Individual Investor: Trade Like a Pro

by Jeff Miller

It has been well documented that individual investors trail the market averages when it comes to investment performance. The "buy and hold" concept has little respect these days, but most individual investors do even worse.

There are many reasons for this, but bad market timing heads the list. As many regular readers know, I have been working on a book aimed at helping individual investors. Part of my approach is explaining how professionals think about problems. Here is one example.

Follow up:

The Concept of Upside Risk

There is a concept well known to financial professionals, but rarely considered by the individual investor. It is the concept of upside risk. Briefly put, it means you have a position that will be a loser if prices move higher. Here are a few examples:

• The most obvious case is the hedge fund manager who is “short” a stock. This means that his fund profits when the stock goes down and loses when it goes up. His risk is to the upside.

• Mutual fund managers try to beat a specific benchmark. When they are partly out of the market, or in very conservative investments, their risk is to the upside.

• When a stock analyst writes a professional report recommending a stock, she lists all of the factors that could be problems for the company. When the analyst recommends against owning a stock, she lists all of the things that might be better than expected. The risk is to the upside.

This is an indispensible concept for the individual investor. It starts with analyzing your personal situation

The Key Investor Question: What is Your Risk?

The average investor thinks only about the downside. Because of our natural human instincts, well established in the psychological studies of behavioral finance, we all focus on what we might lose. This can have a paralyzing effect.

Meanwhile, there is a constant barrage of news about problems. This is the grist for the daily media reports.

Professionals cut through this news. They have a specific market plan, balancing risk with reward. Most individual investors do not have a strong plan -- one with a specific target and a process to reach the goal. They often make the mistake of treating their investments like a poker game where they are “all in” -- or all out.

The Acid Test

If you have all the money you need for your future, you should be preserving capital. I understand that interest rates are low, but security is important. Be cautious!

Most of us are not in that happy position. We need to create wealth, not just to preserve wealth.

If you have significant future needs, and you do not own any stocks, you have upside risk.

To appreciate the risk you should ask yourself what will you do if the market goes to 15,000? To 20,000? When will you decide to buy? If you do not have a plan, it means that you will miss out in achieving your goals.

Every portfolio needs a balanced asset allocation. The right answer is different for each investor.

Key Takeaway

The professional investor views risk in terms of upside and downside. The amateur looks only at the downside. He fails to ask decisively when there is opportunity and chases the market at peaks. There is no better time to invest than when there are many well-known and well-documented worries. A bad time to invest is when no one is worried.

This is very difficult to understand, and even harder to implement.

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Brussels Summit: France and Germany Agree Deal as Leaders Meet to Save The Euro

By Thomas Costello

There is growing optimism in Europe that a deal can be struck to save the euro and the Greek economy after France and Germany came to an agreement over the plans. It was believed that both Angela Merkel and Nicolas Sarkozy would be entering the talks opposed on crucial areas in how to save the Greek economy but it now seems as though both parties will enter the talks united.

The Brussels summit is the tenth time Eurozone leaders have met in the past eighteen months and todays talks will no doubt be the most crucial to the stability of the Eurozone. Ahead of the crunch meeting, leaders will attempt to resolve the Greek debt crisis and prevent further contagion to other Eurozone economies.

Germany had previously insisted that Greek leaders should be forced to take losses as part of any further bailout package. However, after seven hours of talks in Berlin, Chancellor Merkel and President Sarkozy have agreed a compromise on Greek losses. The complex new bailout package will be presented at the meeting with the fundamental issue still remaining who will pay for any further bail out. 

Greece was granted a €110bn (£97bn) bailout in May last year, since then its debt has soared to €340b. It needs a second bailout to keep afloat until 2014. France wants to impose a levy on Eurozone banks which would raise around £10bn a year. Germany are believed to oppose such measures because it would penalise banks not exposed in Greece and would take time to establish. However, the levy would encourage private creditor involvement, something Angela Merkel is keen on.

The seriousness of the situation across the Eurozone has been spelt out by European Commission President Jose Manuel Barroso. He said on Wednesday: "Nobody should be under any illusion; the situation is very serious. 'It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond."

The Governor of the Bank of England, Sir Mervyn King, has said that the crisis in the Eurozone posed the most serious and immediate risk to the U.K.'s financial system.

17 government leaders will attend the Brussels summit today plus heads of the ECB (European Central Bank), European Commission and Christine Lagarde.

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USDA’s Chief Economist: Strong but Volatile Crop Prices Ahead

By: Ed Clark

Producers should expect a continuation of highly volatile crop prices over the next several years, but relatively strong prices due in large part to strong export demand, and, of course, ethanol use. That’s the message from Joseph Glauber, chief economist of USDA.

 

Furthermore, corn stocks will be rebuilt from current very low levels as high prices will stimulate production worldwide, but it will take about two or three years. "It’s hard to rebuild stocks overnight." He sees corn prices $4-plus five to 10 years out and higher than that if energy prices remain high with farm costs so tied to energy.

 

Glauber spoke at a meeting on recognizing the risks in global agriculture sponsored by Federal Reserve Bank of Kansas City.

 

Glauber added in response to a question from AgWeb that it’s difficult to be precise in predicting when stocks will be rebuilt because so much depends on yields and demand. But that said, the last 60 years suggests that high prices stimulate more production and the eventual rebuilding on stocks. "It’s hard to argue against that," he states.

 

Acknowledging that some believe the land price boom is a bubble, Glauber nonetheless does not expect a crash in values, as land reflects underlying fundamentals, "even with $4 corn," although run-ups of 20% that have occurred in two Federal Reserve Districts "are certainly not sustainable." Some softening of values is possible if commodity prices come down somewhat.

 

Glauber also says that he does not believe that non-ag investment in commodity markets is driving prices overall after reading several studies on the impact of funds on prices. "Over the longer term, fundamentals rule these markets," he says. Looking at an individual day, however, it can appear that outside investment has a bearing on market movement, he adds.

 

One reason Glauber is optimistic for agriculture over the next few years is the outlook for strong exports, which are now at record levels. However, the growth in U.S. market share may be reduced, which is to be expected with prices at such high levels. "About 60% of soybean exports in the world go to China. We’re looking for that maintaining if not increasing." India also is emerging as a strong customer, he notes.

 

While most of U.S. exports to China have been soybeans, he sees the possibility for increases in corn exports, too, as China is increasing its non-food-usage of corn. China is also increasing its feed use due to higher levels of poultry and pork production. Remarkable on corn exports to China is that until recently, the nation was a substantial exporter of corn.

 

One hurdle for all major crops is the need to double production over the long term to meet increasing demand, particularly in developing nations for higher diets of animal protein. "The challenge will be coming up with the production."

 

Furthermore, Glauber adds, unlike the commodity boom in the early 1970s, there are few additional acres in the U.S. that can be brought into production. The only acres available are in the Conservation Reserve Program (CRP), and it’s debatable how many of those acres should be brought back into production because of environmental sensitivity, he says.

 

One important factor making U.S. agricultural so competitive worldwide, Glauber says, is the inexpensive dollar relative to other currencies, and he sees nothing to reverse that in the short term. That’s important, because crop prices in Brazil have not seen the rate of increase that they have in the U.S. because of the relative value of the dollars versus the Brazilian real.

 

On U.S. soybeans, he says that demand has been growing at an incredible rate of 4.4%, "and I don’t see any letting up."

 

In the near term for cotton, Glauber predicts "a record amount of abandonment of acres in West Texas," due to the extreme drought. Texas is the No. 1 cotton producing state. He also notes that both China and India are strong U.S. cotton customers.

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Fund managers reverse withdrawal from commodities

by Agrimoney.com

Fund managers have called time on a withdrawal of cash in commodities, amid improved hopes for global economic growth, and reduced concerns for China.

The proportion of asset allocators overweight in commodities, minus those with smaller-than-orthodox positions, rose to 13% this month, after declines in May and June, a survey for Bank of America Merrill Lynch showed.

The rebound, from a reading of 6% last month, tallies with a revival in farm commodity prices from a liquidation heading into early July which drove Chicago wheat prices to their lowest for nearly a year.

However, it defied decreased expectations for rises raw material prices identified in the survey, which found only 6% of fund managers viewing commodity price inflation as the biggest economic threat.

In April, commodity prices were viewed as the biggest danger, a position taken now by European sovereign debt, named as risk number one by 64% of investors.

China sentiment

Nonetheless, the 265 asset allocators surveyed, managing nearly $800bn between them, were more sanguine on prospects for world economic growth, with a net 19% seeing the global economy strengthening over the next year, up from 10% in May.

And concerns over growth in China – a huge buyer of raw materials, including cotton and soybeans - have eased too.

A net 24% of Asian and emerging market fund managers see Chinese expansion slowing, down from 40% last month.

The rise in allocations of cash to commodity investments came at the expense of bonds, with investors also slashing positions in eurozone equities and, in particular, banks.

"Investors have acted decisively in response to recent developments in EU sovereign funding. The question is whether eurozone equities have been oversold," Gary Baker, head of European equities strategy at the bank, said.

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Weather isn't the only decider for corn prices

by Agrimoney.com

Has corn's rally run out of steam?

The grain's upswing on forecasts for hot weather, an uptick which brought Chicago's best-traded December contract 7.5% gains last week, has certainly slowed. On Wednesday, the lot fell for the second time in three sessions.

It could be that the contract has peaked for now, and could even be in for a tumble which lasts into harvest if weather forecasts change for the better.

But that doesn't mean that bears hold all the cards.

Losses containable so far?

Sure, weather damage as currently assessed does not look serious enough to warrant a fresh crack at record prices.

Corn's prospects have suffered from a hot weather blow in a sensitive spot – pollination. But the maths suggests that's well covered by current price moves.

Plug in a figure of 156 bushels per acre - the midpoint of the range of between 152 bushels per acre and 161 bushels per acre that Agrimoney.com has heard about – and the harvest comes in at 13.2bn bushels, using the US Department of Agriculture's latest acreage forecast.

While that's 230m bushels fewer than USDA officials are currently expecting, a noteworthy amount when inventories are thin, it is not enough to get the balance sheet back to where prices were in the run up to last month's high.

It's not even enough to reverse even the extra 2011 corn production the USDA factored into its latest crop data, last week, let alone the increased number for stocks left over from last year's harvest.

The acreage question

However, that's not all investors have to factor in.

Further scorching weather might cut yield forecasts nearer to 150 bushels per acre, and lift prices further.

But so would a drop in the number of acres planted - which is still a possibility even if it appears to have dropped off investors' radars for now.

Bulls could have two bites at this cherry.

The first is a cut to the official estimate for US corn sown.

The critics who attacked the USDA's upgraded figure of 92.3m acres may yet be proven right when revised data are released next month. After all, in North Dakota alone, as Rabobank pointed out, a downgrade of only 2.3m acres total sowings appeared conservative when set against separate survey data showing more than 6m acres unplanted.

Lost crop

The second is the estimate for abandonment.

The USDA currently sees 7.4m acres, or 8.0%, of US corn not making it to harvest. That figure may prove optimistic given the flooding which has claimed huge areas around the Mississippi, Missouri and Ohio rivers.

Indeed, larger losses are hardly uncommon. Half the harvests over the last decade have seen abandonment reach at least 9%, with a 10% rate "not out of the question" for this year, Australia & New Zealand Bank said.

Yield x area

Plug more aggressive estimates on these scores into the balance sheet for US corn and it is not difficult to get more worrying ideas of corn supplies.

Using a 10% abandonment rate alone takes the lost production to more than 500m bushels.

Sure, investors need to watch the how productive harvested corn crops will be. But they shouldn't forget the question about how much was sown in the first place, and how much of that will get lost along the way.

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Where the DJIA Would Be with AAPL Instead of CSCO

by Bespoke Investment Group

With Apple (AAPL) getting close to $400 today and giving Exxon Mobil a run for its money as the largest company in the world, many are once again wondering why Apple isn't in the Dow Jones Industrial Average (DJIA)? While we can't answer that question, we can tell you what might have been.

Back in June 2009, DJIA removed General Motors from the index and added shares of Cisco (CSCO). While CSCO was one of the largest companies in the country at the time and certainly was a viable candidate for inclusion in the index, the case for AAPL was just as -- if not even more -- compelling. After all, just as there used to be a General Motors car in nearly every driveway, there is now an AAPL product in practically every American household.

Below is a price chart of the Dow since the beginning of 2007 compared to how it would have done if AAPL were added instead of CSCO. Below that we also show the percentage spread between where the DJIA would currently be with APPL instead of CSCO. Because AAPL has done much better than CSCO and the fact that the DJIA is a price weighted index, had AAPL been added instead of CSCO back in June 2009, the index would be more than 10% higher than it is now. At a level of 13,928, it would be within 2% of its all-time high of 14,164. 

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