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.

Barron's: Why Aluminum Price Will Bounce

By SIMON CONSTABLE

The cure for aluminum's low prices seems to be those low prices themselves. That's standard free-market economic theory, and it appears to be playing out in the real world. After years of overproduction of aluminum and steady price declines, producers are starting to manufacture less of the metal, which is used in everything from packaging to auto parts to airplanes. That could bring prices back above $2,000 a metric ton.

Benchmark futures, traded on the London Metal Exchange, are down about 34% from their May 2011 peak of $2,774 a metric ton, and recently traded around $1,820. See original story here.

Aluminum extrusion

Photo by Mastars on Unsplash

MarketWatch: How Treasury's Jack Lew Could Kill Stocks

By SIMON CONSTABLE

Who’s going to sink the stock rally?

A lot of people assume it will be Federal Reserve Chairwoman Janet Yellen who sooner or later will start to raise the cost of borrowing. But equally important could be Treasury Secretary Jack Lew.

Why? These two people hold wrenches that could potentially monkey with mergers and acquisitions activity. Frenetic deal making on Wall Street tends to go hand-in-hand with a firm stock market.

Doubt me? Just look at the chart below plotting the dollar volume of U.S. deal activity (as tracked by Dealogic) and the S&P 500. Deal flow goes up, so does the market. Deal flow drops, so do stocks. There’s certainly a correlation.

Deals are affected by many things including management optimism. But a couple of things stand out. One is the cost of borrowing money.

Low interest rates are certainly favorable for M&A, explains Bob Bruner, dean of the Darden Graduate School of Business Administration and co-author of the book, “Deals from Hell.” Or put another way, when the cost of borrowing money is cheap then it can make sense to buy other businesses.

As rates rise the favorability of borrowing to do such things will be lessened. But as we have heard, Yellen’s Fed will likely raise rates starting next year.

The other thing is tax rates. Even the casual observer knows that tax rates drive deal activity. U.S.-based Pfizer’s thwarted desire to buy UK-based AstraZeneca  for $120 billion was no doubt driven by the desire to avoid 35% U.S. corporate tax rates and switch to much lower British taxes. It’s known as tax inversion. Although, the Pfizer-AstraZeneca deal is off for the time being, other companies such as Eaton, Chiquita Brands and Applied Materials have all successfully retreated to lower tax countries, or are well on the way. Others are considering the move.

Although tax inversions are eminently possible now, politicians are increasingly banging the drum to stamp them out. That job will fall on the Internal Revenue Service, part of Lew’s Treasury. It could be that tax inversions get legislated away by Congress. Or alternatively the folks at the IRS could simply eliminate them using new interpretations of existing laws.

So there you have it. A potential nightmare scenario: higher interest rates and a clamp down on tax-led deals could dry up the deal flow.

When it does, expect stocks to languish.                    

See original story here.

Barrons: The Three Big Trends to Watch Internationally

By SIMON CONSTABLE

When George Evans, portfolio manager of Oppenheimer International Growth (ticker: OIGAX), isn't worrying about what the future will look like for his investments, it's likely that he'll be reading for pleasure.

The native of the U.K., who graduated from Oxford with a joint bachelor's and master's in geography, and then earned an M.B.A. from Wharton, says he reads an "enormous amount," including history, armchair science, and novels. Though this reading is not directly tied to his day job, "You never know where ideas come from," he says. "It's tremendously important to read extensively." See original story here.

Photo by Greg Rosenke on Unsplash

Barrons.com: Who You Gonna Believe, Janet Yellen or Your Lying Eyes?

By SIMON CONSTABLE

When it comes to inflation, who are you going to believe, Janet Yellen or your lying eyes? If you see rising prices you should tweak your portfolio with some inflation-loving stocks.

Yellen, who heads the Federal Reserve, says inflation is subdued. The latest government data could delude you into thinking that's true, with the consumer price index up less than 2% on the year.

But here's the rub, because like politics, all inflation is local. If rising prices empty my wallet then we have inflation, regardless of what the government says. See original story here.

United States Federal Reserve, 

Public domain, via Wikimedia Commons

WSJ: A Fund-Company Chief Embraces Technical Analysis

By SIMON CONSTABLE

If it wasn't for the global financial crisis that began in 2007, Sam Stewart, president of the Wasatch Funds, might never have considered using so-called technical analysis to help pick stocks.

But these days he wouldn't consider doing otherwise.

Technical analysis, also known as chartism, is the art of using patterns in stock-price charts to help make investment decisions. It differs from "fundamental" analysis, which looks at the economics and finances of industries and companies.

It's unusual for investment managers who rely on fundamental analysis to give much weight, if any, to stock charts, says Vinny Catalano, chief investment strategist at New York-based Blue Marble Research, a market-research and asset-management firm. Fundamental analysts, he says, often dismiss technical analysis as fluff that lacks any theoretical underpinning for its conclusions. But not Mr. Stewart.

In the fall of 2007, he saw value in stocks. The major indexes were starting to drift lower then, and some sectors, including financials, were already tanking. Some stocks looked cheap to him, based on fundamental analysis, so he bought them—and lost money as markets plunged in 2008 and into 2009.Wasatch Advisors, the fund-management firm Mr. Stewart founded in 1975 and still runs, is well known for doing solid fundamental research and generating competitive returns. "We used to be 100% fundamental analysis," Mr. Stewart says.

In retrospect, Mr. Stewart says, "I lost sight of the forest for the trees." If he had looked at the charts at the time, he'd have said to himself, "You are crazy" to consider buying, he now says.

So, while Wasatch still conducts intense fundamental analysis, Mr. Stewart now monitors "several technical indicators that were flashing warning signs prior to the global financial crisis," as he explained in an April 4 letter to Wasatch shareholders.

He focuses on two technical indicators to supplement his analysis. One is point-and-figure charts, designed to display patterns in share-price movements in a way that makes it clear when a new upward or downward trend has emerged. The other is moving averages of share prices. For instance, if the current price of a stock is above both its average over the past seven weeks and its average over the past 21 weeks, and both moving averages have an upward slope, then the stock is in both a short-term and long-term upward trend. Many chartists see that as a buy signal.

For those who are bullish on stocks, Mr. Stewart has some good news. The same indicators he ignored at his peril back in 2007 "are giving me reasons for optimism today," he wrote to shareholders.

See original story here.