bond yields and GDP. Usually, rising inflation kicks off higher bond yields and higher GDP. But it’s not always the case. Stagflation – when inflation remains high but GDP lags can also come with high bond yields.

Final considerations

Economics isn’t a hard science. At best, economists can give a general idea of how things relate to one another, but there always seems to be that one case that disproves the hypothesis. From one-off events like war or a depression to stagflation, it’s not always possible to create a one-size-fits-all rule. Investors should keep an eye on all three – inflation, GDP data, and bond yields – in order to keep their portfolios optimized for profits.

Do Alternative Investment Funds Actually Work?

man on desk - shutterstock_413093044

The traditional portfolio consists of stocks and bonds and little to nothing of other asset classes. Adding more than that to the mix has generally been left up to professionals to handle. But with the advent of ETFs and other asset creations, everyday investors now have relatively easy access to all sorts of alternative investments from futures to long/short equity funds to derivative investments.

Investors can use alternative investments to boost returns or mitigate risk and with a plethora of options to choose from, there’s virtually no strategy off-limits. The market for alternatives is growing fast with more than $300 billion invested in alternative mutual funds and ETFs as of 2012. Giving investors the ability to profit in any type of market seems like a powerful tool, but with limited data, their actual effectiveness varies.

The role of alternatives in a portfolio

The alternative investment space can be broken up into five main categories: equity-based funds, nontraditional bond funds, commodities, multi-currency funds, and derivatives. Let’s take a look at how each one applies to a portfolio.

The equity-based category can be broken up further into three subsets: bear market funds, long/short funds, and market neutral funds. Bear funds specialize in short selling and other strategies aimed at profiting from down markets. Long/short funds hold net long positions but hedge against downside risk with some short calls. Market neutral funds are designed to profit from markets that trade sideways and don’t have a lot of volatility. Bear and market neutral funds are designed for short-term use only though and shouldn’t be held in a long-term portfolio.

Nontraditional bond funds invest in bonds but may use a variety of strategies to reduce interest rate risk or take advantage of high-yield debt holdings. This aggressive bond strategy shouldn’t be confused with other types of bond holdings which are generally classified as conservative.

Commodities can be invested in a number of ways. Investors can directly invest through futures, or choose ETFs to take advantage of individual commodities or groups of commodities like agriculture. Investors can even choose to stick with stocks that are heavily tied to a commodity like mining companies.

The multi-currency category involves investing the relative differences between two or more currencies. Usually, these funds short the US dollar and take a long position in a different foreign currency. The higher-yielding currency is usually the long position while the lower yielding one is shorted.

Finally, the derivatives category rounds out our list. It comes in several different forms like equity funds did: managed futures, volatility funds, and inverse/leveraged funds. Managed futures invest directly in futures but come in a more compatible asset class like ETFs allowing them to be traded as easily as stocks. Volatility funds take long or short positions on the VIX, the popular Wall Street “fear gauge.” And lastly, inverse/leveraged funds make up the largest category of alternative funds and allows investors to take inverse or leveraged positions in a variety of assets.

Final considerations

Investors interested in alternative funds should carefully consider the risks. Many of these types of asset classes are designed for temporary use and come with higher-than-usual risk. Limiting alternative funds to 20% or less of your portfolios total holdings will help reduce the risks involved and take it to the next level.

Tips And Tricks For Quick Stock Screening

financial banker at work

Building a stock portfolio is no easy task – there are thousands of publicly listed stocks in the US alone. Trying to filter that down to a portfolio made up of 10 to 20 stocks can seem like an overwhelming challenge. But by keying in on just a few specific ratios, investors can narrow down their search options to a manageable level.

Stock screeners come with any brokerage account and some are offered online for free as well. While there are a few differences, the ratios we’ll be discussing can be found in any stock screener. By isolating just a few, you can eliminate worthless stocks and focus just on the ones that fulfill your criteria.

Basic stock screening

While certain industries are exceptions, most stocks can be filtered out by looking for specific ratios and fundamentals. Depending on whether you’re searching for dividend payers, value stocks, or growth stocks, you’ll likely change your search criteria as well.

Regardless, there are a few important criteria you should know so you can search for the best stocks as efficiently as you can.

Price-to-Earnings (P/E) – This ratio is one of the most often used metrics when it comes to screening because it tells investors the earnings multiple others are paying for the stock. It’s one of the most basic ratios for estimating value in a stock and should be compared with industry peers in order to bring context to the figures.

Price-to Earnings-to-Growth (PEG) – Another essential ratio for virtually any stock, the PEG ratio shows investors the relationship between the P/E ratio and the EPS growth rate. A number higher than 2 means that investors are paying more than twice the EPS growth rate for the stock while a figure of 1 or less usually indicates an undervalued stock.

Debt-to-Equity – This underrated ratio is often overlooked but essential for determining the level of debt a company holds relative to its value. This figure can be wildly different depending on the economic sector of the stock and should be compared to industry peers for context.

Dividend Payout Ratio – Dividend seekers should pay particular attention to this ratio. It reflects the percentage of income that’s being spent on dividend payments. The lower the number, the more wiggle room during economic contractions and gives the company the ability to easily raise the dividend in the future. At 100%, the company’s entire income is used towards paying the dividend and anything more than that means the company is losing money by paying out a dividend – an unsustainable situation.

Final considerations

Other than using stock screens to search for potential investments, you can start off ahead of the game by building a watchlist. It takes a little homework, but knowing your top 5 stock picks for any given market sector allows you to quickly analyze winners and losers and identify what sector your portfolio would most benefit from. From there, it’s much easier to stay abreast of changing conditions and quickly take advantage of opportunities as they arise.

A Quick Guide To Biotech Stocks

biotech

Equities are not all the same thing. Even beginning investors know that they’re broken up into categories based on industry or sector of the economy the company participates in. Building a portfolio by mixing up economic sectors is one of the most basic tenets of diversification, but knowing what sectors to invest in isn’t so easy.

One of the most promising sectors right now is biotechnology. Advances in medicine are happening on a daily basis and money is pouring into the industry with venture capital surpassing $10 billion in 2017 alone. For investors looking for fast growth and long-term returns, including a biotech stock is a no-brainer.

Biotech basics

Unlike other industries like mining or consumer staples, biotechnology isn’t quite as easy to understand. The industry doesn’t operate like a standard business where price-to-earnings ratios and sales numbers define a company’s real value. Research and development costs can be staggeringly high while revenues streams can take years to actually become net positive.

One of the biggest uncertainties in biotech investments is the way the FDA drug approval process works. Phase 1 usually takes one year and consists of testing on fewer than 100 individuals to determine dosage and drug safety. Phase 2 can take between one and three years while testing is expanded to several hundred individuals who have the condition the drug is aimed at treating. Finally, phase 3 can take around two to three more years with testing involving thousands of individuals. Investors should note that roughly 10% of new drugs actually make it through all three phases.

One of the most critical metrics used in biotech stocks is research and development as a percentage of sales. Because biotech companies need to invest in research and development in order to create new drugs, costs in this department are usually much higher than other types of industries. However, the more spent relative to sales, the less the company is actually making money on successful products. Investors want this ratio to be as low as possible to emphasize thriving product lines.

Finally, patents can also be an important part of a stock’s value. Patents give a company unique rights to develop and disseminate a drug which could give it an edge over its competition. But patents don’t last forever and expiring patent rights can be devastating to a company who has thrived on just one or two staple drugs. It can also be a windfall for companies looking to take advantage of expiring copyrights in order to develop their own generic line.

Final considerations

Due to the volatile nature of the biotechnology industry, investors may be better served by investing in biotech specific mutual funds or ETFs rather than trying to invest in a single stock. Blue-chip Dow components aside, biotech stock performances are notoriously difficult to predict. Patent laws can be ambiguous at best and passing FDA requirements is never a guarantee, despite what management might have to say about their own drug. Investors should strongly consider investing in an index of biotech stocks to minimize downside risks.

Technology Companies to Watch for the Next Decade

 

stock trading

Technology is one of the fastest growing sectors in the global economy. Tune into any financial news network and if they aren’t already discussing a tech company, it won’t be long before they do. There’s even an entire index made up primarily of technology companies – the NASDAQ.

There’s no shortage of promising tech companies out there but the field is largely led by just a handful of giants. While new players will undoubtedly come onto the scene in the next several years, investors looking for long-term strategies should stick to companies that have demonstrated success.

Companies with staying power

There’s a nickname Wall Street has given the top technology companies in the market right now – FANG. That stands for Facebook, Amazon, Netflix, and Google (now known as Alphabet). Out of that list, three of them are technological conglomerates that are involved in far more projects than their original business. These tried and true leaders in the industry have the innovative capacity and management teams to keep pushing the boundaries of what’s possible.

Facebook – The company that revolutionized the idea of social media is involved in a number of technology concepts ranging from data gathering to a number of different social media platforms. With more than 2 billion registered users, Facebook isn’t likely to fade away anytime soon.

Amazon – Amazon is best known as one of the largest the biggest online marketplaces in the world. But the company also offers television streaming services through Amazon Prime as well as tech devices like the Fire tablet and Echo smart speaker. It’s also on the leading edge of cloud computing technology while its founder Jeff Bezos pushed the frontier of commercialized space travel with his company Blue Origin.

Alphabet (Google) – This holding company contains 20 other companies in its portfolio including Google. From search engines to automated vehicles to its most recent endeavors into artificial intelligence, Google is positioned as one of the greatest technology conglomerates on the planet.

Other companies worth keeping an eye on include Apple and Tesla as well. Apple’s smartphone products and tablets are in high demand globally while Tesla’s electronic and automated vehicles are paving the way for the next breakthrough industry in automation tech.

Final thoughts

Despite their current standing in the US economy, any of the listed companies could find themselves suddenly behind the curve. Technology by its very nature is a disruptive industry and new innovations can make old ideas obsolete without any warning. While major tech companies are more resilient than smaller ones, investors shouldn’t assume a popular stock is immune to competitive pressure.

Why You Should Care About Foreign Markets

global stocks2

As an investor and a US citizen, what happens to the American economy is important – not only to your portfolio but also your job and quality of life. Domestic stock market performance is usually the only financial data most investors follow while economic reports like unemployment figures and quarterly GDP are given priority over others. The data investors usually check is insulated to the US and doesn’t take into account outside influences.

In the modern economy though, there’s no such thing as a truly independent market. The advent of globalization has connected all countries to a single global economy which means that events happening overseas can impact the domestic economy.

Globalization and your portfolio

In the information age, technology is the biggest driver of the global economy. The proliferation of IoT and smart technology has connected the world in a way that’s never been seen before in human history. What that means is that investors need to take into account international economics even if they only hold a portfolio of US stocks.

Many US companies have operations overseas with a large portion of their earnings being derived from international sales. Investors holding Dow components or other large-cap stocks will invariably end up investing overseas in some capacity as a matter-of-fact. That means that companies are subject to foreign currency exchange risks as the US dollar fluctuates in value relative to another countries currency. Profits can be amplified by this effect or muted as some profit is lost when converted back to US dollars.

Small-cap companies tend to be relatively unaffected by foreign markets. They usually don’t have any international operations and business operations are dependent upon a local market or economic factor. While some may import goods or materials from overseas, most don’t have economies of scale to engage in such business practices. However, holding a portfolio of small-cap stocks ignores proper diversification and is riskier than maintaining a diversified portfolio of small and large cap stocks.

Another consideration when it comes to international influence is how interest rates between countries differ. Not only does it impact foreign exchange rates, but it also impacts commodity values and investor interest in other countries. If one country has higher interest rates relative to the US, investors may begin pouring money into that economy.

Final considerations

Not all investors hold to the same belief that international markets matter to investors. Noted investor and founder of The Vanguard Group has stated that he thinks investors need only invest in an index fund like the S&P 500 and let it grow for several decades. While some evidence suggests that holding an index fund over a long period of time is a valid investment strategy, the push for a more interconnected commercial base around the world means that even a domestic portfolio will be impacted by overseas markets.

Easy Stock/Option Combination Strategies for any Investor

investing

Sometimes holding a portfolio of stocks that you buy and sell just isn’t enough. Whether you’re looking for risk management, higher returns, or just something to add a little excitement to your investment activity, options are a great addition to your investment strategy.

By combining your stock portfolio with a few choice option trades, you can greatly reduce the overall risk to your investments or boost returns to a level that would be difficult to achieve with stocks alone. While many investors think of options as being risky profit-enhancing tools, in actuality they often help reduce risk by providing hedges or allowing speculation on a stock without committing a large amount of capital.

Getting started with option trading

Options come in two forms – calls and puts. A call gives investors the right, but not the obligation, to purchase 100 shares of a stock at a given strike price while a put is an obligation to sell 100 shares of a stock at a given strike price should the put be exercised. To simplify, you buy a call if you’re bullish and buy a put if you’re bearish.

Options can also be sold giving investors upfront cash from the sale. However, this action comes with an obligation for calls and puts. Selling a call means you must buy 100 shares of a stock at a given strike price if exercised and selling a put means you must buy 100 shares of a stock at a given strike price.

One of the first option strategies investors usually practice with is the covered call. In this type of strategy, you sell a call with a strike price higher than the current price of a stock that you already own 100 shares of. This gives you upfront cash but limits your total upside potential should the stock rise above the call’s strike price.

Using options can also make short-selling less risky by using a covered put. For this strategy, you short-sell a stock that you’re bearish on and sell a put at a lower strike price. The upfront cash helps hedge against risk but limits your total profit potential if the stock falls below the put strike price. If you want an even better hedge, you could also buy a call while shorting the stock to limit your losses if the stock moves higher unexpectedly, although this means your breakeven point will require the stock to drop below a certain price.

Final considerations

Not every option strategy requires you to actually own the underlying stock. Other combination strategies involve using just options as a way of speculating on a stock without having to buy 100 shares of it. Others are designed to profit from a stock that’s trading sideways – not moving up or down. Once you start to get comfortable with adding options to your stock investments, you’ll be ready for a more advanced kind of trading that gives you access to even more strategies.

10 Essential Rules For Every Investor To Follow

stock 10-k statement

Investing isn’t for everyone. The lure of making money from the simple act of buying a stock and selling it at a high price is hard to resist though. It doesn’t take much time to open up a brokerage account, fund it, and start making moves in the market.

But as with most any activity, trying to play something without having any rules is bound to devolve into a nonsensical endeavor that might result in quitting altogether. But following a small handful of rules can reduce your stress and the amount of risk you take on and help you become the best investor you can be.

10 Rules to live by

Diversify – It’s the most repeated investment phrase for good reason. Diversification means minimizing risk to a single investment and allows for some forgiveness when you make mistakes.

Think Long-Term – Investing isn’t a race; it’s a marathon. Interest works best when it’s compounded over time. Short-term fluctuations happen, but having a long-term goal in mind makes it easier to weather the storms.

Don’t Invest All At Once – Allow yourself to establish a position over time. That will give you a chance to see how the stock performs based on your research and minimize losses if you’re wrong.

Cash Is An Investment Too – Keeping cash on the side may seem counter-intuitive, but it also gives you the ability to invest at a moments notice should you find a time-limited opportunity.

Homework Is Key – Successful investing means putting in the time to research stock picks before you buy. Due diligence means understanding the stock’s financials and plans for the future that will result in a higher stock value.

Buy What You Know – One of the most common mistakes investors make is investing in stocks they don’t understand. If you don’t know how a company makes money, you can’t honestly say whether a company will earn more or less in the future.

Cheap Isn’t Good Enough – Buying a stock simply because you think it looks cheap is a poor reason to invest. You need to be able to explain why the stock will go up in price.

Stick To The Plan – Investing takes strategy. If you’re a conservative investor focused on steady income stocks, it doesn’t make much sense to buy a high growth tech company, even if you think it’s a good buy.

Don’t Panic – No one makes good decisions when they’re panicking. Down markets and sell-offs are scary for any investor, but keeping calm could mean that you end up buying valuable stocks at a cheap price instead of selling on a whim and losing money.

Pigs Get Slaughtered – There’s a saying on Wall Street, “bears make money, bulls make money, and pigs get slaughtered.” Basically, it means that once you achieve the profits you anticipated in a stock, it’s time to get out before you lose out. If you’re still bullish, you can always just cash out your initial investment leaving nothing but your profits at risk.

Final thoughts

Now that you have a base to go on, you can start adapting your own rules as they come up. Lessons are best learned through practice as you’re bound to hit a few speed bumps along the way. But as long as you stick with these 10 simple rules, you should be equipped to handle Wall Street.

Don’t Get Fooled By A ‘Dead Cat Bounce’

bull and bear market

Value investors pride themselves on being able to identify out-of-favor or misunderstood stocks and take advantage of its price difference relative to its intrinsic value. Oftentimes, this means buying a stock near a 52-week low or after a sustained drop in price. But timing is everything – buy too late and you’ve missed out on the rebound, buy too soon and you could lose money or be forced to wait longer than anticipated.

Value investors can get fooled into buying too early if a stock begins to climb after a recent fall. In an effort to hop on board before the stock completely recovers, value investors may be tempted to buy as soon as a stock shows positive gains again. But all too often these stock recoveries are only temporary and value investors that jump the gun are left with a falling stock price and an unknown recovery time.

The market is a trickster

The stock market may behave in certain patterns, but it’s not always easy to see what those patterns are and what path the market will take before a cycle can be observed. Corrections are a normal part of the market’s life-cycle as are long periods of sustained gains. Bear markets can creep up unexpectedly as well making it challenging to accurately predict when a correction is just part of a normal bull market or the beginning of a bearish reversal.

One of the biggest illusions in the market is the ‘dead cat bounce.’ This is when a stock shows positive gains after a recent decline but quickly sheds those gains to resume its downward momentum. Many investors have fallen into this trap only to realize too late that they’ve bought into a false premise of recovery.

Investors worried about getting caught in a ‘dead cat bounce’ need to look for the signs that a recovery may be just an illusion. One of the most common reasons for the temporary spike in value after a decline is short covering activity. Investors that bet against the stock by selling it short need to buy back their shares in order to close out their positions. This buying activity can boost the price of the stock for a limited time before the underlying fundamentals that contributed to the original decline take over again.

The key to avoiding the ‘dead cat bounce’ trap is sticking to your initial analysis of the stock. Stock prices move up and down for a number of reasons, many of which have nothing to do with the actual value of the underlying company. If you see a possible value play and understand at what price the stock should be purchased, then you shouldn’t be tempted to buy before the stock hits that level.

Final thoughts

Patience is one of the hardest things to learn as an investor. A stock on a value investors watchlist that suddenly starts to reverse course can send the message that ‘it’s now or never.’ One of the most repeated phrases on Wall Street is that “no one makes money by panicking.” Trust the fundamentals and don’t let other investors fool you into making a mistake.

What the 10-Year Treasury Says About the Economy

currency trades

There’s no lack of economic indicators for investors to look at when it comes to gauging the current health of the economy. From unemployment figures to GDP estimates, investors have access to virtually any type of data they could want. But one of the most under-represented indicators is the 10-year treasury yield.

The yield on the 10-year treasury is used as the basis for interest rates in the US. Investors can use it to track historical trends and easily determine if rates are rising or falling and how quickly or slowly it’s happening. More importantly, though, the yield can be used as a proxy for overall interest rates, mortgage rates, and other important types of interest rates.

The 10-year treasury as a fortune teller

The 10-year treasury is noted as being the standard for analyzing bonds and bond yields. There is an inverse relationship between yields and bond prices; when yields rise, bond prices fall and vice versa. When investor confidence in the markets is high, bond prices fall and yields rise along with stock values. However, low confidence in the markets means more investors chasing safe haven assets causing bond prices to rise, and yields to fall.

The market usually behaves in a pattern. These observable inter-market relationships can help investors anticipate where the market is going and build portfolio strategies to take advantage of it. For example, when currencies rise, a chain of events begins starting with a fall in commodities prices. Bond prices will then rise while yields fall and finally, stocks will rise thereby completing the cycle.

Another important aspect of the 10-year treasury yield is how it can help investors track changes along the yield curve. Typically, debt obligations with a long maturity pay a higher yield because their investment is tied up for a longer period of time. Longer maturity bonds are also more volatile and sensitive to changes in rates. However, the yield curve can become inverted where shorter-term yields are higher than longer-term ones. This happens most often when yields are expected to decline over time and is considered a precursor to an economic recession.

Finally, the 10-year yield is helpful when compared to inflation which helps investors track real yields and determine whether rates are keeping up adequately with inflation or if deflation is becoming a concern.

Final considerations

Investors should note that market changes don’t always happen on a predictable time-table. While asset classes do interact with one another, changes can take place quickly or slowly depending on a number of different factors. Other considerations like inflation also need to be taken into account to give context to the numbers. A macroscopic view of yields will help investors make smarter decisions in their portfolios.

What A Healthy Stock Buyback Program Can Do For Your Investment

wall street

When considering a stock for investment purposes, there are usually a number of qualities that always need to be addressed – price-to-earnings, sales, profit margins, dividends, EPS growth, debt, and other items. But one of the things that tend to get overlooked far too often is stock buyback programs.

Stock buyback (or repurchase) programs are a way the companies have to mitigate price declines and reduce the number of overall shares on the market. Usually a company buying its own stock is seen as a positive thing – after all, if the company believes in their own stock, maybe investors should too.

Pros and cons of a stock buyback program

It’s not too difficult to find a stock that has an active share repurchase program. You can usually find out if a company has an active program through a simple Google query or simply check the company’s 10-K statement to find out definitively.

Investors normally view stock buyback programs as a positive thing in a potential investment. It means that the underlying company is literally investing in their own brand sending a message to investors that management is “all-in” on the company’s future. It also creates a price support level for investors – an important takeaway in bear markets since it creates an extra layer of support to prevent the stock from falling too far too fast.

Not all stock buyback programs are a good thing for investors though. Sometimes companies use them to hide poor ratios and skew financial data. Because stock buybacks mean fewer outstanding shares, it makes the earnings per share figure go higher if all other things stay the same. For companies looking for a quick EPS boost, buying back stock can inflate that number without actually doing anything meaningful to the business. It also boosts the stock price since a large number of shares are being purchased. While it’s not necessarily a negative thing to watch a stock you own jump higher, it could just be a way for insiders to sell their shares at a higher price.

Depending on an investors’ needs, a share repurchase program can be a great boon to any portfolio. Having a built-in safety net means lower price volatility, especially during bear markets. But investors should keep a careful watch for companies who are only using buybacks to artificially boost prices or inflate EPS figure.

Final considerations

While stock buyback programs are generally a good thing for investors, they should always follow up to see how and when the stock is actually repurchased. Many times a company will announce a stock buyback program but not actually use it in an attempt to lure investors. Simply announcing a buyback program isn’t enough – investors should always follow up and check to see the company’s history of such programs and whether or not share are actually being bought back.

The Best Way to Invest in the US Dollar

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There are four main types of assets investors trade in – equities, bonds, commodities, and currencies. Equities and bonds are relatively easy to invest in while commodities can be done through mutual funds and ETFs, but investing in currencies is usually the domain of large institutional investors.

While there are a number of currencies investors can trade, the largest is without a doubt the US dollar. But other than simply holding cash in hand, investors may not be aware of how to actually take advantage of the ups and downs that the value of the US dollar experiences.

Betting on the dollar

As a global standard of trade, the US dollar is held by virtually every country in the world. As such, the value of the dollar is important not only to the US but also to other countries that own US debt – a drop in the value of the dollar means a drop in the value of those assets. As of the beginning of 2018, the total amount of US debt held by foreign governments surpassed $15 trillion with another $5 trillion owned by the US government itself through trust funds dedicated to programs such as social security and Medicare.

One way to invest in the dollar is through the same medium foreign governments use – treasuries. These government-backed debt securities are 100% backed by the US dollar so its value is tied to the strength of the dollar. However, treasuries come with low yields compared to other types of investments so only very conservative investors should consider trading in treasuries.

Another way to invest in the dollar is through ETFs. Instead of trying to play the futures market themselves, investors can take advantage of ETFs which establish positions in futures contracts without investors needing to take on that kind of risk. And because ETF’s trade like stocks, it makes them a popular option for investing in the US dollar.

Forex trading is one of the most popular ways to trade currencies. But it’s dependent on trading the dollar relative to another currency. Unless you’re familiar with foreign interest rates, central banks, and strategies like a carry trade, investing directly in currencies is a highly risky maneuver.

Of course one of the simplest ways to invest in the dollar is to invest in companies that are primarily dependent on the US economy. Focusing on domestic companies means taking full advantage of US dollar strengths – however, during times of dollar weakness, it may be best to invest in international holdings or companies that derive their profits from overseas instead.

Final considerations

One thing investors need to keep in mind when investing in the US dollar is how it is valued relative to other currencies. The US dollar can’t grow stronger or weaker in a vacuum – it can only do so against a foreign currency. Keeping abreast of interest rates in other countries could help you gain an edge when investing in the US dollar.

Should You Consider Using Leveraged and Inverse Funds in Your Portfolio?

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Building the right investment portfolio is a dynamic process. There’s no perfect solution that fits every investor’s needs, and even a well-designed portfolio will need adjusting on a regular basis in order to minimize risk and maximize profits. At some point, one might even consider adding in leverage to boost profits and take advantage of certain opportunities.

Using leverage in your portfolio can be a great way to boost overall returns if you have the risk tolerance to deal with higher volatility. But making the choice to add these types of funds to your portfolio shouldn’t be taken lightly. There’s a significant impact that it can have on your overall investment goals. There’s also a significant difference in the behavior of a traditional portfolio and one that includes leveraged and inverse funds that could mean changes to your investment strategy.

Using leverage in your portfolio

A leveraged or inverse fund is an ETF or mutual fund that uses leverage or short positions in its trading portfolio. Leveraged funds use margin accounts and futures contracts to generate an amplification of 2-3x what the benchmark index produces. In other words, if an index rises 1%, a leveraged fund might rise 2% or 3%. However, it also means losses are just as amplified, generating losses that may be too much for more conservative investors to withstand.

Inverse funds work on much of the same principles as leveraged funds but are designed for short positions. If an index falls, an inverse fund will profit and vice versa. Unlike pure leveraged funds, inverse funds are meant to be temporary and not long-term holdings. Investors can use inverse funds to hedge their portfolio against downside risk, but since markets tend to rise over time rather than fall, holding on to an inverse fund over a long period of time will likely result in losses.

Leveraged funds can also be used temporarily to take advantage of new opportunities. For example, if you believe that the technology sector will outperform other sectors over the next year, you may consider adding a leveraged technology fund to your portfolio for the next 12 months. Used sparingly, leveraged and inverse funds can greatly boost portfolio returns while reducing the level of risk normally associated with them.

Final considerations

Investors should take extra caution when adding a leveraged or inverse fund to their portfolio. Unless investors can identify a real need for such a fund, they may want to consider more traditional alternatives. Inverse funds, in particular, should only be used in select circumstances. They require active management to know when to buy and when to sell to avoid unnecessary losses. Investors who understand due diligence may find that leveraged and inverse funds have a role to play in their portfolio, but investors who don’t have the time to commit to their investments should avoid using them.