Buy and Hold Plus'  Instablog

There are a number of reasons to consider investing in alternative energy. First, while oil prices are down from the $150 a barrel we saw last year, they are still high in historic terms. That makes alternative energy a more attractive proposition. Second, greenhouse gas emissions from fossil fuels has become a major concern, and it's likely that emissions will be regulated. Finally, there is concern that even if you disregard the high price of fossil fuels and greenhouse gases, some analysts are concerned that traditional sources of energy can't keep up.

Solar is one of the alternative energy sources with a lot of potential. According to some estimates, the Earth receives enough energy from the sun on a daily basis to provide for the energy needs of every single person on the planet for 27 years. So we know the potential is there.

However, the problem is that for all its potential, there are big hurdles that need to be overcome. For example, one analyst covering the solar industry expects to see a continuing price war. One result of the surge in oil prices was tremendous growth of manufacturing capacity for alternative energy sources, including solar. A lot of factories came online, just in time to flood the market when the world's economy headed down. The result is a price war. Average selling prices for solar equipment have dropped to $1.80 a watt this year from $4.05 a watt in the third quarter of 2008. By the end of 2010, those prices could drop below $1 a watt and by 2011, the figure could be as low as $0.50 a watt.

Many solar companies are not expected to survive this price war. According to one analyst, as many as half of all solar companies will not survive through 2010. The problem is a tremendous amount of overcapacity and a huge inventory buildup. Factory utilization for solar companies dropped to 28 percent from 48 percent last year, and inventories climbed to 122 days of sales, up from 71 days last year.

But there is some bright news for the solar sector. For the first time in a year, signs of increasing demand are appearing. Germany, which is the world's largest solar market, is showing definite signs of recovery. Other countries like France, Italy, and the United States are showing improvement, and Japan is likely to increase solar subsidies as the new government puts its stamp on the country's economy.

There are tremendous problems for investors looking to put their money to work in solar stocks. With approximately half of the companies in the field at risk of going bust, how can investors figure out which stocks to choose? After all, how many companies can survive a price cut in their product to one eighth their prior level in just three years?

One answer for investors is to not attempt to choose individual stocks. Instead, investors should consider ETFs. There are two solar focused ETFs which track the MAC Global Solar Index. Both of them charge investors a 0.65 management fee, which is on par with ETFs as a whole and lower than most mutual funds.

The methodology of these two ETFs is similar. Both of them identify all of the companies in the solar field, and then assign them a value of 1, 0.5, or zero depending on the percentage of revenues obtained from solar energy. That score is then multiplied by the company's market capital to determine that holding's weight in the index. This process is repeated quarterly so that the holdings of the ETF reflect the company's contribution to the global solar market.

The two ETFs are the Claymore MAC Global Solar Energy ETF and the Market Vectors Solar Energy ETF. Clicking on either link will take you to Morningstar, where you can read their report on the ETF.

Investors who put their money into these ETFs should be prepared for volatility, as the solar market is an emerging one. Focused funds such as this one should only be a small portion of your overall portfolio. But if you're looking to gain exposure in an industry with a bright future, this is one way to play it.

Stocks sold of on Friday, unable to run their winning streak to six consecutive days. The Dow dropped 0.2 percent to 9.605; the S&P 500 slipped 0.1 percent to 1,043, and the Nasdaq declined 0.2 percent to 2,081. For the week, though, the rally that started in the first week of September and carried over to the week caused the Dow to gain 1.7 percent; the S&P 500 2.6 percent; and the Nasdaq 3.1 percent.

So far, the traditional September slump in stocks has been avoided. The S&P 500 typically declines by 1.3 percent in the month of September. Two weeks into the month, that doesn't look like it's going to happen, although things can change very quickly.According to analysts, profit taking and concerns that the market had run too far too fast overcame positive momentum from a better than expected consumer confidence report. The consumer confidence index rose to 70.2, way higher than the consensus estimate of 67.

Another potential factor in the decline in the markets is continued skepticism about the rally. According to some traders, many skeptics see the high levels of unemployment, national debt, and commercial real estate problems and see an economy in trouble. Many of these skeptics are still shorting stocks despite the huge rally since the market's lows in March.

Financial stocks were the worst drag on the index, with stocks like JPMorgan Chase and Bank of America dropping more than one percent. Declines in stocks like these dragged the financial index to the worst performance of S&P's ten sectors.

You can see a video report from Bloomberg here.

When many people think about trading, they think about scenes like this.



That was how the Chicago Board of Trade used to look. You had people in colorful jackets screaming bids and asks at each other, and that was how trading was done until recently. But technology allowed a change to the system, and recently, the CBOT joined many other exchanges by going to electronic trading.

Here, computers replace the people shouting out buy and sell orders, and the process is quicker, and small traders have just as much of a chance to get their orders completed as big traders. Traders can also see the bid and ask price immediately. It doesn't matter if you're trading one contract or a thousand, with electronic trading, everyone has just as good of a chance of getting their order filled at a price they want.

And what that means is floor traders need to adapt or they will fade away.

A documentary that's soon to be released called Floored will soon be released. Instead of focusing on the high flying trading gurus who are making millions, it focuses on a typical trader on the floor. It looks at how many of them are struggling to adapt to the new world of electronic trading. Much like an autoworker in Detroit who finds out his services are no longer needed, many floor traders not just in Chicago but throughout the world find that electronic trading is killing their jobs.

Floored was highlighted in an article in Barron's and in the Chicago Tribune. The trailer for the movie can be found here.

As you may know, Human Genome Sciences has been in the new lately as a subject of merger speculation. On Wednesday, the stock surged after the Wall Street Journal reported that options traders were speculating on a takeover by GlaxoSmithKline. The companies said that they don't comment on merger speculation, but they didn't deny the rumor.

The next day, though, a report crossed that a takeover was unlikely in the short term, and the stock dropped. The drop in the stock allowed Buy and Hold Plus to stake out a position in the stock. The stock was purchased at $19.23, which was about a dollar lower than the price where it traded on when the Journal released its article on merger talk. On top of that, Buy and Hold Plus sold the September $20 call for $1.41.

Think about that. Someone was willing to give Buy and Hold Plus $1.41 for the right to buy the stock at $0.77 higher than it was available for on the open market at the September options expiration date. They are betting on a merger, and a surge in the stock price to close to the merger price. The income from the call represents 7.3 percent. If the stock remains unchanged until options expiration date, which is 22 days away, the income alone will provide Buy and Hold Plus with an annualized return of 122.7 percent. If the stock appreciates, the gain will only add to the return. And, if the stock price declines, then the call provides protection to $17.82.

Obviously, with a trade involving merger speculation, it is important to monitor the position and close it out accordingly. A probability analysis shows that there is a 58 percent chance this trade will be profitable, and with the kind of gains possible, it's a trade worth making. But stop orders will be put in place to prevent the trade from going bad.

Blackstone Capital is an asset management company, with operations throughout the world. Like many of these companies, it pays a hefty dividend. Last week, the ex-dividend date for Blackstone arrived. The quarterly dividend of $0.30 will be paid on September 11. At the purchase price, that $0.30 provides Buy and Hold Plus with income of 2.2 percent in about three weeks.

As regular readers know, Buy and Hold Plus views the use of covered calls as a great tool to help boost returns. So, a September $14 call was sold for $0.40. That increases the amount of income received from this trade to $0.70, but the holding period increased to about a month instead of the three weeks. The total income earned jumps to 5.2 percent in four weeks.This works out to an annualized gain of 67.6 percent, and is another example of why using options to boost your gains is such a powerful tool.

Options have a reputation for being risky and for being something that only traders with nerves of steel and millions of dollars to work with should use. This is simply not true. Options are no more risky than stocks are, especially if a trader takes advantage of the fact that approximately 70 percent of all options expire worthless. Thus, they are a tool that every investor should look into and learn about.

It is very likely that if you're reading this, you are seeing advertisements for options education all over the page. It may be very worth your time to click on one of those and see what they have to offer to you. Another place to go to find out how options may be useful for you is the Options Industry Council's website. Here you can find out all the information you need on options.One relevant webcast for regular readers talks about covered calls. Registration is required for this, but it's free.

As you know, Wall Street brokerages make recommendations to their clients on what to buy, what to sell, and what to hold. And many investors take their advice. How would investors have done if they listened to these pundits?

Well, if they listened to the pundits starting this spring, when many of those pundits were calling for Dow 5,000 and S&P 500, they'd have lost money. In the spring, when the market was plunging to lows not seen for decades, Wall Street analysts recommended putting money into European energy producers and drug companies. They recommended staying away or even shorting banks and retailers.

What would have following this advice done to a portfolio? It would have destroyed it as much as the plunge in equities last year and early this year did. Investors with $10,000 to work with who followed Wall Street's advice would have lost all of that money and owed an additional $6,000 on bearish trades according to Bloomberg.

For more on this, visit Following Wall Street's Advice Would Cost $6,000