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John Dalt
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John Dalt is a retired small business owner who is now operates galtstock.com for stock investors and traders.
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Galtstock
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MarketToday
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  • ETF Flexibility

     

    ETFs have taken over many investors’ portfolios because when you invest in an ETF you do not have exposure to one company’s peccadilloes. Your portfolio will not be slaughtered by an accounting fraud, or oil spill. You invest in a broad index that may own 50 stocks, or 500, so one company’s problems will just be a blip, not a disaster. The opposite of this is also true; one company’s great success will not make an ETF move higher. ETFs work well to take advantage of a broad based movement in an index. If you feel that financials are oversold, you can buy an ETF that targets financials.  ETFs have low fees, lower than mutual funds, .08% vs. 2.2%.  Another advantage with ETFs is liquidity.  You can buy and sell ETFs whenever the market is open, mutual funds can only be sold after the market closes.
     
    Some ETFs do not own the underlying stocks or commodities.  These ETFs can be Ultra, Inverse and Triple ETFs.  These ETFs use derivatives to track the targeted index.  Put simply they buy options or futures contracts to replicate the movement of the index.  Because they use derivatives they can also double (Ultra) the movement, inverse the movement, or Triple the movement ON A DAILY BASIS.  If the index is up 10%, an Ultra should be up approximately 20%, an inverse down 10%, and a Triple up 30%.  These can also be mixed together, so you can have an Ultra Inverse, down 20%.  You can also have a Triple Inverse, down 30%.
     
    These TRADING vehicles can help you as a long-term investor, if used for specific purposes. A good example; you own 15 of the Dow 30 stocks in your long-term portfolio, and do not want to sell them and trigger capital gains taxes. If you were convinced that the Dow is destined to go down, buy the DXD Ultra ETF, it would increase in price twice as fast as the Dow went down, on a daily basis. When the market falls sell your shares in DXD at a profit, and buy more of your favorite stocks at a discounted price!  You can access lists of ETFs on the web at many financial sites.  We have a list of our favorites at our web site under Investor Resources.
     
    Disclousure: No positions
    Tags: DXD, ETF
    Jun 03 5:52 PM | Link | Comment!
  • ETF Basics

     

    I talked with one of our subscribers this weekend and realized that the letter on Friday may have assumed some market experience that all may not have.
     
    We are all familiar with buying stocks.   We study a company and decide that we would like to be an owner.   We used to call our broker and discuss it with him then place an order to buy the stock.   Our broker helped us with money management, sector diversity, asset allocation, stop losses.      
     
    Today, most of us have an online brokerage account.   These can be with one of the major stockbrokers, or may be with a discount online brokerage company.   There are advantages to each, as the major brokerage houses have more research available. 
     
    Exchange Traded Funds (ETF’s) are relatively new, having been introduced in the mid 1990’s.   The first widely accepted ETF was SPY, which tracks the S&P 500.   SPY owns every stock in the index.   As a small investor, you can buy one share of SPY, and own an undivided interest in every stock included in the SP500!   The stock holdings are weighted and are public knowledge. 
     
    This is how the SPY maintains pricing parity to the stocks it represents. 
     
    1.   If the price of SPY is less than “Net Asset Value”, large institutions can buy SPY shares on the open market then exchange these shares with the ETF creator for underlying index shares; this causes the SPY share price to go up, as supply is reduced. 
    2.   If retail buyers bid up SPY shares above “Net Asset Value”, large institutions can exchange a bundle of the index stocks to the ETF operator in exchange for SPY shares. The institution would then sell these new SPY shares on the market driving down the price, as the supply is increased. 
    3.   These two forms of arbitrage by large institutions keep the ETF priced very close to parity with the value of the underlying stocks. 
    4.   Pricing action is publicly disclosed throughout the day so institutions can evaluate a profit opportunity to either buy SPY shares in the open market to reduce supply, or exchange stocks for “creation” shares to increase supply. 
     
    All ETFs follow similar public disclosure, and arbitrage to outside market makers.   SPY is the original index fund; it actually owns the shares of the companies in the index.   There are ETF’s that track sector indexes, ie: transportation, industrials, technology, consumer goods, utilities, health care, and financials.   There are ETF’s that track the Russell 1000, or Russell 2000, or the Dow. 
     
    Today we have learned a little about index ETF’s, and how they work.   Tomorrow, we will look at Ultra’s, Inverses, Triples, and Back flips.   I just made up that last one, but if some of the jokers on Wall Street get a bright idea, we may see it in the coming months. 

    Disclosure: No Position

    Tags: SPY, ETF
    Jun 02 6:48 PM | Link | Comment!
  • Why is Oil Going Up?

    5/28/09

    Crude oil continues its march to $70 per barrel, and beyond.  Seventy dollars is not going to destroy demand.  The Energy Information Agency (EIA) released their forecast for energy usage through 2030 yesterday.  The headline tells the story for our future, “ World Energy Use Projected to Grow 44 Percent Between 2006 and 2030.”   If they had stopped at the headline, they would not have embarrassed themselves.
     
    The EIA went on to predict the middle ground for crude oil pricing in 2030 of $125 per barrel on production of 107 million barrels per day. Let’s see, they are predicting a 44% increase in usage with only a 33% increase in production. Economics is a tough discipline when you work for a bureaucracy.  When a scarce item is in short supply, the price must rise until supply matches demand.
     
    How do we get a 33% increase in production?  Oh! Bama and environmentalists do not want to drill for oil, anywhere.  Every major oil field in the world is declining production.  Have we forgotten about the very real concept of “Peak Oil”?  Mexico will be importing oil within five years; Chavez in Venezuela is destroying production in the name of socialism.  OPEC countries have been lying about their reserves since the ‘70’s, because production quotas are based on reserves. The prediction of higher usage fed the market yesterday, driving crude higher.
     
    I wrote about Peak Oil on 12/31/08, “Peak Oil does not predict or mean that we will run out of oil, but that production will peak, flatten and then decline on existing wells. The problem is replacing old wells and fields faster than they decline. Hubbert originally predicted ‘Peak Oil’ would be reached between 1965 and 1970. This would be the time when we could no longer replace the declining production with new wells. We have imported oil in increasing quantities year after year. Peak Oil has not affected us because of the availability of oil imports. Now we see peak oil effects on oil exporting countries fields also. Saudi Arabia, Iran, Venezuela, Mexico, and Russia all are facing declining production and increased domestic consumption. Large capital exploration projects are required to find the oil needed to replace the fields that are on the backside of the curve. The first oil in Pennsylvania was sopped up in rags from pools that bubbled to the surface. Today’s large oil pools are found in deep water, under salt, under ice in the Arctic, or off shore in political and environmentally sensitive areas like Florida and California.”
    • Today, the world only finds one new barrel of oil for every 4 barrels we consume. 
    • New wells drilled in the last few years have doubled but production has remained flat. 
    • Almost 75% of today’s production is from fields discovered prior to 1970. 
    • The U.S. now produces the same amount of crude as in 1947 
    Today the EIA report on stocks and days of supply gave the crude market more gas.  Traders are treating this like a couple of teenagers in dad’s car on Saturday night!  Today’s report showed stocks and days of supply continuing their decline for the third week.  Next week’s report should continue the trend since it lags one week and will cover a holiday weekend.  Usage for holiday travel should have affected supply, and production could show small interruptions because of the shortened workweek.
     
    Below are the two charts graphing the supply and production that are pressuring prices.
     
    Days if Supply
    Crude Oil Inventory
    Think of the downturn in the red line of each graph
    as OPEC's finger in your wallet!
     
    Today's Market Conclusion:  Oil is headed higher.  You can play it with the USO or DXO Ultra.  Be cautious of the DXO as it's ULTRA status exposes you to "tracking error."  You may also look at DIG, it is an ULTRA fund that owns exploration and production oil companies.  Exxon is their largest holding.  The unique feature of the DIG etf is it uses margin, not futures to attain it's ULTRA status.  For more information on tracking error reference our article under Investor Resources on ULTRA ETF's.  I am going to write more about "tracking error" tomorrow.

    Disclosure: Long USO, Long DIG

    Tags: USO, DIG
    May 28 10:01 PM | Link | Comment!
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