Barron's: How to Simplify Your Commodities Exposure

By SIMON CONSTABLE

Investors have long known that adding a dash of commodities to their portfolios can be beneficial to their wealth. The only problem has been implementing this strategy.

It's difficult to know which commodities are a good bet, and broad commodities-focused indexes are inadequate. Investors also worry that futures prices don't always track the spot market. But veteran economist David Ranson, at Cambria, Calif.-based HC Wainwright & Co. Economics, might have a solution to all these potential problems: investing in just four commodities. See original story here.

Photo by Markus Winkler on Unsplash

MarketWatch: CEOs Play the Fool with Stock Option Pay

By SIMON CONSTABLE

Just because you run a large and sophisticated public corporation doesn’t mean you can’t be played for a fool when it comes to executive pay.

It’s hard not to draw such a conclusion after reading a recently published study of CEO pay which cited extreme naiveté, confusion and knee-jerk decision-making.

Academics Kelly Shue and Richard Townsend of the University of Chicago and Dartmouth College, respectively, studied executive pay at corporations in the S&P 500 between 1992 and 2010. What they found is somewhere between jaw-dropping and staggering. Read more here.

Xcore082, CC BY-SA 3.0, 

via Wikimedia Commons

WSJ: Why the Time Horizon Matters in Investing

By SIMON CONSTABLE

When it comes to investing, we sometimes forget about the clock. Or as the pros call it, the investment time horizon.

That's unfortunate, because "it's incredibly important," says Cody Willard, an investor in Alto, N.M.

The time horizon is a guide investors use to decide how long to hold an investment. You should make the decision "before you move any money around," says Mr. Willard.

For traders, time horizons can be short—sometimes a matter of hours or days. But for most investors, they are much longer.

A trader may make a bet based on economic data due out a week from now. When the news breaks, the trade is either successful or it isn't. Either way, the position should be closed out.

Failure to close a position within a predetermined time is one of the biggest mistakes a trader can make, says Mr. Willard. That's when a losing trade gets turned into an "investment," he says.

For retirement planning, time frames are necessarily longer. A 30-year-old man should have a time horizon of at least 50 years. Even if you retire at 65, you need to consider that you'll likely be living into your 80s, so your assets will need to be invested for a long time.

Over such a long period, the relative volatility of stocks versus bonds or cash doesn't matter since there is plenty of time for the price to recover.

See original story here.

Barron's: How Fidelity Looks at Tech Stocks

By SIMON CONSTABLE

Some people grow up wanting to be stockpickers. Not so Gavin Baker, manager of the $11 billion Fidelity OTC Portfolio fund.

His work at Fidelity, his home since 1999, is a far cry from Baker's original aspirations. He'd envisioned working the winter ski business and spending the off-season rock-climbing and selling photographs. But then dad intervened. According to Baker, his father said, "Since we've paid your way through college, please take one professional internship of any kind." See original post here.

WSJ: Why Tighter Credit Spreads Matter

By SIMON CONSTABLE

Lately we've been hearing that credit spreads are tightening. What are they, and why do they matter?

A spread measures how much more a business pays to borrow money than the government does.

At any given time, different companies pay different spreads for their debt, depending on factors including the maturity of the debt and the health of the company. But overall, spreads have shrunk in recent years.

It was 1.4 percentage points at the end of June, a fraction of its peak of eight percentage points in December 2008.Consider a BofA Merrill Lynch index that measures the interest rates paid by companies whose debt is rated BBB—neither the highest nor lowest quality. The weighted average spread for all the debt in the index is around its lowest level since the financial crisis, notes Jeremy Hill, managing partner at New York-based research firm Old Blackheath Cos.

Mr. Hill says tighter spreads are a result of the extraordinary efforts by central banks around the world to encourage economic growth by keeping borrowing costs low for companies and individuals. "Monetary policy is vastly different than it was 10 years ago," he says.

For investors, the lower spreads mean less of a reward for venturing into corporate debt rather than buying safer Treasurys. But, Mr. Hill notes, that hasn't stemmed demand for corporate bonds, because "investors are yield-hungry."

He adds that the credit risk of buying corporate debt has declined, in part because the lower cost of borrowing means there is less risk of companies failing to pay the interest owed.

See original story here.

MarketWatch: Why it’s time to invest in transportation stocks

By SIMON CONSTABLE

Has the lackluster U.S. economy finally become the little engine that could?

A quick look at the rail freight business suggests something good is happening. The only question is how long it lasts.

Movement of rail cars around the U.S. has surged so far in 2014 in a way not seen for years, as you can see from the chart.

Rail shipments — which include everything from coal, petroleum products, grains and auto parts — jumped 5.8% in May versus a year earlier, to a weekly average of 296,579, according to D.C.-based industry group American Association of Railroads. In April, they rose 6.9%.

Why should we care?

“It suggests the economy is expanding,” says John Osterweis, chairman and chief investment officer of San Francisco-based Osterweis Capital Management.

Based on past experience he’s likely not wrong. A MarketWatch analysis of industrial production and rail car shipments from January 2001 through April this year shows that 63% of the variation in the growth of shipments is explained by changes in growth of industrial production. (The analysis is known as regression analysis, if you are interested.) The relationship makes intuitive sense also because much, but not all, of the things shipped are used in industrial processes.

It isn’t 100% because some of the items shipped aren’t used in industry, such as grains or road aggregates. In addition, there are timing differences — some things go into inventory and take a while to work their way into finished products.

The takeaway is that as rail shipments go, so goes manufacturing. But for investors, watching the rail data is just better. Why? For starters, the rail data comes out weekly, while the industrial data for the U.S. comes out half way through the following month. Even better, outside of rail stock analysts, the shipments data hardly get any attention.

To profit from the trend, if it continues, go for stocks in the transport sector such as “rails, transports, airplanes and industrials,” says Steven Pytlar, chief equity strategist at New York-based brokerage firm Prime Executions.

He doesn’t mention specific names, but likely beneficiaries would include FedEx, CSX, Norfolk Southern and Alcoa.

Then later in the economic cycle he says go for sensitive areas of the economy like energy and materials such as Exxon Mobil and BHP Billiton. He reasons that late in the economic expansion, cost pressures start to rise and such companies tend to be good inflation hedges.

See original story here.

WSJ: Try Stop Orders, For Peace of Mind

By SIMON CONSTABLE

Sometimes when you've made substantial gains on a stock or exchange-traded fund, you face a tough choice: Do you sell to lock in the profit? Or hold on for more gains but risk losing what's been made?

Mr. Elfenbein notes that once you have a gain on paper, it's psychologically very hard to watch it disappear. The ability to protect those gains makes the trailing stop order very appealing.One way to have your cake and eat it too is to use a trailing stop order: an order to sell your position if the price falls by a predetermined percentage or dollar amount. Most orders are set 20% below the current price, says Eddy Elfenbein, editor of the Crossing Wall Street newsletter. Some people also periodically cancel the orders and reset them at higher prices if there is a rally. Stop orders cost a little more than simple market orders.

But these orders aren't without peril. "There is a risk you get 'stopped out' of a good position," Mr. Elfenbein says. How so? Flash crashes—or temporary drops caused by electronic trading glitches or errors—may cause a position to be sold when it would have been better to hold on.

Another risk: When the stop price is reached, the order is filled at the market price. During periods of market disruption, that can mean you get a price much lower than where the "stop" was placed.

Trailing stops also are available for short sellers, who sell borrowed stock hoping to buy it back later at a lower price. Their stops take the form of buy orders set above the current market price.

See original story here.