Stock Market Literacy by Bill Cara

THE SIMPLEST INTRODUCTION TO

STOCK MARKET LITERACY The world-renowned Trader Wizard lays the groundwork for students around the world, young and old in 120 Living Lessons

BILL CARA

Published by Greenfield Cara Attn: Bill Cara Etobicoke, Ontario M8X 3A3 Canada 647-868-6013 billcara@billcara.com Copyright @2022, @2023 by Bill Cara All rights are reserved, including the right to reproduce this book or portions thereof in any form. First edition January 2023 ISBN 978-0-9879770-3-8 (Paperback) ISBN 978-0-9879770-5-2 (eBook)

Typesetting and cover design by Andy Magee, AM Graphic Design LTD (amdesigner.co.uk)

Disclaimer The author and the publisher make no representations or warranties concerning the accuracy or completeness of the contents of this work and expressly disclaim all warranties, including warranties of fitness for a particular purpose, without limitation. No warranty may be created or extended by sales or promotional materials. The advice and strategies contained herein may not be suitable for every situation. This work is sold with the understanding that the author and publisher are not rendering financial, legal, accounting, or other professional services. In specific cases, if professional assistance is required, the services of a competent professional person should be sought. Neither the publisher nor the author shall be liable for damages arising therefrom. The fact that an organization or website referred to in this work is a potential source of further information does not mean that the author or publisher endorses the source. Readers should be aware that organizations and internet websites listed in this work may have changed or disappeared between when it was written and when it was read. At press time, this edition contains the most complete and accurate information currently available. However, due to the nature of capital markets, information frequently changes and may have been added recently to the latest text that does not appear in this edition. Please get in touch with the publisher by email should you believe that more current information is available.

Disclosures At the date of the initial publication of Stock Market Literacy, Bill Cara is a US-registered Financial Advisor and Canadian resident. Bill Cara’s opinions are his own and do not constitute financial or investment advice in any way whatsoever. The information Bill provides is solely for educational and informational purposes, not explicitly directed guidance.

Hyperlinks in eBook Hyperlinks can be harmful to your computer and data. To protect your computer, click only those hyperlinks from trusted sources. There are thousands of hyperlinks in this book’s digital form, and all can be trusted. Each one comes from my files, created by me. All chapters, illustrations, tables, and keywords have been bookmarked and hyperlinked for easy navigation. I make liberal use of market data from sources like Investing.com, FinViz. com, StockCharts.com, TipRanks.com, Finance.Yahoo.com, and MarketBeat.com. Each company has exceptional service levels, so I apologize in advance if I linked to anything behind a paywall. Also, some of these links will go dead in the future, but only a few of them with any luck, so I hope the digital version of this book will be helpful for many years. Buyers of the printed books should email billcara@billcara.com with details of the purchase, and I will send you a free copy of the eBook so you can access the links. Readers who spot errors can message me at billcara@billcara.com.

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From the author Stock market literacy is a life skill many people think is unattainable. This book provides the required education. It’s a book for teaching newbies and experienced investors alike. And, best of all, it doesn’t take that much time - you will feel its impact by committing 10 to 15 minutes daily. Successful investing involves applying simple business and economics principles to market prices and then using common sense. There is much common sense around, but securities investors ignore most of it. I hope my experience and proven abilities in capital markets will lead you to listen to mine. I am a registered investment advisor and successful entrepreneur. I have deep financial expertise in accounting, investments, and capital markets. When Forbes called me “Best of the Web” and “Our Favorite Blogger,” I earned the right to teach. I teach that an investment in yourself will be your most significant investment. To control your destiny and your path to success, you must become literate in the stock market. Education is so important to me. Professors at the University of Toronto, Wilfred Laurier University (Hons. BBA and Wall Street Journal Student Achievement Medal), and McMaster University (MBA) taught me about business. Then the partners and managers at PriceWaterhouseCoopers and KPMG (CA and CMA) taught me how to apply knowledge. I don’t use formal designations on my calling card because that’s the past, investing is about the future, and investing is my life. I learned how to invest at Dominion Securities, Dean Witter, and Canaccord. And even at 77, I passed the SEC/FINRA Series 65 exam. I had to understand US securities law when I moved my international business from the Bahamas to an office at Aragon Capital LLC in Fort Lauderdale. A teacher at one of the country’s most prestigious international day/boarding private schools was asked a pointed question by a parent. How was it that he had built a substantial company with many employees, yet his child knew more about the stock market than he did? The teacher replied: “Ask Bill Cara.” That teacher used my daily blogs in his teaching. This book offers readers 120 chapters on Stock Market Literacy based on what I learned in five decades and the sweat equity I invested in becoming “The Trader Wizard.” Complete courses in schools teach the contents of individual chapters. But that is a mistake. The market is a dynamic system, so students first need to get their heads around the subject matter before focusing on small pieces. Taken together, I intend these chapters to be a virtual survivor handbook for students of the market and a guide to success. This book encapsulates my advice that “preparation turns opportunity into success.” Risks in investing are omnipresent. So saying good luck is not an appropriate introduction to readers interested in capital markets. But I do wish everyone good fortune. May your hard work and risk-taking pay off as mine did.

PICTURE OF PAT AND I ON OUR ‘TIME & SPACE’ AND LIFE IN THE BAHAMAS

Dedication Stock Market Literacy is dedicated to independent thinkers and writers, a growing part of the literary landscape. May your publishing dreams come true.

Contents A Mindset for Successful Investing Chapter 1

Why stock market literacy is important............................................................. 22

Chapter 2

We trade prices....................................................................................................... 26

Chapter 3

Investors need structure........................................................................................ 29

Chapter 4

What should we buy.............................................................................................. 32

Chapter 5

What defines a Quality company ........................................................................ 35

Chapter 6

What is a value stock ............................................................................................ 40

Chapter 7

What is a growth stock.......................................................................................... 44

Chapter 8

What is an income security.................................................................................. 48

Chapter 9

Selling risk versus buying opportunity............................................................... 53

Chapter 10 Strategy and tactics ground rules........................................................................ 55 Chapter 11 Advice from the market gurus............................................................................. 59

Things to Know About Markets Chapter 12 Why do prices fluctuate........................................................................................ 69 Chapter 13 Drivers of price change ........................................................................................ 73 Chapter 14 Social media influencers ...................................................................................... 81 Chapter 15 Financial advice versus financial advisor ........................................................... 84 Chapter 16 Automated advice.................................................................................................. 91 Chapter 17 Corporate filings.................................................................................................... 97 Chapter 18 Seasonality data.................................................................................................... 100 Chapter 19 Market study 1: advance-decline data............................................................... 103 Chapter 20 Market study 2: moving average data................................................................ 106 Chapter 21 Market study 3: pe ratio data.............................................................................. 109 Chapter 22 Market study 4: yield data................................................................................... 114 Chapter 23 Market study 5: volume data.............................................................................. 117 Chapter 24 Market index study 6: bearish data.................................................................... 119 Chapter 25 Market index study 7: bullish data.................................................................... 121

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Funds and Non-Stock Assets Chapter 26 The ETF................................................................................................................. 125 Chapter 27 The inverse ETF .................................................................................................. 132 Chapter 28 Investing in closed-end funds............................................................................ 139 Chapter 29 Investing in mutual funds................................................................................... 141 Chapter 30 Investing in bonds............................................................................................... 150 Chapter 31 Bond yield or dividend yield.............................................................................. 155 Chapter 32 Currencies............................................................................................................. 160 Chapter 33 Cryptocurrencies ................................................................................................ 167

Essential Economic and Financial Data Chapter 34 Economic data that investors must understand ............................................. 174 Chapter 35 Economic data that moves market prices the most........................................ 180 Chapter 36 Macroeconomic study 1: US consumer data ................................................... 186 Chapter 37 Macroeconomic study 2: US jobs data ............................................................. 190 Chapter 38 Macroeconomic study 3: US housing data ...................................................... 194 Chapter 39 Macroeconomic study 4: us corporate & business data ................................. 197 Chapter 40 Macroeconomic study 5: us economy data ..................................................... 201 Chapter 41 Financial study 1: US treasury data .................................................................. 204 Chapter 42 Financial study 2: US Federal Reserve data ..................................................... 209

Fundamental Analysis of Companies Chapter 43 Corporate fundamentals overview.................................................................... 215 Chapter 44 Financial strength of a company........................................................................ 218 Chapter 45 Profitability of a company .................................................................................. 220 Chapter 46 Earnings quality .................................................................................................. 225 Chapter 47 Quality of financials ........................................................................................... 228 Chapter 48 Business predictability ....................................................................................... 232 Chapter 49 Volatility and beta ............................................................................................... 235 Chapter 50 Earnings and EPS revisions ............................................................................... 238 Chapter 51 The price earnings ratio ..................................................................................... 240

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Chapter 52 Dividend yield...................................................................................................... 246 Chapter 53 Enterprise value compared to market value..................................................... 248 Chapter 54 Corporate reporting ........................................................................................... 250 Chapter 55 Analyst ratings..................................................................................................... 252 Chapter 56 Analyst price targets............................................................................................ 255

Technical Analysis and Market Timing Tools Chapter 57 The need to develop timing skills ..................................................................... 258 Chapter 58 Introduction to technical analysis..................................................................... 263 Chapter 59 Trends and cycles analysis and application in trading.................................... 268 Chapter 60 Technical support and resistance....................................................................... 273 Chapter 61 Point & figure charting ....................................................................................... 278 Chapter 62 Introduction to technical indicators ................................................................ 280 Chapter 63 The Moving Average Convergence Divergence (MACD) indicator............. 283 Chapter 64 The Roc Indicator................................................................................................ 287 Chapter 65 The Stochastic Oscillator.................................................................................... 289 Chapter 66 The RSI Oscillator................................................................................................ 292 Chapter 67 The importance of volume in technical analysis............................................. 296 Chapter 68 Volume-based oscillators.................................................................................... 299 Chapter 69 Divergence between indicator and price is a vital alert.................................. 302

Trading Chapter 70 Is there a best investing style?............................................................................ 305 Chapter 71 Investing defensively .......................................................................................... 308 Chapter 72 Strategies for the higher risk-taking investor................................................... 311 Chapter 73 Potential upside.................................................................................................... 314 Chapter 74 Peer groups and why we study them................................................................. 317 Chapter 75 Using technical indicators when trading.......................................................... 321 Chapter 76 Accumulation Zone, Buy Alert, and Buy Signal.............................................. 327 Chapter 77 Distribution Zone, Sell Alert, and Sell Signal.................................................. 329 Chapter 78 Analytics I use for research and to support investment decisions................ 331 Chapter 79 Automating decision support for trading ....................................................... 337 ix

Investing by Sector Chapter 80 Investing in the Energy Sector........................................................................... 343 Chapter 81 Investing in the Materials Sector ...................................................................... 350 Chapter 82 Investing in the Commodities markets............................................................. 354 Chapter 83 The Gold & Silver markets.................................................................................. 360 Chapter 84 Precious Metal Royalty and Streaming Instruments....................................... 369 Chapter 85 Investing in the Industrials and Transports Sector ........................................ 372 Chapter 86 Investing in the Consumer Discretionary Sector ........................................... 377 Chapter 87 Investing in the Consumer Staples Sector ....................................................... 382 Chapter 88 Investing in the Health Care Sector ................................................................. 385 Chapter 89 Investing in the Financial Sector....................................................................... 389 Chapter 90 Investing in the InformationTechnology Sector.............................................. 395 Chapter 91 Investing in the Communication Services Sector........................................... 400 Chapter 92 Investing in the Utilities Sector.......................................................................... 404 Chapter 93 Investing in the Real Estate Sector..........................................................................

Investing in the US Chapter 94 The Dow Jones Industrial Average ................................................................... 414 Chapter 95 The Dow Jones Transport Average.................................................................... 420 Chapter 96 The Dow Jones Utilities Average (DJUA) ........................................................ 423 Chapter 97 Investing in US large-cap company stocks....................................................... 426 Chapter 98 Investing in US mid-cap company stocks........................................................ 431 Chapter 99 Investing in US small-cap company stocks...................................................... 435 Chapter 100 Investing in micro-cap and nano-cap company stocks................................ 439

Investing in International Markets Chapter 101 Investing in Canada.......................................................................................... 449 Chapter 102 Investing in Mexico........................................................................................... 455 Chapter 103 Investing in South America............................................................................. 460 Chapter 104 Investing in France............................................................................................ 466 Chapter 105 Investing in Germany....................................................................................... 472 Chapter 106 Investing in Italy................................................................................................ 478 Chapter 107 Investing in Spain.............................................................................................. 482 Chapter 108 Investing in the Netherlands........................................................................... 486 Chapter 109 Investing in Sweden and Norway.................................................................... 491 Chapter 110 Investing in Switzerland................................................................................... 497 Chapter 111 Investing in the United Kingdom (UK)......................................................... 502 Chapter 112 Investing in India.............................................................................................. 506 Chapter 113 Investing in Australia and New Zealand........................................................ 513 Chapter 114 Investing in Japan.............................................................................................. 521 Chapter 115 Investing in Singapore...................................................................................... 528 Chapter 116 Investing in Hong Kong................................................................................... 532 Chapter 117 Investing in China............................................................................................. 537 Chapter 118 Investing in the rest of the world.................................................................... 542 Chapter 119 Bellwether stocks for each country................................................................. 559 Chapter 120 Investing in a global stock portfolio............................................................... 565

Addendum Table 1 List of investor websites to help you get started Table 2 The world’s most essential stock exchanges Table 3 List of the leading indices of the world stock exchanges with Wiki descriptions Table 4 List of the international markets covered by Yahoo Finance Table 5 The world’s Forex currency pairs Table 6 Choices of market data Table 7 Keywords Index

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Illustrations Fig. 3.1

GICS eleven Sectors

Fig. 3.2

GICS 4-level coding for the Telecommunication Services Sector and a few examples

Fig. 5.1

Key elements that define a company’s Quality

Fig. 5.2

Desirable perspective for high-Quality

Fig. 5.3

List of high-Quality Cara 100 candidates in April 2022 if Timeliness is a consideration

Fig. 7.1

Cathie Wood’s nine ETFs to start 2022

Fig. 8.1

Dividend Yields of Russian companies after post-Ukraine invasion sanctions

Fig. 8.2

High-Quality Top Dividend payers

Fig. 12.1

Price Catalysts

Fig. 12.2

Correlation between High-Yield Corporate Bonds (HYG ETF) and Nasdaq Composite Index

Fig. 13.1

ESG topics at ETFDB.com

Fig. 13.2

BlackRock’s flagship USA ESG ETF

Fig. 14.1

Where Gen Z and millennial investors look for money tips

Fig. 15.1

A ranking of the best US online brokerage services and trading platforms

Fig. 18.1

Sector and Industry Seasonality

Fig. 19.1

Broad Market Advance-Decline Indices by Number

Fig. 19.2

Broad Market Advance-Decline Indices by Percent

Fig. 19.3

Sector Advance-Decline Indices by Percent

Fig. 20.1

Stocks that are over their Moving Averages

Fig. 21.1

Price-Earnings Ratios for various industries

Fig. 21.2

A selection of high-rated industries based on 5-year EPS Growth

Fig. 21.3

PE data and other essential fundamentals data for each GICS sector

Fig. 22.1

Yield-related market indices

Fig. 22.2

A ‘healthy’ yield curve for US Treasury Securities, dated Dec. 12, 2015

Fig. 22.3

A graph that depicts an ‘unhealthy’ downward-sloping yield curve

Fig. 22.4

A recession-indicating negative 10-2-year US Treasury yield spread

Fig. 23.1

Broad market volume-based indices

Fig. 24.1

Four phases of a stock cycle: Accumulation, Retail Markup, Distribution, Retail Markdown

Fig. 24.2

Indicators of Market Bearishness

Fig. 25.1

Indicators of Market Bullishness

Fig. 26.1

Links to the fundamental ETFs for all countries

Fig. 27.1

The 24 top-volume Inverse ETFs that trade in New York

Fig. 27.2

Smaller Cap Inverse ETFs that trade in New York

Fig. 27.3

A selection of Volatile 2x and 3x Leveraged Bull and Bear ETFs that trade in New York

Fig. 27.4

The enormous cost of Leveraged ETFs illustrated

Fig. 27.5

Single-Stock ETFs that trade in New York as of mid-July 2022

Fig. 28.1

Closed-End Fund Companies that trade in New York

Fig. 29.1

The world’s four largest Fund companies (aka asset managers) in 2022

Fig. 29.2

The 100 biggest US Mutual Funds in Net Asset ranking as of February 22, 2022

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Fig. 29.3

Major Fund Buy/Sell summaries of Technical Indicators, Investing.com, April 10, 2022

Fig. 29.4

A plethora of information on the significant Mutual Funds in 63 countries

Fig. 30.1

Credit rating agencies

Fig. 30.2

Germany, Japan, UK, and US Treasury Bonds

Fig. 30.3

Highest sovereign credit ratings

Fig. 30.4

Lowest sovereign credit ratings

Fig. 31.1

10-2 Year US Treasury Bond Yield Spread chart, March 18, 2022

Fig. 32.1

US Dollar is used in 88% of global transactions, per BIS 2022 Triennial Survey

Fig. 32.2

Forex Pairs Trading and Indices

Fig. 32.3

EUR/USD trading chart reflects the Euro Bear

Fig. 32.4

10-year chart of the US Dollar Index

Fig. 32.5

Chart of plunging Eurodollar futures in 2022

Fig. 33.1

Links to Bitcoin and Ethereum trading in US Dollars

Fig. 33.2

Chart showing the rapid rise and fall of Bitcoin

Fig. 33.3

Listing with links to charts of the USD-denominated Cryptocurrencies on my watchlist

Fig. 33.4

Trading permitted at IBKR in Cryptocurrencies plus possibilities. Blockchain stocks I trade

Fig. 34.1

Seven economic analysis protocols investors could follow to see the big picture

Fig. 35.1

Family purchase items used to compare inflation over 67 years

Fig. 35.2

The primary datasets used to observe the impact of economic factors on market prices

Fig. 37.1

Industries likely to be most impacted by trend reversals in economic data

Fig. 38.1

Industries likely to be most impacted by trend reversals in housing data

Fig. 38.2

Graph showing the impact of falling Mortgage Rates on New Home Sales

Fig. 39.1

Supplementary list of significant corporate and business-related data to be monitored

Fig. 41.1

Seventy-year history of Fed rates

Fig. 41.2

The total value of negative-yielding bonds in the world rising since 2015 peaked in 2021

Fig. 41.3

List of information sources for global interest rates and debt instrument prices

Fig. 41.4

ETF database provides access to all types of Bonds

Fig. 42.1

List of Fed-related reports

Fig. 43.1

For trading Growth-oriented companies, the corporate fundamentals to focus on

Fig. 43.2

For Value-oriented companies, focus on

Fig. 43.3

For Income-oriented companies, focus on

Fig. 43.4

For all companies, the most important financial ratios to understand are

Fig. 45.1

Gross and Net Margins of Dow 30 companies

Fig. 46.1

Personal ranking of the Dow 30 companies (best to worst) for Earnings Quality (June 2016)

Fig. 47.1

Characteristics of companies with High-Quality Financials

Fig. 48.1

List of Dow 30 companies best able to predict earnings and analyst rating changes

Fig. 49.1

Broad Market Volatility Indexes

Fig. 51.1

Table of Dow 30 company PE Ratios and Forward Price Earnings Ratios

Fig. 51.2

General Electric Company chart showing a two-decade-long decline in market value

Fig. 52.1

Dividend Yields of High-Quality companies (April 2022)

Fig. 55.1

Highest to Lowest Analyst Consensus Ratings of Dow 30 stocks (April 2022)

Fig. 56.1

List of Analyst Ratings and Price Targets of Dow 30 stocks (April 2022)

Fig. 57.1

An illustration of how the stock cycle typically leads the economic cycle

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Fig. 57.2

Different Time Series Data Periods of interest to investors

Fig. 57.3

Ian Notley Schematic Market Cycle Model (MCM) showing Accumulation/Distribution Zones

Fig. 58.1

An uptrend is a line joining HL points, and a downtrend is a line joining LH points

Fig. 58.2

Example of a Price staying on the right side of the Up Trendline

Fig. 58.3

A graphic example of how Price Cycles differ from Price Trends

Fig. 58.4

Schematic of Cyclic Wave Motion

Fig. 58.5

Notley Market Cycle Model schematically shows the structure of Cycles overlaying the Trend

Fig. 59.1

Chart example of Down Trendline connecting the lower highs breaking out

Fig. 59.2

Chart example of Up Trendline connecting the higher lows breaking out

Fig. 59.3

MCM illustrates the concept of selling peaks in Up Trend and buying troughs in Down Trend

Fig. 59.4

Schematic of the four Cyclic phases

Fig. 59.5

Schematic showing to Accumulate when prices are Oversold and Distribute when Overbought

Fig. 59.6

Schematic showing the time to accumulate and go long rallies and the time to liquidate

Fig. 60.1

‘Lower Low Breakdown’ Pattern

Fig. 60.2

‘Cup and Handle’ Continuation Pattern

Fig. 60.3

Pivot Point calculations for each Dow 30 company

Fig. 60.4

Links to Important Market Pivot Points

Fig. 61.1

Point and Figure graph

Fig. 63.1

MACD and MACD Histogram

Fig. 63.2

Chart of the % of S&P 500 stocks trading above their 200-day Moving Average

Fig. 63.3

Chart of the % of S&P 500 stocks trading above their 20-day Moving Average

Fig. 64.1

Investopedia chart showing Rate of Change (ROC)

Fig. 65.1

Stochastic Oscillator Indicator (%K) formula

Fig. 65.2

Slow Stochastic Indicator (%D) formula

Fig. 65.3

Investopedia chart of Stochastic Oscillator

Fig. 65.4

Example of Stochastic Cross-Over

Fig. 66.1

Relative Strength Index formula

Fig. 66.2

Example of using RSI Indicator to signal a Buy and Sell opportunity

Fig. 66.3

Chart of Relative Strength Index (RSI) Oscillator

Fig. 66.4

Chart of Money Flow Index (MFI) Oscillator

Fig. 66.5

Table of RSI-14 of the Dow 30 stocks on April 22, 2022

Fig. 67.1

Table of Relative Volume (RVOL) of the Dow 30 stocks on April 22, 2022

Fig. 68.1

Money Flow Index (MFI) Indicator Formula

Fig. 68.2

RSI and MFI indicators compared

Fig. 69.1

Example of Divergence in Money Flow Index (MFI) relative to Price

Fig. 71.1

Six financially sound S&P 500 candidates for defensive investing

Fig. 72.1

Features of High-Quality companies

Fig. 72.2

Diversified list of High-Quality companies

Fig. 72.3

List of financially sound companies acceptable to risk-tolerant investors

Fig. 73.1

Analyst Price Target Potential Upside in Dow 30 stocks

Fig. 74.1

Photo of an Orca whale stalking a herring ball

Fig. 75.1

Stochastic Oscillator %K Formula

Fig. 75.2

Stochastic Oscillator %D Formula

Fig. 78.1

Schema for Bill Cara’s “Decision Support System”

Fig. 79.1

Bill Cara’s Rules-based system

Fig. 80.1

GICS Sector 10 8-digit Coding (Energy)

Fig. 80.2

GICS Sector 10 Industry and Sub-Industry Indexes (Energy)

Fig. 80.3

List of International Integrated Oil Companies that trade in New York

Fig. 80.4

List of North American Oil Exploration & Production Companies that trade in New York

Fig. 80.5

List of North American Natural Gas Exploration & Production Companies trading in New York

Fig. 81.1

GICS Sector 15 8-digit Coding (Materials)

Fig. 81.2

GICS Sector 15 Industry and Sub-Industry Indexes (Materials)

Fig. 82.1

Major Indices in the Commodities market

Fig. 82.2

Commodity-based ETFs

Fig. 82.3

Commodity-based Mutual Funds

Fig. 82.4

Chart of the Dow Jones Commodity Index (DJCI)

Fig. 83.1

Major Indices for Gold Miners

Fig. 83.2

Major ETFs for Gold Miners

Fig. 83.3

Large Gold-related US Mutual Funds

Fig. 83.4

Largest Gold & Silver mining stocks by Market Cap that trade in New York

Fig. 83.5

Graphic illustrating the fewer Precious Metals projects based on strict criteria

Fig. 83.6

New Pacific Metals (NEWP)(NUAG.to) chart, September 20, 2022

Fig. 84.1

Major Indices for Gold-related investors

Fig. 84.2

Major ETFs for Precious Metals Miners

Fig. 84.3

Most prominent Precious Metals industry financiers

Fig. 85.1

GICS Sector 20 8-digit Coding (Industrials and Transports)

Fig. 85.2

GICS Sector 20 Industry and Sub-Industry Indexes (Industrials and Transports)

Fig. 85.3

Dow Jones Transports Average components

Fig. 86.1

GICS Sector 25 8-digit Coding (Consumer Discretionary)

Fig. 86.2

GICS Sector 25 Industry and Sub-Industry Indexes (Consumer Discretionary)

Fig. 87.1

GICS Sector 30 8-digit Coding (Consumer Staples)

Fig. 87.2

GICS Sector 30 Industry and Sub-Industry Indexes (Consumer Discretionary)

Fig. 88.1

GICS Sector 35 8-digit Coding (Healthcare)

Fig. 88.2

GICS Sector 35 Industry and Sub-Industry Indexes (Healthcare)

Fig. 89.1

GICS Sector 40 8-digit Coding (Financial Services)

Fig. 89.2

GICS Sector 40 Industry and Sub-Industry Indexes (Financial Services)

Fig. 89.3

GICS Sector 40 Industry and Sub-Industry Indexes (Banks)

Fig. 89.4

GICS Sector 40 Industry and Sub-Industry Indexes (Insurance Companies)

Fig. 89.5

Money and Money Supply Indexes

Fig. 90.1

GICS Sector 45 8-digit Coding (Technology)

Fig. 90.2

GICS Sector 45 Industry and Sub-Industry Indexes (Technology)

Fig. 90.3

Most significant holdings of the XLK ETF

Fig. 90.4

Most popular Technology ETFs

Fig. 91.1

GICS Sector 50 8-digit Coding (Communications and Media)

Fig. 91.2

GICS Sector 50 Industry and Sub-Industry Indexes (Communications and Media)

Fig. 91.3

The largest Telecom companies that trade in New York

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Fig. 91.4

List of large-cap Communications sector company ETFs that trade in New York

Fig. 92.1

GICS Sector 55 Utility Industry Groups newly classified in 2022 by the GICS committee

Fig. 92.2

GICS Sector 55 8-digit Coding (Utilities)

Fig. 92.3

GICS Sector 55 Industry and Sub-Industry Indexes (Utilities)

Fig. 92.4

The 15 Dow Utilities Average stock components

Fig. 92.5

Ten large-cap Utility ETFs that trade in New York

Fig. 93.1

GICS Sector 60 8-digit Coding (Real Estate and REITs)

Fig. 93.2

GICS Sector 60 Industry and Sub-Industry Indexes (Real Estate and REITs)

Fig. 93.3

The largest NYSE-listed US Real Estate Companies

Fig. 93.4

The largest NYSE-listed REITs

Fig. 93.5

Critical data studied by Real Estate Sector Investors

Fig. 94.1

Dow Jones Industrials Average (DJIA) Components

Fig. 94.2

The 10 Dogs of the Dow over the years

Fig. 95.1

Dow Jones Transport Average (DJTA) Components

Fig. 96.1

Dow Jones Utilities Average (DJUA) Components

Fig. 97.1

Stock Capitalization Categories

Fig. 97.2

Large-Cap US ‘Value’ Companies [2022-03-19]

Fig. 97.3

Large-Cap US ‘Growth’ Companies [2022-03-19]

Fig. 97.4

Large-Cap US ‘Income’ Companies [2022-03-19]

Fig. 98.1

Mid-Cap US ‘Value’ Companies [2022-03-19]

Fig. 98.2

Mid-Cap US ‘Growth’ Companies [2022-03-19]

Fig. 98.3

Mid-Cap US ‘Income’ Companies [2022-03-19]

Fig. 99.1

Small-Cap US ‘Value’ Companies [2022-03-19]

Fig. 99.2

Small-Cap US ‘Growth’ Companies [2022-03-19]

Fig. 99.3

Small-Cap US ‘Income’ Companies [2022-03-19]

Fig. 100.1 Micro-Cap US Growth Companies [2022-03-19] Fig. 100.2 OTC Markets Group OTCQX® 2022 Best 50 Companies Fig. 100.3 Bill Cara 2021-2022 holdings in three OTCQX Best 50 Companies Fig. 101.1 Graphic symbolizing that the economies of Canada and the US are inseparably linked Fig. 101.2 The critical Canadian stock market indices Fig. 101.3 Leading ETFs in Canada Fig. 101.4 Toronto Exchange Market Sentiment Indexes Fig. 101.5 Key stocks in the S&P/TSX 60 Fig. 101.6 The indexes and Canadian currency pairs for international Forex trading Fig. 102.1 The critical Mexican stock market indices Fig. 102.2 Mexican Funds that are US listed Fig. 102.3 Mexican market ETFs Fig. 102.4 Noteworthy Mexican companies listed on the Mexican Exchange Fig. 102.5 Mexican companies listed on US markets Fig. 102.6 The indexes and Mexican currency pairs for international Forex trading Fig. 103.1 Links to all ETFs that trade in South America Fig. 103.2 South American market Indices Fig. 103.3 South American company ETFs

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Fig. 103.4 Wikipedia.com links to South American country economies and stock exchanges Fig. 103.5 List of leading South American companies Fig. 103.6 List of 32 key Latin American companies with tickers for US and domestic exchanges Fig. 103.7 Currency charts for Brazil and Chile Fig. 104.1 French stock market Indices Fig. 104.2 French and neighboring country stock market ETFs Fig. 104.3 French market traded ETFs Fig. 104.4 List of thirty-five large-cap French stocks that trade in Euro on the Paris Exchange Fig. 104.5 List of French-headquartered companies that trade in the US Fig. 104.6 The indexes and French currency pairs for international Forex trading Fig. 105.1 German stock market Indices Fig. 105.2 German stock market ETFs Fig. 105.3 German and neighboring country stock market ETFs Fig. 105.4 German Bond or Commodity ETFs Fig. 105.5 List of thirty large-cap German stocks that trade in Euro on the Frankfurt Exchange Fig. 105.6 List of the German stocks traded in New York Fig. 105.7 The indexes and German currency pairs for international Forex trading Fig. 106.1 Italian stock market Indices Fig. 106.2 Italian and neighboring country stock market ETFs Fig. 106.3 List of the Italian stocks traded in New York Fig. 106.4 List of key Italian stocks that trade on the Milan Stock Exchange Fig. 106.5 The indexes and Italian currency pairs for international Forex trading Fig. 107.1 Spanish stock market Indices Fig. 107.2 Spanish and neighboring country stock market ETFs Fig. 107.3 List of twenty large Spanish company stocks that trade in Spain and the US Fig. 107.4 The most important currency pairs for trading in Europe Fig. 108.1 Netherlands stock market Indices Fig. 108.2 List of Dutch Sector Indices at Yahoo Finance Fig. 108.3 Netherlands and neighboring country stock market ETFs Fig. 108.4 Popular ETFs trading in Amsterdam Fig. 108.5 List of twenty large-cap Dutch stocks that trade in Euro on the Eurex in the US in USD Fig. 108.6 List of the Dutch stocks traded in New York Fig. 108.7 The most important currency pairs for trading in Europe Fig. 109.1 Swedish stock market Indices Fig. 109.2 List of Swedish Sector Indices available at Investing.com Fig. 109.3 List of Swedish equity ETFs that trade in Sweden Fig. 109.4 Swedish and neighboring country stock market ETFs Fig. 109.5 Companies that trade in Sweden and the US Fig. 109.6 Significant Swedish company stocks that trade in New York Fig. 109.7 Important currency pairs for trading in Sweden Fig. 109.8 Important currency pairs for trading in Norway Fig. 110.1 Swiss stock market Indices Fig. 110.2 Swiss and neighboring country stock market ETFs

xviii

Fig. 110.3 List of thirty large-cap Swiss company stocks Fig. 110.4 Swiss company stocks that trade in New York Fig. 110.5 The most important currency pairs for trading in Switzerland Fig. 111.1

UK’s stock market Indices

Fig. 111.2 UK and neighboring country stock market ETFs Fig. 111.3 The major UK companies that trade in New York Fig. 111.4 The most important currency pairs for trading in the UK Fig. 112.1 India’s stock market Indices Fig. 112.2 US-listed India-based ETFs Fig. 112.3 India and region ETFs that trade in New York Fig. 112.4 List of thirty-six large-cap stocks traded in Rupee in India Fig. 112.5 Projected Populations of India and China Fig. 112.6 List of Top Indian Origin CEOs in American Companies (3Q2022) Fig. 112.7 The most important currency pairs for trading in India Fig. 112.8 India Rupee currency trading at X-rates.com Fig. 113.1 Australian economic data (May 2022) Fig. 113.2 Australian stock market Indices Fig. 113.3 Australian ETFs listed on the Sydney market Fig. 113.4 Australian ETFs that trade in New York Fig. 113.5 List of twenty large-cap Australian companies Fig. 113.6 The ten largest Australian-headquartered companies that trade in USD in New York Fig. 113.7 The most important currency pairs for trading in Australia Fig. 113.8 New Zealand’s stock market Indices Fig. 113.9 List of New Zealand-based ETFs that trade on the NZSX market Fig. 113.10 List of larger New Zealand-based Companies that trade on the NZSX market Fig. 113.11 The most important currency pairs for trading in New Zealand Fig. 114.1 Japanese stock market Indices Fig. 114.2 Japanese ETFs listed on the Tokyo market Fig. 114.3 The most popular (in order) Japanese ETFs that trade in the US in US Dollars Fig. 114.4 Japan and region ETFs that trade in New York Fig. 114.5 List of vital Japanese stocks that trade in Tokyo Fig. 114.6 List of Japanese liquid stocks listed on the NYSE Fig. 114.7 The most important currency pairs for trading in Japan Fig. 115.1 Singapore’s stock market Indices and ETFs Fig. 115.2 Singapore-exchange listed companies Fig. 115.3 Singapore stocks that trade in New York in USD Fig. 115.4 The most important currency pairs for trading in Singapore Fig. 116.1 Hong Kong stock market Indices Fig. 116.2 Large-cap Hong Kong-headquartered companies that trade in Hong Kong Fig. 116.3 The largest cap Hong-Kong-headquartered companies that trade in New York Fig. 116.4 The most important currency pairs for trading in Hong Kong Fig. 117.1

List of large-cap China-headquartered companies whose stocks trade in many markets

Fig. 117.2 List of 24 US-listed China ETFs

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Fig. 117.3 US Dollar to Chinese Yuan currency trading Fig. 118.1 Country-based Indices of securities that trade in many countries not listed earlier Fig. 118.2 Country-based ETFs are available at Investing.com for countries not listed earlier Fig. 118.3 Other country ETFs that trade in New York Fig. 118.4 Regional Grouping of Country ETFs Fig. 118.5 ADRs from tier-two countries that trade in the US Fig. 118.6 Some large company stocks that trade in countries not written up in a separate chapter Fig. 118.7 Some large company stocks that trade in New York but are not written up earlier Fig. 118.8 Company ADR Stocks from these countries that trade in the US Fig. 118.9 Country-based Mutual Funds sold in many countries not listed in earlier chapters Fig. 118.10 All country Currency Pairs Fig. 119.1 To recap, the eleven stock market sectors Fig. 119.2 Table of international bellwether stocks in each sector (and sub-sectors) Fig. 119.3 In the US Consumer Discretionary sector, Amazon (AMZN) is the bellwether Fig. 119.4 Bellwether stocks are typically the top holdings of domestic market ETFs Fig. 120.1 Information on broad market indices, sectors, and vital stocks for tier-one countries Fig. 120.2 Links to (1) Performance, (2) Technical Analysis, (3) Snapshot for tier-one Country ETFs Fig. 120.3 S&P 1200 Country stocks composition Fig. 120.4 S&P Asia 50 Constituents as of May 12, 2022 Fig. 120.5 Portfolio of eight NYSE-listed stocks from the S&P Asia 50 Fig. 120.6 S&P Latin 40 Constituents as of January 20, 2022 Fig. 120.7 Twenty high-quality Mexican and South American Companies listed on NYSE Fig. 120.8 A plethora of data on stocks in 94 countries from Investing.com Fig. 120.9 Allocating stocks from various countries for a balanced global portfolio Fig. 120.10 Selection of twenty High-Quality companies for a balanced global portfolio

SECTION 1

A Mindset for Successful Investing 1

Why stock market literacy is important

We trade prices

Investors need structure

What should we buy

What defines a Quality company

What is a Value Stock

What is a Growth Stock

What is an Income Security

Selling Risk versus Buying Opportunity

10 Strategy and Tactics Ground Rules 11 Advice from the Market Gurus

CHAPTER 1

Why stock market literacy is important This chapter explains that a stock is the means for people to invest and trade in the stock market, while a company is a legal structure for businesspersons to create and sell goods and services. Understand this fundamental difference. Stock market literacy is a learned skill. Successful investors are the end product of learning, which is why I say we are all students of the market, including me, an acclaimed Trader Wizard. Stock market literacy is critical to successful participation in capital markets. What is required is the ability to read and write facts and figures that involve prices and companies. The key to survival and success in markets and financial freedom will come from studying (i) the securities you should invest in and (ii) the timing of when to buy and sell those securities. These tasks need specific skills and knowledge, which this book explains. I include as many hyperlinks to essential terms as possible throughout the book. Based on 50-plus years of experience trading in securities, I often take issue with some of the content presented in these educational links. But on balance, students need to do the reading. To cope with today’s capital markets’ volatility, you must do your homework – like in high school and college. Do not let Financial Entertainment Media and the self-conflicted Sellside of the investment industry mislead you. That takes discipline. So let’s get started with the important stuff. Investors in capital markets do not buy and sell Companies. We trade Prices. That simply means that we buy and sell current prices of what is called a security. A Security, also known as a tradeable Instrument, may be an Equity, a Bond, or a contract involving an Option, Future, Commodity, or Currency. Each type of security is a fungible medium of exchange, which I discuss in subsequent chapters. For simplicity purposes, let’s refer to all these securities as Stocks, but they are just prices that trade in a financial market. There is a market for each type of security, and for every need, there are stock exchanges for trading. 22

Why stock market literac y is important

There are about 100 countries with at least one exchange, and some, like Canada and the United States, with many. One of the functions of an exchange is to facilitate a capital market, which is a place where investors of all types meet governments and companies that need capital to operate. As these new funding transactions coincide with other securities trades, there is no difference between the capital and stock markets. The capital market of the world is enormous. Millions of prices trade every day. You will discover that each new price affects all others. That may seem daunting, but it shouldn’t. The only market prices that matter to you are the securities you own. The key to understanding the stock market is looking at it as risk trading when you buy or sell a price. It’s that simple, but most people do not understand the basic definition of the capital market. The process starts with investment banking. That is the function of raising capital for companies or governments by creating and selling securities at a price that is set based on risk. So, they sell risk and get buyers to buy risk. After the buyer and seller agree, every transaction sets a new price. One of the keys to investing in securities is understanding risk dynamics. We do that by studying and knowing the bigger picture and the inter-relationships of prices as money moves around the world between currencies, asset classes, and sectors/industries. Please assume any reference to a price in this book is US Dollars (USD) unless otherwise stated. Total amounts are usually M (Millions) or B (Billions). One of the first questions people ask me is about the difference between investing and trading. The difference between trader and investor might be confusing. I will explain the difference. Unlike the usual explanation, the time horizon is not the difference. Why do we trade in securities? We do it to increase our wealth. Our only possible wealthseeking objectives are (1) seeking capital appreciation via Growth or Value and (2) seeking Income from invested capital. We can achieve both objectives simultaneously, but let’s not get ahead. The question is, why are we investing? Why are we taking on risks? If you trade in securities to make a Capital Gain or Income after understanding the risk based on fundamental analysis of corporate financial statements and financial ratios as well as technical, quantitative, and macroeconomic analysis, then you are an investor. If you trade based on market price without considering the merits of the companies involved, then you are a trader. When executing a trade, every investor who trades in securities is, by definition, also a trader. So let’s agree that we are all traders, but only some are investors. Much of the material we cover is fundamental for many of you; however, bear with me. It’s all part of a holistic investment approach needed for success. To trade prices in a securities market, we must know how to invest appropriately. To determine risk, investors base every market price on studies of valuation and economics. 23

BILL CARA / STOCK MARKET LITERACY

For every trade in securities, there are two market prices in the form of a bid-and-ask. The market price is an auction price. If we are selling, which means we are selling risk, the critical price to us is the bid price. That is the risk a buyer is prepared to take at that moment. The only price vital to us is the offered price if we buy. When we often refer to Price, we refer to the last traded price or the End of Day (EOD) price, today or on a previous day. A Ticker identifies the Stock that we trade. For example, MSFT is the ticker (or symbol, if you will) that we use to buy and sell Microsoft stock. If we trade in Hong Kong, China, South Korea, or Japanese markets, the tickers would be numbers, not letters. Ticker numbers may be more appropriate as we buy prices, not companies. A company is a legal organization owned by shareholders and controlled by its shareholderelected board of directors. Management and employees produce goods or provide services to make a company profit. When we trade in securities, we are not trading companies. Wall Street tells you that shareholders own and control the company. The reality is that a small number of individuals and organizations control the company through its shareholder-elected Board of Directors and the Board’s appointed management, headed by the Chief Executive Officer (CEO) and other C-Suite officers. Microsoft, for example, is one of those companies. We do not buy and sell Microsoft. We buy and sell the price of the Microsoft ticker MSFT to make a personal trading gain. That gain might be in the form of Profit or Income. Regardless of the security, we own only the market price we paid, not a piece of the Company. If, on June 1, 2022, we paid $270.04 for one share, that is the price we own. If somebody else paid $277.69 for one share on the same day, that is their price. We don’t hold the same piece of the company. We own different prices. Our holding in a Stock is called a Position. That is the total number of shares we have bought (and held) times the average cost (as there may be more than one buy). Since we have no control over the Market Price, the trading profit or loss of our Position is called, for reference’s sake, an unrealized gain or loss. As soon as we close a Position (or part of it), we call the profit or loss a realized profit or loss, which is permanent. Individual investors may hold stock Positions for seconds or minutes, whereas others may hold Positions over many years. Some investors use taxable accounts, whereas others use tax-deferred accounts. Calculating gains and losses for tax purposes, a complex subject, is outside the topics we cover. Unless securities are held in an Individual Retirement Account (IRA), directly or in a 401K with an employer, or some other tax deferral scheme, all realized profits and losses have annual tax implications. So, investors with no tax deferral scheme must keep track of each position’s cost.

Why stock market literac y is important

The cost basis is the asset’s original value, or buy price, for tax purposes. Cost is adjusted for reinvested dividends and capital gains and maybe return of taxable capital distributions that are taxable in the year they occur. In my view, investors are overly concerned with unrealized profit or losses as these are in constant flux as market prices change. Too much focus on unrealized gain or loss shows impatience and ignorance that none of us controls the price. Bottom line: Few investors are interested in owning or controlling the company whose securities they trade. They are interested only in increasing wealth. They are trading various instruments in the market at their risk in search of capital growth or income.

CHAPTER 2

We trade prices This chapter repeats the ‘We trade prices… We do not trade companies’ ideas from Chapter 1 because understanding price is all-important to anybody who invests in capital markets. Fact: There are good and bad stocks, as there are good and bad companies. To succeed as an investor, you must learn to differentiate good from the bad. That sounds simple, but to do so, you will have to understand the concepts of price and price motion. You must understand time and space, which we discuss in various chapters of this book. Capital market prices fluctuate, often changing quickly due to risk, value, and market sentiment, whether real or perceived. In the long run, prices vary for fundamental and technical reasons and from moment to moment because of stories. As an aside, investors should not base trades on stories, but many do. ‘Breaking News’ today – most of which is opinion – is the cause of much of the volatility in price motion. A stock is a ticker or symbol that trades in a market, and the price is the last trade displayed for the ticker. But, looking at a stock’s price and a price change figure will not tell you much other than what it is and what changed. What you need to do is to look into the future. You need to understand and assess price motion, a function of time and space. Imagine if — you could discover near future prices of your investments or any stocks in the world? you could forecast a stock market bear phase or even a financial system collapse? Some of these ideas may seem far-fetched, but there is no need to imagine the future. As I lay it out in this book, understanding time and space will make you a superior investor and trader of stock prices. Isn’t that what interests you? Motion is key. You will learn in this book to study movement, not static data. You will analyze price and volume data for individual companies, peer groups, and key stocks in a country, sector, or industry. In this mass of data, you will learn to look for (1) the commonality of cyclic topping and bottoming within the different time horizons, (2) Trend breakouts and breakdowns, and (3) Anomalies in the data that require your deeper investigation. These are the keys to successful investing and trading.

We trade prices

In our journey, one of the most fundamental concepts you will learn is that a good company can be a bad stock. Also, a good stock can be a bad company. So, the company and its stock are different concepts. Many professionals in the capital markets do not understand this simplest of truths. You may not want to hear this, but the ubiquitous problem investors face, both amateurs and professionals, is bias. Bias prevents investors from recognizing the times that good becomes bad, i.e., when a good company becomes a bad company and frequently a bad stock. A good company has corporate fundamentals that are superior to its industry average. If you want to invest in a particular industry, you should invest in the best. Even if we choose only good companies in which to invest, the share price may be good or bad. A bad price trends down over time and flows downward in the Market Cycle. Many investors have difficulty understanding the difference between a Trend and a Cycle. The cycle is the amplitude above or below the long-term average price or the Zero line, which is the trend. Simply stated, a trend is like the average day in a marriage, and a cycle represents the times within a marriage that fluctuate between harmony and argument. A marriage can be good or bad. There are always times in a good marriage that are anything but peaceful. Think of prices as the interactions in the marriage. Sometimes they flow in a positive direction; sometimes, the flow is negative. There are always influences (i.e., facts and stories), aka drivers. Investors want to be in good marriages and hope to enjoy good times. People leave bad marriages and stick with the good ones. Investors do the same. Another example would be a photo of a car on a highway. You might see its direction, which is Trend, but not much else. More data would tell you whether the vehicle is going fast or slow, speeding up or slowing down. That is what is called Momentum. In this case, what’s important to investors is if you are not going in the right direction, you won’t get to your destination. So Trend is most important. When you get there depends on Momentum. Another factor comes into play, which relates to the back-seat driver syndrome. In capital markets, opinions, attitudes, skills, and knowledge are factors in decision-making. Similar to marriage, investors often buy bad prices (i.e., make bad decisions) because of biased opinions and interventions. Market stories play on investor bias. Many stories come from a seller misleading potential buyers by misrepresenting the facts. Once investors have researched and are comfortable with a company meeting their interests and needs, they ought to trade the price as it is. Bias should not impact their decisions. If only our trading systems could replace a ticker symbol with a random number. Many investors put in a lot of time and effort to invest in High-Quality companies, but bias becomes their biggest trading problem. They fail to see when good companies become bad stocks.

BILL CARA / STOCK MARKET LITERACY

You can now see that in the capital markets context, the terms good and bad are quantitative and based on facts. Stories are qualitative and should be of little interest to investors seeking income or capital appreciation. When it comes to our basic needs – increasing our income or our wealth or protecting it — we must rely on facts. If our needs and interests align, what is good for you is good for me, and what is bad for you is bad for me. Market Sentiment comes from Quantitative and Qualitative inputs. It’s like the tide that lifts and drops prices. Since my basic trading strategy is to Buy Weakness, Sell into Strength, I am trading against highly biased Market Sentiment. Understanding psychology and shaping investor opinion and behavior through narratives is an essential topic for all of us to appreciate and consider when investing and trading. Narratives start from the use of vague words by leading monetary authorities. Examples in the recent past include Fed chair Jay Powell saying that US inflation was “transitory,” and ECB head Christine Lagarde told us her bank intends to return inflation to its 2% target in a “timely” manner. Financial entertainment media then develops news cycles around words that can mean anything. Narratives, i.e., what drives the prices of Story Stocks, is about the future. In psychological terms, narratives appeal to fear and greed. This is what I mean when I say, “the stock market is a game that plays people,” which is a well-known quote of mine. I have the experience to say that one of the worst biases that affect my trading is to look at the cost basis constantly, but that is a market price from the past. What we trade is the present, and we base our decisions on analysis that forecasts the future. We also need to understand that capital market prices are not products or services sold by financial services companies. They are prices provided by stock exchanges. This book contains the background of those prices and the tools to study them and make decisions. Bottom line: Whether a trader or an investor, remember that we all trade prices and that market prices are facts, not stories. Stories continually told by companies, analysts, and media, as well as by our family and friends, are distracting. Investing is about us and our money, which are matters of fact.

CHAPTER 3

Investors need structure Please permit me to be blunt: I never met a professional investor or trader in 50 years who believed the random walk nonsense. Academicians claim that beating the market is impossible as all relevant information is already in a price. That is the basis of the Capital Asset Pricing Model (CAPM) and Efficient Market Hypothesis (EMH). The laws of nature debunk these theories, and every professional trader knows it. The common perception is that the stock market is disorganized. Professors Burton Malkiel, Eugene Fama, and William Sharp published academic theories to support that notion. Random Walk Theory (1973), Efficient Market Hypothesis (EMH), and the Capital Asset Pricing Model (CAPM) evolved into commercial applications. This literature is misleading. The capital market is well organized. Market sector and industry classification systems enable investors to grasp market dynamics. Warren Buffett, one of the greatest securities investors in modern history, published a 1984 article that challenged these theories. “The Superinvestors of Graham-and-Doddsville” showed successful investment managers consistently generated gains well above market benchmarks. He challenged these professors to put up or shut up. They would not accept his bet. Investment success is not based on academic theory but on understanding human nature and crowds’ actions. What is the market other than people acting like people? While the capital market may appear chaotic, it is not because people are not crazy or random. The market is us. Now there are systems designed by investment professionals that enable us to understand the market and to see its DNA genetic code. Today, the professional investment management community uses systems like the Global Industry Classification Standard (GICS) developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s (S&P), and the Industrial Classification Benchmark (ICB) developed by Dow Jones & Company and FTSE Group of the London Stock Exchange. There are differences in each system, but each provides investors with a reliable set of sector and industry definitions reflecting the macro-economy and is adaptable to ever-changing capital markets. From its start in 1999, I have always used the GICS system. https://www.spglobal.com/marketintelligence/en/documents/112727-gics-mapbook_2018_v3_letter_digitalspreads.pdf https://www.msci.com/documents/1296102/11185224/GICS+Methodology+2020.pdf 29

BILL CARA / STOCK MARKET LITERACY

The GICS hierarchy begins with 11 sectors, and as of January 2020, these sectors contain 24 industry groups, 69 specific industries, and 158 well-defined sub-industries. Fig. 3.1 GICS eleven Sectors GICS 10

Energy

GICS 15

Basic Materials

GICS 20

Industrials and Transports

GICS 25

Consumer Cyclical & Discretionary Spending

GICS 30

Consumer Non-Cyclical & Staples Spending

GICS 35

Consumer and Industrial Healthcare

GICS 40

Financial and Insurance

GICS 45

Technology

GICS 50

Telecommunications and Media

GICS 55

Utilities

GICS 60

Real Estate

Between 25,000 and 50,000 exchange-traded stocks worldwide are classified by GICS’ 8-digit coding covering all eleven sectors. The GICS assigns each company to a subindustry according to its principal business activity. Since the system is hierarchical in four levels, a company can only belong to one grouping. Fig. 3.2 GICS 4-level coding for the Telecommunication Services Sector and a few examples 50 – Telecommunication Services 5010 – Telecommunication Services 501010 – Diversified Telecommunication Services 501020 – Wireless Telecommunication Services 50101010 – Alternative Carriers, e.g., Cable & Wireless (UK), Level 3 Communications (US) 50101020 – Integrated Telecommunication Services, e.g., AT&T (US), Verizon (US) 50102010 – Wireless Telecommunication Services, e.g., Vodafone Group (UK)

At times, there are changes in the classifications. As life changes, so must the GICS. For example, Renewable Energy, including Solar, has been put into an expanded Energy Sector instead of technology. In the eyes of the beholder, classification systems often err in classifying companies. For some of you, Apple is a technology company, whereas others see it as a Media company, and others as a Music company or Retailer. The GICS committee might have classified Apple as a Conglomerate like Berkshire Hathaway with varied business segments.

Investors need structure

But without classification systems, our lives would be more complicated than necessary. Take, for example, the supermarket. There are sections and aisles to guide shoppers to an efficient shopping experience. The display of fruit, vegetables, dairy, canned goods, meats, seafood, bread, health and beauty, and beer and wine is not random. Some stores put certain products in unaccustomed sections, so we tend to frequent the stores we know. So, in the GICS system, if Apple (AAPL) is classified in one place only, then at least we know where to look for it, even if the place is not to our liking. GICS facilitates studying fluctuating price motion caused by specific influences that we call drivers. These influences may be the changes in commodity prices, interest rates, central bank policies, foreign exchange (currency) rates, government spending, treasury needs, money supply, business conditions, consumer and corporate behavior, employment, the housing market, and so forth. For every such change action, there is a market reaction. GICS enables us to study complicated dynamics. Once we understand market structure, we must line up the dots to make sense of what appears to be chaos. Those who do it best are the best investors and traders. This book will help you understand the market and how to deal with it more than any academic theory. Bottom line: Academicians cannot compete with investors in understanding capital markets because they do not know that we study the manufacturers, the distributors, and the consumers to assess risk. We know that the market is people acting like people. We are not random. We are not perfect. We are not always transparent. We are somewhere between, and our emotions move between fear and greed. But our actions are consistent because, like all animals, humans follow routines.

CHAPTER 4

What should we buy This chapter points out that, like anything in life, we should buy what we need. That may seem obvious, but it’s not that way in capital markets. There is a saying that stocks are not bought; they are sold. That means the financial services industry’s Sell-side is stronger than the Buy-side. Independent investors (aka the Retail Investor) seem to accept that the agent is dictating to the principal. That is what is wrong with our capital markets. Buying what you need is not always easy. The market will not hand it to you. You will have to find it. The market will only give you what it is selling. NYUGrad, a long-time reader of and contributor to billcara.com, acknowledged this lesson in one of his comments. I hope everybody appreciates this point because the market reality is worse than most people think. One day, my late dad asked me, “Why do people go to salesmen to ask them what they need?” And they do! That lesson taught me in my youth was that I ought to grow up to be a person who always does his thinking rather than allowing salespeople to do it for me. Later I became one of those smooth-talking salespeople my dad had acknowledged. But I always tried to educate the client to make their own decisions and that I should give them information to make it easy. I still write that same way in blogs and articles at BillCara.com, although I am now on the Buy-side. Here are my most straight-forward guidelines for what to buy: • If you need capital growth, buy the securities of leading high-Growth or Value companies. (Lesson 9) (Lesson 10) • If you need income, buy the securities of financially strong (i.e., low-risk), highdividend, or interest-paying companies. (Lesson 11) • Regardless of your needs, ignore the most popular stocks and try to buy Blue-Chips, i.e., the highest-quality companies. (Lesson 12) The Sell-side always portray their offerings as something you need or should desire. That is how they make money. It’s their job to sell, but it’s not your job to buy whatever they sell. You wouldn’t do that in a supermarket. Please don’t do it in the capital market.

What should we buy

If you are a frequent watcher of Financial Entertainment Television or a user of apps to access financial news, you face a continuous stream of recommended stocks. The guests and talking heads repeat the names ad nauseam in discussions. Let’s take a Dow 30 company as an example. The media will often recommend the shares of, let’s say, American Express (AXP) as Buy (mostly), Hold (infrequently), or Sell (seldom). The critical issue is, “Do you need AXP in your portfolio?” Is American Express a Quality company? Is AXP a timely stock? Maybe it is, but if you were to listen to Sell-side stories continually, you would never have the answers you need. You would only know what they are promoting. There are independent data sources – some of them excellent. I rely on factual market data from reputable suppliers like Thomson Reuters, Dow Jones & Company, Standard & Poor’s, and Bloomberg. But, when accessing their so-called “news” articles, I see opinion journalism and mostly misleading or pitch-oriented headlines. There are many excellent, accessible information sources known as data aggregators. Investing.com, Finance.Yahoo.com, FinViz.com, StockCharts.com, MarketBeat.com, and the Investopedia.com dictionary are good. Throughout this book, you will find links to their most current information. American Express is a Dow 30 Industrial Average component a partner a few years ago ranked 28 of 30 for Overall Quality plus 26 of 30 for Growth, 24 of 30 for Value, and 29 of 30 for Income. Since independent investors only need Growth, Value, or Income in any portfolio, very few likely showed interest in AXP then. In my partner’s study universe of just over 1,000 stocks, American Express (AXP) was ranked 897th best for Growth, 720th best for Value, and 595th best for Income. For overall Quality, the Company ranked extremely low at 920 lowest out of 1,000. Since our ranking cut-off for trading consideration was between 100 and 150 for Growth, Value, or Income, AXP was of no interest to us. Note that the entire database was updated daily, and the rankings changed continuously. Not being keen to invest is not to say that American Express was or is a “bad” company per se because it isn’t. The company has a strong brand image, and I have been a customer. But the company must meet my portfolio manager standards for Quality and the type of stock I need, such as Growth (at times), Value (at times), or Income. Those times depend on price changes resulting from causal forces, as discussed in Lesson 6. I refer to all companies (based on corporate fundamentals) or all stocks (based on market price and volume technicals) that fail to meet my standards as ‘bad’ companies or ‘bad’ stocks. My use of the term bad is strictly in the context of capital markets trading. For my tradeable universe, I will not consider buying shares in a company not followed by a professional analyst I respect or at least two other analysts. Analysts widely follow companies that are in the broad market indexes.

BILL CARA / STOCK MARKET LITERACY

For various reasons, my investible universe is under 50 companies. Half of these are newly public and lack enough seasoning to be called Blue Chip. These are Cleantech, Agritech, and Biotech companies that I am hopeful will help the world to a better quality of life. Most others are Commodity-related, such as Miners in Gold, Silver, Copper, Uranium, and Oilers. I will discuss those in later chapters. Finding the best stocks to meet your needs and interests requires knowledge and skill. With time and learning, you ought to be able to do that yourself. But, if not, the assistance from an independent and objective professional, not a salesperson or newsletter promoter. Real estate investors buy location, location, location. Investors in securities buy quality in value, growth, or income that meets one’s needs and interests. Even when purchased on an untimely basis, that is, during a Seller’s Market when prices are elevated, whether it’s real estate (location) or securities (quality), you get what you pay for that, in time, proves to be the best investment. Bottom line: Being independently minded and doing your thinking is essential to success in capital markets. For what to buy, investors should be interested only in superior quality and a match for their specific needs. The answers come from market data and never from a Talking Head.

CHAPTER 5

What defines a Quality company Understand that a company is not a stock. While not permanent, companies have Quality, which is somewhat ongoing, whereas stocks are prices that fluctuate momentarily and often in the extreme. This lesson is about a company’s quality and not about price. Every company’s C-suite executives will talk of customers’ fickleness, the pressures of competition, and the economy’s strength or weakness. But whether by Business Model design, capital structure, consumer demand, or good management, some companies consistently rank highest in Quality. As said, even if it is not permanent, Quality is enduring. While not as subjective a topic as ‘beauty’ in the eyes of the beholder, Quality is still hard to define. Here are two true stories that, while anecdotal, may serve you well in determining the nature of Quality. Many years ago, an associate of mine, early in his career, worked at General Electric with Jeff Immelt, who became GE Chair and CEO. He asked me about my assessment of the Company. He had invited me to be the luncheon guest speaker to GE executives in the US South-East region. I explained that for 50 years or more, America’s leading companies had been the “Generals.” That was General Motors and General Electric. But these companies were being overrun by competition adapting to macroeconomy changes. Soon, perhaps in ten years, their lack of Quality would become evident to investors. GE had a flawed business model, trying to have its finance division ease the sale of its manufactured products, which at some point in time would fail. There were different goals, objectives, and cultures of the various divisions. I opined that GE would fall behind the performance of its manufacturing peers, and that did happen. GE almost collapsed. Another story is about Nortel. About 20-25 years ago, an associate asked me to assess Nortel, then Canada’s largest IT manufacturer and by far the dominant weighting in the Toronto 300 stock index. Nortel management had run into a similar problem as GE in that the company had become so big that they decided to invest billions in a software company that had little to do with manufacturing. I opined that the goals and objectives of the different cultures would be disruptive to executive management. Nortel’s established quality soon disappeared, and the company imploded.

BILL CARA / STOCK MARKET LITERACY

In my view, Quality refers to a company that continually outperforms its industry peers, which is the true definition of business success. Over the long run, investors should try to trade the stocks of Quality companies because, most likely, sooner or later, that is where they will have trading success. Isn’t this like a parent saying to a child, “Choose your friends wisely”? Some Quality companies, the ones we call ‘good’ companies because they have a sound business model, focused management, and reasonably priced products that meet customer needs, may also be ‘bad’ stocks. But not often and usually only for a short time. And isn’t that like saying, “Some good children will misbehave at times”? Quality may exist in a high-Growth company, a high-Value company, or a company from which you seek Income. Chapters 10, 11, and 12 cover these types of companies. We discuss Quality companies in this lesson, found in every sector and industry. With the Global Industry Classification System (GICS) structure discussed in lesson 5, you can choose from 11 sectors containing 24 industry groups, 67 specific industries, and 156 well-defined sub-industries. You can always find high-Quality. You see them by searching for them. The industry leader we are looking for is a company that clicks on all cylinders. It’s going to have the following qualities: • respected management • a solid balance sheet • is growing its revenue and its earnings relatively quickly • has sustainably higher margins compared to its competitors • is respected by industry analysts for its predictability and its probable growth, and • pays a substantial dividend or plows its earnings back into a business growing so fast that dividend payouts can wait. Industry leaders may not be ranked number 1 in every vital metric or any of them if a close 2nd or 3rd. Quality is a broad measure based on sustainable competitiveness. In some cases, especially in small and mid-cap companies, the public is unaware of the business reality of a particular company, but its industry peers have taken note. Corporate directors and managers of the competition are envious. Traders, investment analysts, and Mergers & Acquisitions teams are studying it in detail. A company that I liked in 2016 for its high overall quality was Murphy Oil USA (NYSE: MUSA). However, when I did the research, I noted that the stock was over-priced on 201607-12. MUSA was up +24.4% YTD and +37.1% in the prior twelve months, with a Daily RSI-7 at a lofty 79.9 when I prepared my notes. In May 2016, this Arkansas-based company reported that quarterly EPS from continuing operations had soared from $0.51 (1Q2015) to $2.08 (1Q2016). Analysts were looking for further growth in 2017.

What defines a Quality company

Murphy USA, which I believe was doing a lot of things right, was not a super-star, at least not then, but there was a lot there for an investor to like, which was why I had included it in my 2016 Cara 100 US-listed companies. At the time, MUSA traded at about $75, and although the stock price dropped to around $60 at the end of 2016, the Company was still high-Quality, and I believed that the long-term price trend would reflect that. MUSA continued to rise in price and was up to $80 at year-end 2017, a slight dip to $76 at year-end 2018, then $113 at year-end 2019, $130 at year-end 2020, and $200 at year-end 2021. One way to find Quality companies is to dig through the 10-Q quarterly and 10-K annual financial reports filed with securities regulators. However, doing that kind of research is time-consuming and mysterious to most investors. I prefer to have hundreds of professional industry analysts do that homework for me and report their findings to Thomson Reuters and other financial data publishers like MarketBeat.com, whose aggregated data is easy to collect and review. Research to find Quality still takes time – time investors should not take to watch financial entertainment TV programs. TV is marketing financial services or stocks in all discussions that are or should be of no interest to you as they are not high in Quality. Fig. 5.1 Criteria on which to define a company’s Quality • Revenue Growth • Profitability • Earnings Quality • Price Potential • Valuation • Business Predictability • Financial Strength • Financial Safety • Earnings Multiple • Dividend Yield • Volatility • Analyst Consensus

When trading funds, you don’t find this bottom-up understanding of companies and capital market prices. For that reason, I stick to my discipline, my knitting, as some call it. I find high-Quality companies only among the categories that interest me, such as Growth (maybe), Value (perhaps), or Income (if and when I need it). The use of technical and quantitative tools for well-timed entry and exit points is a matter of Price and not Quality. Price only comes into play after I know which companies can meet my investment aims. No single factor assures me that a company is of high Quality. Besides, how investors determine Quality is a matter of personal judgment. I look at the whole picture, realizing that a company does not change much in two years, during which, if I hold the stock, I often trade it several times. 37

BILL CARA / STOCK MARKET LITERACY

Fig. 5.2 Desirable perspective for high-Quality • Steady price motion of the stock, which reflects sustainable investor confidence • No management scandals or major lawsuits • A clean balance sheet with no bankruptcy concerns or inability to raise capital if needed • Sufficient free cash flow to satisfy obligations and provide excellent returns to the investor • Steady growth in company revenue • Up-trending free cash flow growth • Steady, minor improvements to profit margin • Earnings with up-trending earnings growth • Relatively higher return on equity than the peer group • Relatively higher return on invested capital than the peer group • Dividend growth if paying dividends; but dividends are unnecessary if capital is used wisely • Relatively low short-selling activity • A ’Buy’ consensus rating by industry analysts

As long as interest rates are low and not likely to rise to historical norms in the foreseeable future, I am not too concerned about debt ratios. By 3Q2022, that multi-year low-rate picture is changing. Debt ratios must now become a more significant part of assessing Quality. I am also not too concerned about book value, as there is a greater emphasis on intangible assets in the digital era. At stock market cycle peaks, investors tend to shift their focus from Growth to Value, placing greater importance on low price-to-book value multiples. As investors in the equity market, our investment criteria are quite different from someone like Warren Buffett. Buffett is interested in buying control or large stakes in companies that influence their board of directors. While every investor is seeking capital growth or income, independent investors also seek quality to avoid surprises while trading the common stock. All of us have a shortage when it comes to time, so it is crucial to apply all our available resources to trade only the stocks of Quality companies. To shorten the search for Quality, I maintain a Cara 100 list of candidates, which I try to update periodically every couple of quarters if time permits. Cara 100 companies are the ones that I consider high-Quality (i.e., investment-grade for trading purposes), but my list is not a recommendation to buy or sell. As you know from this book and my earlier Lessons from the Trader Wizard, there are always good times to buy and sell. For a trade to occur, the buyer and the seller must agree on those times. The resources, personalities, experiences, skills, interests, and needs of those who invest and trade are extensive, so one size can’t fit all. Regardless of my being a licensed wealth manager, since I do not know you, I cannot advise you. As of January 1, 2023, this is the Cara 100 list of company stocks at billcara.com: https://www.billcara.com/cara-100/ At FinViz.com, you can immediately find most of the fundamental and market data you need on this Cara 100 list (dated January 1, 2023): https://tinyurl.com/Cara-100-2023-Jan-1 38

What defines a Quality company

Many companies will not be to your liking regarding needs and interests. But, in my view, they represent high quality in their industries. Their stock price is ‘good’ or ‘bad’ at times, but Timeliness (i.e., Price) is not a definition of Quality. Fig. 5.3 list high-Quality Cara 100 candidates in April 2022 if Timeliness is a consideration Company

Ticker

Industry

Country

Market Cap

Activision Blizzard, Inc.

ATVI

Electronic Gaming

USA

63.13B

Alamos Gold Inc.

AGI

Gold

Canada

4.26B

Amazon.com, Inc.

AMZN

Internet Retail

USA

1653.17B

Apellis Pharmaceuticals, Inc.

APLS

Biotechnology

USA

5.40B

Applied Materials, Inc.

AMAT

Semiconductor Equip

USA

113.81B

Arvinas, Inc.

ARVN

Biotechnology

USA

3.82B

Brookfield Asset Management

BAM

Asset Management

Canada

92.94B

Chemed Corporation

CHE

Medical Care Facilities

USA

7.69B

CrowdStrike Holdings, Inc.

CRWD

Software - Infrastructure

USA

52.92B

Darling Ingredients Inc.

DAR

Packaged Foods

USA

13.30B

Federal Signal Corp

FSS

Pollution Controls

USA

2.05B

First Majestic Silver Corp.

Silver

Canada

3.48B

Freeport-McMoRan Inc.

FCX

Copper

USA

73.45B

Marten Transport, Ltd.

MRTN

Trucking

USA

1.41B

Mastercard Incorporated

Credit Services

USA

356.11B

NexGen Energy Ltd.

NXE

Uranium

Canada

3.40B

NVIDIA Corporation

NVDA

Semiconductors

USA

681.56B

salesforce.com, inc.

CRM

Software - Application

USA

213.07B

SSR Mining Inc.

SSRM

Gold

Canada

4.69B

Teck Resources Limited

TECK

Base Metals & Mining

Canada

22.73B

Teleflex Incorporated

TFX

Medical Instruments

USA

16.39B

Visa Inc.

Credit Services

USA

472.20B

Wheaton Precious Metals

WPM

Gold

Canada

22.00B

Zendesk, Inc.

ZEN

Software - Application

USA

14.96B

Click on the Name link to get a comprehensive snapshot from FinViz.com. Click on the Ticker link

to get a long-term (monthly data) chart from StockCharts.com

Bottom line: Assessing Quality is a subjective process and always a matter of judgment. While there is a high correlation between a company’s Quality and its stock price, there are substantial differences.

CHAPTER 6

What is a value stock When we talk about Value Investing, we refer to a company. We seek to invest in securities of companies that meet our needs. So, Value relates first to the company and secondarily to securities. The security may be its common stock, a warrant, or a stock option. To keep it simple, we only discuss the common stock. We leave the income subject to a future lesson because we can obtain income from bonds or stocks. Many investors think Value means ‘cheap,’ as in low price relative to the rest of the market. Value, however, is not cheap. So, what exactly does Value mean, and how can we use investment analysis to pinpoint Value-based investment opportunities? That is the subject of this chapter. Let’s start this Lesson on Value with the notion: “Sometimes we choose Growth; sometimes Value.” In the tortoise and the hare fable, a Value company is a tortoise, and a Growth company is a hare. Just as the expression of horses for courses is true, how to best meet your capital gain’s objective is up to market conditions. Sometimes those conditions are right to seek Growth, sometimes Value. The hare may win a race. But the market is a marathon. So the tortoise also can win. Warren Buffett is the first name that comes to mind when many investors think about Value. No surprise there. He is known for buying solid companies at great prices. But that wasn’t always the case. In the beginning, Buffett would buy basement-bargain stocks and wait for a bump in share prices to make a profit. Buffett once said, “A cigar butt found on the street with only one puff left in it may not offer much of a smoke, but the bargain purchase will make that puff all profit.” He then became known for “cigar-butt investing.” On August 30, 2022, Buffett will be 92 and one of the top ten wealthiest persons on earth, a billionaire more than 100 times over. He got that way by listening to his mentor and professor at Columbia, Benjamin Graham, where Buffett earned a graduate degree in Economics. He then went into his father’s brokerage business, where he met Charlie Munger, an older but still vibrant individual who turned 98 in 2022. Munger, who understood and invested in Value, and Buffett became partners in Berkshire Hathaway, and they actively manage that conglomerate today.

What is a value stock

Charlie Munger taught Buffett, “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That is because a real Value investment offers more substantial and stable returns than simply low-priced ones. Unless you are an investor or arbitrageur close to the liquidator of a sick company, then the ‘buy cheap’ approach to finding Value is simplistic and maybe foolish. That strategy would likely focus on a stock’s lowest Price-to-Earnings (PE) ratio regardless of other financial figures that we call Corporate Fundamentals. Well-known fund manager Bill Miller is a Value investor who believes, as I do, that “any stock can be a Value stock if it trades at a discount to its intrinsic value.” Nothing you will read on the subject of Value will be more meaningful to your education than this quote from Bill Miller: “Value investing means really asking ‘what are the best values?’ and not assuming that because something looks expensive that it is, or assuming that because a stock is down in price and trades at low multiples that it is a bargain … Sometimes growth is cheap and value expensive…The question is not growth or value, but where is the best value… We construct portfolios by using ‘factor diversification.’ …We own a mix of companies whose fundamental valuation factors differ. We have high PE and low PE, high price-to-book, and low-price-to-book. Most investors tend to be relatively undiversified with respect to these valuation factors, with traditional value investors clustered in low valuations, and growth investors in high valuations… It was in the mid-1990s that we began to create portfolios that had greater factor diversification, which became our strength …We own low PE, and we own high PE, but we own them for the same reason: we think they are mispriced. We differ from many value investors in being willing to analyze stocks that look expensive to see if they really are. Most, in fact, are, but some are not. To the extent we get that right, we will benefit shareholders and clients.” When Miller wrote those remarks in a client letter, his Value Trust fund’s after-fee total return performance had beaten the S&P 500 index remarkably for 15 consecutive years. Investors err in believing that Wall Street’s Value-themed ETFs and Mutual Funds contain only genuine Value companies or stocks. As I say, funds are mixed bags with good, bad, and ugly constituents. Good companies often become bad stocks and occasionally turn into bad companies. Besides, as prices change, what was once a Growth company could become a Value company. To find Value in company stock, in addition to a reasonably low PE multiple, investors must look at the company’s Debt-to-Equity ratio and Enterprise Value (EV), especially EV relative to sales and EV to profitability. In other words, you want solid, reliable financial performance from the company that eventually will, without the interjection of promotional stories, translate over time into higher share prices than what you paid.

BILL CARA / STOCK MARKET LITERACY

When I seek Value, I go to the Screener function at FinViz.com. In the filters at the top, I check “All” factors and then set up a Custom filter that must include PE and Forward PE multiples and Debt-to-Equity ratios. But as Price is constantly fluctuating and Interest Rates may be high or low relative to their long-term norms, these factors are not as important to me as filtering out companies that have (1) a Return on Equity (ROE) less than 20, (2) a Price-to-Earnings Growth Ratio (PEG) of more than 2, and (3) a current Dividend Yield less than 2%. I see the companies that meet my ROE, PEG, and Dividend Yield criteria as good Value candidates. To reduce the number of candidates, I will rule out the highest PE multiple, highest Short Interest Ratio, and poor consensus ratings of Buy, Sell or Hold from investment analysts. While Analyst Consensus Estimates for Earnings and Revenues are essential, their Buy/ Hold/Sell ratings are not a significant consideration because that factor is opinion based while I am looking for reliable data to help me make decisions. Once I have a candidate list according to my interest in the large, mid, or small-cap size of the company and the country where headquartered, I look at market price Trends and Cycle factors. I start with the monthly (long-term) data chart to see if the stock is in a rising (Bull) trend. I use various technical analysis forms described in these chapters to reduce the candidates further. But I want to see a relatively high Average Volume of Daily trades, which indicates greater market liquidity and analyst Price Targets that are well above the Current Price. Once you have used the FinViz.com screener function a few times, you will find that following this protocol is much easier than I make it sound. Investors could find Value in companies with a Market Capitalization of under $300 million. But let’s leave “Story Stocks” out of the Value lesson. Because of the marketing hype with small companies still in their capital-raise phase, these small company stocks seldom trade at a discount to intrinsic value, which means they are at higher market risk. You will likely find that Value companies are Large-Cap, Mid-Cap, and perhaps Small-Cap. High-Growth companies are often small companies. Remember, it’s a market of stocks, or as I prefer, a market of prices, and you are not trading the market. You are trading prices that are continuously fluctuating. Investors know that price always matters and that prices fluctuate. A stock that once represented Value at low prices may no longer represent Value at higher prices. Stock prices may rise strictly because of the general market condition or because savvy buyers recognize the Value, in which case there would also be a time to sell. Value-priced stocks should always be more appealing than Growth when people complain of sticker-shock inflation. So, as opined in the previous Lesson: Buy Growth early in the market cycle (i.e., following a Bear market in the major indexes) and buy Value later in the Cycle when others complain of high market valuations.

What is a value stock

Note that while I used the word ‘indexes’ here, I could have used ‘indices.’ For the most part, in this book, I do. You will find that when I refer to the broad market, I use ‘Index,’ but for sectors, industries, and groups, I use the term ‘indices’ as these are most common in the industry terminology. But there is no difference between the two. Bottom line: Because prices often fluctuate in the extreme, companies continually move into and out of the Value spectrum. That’s like saying, “Every rose has its thorn.” If you are interested in Value, don’t be fooled by a name or what the narrative calls a company. Even the lists of so-called Value ETFs that never change labels are inaccurate and unhelpful. Check the data.

CHAPTER 7

What is a growth stock When we talk about the subject of Growth, like when we discuss Value, we refer to a company, and then we seek to invest in a security of that company that meets our needs, which may be its common stock, a warrant, or a stock option. To keep it simple, we shall only discuss the stock. When we say “Growth, many investors think of more sales revenue or expansion of the company’s assets. But that would only be half the picture. Is the growth in unit sales or a revenue increase due to inflationary prices? Did the liabilities grow faster than the assets? Is the change in absolute terms or on a per-share basis where shares could be higher or lower due to new issuance or buy-backs? These issues are the subject of this chapter. Let’s start this chapter with the notion: “Sometimes we choose Growth; sometimes Value.” When we say Growth, many investors think ‘pricy,’ or at least expensive relative to the rest of the market. However, Growth does not mean costly. So, what exactly does Growth mean, and how can we pinpoint investment opportunities? Once again, we’ll find the answer in time and space. As an analogy to the tortoise and the hare fable, a Value company is a tortoise, and a Growth company is a hare. In a sprint race, the hare wins, but the market is a marathon or at least a continuing number of sprints. Just as the expression horses for courses is accurate, choosing how to meet your capital gain’s objective best is up to market conditions. Sometimes we select Growth, and sometimes Value. One of the essential bits of company data to consider is revenue. Increased revenue means a company is growing. Growth may be noticeable, but your analysis should not stop there. It is just as important to know where that revenue came from and the profit margins. Bear in mind that company growth can happen in different ways. Growth may result organically from sales revenues from more units shipped or services rendered or higher profit margins, both of which require superior operating expertise. However, gains that increase strictly because of price inflation are not favorable. Growth may also happen because of acquisitions. These transactions need financial and deal-making expertise, as they may be positive or negative. In industry jargon, the terms are accretive or dilutive.

What is a growth stock

The best place to look for a high-Growth company is to think small, perhaps even tiny. Look for corporate fundamentals like (1) revenues that are rapidly increasing, (2) operating profit margins that are high or growing, and (3) free cash flow that is earning the Company a decent return. Because of the Law of Large Numbers, small companies have the most potential to grow. You know that simply by watching vehicle traffic, the photo of a car going 30 miles per hour looks no different than one going 60. So using all the criteria that I listed above will give you a deeper understanding of a company’s Growth and growth potential than any single figure. Growth is never a constant. Growth speeds up and slows. There are causal factors that result in a high-growth company becoming a slow-growth or even a declining company, and vice versa. When oil prices were trading near $100 a barrel, a company that spent $40 a barrel to find and produce that oil was a Growth company because its profit margins would be substantial; however, as oil prices fell, those profit margins dropped. There were few Growth companies in this sector at a $ 30/barrel oil price. The same would be true if oil prices remained high, but the costs to extract oil had dramatically increased, cutting margins. For larger companies, investors need to analyze management’s long-term record in terms of growth of revenue, gross profit margin, net earnings, and return on stockholders’ equity. If searching for a Growth company, I consider not investing in shares of any mature company that has not averaged at least 15% Return on Equity and preferably greater than 20% over the past three and, preferably, five years. When I seek Growth, I go to the Screener function at FinViz.com, and at the top, I check “All” factors. I set up a Custom filter that includes PE and Forward PE multiples, as a lower Forward PE is important. As Price is constantly fluctuating, and Interest Rates may be high or low relative to longterm norms, these factors are not as important to me as filtering out companies that have negative Earning Per Share for this year, next year, and the next five years. I am looking for the highest percentage of Earnings Growth, quarter-to-quarter, next year and for the five years. In cyclical industries, the earnings may be negative this year but likely rise. I will rule out the highest PE, highest Short Interest Ratio, and lowest consensus Buy, Sell or Hold rating from investment analysts to reduce the number of candidates. Short Interest is essential because it reflects market sentiment. Analyst ratings are a lesser consideration because that factor is opinion based while I am looking for reliable data to help me make decisions. Once I create a candidate list of Large-, Mid-, or Small-Cap size and the country where headquartered that interests me, I look at market price factors. I start with the monthly (long-term) data chart to see if the stock is in a rising trend, which I call a Bull phase, even if not in what the industry defines as a Bull Market.

BILL CARA / STOCK MARKET LITERACY

To further reduce the candidates, I use technical analysis, described elsewhere in these chapters, but it also has limitations. I do want to see (1) a relatively high Average Volume of Daily Trades (AVDT), which indicates greater liquidity, and (2) analyst Price Targets that are well above the Current Price. Once you have used the FinViz.com screener function a few times, you will find that following this protocol is much easier than I make it sound. The vital consideration in this Lesson is that due to the Law of Large Numbers, most Growth companies are Small-Cap to Mid-Cap in size. For example, many Dow 30 companies are well-known, well-managed, and financially strong. Being widely held, they are the ones being discussed every day on Financial Entertainment Television. However, they are so large that it is difficult and almost impossible for their management to sustain extremely high growth rates. The Talking Heads often get into minutia and various stories that distract an investor from discovering high-Growth companies. A discerning investor like Cathie Wood, who focuses on high-Growth, entered the arena as a successful investor. But after her portfolio of lesser-known companies weakened, she became the enemy of the Talking Heads and her ETF Sell-side competitors, including the ones who now offer Cathie Wood inverse ETFs. Although I am no Cathie Wood acolyte, I study the constituents of her ETFs, all of which her team has thoroughly vetted. I try to match those with my needs and interests for Growth. Then I study corporate fundamentals and technical indicators before investing. All investors and traders know entries and exits from an instrument require understanding of price trends and cycles. Technical analysis is critical in high-volatility instruments like Cathie Wood funds. Fig. 7.1 Cathie Wood’s nine ETFs to start 2022 ARKK

ARK Innovation ETF

26,833,180

ARKG

ARK Genomic Revolution ETF

3,423,475

ARKW

ARK Next Generation Internet ETF

3,168,453

ARKF

ARK Fintech Innovation ETF

2,793,140

ARKQ

ARK Autonomous Technology & Robotics ETF

388,293

ARKX

Ark ETF Trust - ARK Space Exploration & Innovation ETF

210,115

PRNT

The 3D Printing ETF

33,112

CTRU

Ark ETF Trust - ARK Transparency ETF *** Closed July 26, 2022

16,657

IZRL

ARK Israel Innovative Technology ETF

12,976

I added a recent trading volume to this table to reflect the popularity.

What is a growth stock

I recently began attending emerging company ‘discovery’ conferences that let me go oneon-one with C-suite executives. I meet the Founder-CEO so that I can spot the ones with the potential for the highest Growth, something large-cap company CEOs wouldn’t give me the time of day to do to investigate my wants and needs. Meeting the Capital Events Management (CEM) team has been a blessing. They filter companies in early-phase capital raise mode to ones they invest in or who they think may be investible. Many of these have recently gone public or are about to. I say blessed because CEM, like Cathie Wood with her more seasoned group of companies, saves me enormous time in finding suitable candidates among the thousands of potential high-growth companies. That’s not to say that I expect all these companies to be qualified investment candidates. I don’t. At the time of writing content for this book, I had met 36 companies in personal meetings and another six through CEM-organized one-on-one Zoom calls over just four months. After considerable work, I invested in 17 of the 42. After taking small starter positions and studying more, I sold two. Of the other 15, I sold another nine based on their trading patterns, leaving six. Most of the ones I sold are good companies, run by people I speak to or write to frequently, but the onset of a broad market Bear phase in 2022 resulted in a liquidity squeeze that caused collapsing stock prices as bids disappeared. So while I substantially reduced this tiny-cap portfolio, I have now settled on 6 of 42 that I believe are worthy of additional investment following the end of the market’s Bear phase. I often write about these tiny-cap Growth companies at billcara.com/community. I used the Visual Capitalist graphic that differentiated Value from Growth for my readers. Bottom line: Value companies tend to have more robust cash flows, steadier income, and trade below intrinsic value. These companies tend to be in Sector 10 (Energy), Sector 20 (Industrials), Sector 35 (Healthcare), and Sector 40 (Financials). On the other hand, Growth companies tend to have lower cash flows, certainly lower free cash flows, and low and even no earnings. But they have strong earnings growth potential, often based on proprietary products and Intellectual Property. These companies tend to be in Sector 25 (Consumer Discretionary), Sector 45 (Technology), and Sector 50 (Communications).

CHAPTER 8

What is an income security We seek to create wealth via capital gains from Growth and Value companies, which we discussed in the preceding two chapters. In this chapter, the subject is Income and how we can find the best instruments in capital markets – stocks or bonds – to accomplish that objective. Investors cannot discuss the subject of Income without understanding the monetary policy of the Fed, which varies from the extremes of Quantitative Easing (QE), which typically lowers rates, to Quantitative Tightening (QT), which naturally raises rates. Investors earn income from a Return on Capital (ROC) bond interest or stock dividends. That search will require the study of yield, which is the instrument’s interest or dividend divided by cost price. Total Return is income from yield plus any capital gain or capital loss on a sale of the financial instrument. Capital gains are taxed differently than interest and dividend yield. An advantage of seeking income from newly issued stocks rather than newly issued bonds is that bonds return only their face value capital, and nothing more, at the end of the term. In most cases, solid, high dividend-paying companies will likely have increasing stock prices over time, resulting in a capital gain and the income earned from dividends. Of course, if you buy a bond in the market at less than face value, i.e., at a price discount, and hold it to maturity, you will also have a capital gain if you redeemed the bond at face value. When the bond market is healthy, an average bond yield is likely higher than an average stock yield. Hence investors seeking Income usually invest in bonds during those ‘healthy market’ years. However, following the 2008 global financial crisis and the Fed’s Quantitative Easing policy that started in March 2009, the Fed almost destroyed the bond market by manipulating Treasury bond yields to nearly zero over the next several years. They did so by lowering rates so they could buy most Treasury debt to control that market, just like they did the US mortgage market at that time. Central banks worldwide followed this path by buying risk-free bonds as G-7 governments issued them. So, from 2009 through 2021, central bankers forced the buyers of bonds from an income-seeking objective to one of capital growth-seeking, and those who seek income from securities to look first to dividends from companies.

What is an income security

To begin 2022, the Fed announced a Quantitative Tightening policy that will eventually bring the bond market back to prominence for investors seeking Income. In any case, until the bond market returns to good health by paying a reasonable economic rent for the borrowed capital, those who seek income via total return on their invested capital must still look to the stock market. It’s how it has been since the 2008 global financial system collapse. When the stock price of a consistent dividend-paying company is high, the dividend yield is low. The problem is that you don’t want to buy high with the possibility of later having to sell low. If that were to be the case, the stock’s dividend income would be offset by a capital loss, often more extensive than the dividend income. When the stock price of a consistent dividend-paying company is low, the current dividend yield is high. That may appear to be an excellent time to buy the stock for income; however, maybe there is a good reason for the stock price to be low (and the dividend yield so high). Perhaps the company is struggling financially and will be forced to reduce or eliminate the dividend. So, your expertise in market Technical Analysis will be called upon when prices are high as you will need to sell when the stock price is still high, but in the interim, collect the solid dividend you want. On the other hand, your expertise in understanding Corporate Fundamentals can determine if a company is financially strong enough to meet its ongoing financial obligations when the stock price is low. Now you can see that your search for income stocks requires expertise in the study of both Technical and Fundamental Analysis, just the same as if you are investing in Growth and Value companies.

[In 2016, I authored a detailed report of the Ford Motor Company (NYSE: F) as a blue-chip company that I rated high for Income and Value. If you had read that report, you would see why I liked it well enough almost to put it into the Cara 100 US listed companies. One reason is the dividend increased each year from $0.40 (2013) and $0.50 (2014) to $0.60 (2015). Analysts also expected a further lift for the next two years: $0.87 (2016) and $0.90 (2017). As this book is on investing in global capital markets, investors seeking income should consider looking around the world to find it. Macroeconomic risk must be considered before investing in any country or region. For 2022, VisualCapitalist.com explains these risks in partnership with New York Life Investments. I posted their informative graphic at the end of this chapter.

BILL CARA / STOCK MARKET LITERACY

As I wrote this lesson in April 2022, I noted the exceptionally high dividend yields in formerly financially sound Russian companies, which increased because of a sell-off of Russian stocks due to Russia-Ukraine geopolitics that captured the world’s news headlines. These stocks are traded in Russian Rubles (RUB) on the Moscow Exchange or in Pound Sterling (GBP) on the London Exchange. After a couple of months of the war and incredibly tough sanctions against Russia and Russian-based assets held abroad, extremely high dividend yields mean little if the companies cannot pay. Fig. 8.1 Dividend Yields of Russian companies after post-Ukraine invasion sanctions, reflecting low stock prices Russian Company

Moscow Exchange

UK Ticker

Industry

Dividend Yield

Lukoil

LKOH.ME

LKOD.L

Oil and Natural Gas

8.6%

Gazprom

GAZP.ME

OGZD.L

Natural Gas

10.0%

Magnit

MGNT.ME

MGNT.L

Food retail

10.0%

Norilsk Nickel

GMKN.ME

MNOD.L

Nickel & Palladium Mining

11.5%

Magnitogorsk

MAGN.ME

MMK.L

Iron and Steel

15.3%

Severstal

CHMF.ME

SVST.L

Steel and Mining

21.5%

Novolipetsk

NLMK.ME

NLMK.L

Steel

23.0%

Once to meet a regulatory requirement of the Securities Commission of Bahamas, rather than depositing cash in a bank savings account, I purchased a high-yield South Korean bond suitable to the regulator. A final word of advice when you have zeroed in on your Income candidates and are ready to buy: Try to buy them on big down days in the market. If the dividend is solid, the lower price increases your yield, lowers your risk, and results in a higher total return. Expertise in trading is knowledge and skill which takes time to acquire. But it is not rocket science, so there is nothing to fear. If your interest is Income, you don’t have the time to also research Growth and Value companies, so stick to your knitting, which in this case is Income. The more you focus on what you need, the quicker you acquire the knowledge and skill to attain your objectives.

What is an income security

Fig. 8.2 High-Quality Top Dividend payers Company

Ticker

Market Cap (2022-04-04)

Dividend Yield

Abbvie

ABBV

286.33B

3.47%

Amcor

AMCR

17.15B

4.16%

Franklin Res.

BEN

14.02B

4.15%

Cardinal Health

CAH

15.71B

3.40%

Chevron

CVX

317.12B

3.46%

Consol. Edison

33.53B

3.23%

IBM

116.93B

5.04%

Kimberley-Clark

KMB

41.50B

3.71%

Coca-Cola

268.77B

2.67%

Leggett & Platt

LEG

4.65B

4.73%

AT&T

168.79B

8.67%

Exxon

XOM

349.65B

4.23%

Snapshot and charts https://finviz.com/screener.ashx?v=341&t=ABBV,AMCR,BEN,CAH,CVX,ED,IBM,KMB,KO,LEG,T,XOM Financial data https://finviz.com/screener.ashx?v=161&t=ABBV,AMCR,BEN,CAH,CVX,ED,IBM,KMB,KO,LEG,T,XOM The strategy to maximize income is: 1. Select only long-running high-dividend payers with low PE and Forward PE where investors expect dividend payment. 2. Trade the stocks in or out based on (a) RSI-5 trendline breaks to avoid capital losses (see chapter 33) and (b) capturing dividends where possible. 3. The objective is Total Return as well as maximum income from these stocks. On April 4, 2022, these 12 stocks had a +4.24% current yield with an acceptable PE of 19.9 and a relatively low 13.7% Forward PE. Also, the one-year and YTD performance were gains of +11.0% and +6.2%, respectively. Snapshot of my Dividend 40 watchlist. Here are links to charts of my Dividend 40 watchlist. Bottom line: There are risks with every type of investment, including Income instruments. There is capital and market risk, which applies to stocks and bonds.

BILL CARA / STOCK MARKET LITERACY

On the following page, I posted the graphic of the 2022 macroeconomic risk published by VisualCapitalist.com.

CHAPTER 9

Selling risk versus buying opportunity Most investors open a new position with a Buy. The focus for each Buy is on the opportunity for Capital Gain. A Buy also exposes the trader to risk. A Sell terminates the opportunity but also the risk. Risk Management is the key to successful investing. The finality of closing risk and opportunity, and the profit or loss, is a primary reason that selling is the more important decision than buying. Some investors think this is a controversial subject. I think it’s a straightforward matter. An actual investment loss is more important than a possible loss. Only after closing positions are losses or gains realized. Also, Buy decisions are more likely to be profitable than Sell decisions. Studies have shown that for every 200 Buy decisions made by a trader, about 115 were profitable. But for every 200 Sell decisions, about 85 were good. These two reasons show me that most investors are more concerned with opportunity than a risk. They tend to take more time studying an opportunity than terminating risk. The same logic (i.e., focusing on opportunity versus risk) applies to closing a Short Position. A small percentage of investors open Short Positions where they first sell a stock they borrow and must later replace it with a subsequent Buy that is needed to close the Short Position. There is risk involved in every investment, which means that human emotion is involved. In buying, opportunity and greed align. As prices rise, investors become more aware of and concerned with those risks. What they see is referred to as the Wall of Worry. In selling, risk and fear are more closely aligned. Selling is the more difficult decision because markets reflect human nature in that fear is greater than greed. Fear causes market prices to fall more quickly than they rise. As a case in point, an expression often heard in the market is that stocks walk up the stairs but come down the elevator. Fear will also cause an investor to fail to act in the face of extreme risk. Such a condition in life is known as ‘in extremis.’ In capital markets, investors occasionally freeze and cannot sell a failing position. The opposite of fear is greed, where the opportunity seems extreme to the investor. At times, greedy investors cannot even consider the notion of selling. 53

BILL CARA / STOCK MARKET LITERACY

Many of us know the “Greed is good” speech in the movie Wall Street from the fictional character Gordon Gekko. The script reads: “Greed, for lack of a better word.” The writer might have used the words “extreme action to seize an opportunity,” but without the “greed” rhetoric, there would not have been such an unforgettable speech. Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars a year. I have spent the last two months analyzing what these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated. In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars. Thank you. I am not a destroyer of companies. I am a liberator of them! The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will save Teldar Paper and that other malfunctioning corporation called the USA. Thank you very much. In my view, the Gekko performance in the Wall Street movie is a warning about trying to create wealth without proper due diligence of risk factors. That can lead to obsessivecompulsive behavior, which is terrible for investors. Bottom line: An investor’s primary focus when buying a stock is on opportunity; often, substantial risks are unknown or ignored. Selling terminates risk, so selling is the more critical decision.

CHAPTER 10

Strategy and tactics ground rules While it’s too early in the book to recommend detailed strategies and tactics, it’s not too early to lay down ground rules within the broad context of investing and trading. This chapter offers the notion of the importance of mindset and thinking about how investors must act to survive. It’s mostly about common sense. While I do discuss my biases here, these come with explanations based on a lifetime’s experience. Every trader needs a set of guidelines that directs how they interact with capital markets. Think of the list as a framework for investing, an attitude, and a mindset. Thinking the right way will help you appreciate the importance of each lesson in the book. 1. Only trade the stocks of successful companies, which is like saying, ‘choose your friends wisely.’ 2. Base all decisions on actual company and market data while ignoring market stories or beliefs of others 3. Be mindful of Price Drivers, aka catalysts or influences, and continually seek to discover the reason why prices are rising and falling 4. Buy/Sell only on Trend and Cycle reversals, aka breakouts/breakdowns of Prices and Technical Indicators, based on the weight of the evidence 5. Hold positions on the Price Trend’s good side. Let the wind always be at your back 6. Do not set Price Targets or anticipate gains, which is an exercise in greed and the path to losses 7. Be mindful of areas of Price Support and Resistance for all your holdings, as that is the market speaking, and you must listen to the market, which has a reason for all price action 8. Be mindful of Company reporting dates and key Macroeconomic reporting dates because those are the times that investors and traders make most of their decisions 9. As with anything, try to have more winners than losers. You will have losers, but you must never succumb to fear of losses, which is the dark side. And try to have more minor average % losses than average % gains, which should be your number one risk management rule.

BILL CARA / STOCK MARKET LITERACY

10. These are well-known rules for investing and trading, all of which are consistently applied. But such rules must fit your needs and interests, or you will not stick with them. Be aware that my buy-side thinking and experiences are the opposite of some generally accepted securities industry advisories that have evolved from the sell-side. In subsequent chapters, I will use graphics and links to information to supplement concepts within the following narrative: Very few people who work in financial services know how to invest or trade well. To the credit of most of them, they are well-educated decent people who work hard for their companies, colleagues, and clients. But, having worked with the Sell-side for many years, I know that most of them are not even involved in investing or trading during the day. They are in management, sales, research, investment banking, technology, communications, legal, reception, back-office administration, etc. I respect most of them, but I believe that, like their firm’s clients, not more than 10% invest and trade successfully. Bottom line: the great majority of people on the Sell-side, just like the Buyside, need to learn how to invest and trade. a. Although most investors trade Exchange Traded Funds (ETFs) (see chapter 67), the ETF is not an effective risk management tool as advertised. Most ETFs and mutual funds hold bad companies and stocks and thus passively managed traps. For example, when shopping in a supermarket for fruit, you never take the first dozen bananas off the shelf. Nobody does. Enough said. b. ETFs, by definition, comprise good, bad, and often ugly securities. The best investors research high-quality individual companies to find the best ones in the best industries for economic and business cycles. They buy the stocks of these companies when the price is out of favor for whatever reason. It’s a fact that prices are often pushed to extreme lows by interventionists, skilled manipulators, surrogate media, and the communications specialists in their employ. ETFs disguise those actions, so I avoid ETFs, and I use the market’s movement to help me find good stocks among the good companies I am interested in and need. c. Asset allocation is overrated and promoted by Sell-side financial services companies that promote their ETFs, bonds, and alternative investments. Consider, if you will, that every large financial services company has many unique service departments, each with managing directors, each vying for marketing exposure via internal politics at the executive committee level. These people fight for space under the big umbrella knowing their firm’s whole marketing spend embraces collective thinking. You will see the usual recommendation for a 60:40 equity vs. bond allocation. Within equities, there will be slices for energy, technology, etc. You will find allotments for alternative investments, Crypto, emerging markets, and so forth, depending on the power of the Big Swinging Dicks. They manage these departments at Humongous Bank & Broker. I, on the other hand, am an individual and think for myself. I believe that you ought to invest only in what you need, such as Growth (at or near market

Strategy and tactics ground rules

cycle bottoms), Value (often as Bull markets mature and even at or near market cycle tops), or Income (when you need it). There is never a need to buy pooled investments like ETFs or Mutual Funds (chapter 94) or Bonds (chapter 96) unless your portfolio is strictly for income and the prices of high-Quality Bonds at that time happened to be more attractive in yield than were dividends. In other words, leave the marketing to the Sell-side while focusing on your needs. d. Averaging down is an essential part of the entry strategy. Professional investors call it ‘painting the bottom’ as nobody can pinpoint a precise cycle bottom in price. Having studied the industry drivers, company fundamentals, and the market prices of the stock and its benchmark prices, we use facts in our plan to accumulate stock. Then we buy into weakness, which means prices are low and possibly going down as the sellers become exhausted. During distribution, we sell into strength, which means prices are high and perhaps higher as the buyers become exhausted. Traders never ring a bell at the top or bottom of a price cycle, so never wait for one. If someone says that you bought too early in a falling market, their fear and greed emotions are more acute than yours. e. I do not believe in giving a broker a stop-sell order because that information soon becomes knowledge disseminated to sophisticated financial services industry insiders. It is to your detriment when it’s in their interest to act upon this information. This hidden use of client trading data, which becomes what they say is wisdom, is a kind of insider trading. For this reason, some people in the securities industry make money, and most of their clients don’t. In considering this point, you might think about the DIKW Pyramid. f. As you become knowledgeable, you will see that the only reason for selling an investment earlier than anticipated is a relevant and material change in market drivers or corporate fundamentals that were the basis for your earlier decision to buy or hold a position in a particular stock. Nobody can accurately guess the timing of these significant changes, so don’t try. In the interim, you will have your accumulation or distribution zone alerts and trade execution signals, which you will learn about in this book, to guide your ongoing trading. g. Every talking head who announces their favorite stocks on Financial Entertainment Television is your enemy. They are really ‘talking their book’ to influence you to buy at higher prices than they paid, which you would do at risk. I do not participate in popular media for this reason. It’s a marketing exercise. In my case, I blog to my followers about what I do and my thinking as a way of teaching, not marketing or selling. I am an independent investor on the Buy-side. You will see from the material in this book that you must rely on accurate, timely, relevant data to succeed. And while the market may seem chaotic, there is structure to the data covered in Lesson 5. You also need a system for how you make decisions and act. Everything starts with a few simple concepts: (i) we trade prices, (ii) there are reasons why prices fluctuate, (iii) a Stock is not a Company; it’s a Price, and (iv) a Company is not a Stock.

BILL CARA / STOCK MARKET LITERACY

Bottom line: This is a short chapter, but maybe the most important one in this book because it defines how you must think as an investor in the stock market. All the other chapters explain why and how you should act. By the end of Chapter 120, I am confident that many of you will have learned how to survive the many pitfalls of capital markets and to invest and trade successfully.

C H A P T E R 11

Advice from the market gurus According to our securities laws, investment advice should come only from investment experts, not activists and politicians. Fortunately, there are great investors of the past and present, people who are called gurus, who provide people with what I call guidance. Their savvy advice exhibits timeless value. Individuals in capital markets who investors respect for their guidance, people as Sir John Templeton, Warren Buffett, and Peter Lynch, are deservedly called ‘Gurus.’ They made fortunes by investing wisely, not by politicized preaching. You may consider these general comments to be recommendations, but for advice to be a recommendation, somebody must personalize it. A sales pitch is personalized but selling, not advice, guidance, or a recommendation. Before making every investment decision, only consider what you need from the seller. Why are you being offered the stock? Does it meet your specific needs? Are you possibly being played? When it comes to investing, most people do not know where to start. They should start by becoming a student of the market. After more than 50 years of investing and trading in securities, I still proudly call myself a student of the market. I am always studying companies and prices and always trying to learn how to improve my performance. In this book and on my website, I try to help new students of the capital markets (1) find the best sources of factual information, (2) consider different points of view, and (3) go beyond obvious and possibly misleading information to understand the market’s cause-and-effect relationships and other complexities before making decisions or expressing opinions. I firmly believe in free capital markets, where we make investment decisions based on our personal beliefs, interests, and needs. There is no reason for others to tell us how to think and act. And they do because they can, and often because of reasons that have a political agenda. If we need decision support from an advisor, understand that a proper securities recommendation comes only from a registered Securities Investment Advisor. All investing requires independent thinking. That’s a “must.”

BILL CARA / STOCK MARKET LITERACY

Unfortunately, since the 2008 collapse of the global financial system, a new wave of political correctness has permeated the capital markets. There now are organizations and people whose job it is to tell people how to think and act. This quote from Wall Streeter @VivekGRamaswamy sums up my point: BlackRock CEO Larry Fink famously said in 2017: “You have to force behaviors. At BlackRock, we are forcing behaviors.” The part he didn’t speak out loud: he’s using other people’s retirement funds to do it. As readers probably know, Larry Fink is the founder/chairman of the world’s largest manager of Other People’s Money – 10 Trillion US Dollars. Larry Fink’s recent senior executive in charge of investing in ESG departed BlackRock to join President Biden’s cabinet as the senior economic advisor. He is now telling the government how to act. Socially Responsible Investing now seems to be a requirement, and the ‘Environment’ is at the core. Abstract concepts like ESG, Build Back Better, Climate Change and the Green New Deal are highly political and designed to guide investment in a socially acceptable way. Many of these activists and lobbyists are in the financial services business. They have achieved lofty heights in management and administration. They may be elected representatives in our governments or workers in the civil service or non-governmental organizations, but the bottom line is that they are not investment experts. And yet they are telling investment professionals and independent investors that they know better. In the capital markets, an activist is not a Guru. A Guru is a Buy-side participant in the investment industry and an investor-educator whom other investors hold in high regard. There are Guru-pretenders, like BlackRock’s Larry Fink, and many of the creators of branded technical indicators, who may be self-anointed kings and queens because of their success in sales, business administration, or the boardroom, but they are not investment gurus. Instead, consider the most well-publicized, thoughtful, and inspiring words from the following gurus. Here are some of my favorite guru quotations that I categorized by investment principle.

(1) In time, you will discover that knowledge is your most important capital When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research and analysis before making any investment decisions. “The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher

Advice from the market gurus

That is another testament that investing without education and research will lead to regrettable investment decisions. Research is much more than just listening to popular opinion. People in the stock markets love to look at historical prices before making buy or sell decisions. Too much focus on history is a loss-making approach in the long run. There can be shares at an all-time low that are still not worth buying. There can be shares that have reached their all-time high and are still worth the price. Philip Fisher’s motivational quotes are famous among the more experienced investors.

(2) Do Your Homework “Know what you own and know why you own it.” — Peter Lynch Peter Lynch is my favorite investment guru. His portfolio success was unrivaled, and his thoughtful writings were prodigious. He is best known for doing his homework before making an investment decision. Do not invest in stocks just because everybody is talking about them. There is an exciting topic – circle of competence – in which a person’s expertise and interests should align. That can mean you should invest only in stocks that you understand. And not just that, understand why you invested in a particular stock. There could be times when you might have to sell the stock because it does not suit your investment style. Once you have decided, make sure to re-evaluate your portfolio promptly. A wise holding today may not be an intelligent holding in the future. Peter Lynch, the legendary investor, has doled out such great advice to the markets over the years that he has many motivational quotes to his credit.

(3) Think for yourself I probably have written these words more than any other. I particularly like the following quotation, and the others are extensions. “The most contrarian thing of all is not to oppose the crowd but to think for yourself.” — Peter Thiel “If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don’t need extraordinary intelligence to succeed as an investor.” — Warren Buffett “The person who starts simply with the idea of getting rich won’t succeed; you must have a larger ambition.” —John D. Rockefeller

BILL CARA / STOCK MARKET LITERACY

Success requires thinking.

(4) Focus on the Long-Term The long-run rate of return on investments determines how much wealth people accumulate over time. Patience is a requirement. “The stock market is a device to transfer money from the impatient to the patient.” —Warren Buffett “Waiting helps you as an investor, and a lot of people can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work hard to overcome that.” —Charlie Munger “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” —Benjamin Graham

(5) Diversification Advisors and salespeople tell you to diversify your risk by investing in many stocks so that you don’t lose too much if something terrible happens to one stock. But the flip side is that if you invest in too many stocks, you don’t get massive returns from the meteoric rise of a few good stocks. “Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett Importantly, any attempt to mitigate risk is relevant. However, there are dangers of overdiversifying your portfolio. Once you’ve gotten your feet wet and have confidence in your investments, you can adjust your portfolio accordingly and make bigger bets with fewer holdings. So what Warren Buffet suggests is that once your understanding of stocks is good enough, you should invest in fewer companies. It would help if you diversified – but try to avoid over-diversification.

(6) Markets fluctuate. Stay the Course For every trade, there is a buyer and a seller. The stock market is a world of conflicting opinions.

Advice from the market gurus

It’s far too easy for investors to lose perspective. Whenever something big goes wrong, many people panic and sell their investments. “History provides a crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.” —Shelby M.C. Davis “A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic and more likely to remain invested, benefitting from the wealth-building power of stocks.” —Christopher Davis “In the short run, the market is a voting machine. In the long run, it is a weighing machine.” —Benjamin Graham “With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.” — Carlos Slim Looking at history, the markets recovered from the 2008 financial crisis, the dotcom crash in 2000, and even the Great Depression in the 1930s, so they’ll almost certainly get through whatever comes next. “We don’t predict macroeconomic factors. We’re looking at our companies from a bottom-up perspective on their long-run prospects of returning.” — Mellody Hobson (co-CEO, Ariel Investments, and Starbucks Chair) Predicting the next recession or stock market crash is tough, so many of the best investors don’t even try. Instead, investment gurus will say to look for good companies with the strength to make it through the occasional challenging economic environment. “Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off.” — Carlos Slim Don’t despair amid the inevitable setbacks that all investors face, especially during a crisis in the market. If the reasoning behind the investment is sound, stick with it, and it should eventually turn around. “You get recessions, and you have stock market declines. If you don’t understand that it is going to happen, and you’re not ready, you won’t do well in the markets.” — Peter Lynch Recessions do happen. So too, are frequent periods of market selling. They are often unavoidable. If you do not dare to stay invested through the ups and downs of the markets, investing in stock markets may not be for you.

BILL CARA / STOCK MARKET LITERACY

When hit with recessions or declines, you must stay the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries. As mentioned earlier, most of whatever Peter Lynch said became motivational quotes. “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.” — George Soros Too many investors become obsessed with being right, even when the gains are small.

(7) Keeping emotions under control On this list of motivational quotes, this quote by Jim Cramer is intended as a statement more than advice. “Every once in a while, the market does something so stupid it takes your breath away.” —Jim Cramer Brilliant people have tried to understand and predict the movement of the stock markets. And they have failed. Stock markets are irrational in the short term. It would help if you always were prepared for the unexpected to happen. That is the randomness factor. “Many people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.” —Charlie Munger “The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.” —Benjamin Graham

(8) Keep it Simple Investors often make things too hard for themselves. Buffett prefers value stocks to outperform the market, making success easier. “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” — Warren Buffett Sophisticated strategies, such as short selling, lose money in the long run, so profiting is more difficult. “The older I get, the more I see a straight path where I want to go. If you’re going to hunt elephants, don’t get off the trail for a rabbit.” —T. Boone Pickens “The four most dangerous words in investing are: ‘this time it’s different.’” —Sir John Templeton

Advice from the market gurus

A track record is of utmost importance. Don’t expect different results if you invest a considerable chunk of your money in a stock with poor performance history. The chances of the stock suddenly changing its nature are minuscule.

(9) Market Forecasts “Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” —Peter Lynch “The function of economic forecasting is to make astrology look respectable.” —John Kenneth Galbraith “I do not attempt to forecast the market—my efforts are devoted to finding undervalued securities.” —Warren Buffett “The individual investor should act consistently as an investor and not as a speculator.” —Ben Graham You are an investor, not someone who can predict the future. Base your decisions on facts and analysis rather than risky, speculative forecasts.

(10) Timing the Market “Far more money has been lost by investors trying to anticipate corrections than in the corrections themselves.” —Peter Lynch “What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower.” —William O’Neil “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” —Warren Buffett “Returns matter a lot. It’s our capital.” — Abigail Johnson Most people are lousy market timers, and their performance is sub-optimal. Going against the majority is the proper way to outperform the stock market. The market is one place trying to fit in with the crowd can be a giant mistake. On the other hand, understand that, over the long term, the public is often correct.

(11) Contrarian Thinking “The four most dangerous words in investing are, it’s different this time.” — Sir John Templeton

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Follow market trends and history. Don’t speculate that this particular time will be any different. Its five-year performance is a significant key to investing in a specific stock or bond fund. “Bottoms in the investment world don’t end with four-year lows; they end with 10or 15-year lows.” —Jim Rogers While 10- to 15-year lows are not common, they do happen. During these times, don’t be shy about going against the trend and investing; you could make a fortune by making a bold move or lose your shirt. Remember the first quote in this article and invest in an industry you’ve researched thoroughly. Then, be prepared to see your investment sink lower before it turns around and starts to pay off.

(12) A Market Correction is an Opportunity to Take a Risk “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” —Warren Buffett “Be prepared to invest in a down market and to “get out” in a soaring market.” —Warren Buffett I say it differently, but the concept is the same: “Buy into weakness; sell into strength.” –Bill Cara “The intelligent investor is a realist who sells to optimists and buys from pessimists.” —Benjamin Graham I’ve heard this: “Optimists create sellers’ markets, and pessimists create buyers’ markets.” “You make most of your money in a bear market, and you just don’t realize it at the time.” —Shelby Cullom Davis This quote is one I like: “Bull markets baffle brains” because it infers that investors stop thinking and learning when prices are trending higher. When prices fall in a Bear trend, investors stop to ponder the importance of causality. That is part of the learning process needed to make serious money in equity markets. “It is said that placid seas make lousy sailors, and these new investors have only sailed through the calm seas with a steady tailwind at their back.” —Steve Sosnick - Interactive Brokers “Given a 10% chance of a 100 times payoff, you should take that bet every time.” —Jeff Bezos Most people dismiss many of the best and most profitable investment ideas simply because they aren’t working in the short run. These investors never stop considering how much they could make if unlikely outcomes occur. Jeff Bezos took those bets and became the second richest person in the world. 66

Advice from the market gurus

(13) Bonus quote never to forget “The market is a game that plays people.” —Bill Cara In 2012, investment guru Bill Ackman published a 44-minute video for young investors: Everything You Need to Know About Finance and Investing in Under an Hour.

KEY TAKEAWAYS • Timeless quotes from Gurus give investors a winning perspective on the future by conveying wisdom from the past, which is what educators do. • These quotes show anyone how to build a fortune in the long run by investing resources wisely in the short run. • The best quotes teach investors how success in the market depends on independent thinking, deep research, and investing in probabilities rather than following their instincts or the recommendations of salespersons. Bottom line: Advice from a Guru, like these quotes, urges thoughtfulness over impulsiveness, boldness instead of caution, and intelligent research over flavorof-the-month decision-making. By listening carefully, their words can become your knowledge.

SECTION 2

Things to Know About Markets 12 Why do Prices Fluctuate 13 Drivers of price change 14 Social media influencers 15 Financial Advice versus Financial Advisor 16 Automated Advice 17 Corporate Filings 18 Seasonality Data 19 Market study 1: Advance-Decline Data 20 Market study 2: Moving Average Data 21 Market study 3: PE Ratio Data 22 Market study 4: Yield Data 23 Market study 5: Volume Data 24 Market Index study 6: Bearish Data 25 Market Index study 7: Bullish Data

C H A P T E R 12

Why do prices fluctuate This chapter explores the importance of Causality, which is the study of cause and effect relationships among prices of things or groups of things in the market, like companies, industries, and sectors. Since we trade prices, understanding how to connect the dots between prices helps us decide what to buy and sell (Lesson 8) and what to buy (Lesson 7). Following the previous chapter’s discussion of market structure and the sectors, industries, and company stocks that trade in the market, I might have inserted a separate lesson devoted to Correlation. But since the Global Industry Classification System (GICS) already displays how they are connected, I decided to introduce Causality, which shows market dynamics within the structure. Understanding the drivers of price change, called Causal forces, which lead to changes in asset allocation and price trends, is the key to successful investing. Correlation shows the strength of a relationship between two variables, which is vital to know. Correlation is one of the key concepts in investment decision-making and portfolio management. To discuss correlation, however, I would have to cover topics like Spurious Correlation and Gambler’s Fallacy, which are too complex to discuss in the book. Knowing that two assets like Airlines and Hotels are correlated both in the economy and the market does not imply causation or help us understand why prices fluctuate. Some of us think that the weather is a significant causal factor in capital markets. If you invest in commodities or instruments, commodity prices affect the revenue and profitability of the companies whose stock prices you are trading. But the weather is not a big deal for most investors. However, the weather is a significant causal factor in everyday life. We all like to enjoy sunny days and avoid storms with high wind, rain, or snow, so I use the weather to explain the concept of time and space in the market, which is vitally important to persons who are learning to invest. Like investing or trading, you need to know when and where to understand the weather. If somebody asks, “How’s the weather?” the question should be “when?” and “where?” That is time and space. Once in an investment seminar, I held up a photo of a price chart and asked the audience if they would buy that stock. All said yes. Then I showed a second chart, and all said no, they would sell. But the chart was for the same company. The first was Daily, and the second was Weekly data. Then for the same timeframe, I showed broad market charts from different 69

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parts of the world. Some indicated buys and some sells. Without knowing the timeframe or location, they could not decide. That’s how this group quickly learned the importance of time and space. Investing is all about time and space price motion. For instance, are you thinking about hours, days, weeks, months, or years when making investment decisions? Are you thinking of a country, market sector, sector group, or industry group? Only when you know time and space can you study why prices are in motion. With some study, you will see that all prices are moving forward in Trends and Cycles, and there are reasons for it. Please re-read the last sentence. Financial services companies constantly tell you that investors cannot time the market. That is misleading because their traders and computer algorithms are precisely doing that. I believe you can succeed only by luck until you understand the Trends and Cycles of the stocks in your portfolio. Gamblers need luck. Investors need skill and knowledge. One or more catalysts always influence capital market prices depending on the time and space involved. Major geopolitical events like BREXIT are game changers for capital markets, particularly regional ones. Leading up to BREXIT in January 2020 and the months following, investors had concerns about what such a game-changing decision would mean to macroeconomic activity in Europe and the UK. The British Pound (GBP) fell to a 35-year low of about $1.15, down from a high of about $2.11 in November 2007. BREXIT had a much more significant impact on the European and UK capital markets than the major markets of the US, Japan, or China. The FTSE 100 stock index in market capitalization of leading British companies dropped an astounding £100 billion in the four days following the first vote in 2016. In subsequent chapters, we will discuss causal factors, such as the ones linked to significant events like BREXIT. For now, however, it is essential to know that market prices are like the weather, a function of time and space, driven there by Macroeconomic activity, Interest rates, Forex rates, Commodity Futures prices, and the action of Peer Group stock prices. Fig. 12.1 Price Drivers • Macroeconomic activity • Interest rates • Foreign Exchange rates • Commodity prices • Peer Group stock prices

Analysts consider all these factors when determining changes in Ratings and Price Targets, which also impact share prices. However, observant investors can anticipate specific actions of the analysts. 70

Why do prices fluctuate

Throughout this book, I point to the importance of using free or inexpensive investor websites to assist decision-making. MarketBeat.com offers its Idea Engine, a free service that employs more than two dozen algorithmic factors and technical indicators to identify stocks poised for price change. Events that “may place a stock on the MarketBeat.com Idea Engine list (for near-term price growth) include beating earnings estimates, increasing a dividend, multiple positive analyst recommendations, announcing a buyback or a stock split or a significant increase in the positivity of news about a stock.” These corporate fundamentals change quarterly, whereas the causal factors that I list are in constant motion. This book covers all these topics. At the beginning of the chapter, I stated that Correlation is one of the key concepts in investment decision-making and portfolio management. I discussed causality as a more important concept than correlation because investors need to understand why prices change. Prices that are highly correlated today may not be correlated much in the future. Still, until trends and cycles change, correlation is significant because the price drivers have the same impact until they don’t. Divergence in typically correlated prices is the point investors must focus on causality. I have studied the correlation between Gold in US Dollar prices and the US Dollar for many decades. The usual relationship is that as the Dollar strengthens, the price of Gold weakens because Gold is priced in Dollars. But there are times when investor demand for Gold rises even as the Dollar strengthens. Wartime is an example when that may occur because wars are inflationary, reducing the Dollar’s buying power. Investors then turn to Gold as a store of value. At the same time, however, investors typically sell the currencies in the countries or regions most heavily impacted by war, and they turn to the US Dollar. As I write this book, there is a case where high-yield corporate bond prices are highly correlated to the Nasdaq Composite Index. Debt service of thinly capitalized Nasdaq companies is a concern during the liquidity crisis of 2022. The Fed has been hiking rates higher and faster than at any time in history. So, as rates rise, the high-yield corporate bonds fall, and so do the prices of Nasdaq stocks. As the rise in rates pauses, the pressure is off the companies, and investors return to buying the stocks and the high-yield corporate bonds. Fig. 12.2 Correlation between High-Yield Corporate Bonds (HYG ETF) and Nasdaq Composite Index

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The Nasdaq Composite is in blue, and the HYG price is in red. Correlation is first-level thinking, and causality is second-level thinking. Correlation is a snapshot. Causality helps investors line up the dots to help determine where price trends and cycles are most likely to go. Bottom line: Trading in capital markets does not occur in a vacuum. The market is a matter of many relationships where anything that changes a market price will soon impact many other prices. The takeaway from this chapter is that to stay on the right side of the price trend, investors must monitor specific causal factors that could cause a change in the trend. These factors are in constant motion, whereas corporate fundamentals are slow to evolve.

C H A P T E R 13

Drivers of price change Just as we need to study corporate fundamentals and technical indicators for individual stocks, we must also be aware of significant factors that affect the big picture. The events of 2007-2008 that resulted in the collapse of the global financial system caused a systemic change in people’s saving and investing of money. What also changed materially was the overall government and central bank approach to money. In my view, capital markets became permanently distorted. The drivers of price change became more the government and central bank movers and shakers than ever before. Then, in 2022, the world was shocked at Russia’s invasion of democratic and nonoffensive Ukraine. This event has also significantly impacted money because war is always the number one cause of inflation, a known fact over hundreds of years everywhere in the world. Historians also know that the invader’s objective is to steal wealth. They want to steal the Gold and never the money. Let that point sink in regarding what has value and what doesn’t. Of course, governments that rely on the importation of goods and services and their central bankers will do all in their power to lift the value of their currency to reduce domestic inflation. Since the market prices Gold in US Dollars, the Fed and its agent commercial banks’ mission is to suppress Gold’s price. This chapter discusses the key drivers of market price, the most important of which is the US Dollar. Trading does not happen in a vacuum. So there will always be differences between what appears to happen and what happens. For hundreds of years, securities prices have resulted from supply and demand, which means bids and offers. Within the conventional market process, prices fluctuated because there were always fewer or more bids from buyers or fewer or more offers from sellers. Over time, we know that the factors that weighed most on investors’ general attitudes, willingness to assume risk, and ultimately their decisions to invest are changes in (a) corporate fundamentals, (b) business conditions, and (c) political matters, whether it be geopolitical, national, or local news. a. Specifically, the corporate fundamentals that influenced investors the most have been (1) asset discoveries, (2) changes in assets due to mergers and acquisitions, (3) surprises in reported revenue, earnings, cash flow, and dividends, (4) actual changes 73

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in revenue, earnings, cash flow, and dividends, (5) substantial change in guidance related to revenue, earnings, and cash flow, and (6) changes in management. b. Investors are significantly influenced by changes in business conditions as seen or anticipated in macroeconomic data, such as (1) monetary policy and interest rates, (2) commodity prices, (3) employment, (4) personal savings and consumption, and (5) housing and real estate. c. Politics, with news seemingly breaking every minute, has always influenced prices. Based on fact or fiction, the words increasingly became just opinions. Following the arrival of the Internet and social media, opinion leaders became primary market movers. For hundreds of years, these are the factors that we knew moved prices. But the 2007-2008 global financial crisis changed everything. The collapse of the worldwide banking system caused people to question the value of money and why they spend and invest it in the way they have been for hundreds of years. A 20072012 worldwide thoughtful period led to a paradigm shift in the treatment of money. During this time, because of his success with payments facilitator PayPal, then auto manufacturer Tesla, and later with rocket manufacturer SpaceX, Elon Musk became the wealthiest person alive. In doing so, he became a leading influencer. Musk constantly challenged established government and industry organizational control systems by always thinking outside the box. If conventional short sellers or securities regulators challenged Musk’s beliefs, he tried to prove them wrong and usually succeeded. His open-minded thinking led the counterculture fight against the establishment, legacy media, and long-held biases. His adoption of the new Cryptocurrency was indeed revolutionary. He had become an insult to anybody who had achieved the power to tell people how they should think and act. As I was drafting this book, that challenge was concluded with the public announcement that Twitter’s Board of Directors had agreed to sell Musk the ownership of the Company. As Twitter is based on peer-to-peer communications and is the world’s most popular social media company for personal messaging, Musk would have the capacity to be, by far, the world’s most crucial social influencer and price mover in capital markets. Breaking News

Bill Cara Author October 28, 2022, 9:35 am Musk is now the Chief Twit I believe the world has arrived at an existential moment of choice between the traditional hierarchical model (control of many by a few) and the network model (many-to-many relations subject to the power of influence as opposed to control).

Drivers of price change

Trust me. Twitter will be Musk’s biggest game-changer. Because of the enormity of the stakes, expect politicians and the broadcasting and publishing industries to do all they can to discredit Elon Musk. He is now their biggest threat. Putting aside new wave constructs Bitcoin, Web 3.0, Reddit, Cannabis & Psychedelics, and Trumpism, which have been widely embraced by those seeking change, what’s different following the collapse and re-start of the global financial system is that life no longer went forward on a treadmill. Activists are now involved more than ever, and the people are demanding change. Today, the public, including investors, focuses on what’s changing most and fastest. Therein lies a problem. For the most part, when investors see a list of the day’s biggest movers, up and down, they are simply looking at the outer margins of trading activity, like both ends of a Bell Curve pattern. Other than indicating the size of the gains or losses, the list does not give much information. These are mostly the companies that were in the news that day, both good news and bad, factually or as spun by Talking Heads. Throwaway news releases now catch the public’s attention. It’s easy to see that investors are increasingly trading on what has conveniently been called “breaking news.” Market volatility around news and promotion has become extreme. But reacting to news should not be part of our trading plan unless perhaps we were expecting that news in the form of positive or negative corporate reports of revenue and earnings, which is essential information. In those cases, savvy investors stick to the facts and ignore the onslaught of crafted messages, media narratives, and clickbait. While some news is essential to many investors – like changes in financial laws and regulations, take-over bids, or a company disaster of some kind – a lot of so-called business news today is of the market-based fluff promotion or entertainment variety. For example, Ford (F) wants to tell the world why the company is embracing driverless cars or McDonald’s has a new low-calorie meal on the menu. This news lets promoters off their holdings by immediately putting their hype machines to work. We must adapt, stop being a part of the crowd, and start thinking independently. Yes, independent investors should be ready to exploit the news too, but only news that is timely and relevant to our portfolio, and when we do so, we must stick to facts. And, as serious investors, we must try to filter out non-essential. We should be looking for gravitas in business news, such as the importance of revenue and earnings announcements that are in line or better or worse than Analysts anticipated. Performance-seeking investors must ignore all the fluff to focus on the data they need to earn performance results. Out-performance must be their only objective. From my perspective, if you need to get your drama from market promoters and entertainers, you are a dysfunctional investor. An extreme price change is important news, but only in context. One context is the response to movement in a price driver like Commodity Price, Interest Rate, Forex, or Macroeconomic report. Many such events are known as (i.e., most likely promoted as) ‘market-movers.’ 75

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Investors study the public’s reaction to ‘market mover’ news items closely because, frequently, the immediate response is the wrong one, which enables serious investors the opportunity to buy into weakness or sell into strength if they are close to the situation awaiting the information release. Regrettably, that collective public unthinking reaction, such as from recommendations from shills and swindlers, is often the result of engineered fraud. Such is hard to prove, of course. So each incident is seen as a trifling matter, and regulators almost always overlook it. When investors see an extreme price change, they are desensitized to it, leading to more radical price changes. The downside is those deceptive tactics are now engrained in the culture of Wall Street – tricking people out of their money like it’s no different than bluffing in a casino card game. Since I wrote the Lessons from the Trader Wizard book in 2007, an important new phenomenon has occurred in capital markets: the politicization of capital markets by business activists and governments is presently a considerable market-moving force, and that’s not a good thing. As a conventional investor, I believe that politicization, as evident in Environmental, Social, and Governance (ESG) and Build Back Better movements, is a clear and present danger to our capital markets’ integrity and, ultimately, our freedom. These top-down schemes are strategies and tactics to guide people in ways that support the motivations and intentions of a political class. They are not ground-up developments. Today the Build Back Better and ESG movements are coordinated in America and Europe by elitist politicians, lobbyists, and investors like Bill Gates and Larry Fink, the founder and CEO of the mighty asset manager BlackRock Group. Fink, on behalf of BlackRock, has personally developed a dangerous relationship with politicians over the years. BlackRock controls $10 Trillion of other people’s money. They also provide administrative services to other managers and Assets Under Administration (AUA), so BlackRock has significant influence over a total of perhaps $25 Trillion of Securities and Mutual Fund assets owned by the people. No other investment firm comes close to this degree of influence. BlackRock has now taken this near monopolistic power directly into the White House. In the opinion of critics, after essentially leading President Biden’s 2020 election funding, Fink installed Brian Deese, the former BlackRock global head of ESG investment, as the 13th Director of the National Economic Council serving President Biden. Today, ESG promotion is constant to investors and financial advisors. Prominent in the promotion are political platforms such as Socially Responsible Investing (SRI) (e.g., Equity, Diversity, and Inclusion), Sexual Rights Activism (LGBTQI), and Climate Change Theory Investing, e.g., carbon offsets and alternatives to fossil fuels. Many, and perhaps most of us, believe in such principles. Still, the problem is a relatively few people and organizations are indoctrinating people. We must step back and consider whether our decisions result from independent thinking. Consider how the ESG is impacting social discussion and investing today. This list comes from ETFDB.com. 76

Drivers of price change

Fig. 13.1 ESG topics Environmentally Responsible Carbon Intensity Fossil Fuel Reserves Water Stress Energy Efficiency Alternative Energy Green Building Pollution Prevention Water Sustainability Socially Responsible Affordable Real Estate Education Major Disease Treatment Healthy Nutrition Global Sanitation SME Finance Human Rights Violations Labor Rights Violations Customer Controversies UN Principles Violations Catholic Values Sharia Compliant Investing Adult Entertainment Alcohol Gambling Nuclear Power Tobacco Weapons Involvement Firearms Predatory Lending GMO Involvement Responsible Governance Board Flag Board Independence Board Diversity Entrenched Board Overboarding Shareholder Rights Fund Ownership Poison Pill Executive Compensation Accounting Flags

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Without dismissing the importance of their principles, I am alarmed that promoters of socially responsible investment overlook the most basic precepts of successful investing. Successful investing is the bedrock of capitalism, which has provided people with a good life. We should not be working to destroy its foundation to improve it. It’s the old story of working so fast that the builder wants to construct the house without foundation. That is a severe problem because the house will collapse. ESG discussions now happen worldwide due to activists and politicians who demand the right to speak for national groups. They want to determine how all individuals in the world must act versus individuals who require the right to decide how they invest and live their lives responsibly based on their circumstances. Personal freedom has always been predominant in our society, but well-organized activists and politicians are now succeeding in guiding the public’s decisions, including investors. Society is changing so that most investors no longer care about traditional investment reasons. Often there is no simple right or wrong. We have always known this. The concept of right in some countries is wrong in others. The question to ask globalists is, is there truly a society of people who seek goodness for all, or is the world still a collection of small communities, each serving its interests and needs? Political forces who demand to do good for society are often at odds with investors interested in value creation based on factors like Return on Investment (ROI), which is the basis of Capitalism. In my case, I take the individual investor’s traditional position that we need a free Market Economy rather than a Command Economy. In almost every issue in life, I want to be able to choose my path. Neither a command economy nor ESG preaching is in my interests. On 2022-06-13, while drafting the manuscript for this book, I noticed an article that stated that Goldman Sachs ESG Funds were under SEC investigation. So I blogged on billcara. com as follows: There are two sides to the ESG reporting issue. Some want more ESG information reported as they see it as promotional content. I have been arguing against this forever. Others want the data fleshed out to include ROI for every project because if these investment vehicles are political and not investment-related, then the filings expose the companies, fund creators, and managers to investor fraud. Line up the class lawyers because their party is just getting started. As I see it, there is so much falsehood and hypocrisy in the world today around this issue, especially in the capital markets. I believe that an investor who puts society ahead of the individual should be walking the talk. They should be personally buying an EV auto or using green transportation, living in 78

Drivers of price change

an energy-efficient Net-Zero home, raising their fruits and vegetables, and camping locally instead of holidaying abroad or on a cruise ship. But they don’t. Then there is the case of false advertising from the leading ESG proponent, BlackRock. As an investor, my research shows that fully nine of the top 10 holdings of BlackRock’s flagship USA ESG ETF – Tesla being the exception – have, in fact, not a lot to do with ESG: Fig. 13.2 Holdings of BlackRock’s flagship USA ESG ETF APPLE

AAPL

MICROSOFT

MSFT

ALPHABET CL. A

GOOGL

NVIDIA

NVDA

TESLA

TSLA

HOME DEPOT

JOHNSON CONTROLS

JCI

BLACKROCK

BLK

MMM

TEXAS INSTRUMENTS

TXN

Among the top 10 holdings of the BlackRock flagship ESG ETF, only the Electric Vehicle (EV) and Renewable investments of Tesla (TSLA) seem fully aligned with society’s interest in better lives for our children. Yet, this May 18, 2022 article states that “Index provider S&P Dow Jones Indices has removed Tesla (TSLA) from its widely-tracked S&P 500 ESG Index, citing issues related to claims of racial discrimination and crashes of Tesla’s autopilot vehicles”. Tesla was dropped from the S&P ESG index because the powers-that-be were worried about the social reach of Elon Musk, and not because the Tesla automobile is more harmful to the environment than Oil-powered automobiles because it isn’t. The most significant holding of the BlackRock flagship ESG ETF is Apple (AAPL). Despite their claims to the contrary, Apple has many Chinese suppliers, where most of their production exists, that employ child labor and whose employment programs are blind to international allegations of China’s genocide against Uyghurs. Tesla’s Elon Musk, among others, is now engaging in open debate with Bill Gates and others in the establishment who constantly promote ESG. Musk turned his attention to the acquisition of Twitter. He says he seeks to ensure that all of us use the world’s leading social media service. That would be a paradigm shift away from establishment-controlled broadcasting and publishing. Big Media and their establishment patrons are alarmed at the potential loss of message control, so Musk is on the receiving end of considerable push-back. While I reject the preaching of ESG advocates, the paradigm shift to socially conscious investing has also impacted me because I now wish to pursue personal investments in clean 79

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technology and biotech industries. I believe we do have an obligation to our grandchildren to leave a world that is solving the problems we created. It will be a world they inherit, and we leave them as a legacy. Political systems are the main problem for us, free market patriots, today. To close, I will tell you of a personal meeting in late 2016 or early 2017 in Havana where a senior management delegation from a major company in China came to visit me. They enquired how I, a capitalist, might develop real estate in totalitarian-run Cuba. Their company had built and managed the mega-tall Shanghai Tower skyscraper, and a corporate director led this group. During our conversation, the subject of politics was going to come up. When it did, I remarked that, as an entrepreneur, I was apolitical. The Chinese corporate director, a Wharton School MBA grad, quickly responded: “But politics is involved in everything.” Her comment made me think about the funny remark, “Politicians should wear sponsor jackets like NASCAR drivers.” So, while I have tried to author a book strictly on stock market literacy, my experience in life makes me grudgingly accept that politics and activism are significant influences on market prices. Too often, Return on Investment (ROI), capitalism’s fundamental precept, is overlooked today. Bottom line: Politics should not be the most significant influence of price change in the market, which it is today, or else Capitalism is on a course to be replaced by a command economy. In that case, the wealth creators in our society would be, like Cubans, marched to slavery.

C H A P T E R 14

Social media influencers How important is social media to investors? Investopedia.com answered that question in a February 7, 2022, article that stated: A National Association of Personal Financial Advisors survey found that more than one-third (39%) of Americans under age 65 get financial advice online or from social media. Therein lies a serious problem. This chapter surveys what is happening. Corporate earnings, cash flow, dividends, and macroeconomic reports are the primary decision factors underlying investment. At least, it used to be that way. Investor behavior today results from attitudes, thoughts, and opinions from financial facts. There is a reason why life has changed. Today, billions of people access the Internet and its millions of websites and applications. People participate in virtual communities and networks such as Facebook, Twitter, Instagram, LinkedIn, TikTok, YouTube, and Reddit, where they create, share, and exchange information and ideas. It is called Social Networking. There are social networks for many things, and many participants become influencers even if they are not experts. The question is, how much are capital market prices dependent on sociology and psychology versus financial data? The influencing of Market Sentiment is the issue. Investopedia.com says: Influencers can create blogs or websites to promote their content. They may monetize their blog and/or social channels in various ways, including engaging in affiliate marketing, running ads, selling digital or physical products, charging fees to access premium content, and creating sponsored content. Some influencers may also offer coaching services for a fee. Due to the billcara.com blog reaching millions of readers over the past 18 years, I am an influencer, but I have always done it for free. No paywall. No advertising. No promotion. For that, a writer in Barron’s magazine once called me “eccentric.” The fact is, I never saw a business model that interested me. I preferred to share. Because I give people unrestricted access to share their personal views on investing, maybe I’m a little like Elon Musk (minus the money, of course), who says he intends to operate Twitter as a minimally moderated townhall-type virtual community.

BILL CARA / STOCK MARKET LITERACY

Is social media essential? Investopedia.com answered that question in a February 7, 2022, article that stated: A National Association of Personal Financial Advisors survey found that more than one-third (39%) of Americans under age 65 get financial advice online or from social media. While about half of Americans feel they have a firm grasp of financial literacy basics, such as spending, budgeting, paying taxes, and saving, far fewer have the same level of understanding when it comes to investing. A personal finance influencer is a social media influencer who shares tips about finances and money. According to Morning Consult, the rise of the personal finance influencer is partly attributed to the growing use of social media for accessing money advice. Fig. 14.1 Where Gen Z and millennial investors look for money tips • Facebook – 33% • Instagram – 32% • Reddit – 29% • Twitter (for money hacks) – 27%

In other words, many people get their investment ideas from Facebook, Instagram, and Reddit as much as from an investment professional. Maybe many internet users are not wealthy, but they would like to be. The fact is that at least a billion of them are looking. Their thinking about wealth is affected by others who are not wealthy and have low to zero credibility to influence investment decisions. Investopedia.com covers “strategies for banking, budgeting, loans, and credit, renting or buying, retirement, insurance, taxes, and more.” Investing, of course, is a different subject than Personal Finance. America has the most sophisticated financial and investment markets in the world, but people in America and obviously who reside elsewhere still need investment literacy. I started the Cara Community in 2004 and wrote Lessons from the Trader Wizard in 2007-8, and this book serves that need. I was concerned that people would learn about investing from politicians, activists, social influencers, bankers, economists, techies, and academicians. In other words, by people who are not investors but also by investors who are on the sell-side with products and services to sell. And that’s what is happening, more now than ever. There is no independence and objectivity in stock market education.

Social media influencers

With any source of information, there are red flags. Advertising and unregistered investment promotions pay the costs of many so-called free services. Newbie investors and traders who have not yet developed sensitive filters may get caught up in various scams and frauds. Caution is needed. Educational resources, such as Investing.com, StockCharts.com, Finance.Yahoo.com, FinViz.com, MarketBeat.com, and Investopedia.com, are available. For most, Facebook, Instagram, TikTok, or YouTube are not helpful. But nowhere until I authored this book have I discovered a singular source that would give students a good learning experience. While the Cara Community is free to join and participate in, the world’s leading community platform for investors and traders today is Reddit. I feel that LinkedIn and Twitter have possibilities to join with the best of Reddit. But many popular Reddit investing and trading communities are frankly unacceptable. In any case, I think my initial thoughts about the internet twenty years ago were right. Unless you are actively involved in sharing knowledge in many-to-many networks where you will find an abundance of experience, the use of ‘social’ media just for receiving information is not the best influencer for students of the market. Bottom line: Getting educated is personal and not social. Education is up to the student. I believe that one’s education is learned and not taught. We gain the most by reading, thinking, and participating, which is why I authored this book and provided many links. It’s up to the reader to follow through on a personal level. For the moment, everyone should understand that social media platforms are distracting and doing nothing to help in education concerning Stock Market Literacy. If anything, there is a dumbing down process and the building of herd thinking. It’s crucial today to take personal control.

C H AP T E R 15

Financial advice versus financial advisor Although investors read about Financial Advisors (FA), do they know what it means? For instance, someone licensed as a Financial Advisor, like me, is one because the securities regulators say so. But is a Stockbroker a Financial Advisor, for instance? Is a banker, a lawyer, or an accountant? How about a famous newsletter writer, website blogger, or maybe someone just a good friend? This chapter discusses unregistered advice regarding securities and the need for strict licensing. Financial advice could be, say, should you restructure your debts? Or should you afford to buy that new car? Or is this the time to start a retirement fund? Is financial advice the same as investment advice, such as is Wheaton Precious Metals (WPM) a risky investment? Aha, the name Financial Advisor has different meanings. In addition, the exact meaning could have different names. For example, Securities Investment Advisors, which is how the Bahamas licenses them, are licensed in the United States as Financial Advisors. People who do not speak English as their first language are often confused by the words we use. An investment pool is nothing to do with a swimming pool, for example. The drilling season might be hot but has nothing to do with flavor, which would be a seasoning. My manuscript for this book is a draft but hopefully is not cold. This point hit home when I lived in Havana, where IT experts programmed my trading systems. Cuba’s command economy is entirely different from our capitalist economy. Their country’s culture was rich in the arts and sciences but poor in business. Their language was Spanish, and my associate’s use of English made me shake my head every day when they couldn’t understand the most straightforward investment concepts. For example, my question, what is the best job in Cuba, was answered, truck driver. Why was that? “It’s because we get to keep everything that falls off the truck.” Not coming from a communist political system that controls people’s freedom, it’s hard to relate to people in that situation.

Financial advice versus financial advisor

Another true story was the unbelievable answer I got when I asked a Cuban computer engineer the question, what would it be if he could buy the first thing that came to mind? He said, “A Mac,” and I responded that if he gave me the spec, I would buy him one and have it delivered from the United States within days. No, he said, he wanted a Big Mac. So, I found myself trying to frame every word and sentence in ways that these brilliant university grads could understand, at least relate to, and still move the project forward. In the end, I learned the meaning of mañana, which taught me that words and context matter. Unfortunately, nomenclature in our capital markets and Financial Service industries doesn’t mean much these days. A simple question of “What is a bank?” could result in endless answers. It could be an agent, an advisor, a principal trader, a securities depository, a lender, a trustee, an insurer, an insurance agent, a real estate investor, a realtor, and many other things that operate under the same brand umbrella, most of which have conflicting duties and responsibilities. We seem to want to maintain the confusion to maintain the system, which speaks to our being deliberately inefficient. Inefficiency establishes a need for new industries to modify bad habits when we should stop the bad habits. That’s capitalism because, in the end, things still get done. It’s called effectiveness, something that command economies do not have. For example: in a command economy, “They pretend to pay us. We pretend to work.” Our system is not perfect. A Financial Advisor could be almost anything that involves money. It could be a wealth manager licensed to buy for a principal, a stockbroker licensed to sell to a principal, or an insurance agent licensed to sell insurance products. Financial advisors could be lawyers practicing as lawyers or professional accountants who practice as auditors. It would not surprise me that someday, even the stock jockeys at Seeking Alpha, Kitco Media, or Stansberry Research will represent themselves as financial advisors. After all, there are work-from-home social influencers who have financial advice blogs. Some of them are teenagers working from their bedrooms. Some are even celebrities. In its October 2022 FAIR Focus publication, Canada’s Investor Rights Advocate discusses regulators clamping down on misleading social media “finfluencers” who promote investing and financial products to investors. The headline reads, “Would You Take Financial Advice From Influencer Kim Kardashian?” In June 2021, reality TV star Kim Kardashian promoted the EthereumMax cryptocurrency on Instagram to her more than 250 million followers. The Chair of the U.K.’s Financial Conduct Authority said the post “may have been the financial promotion with the single biggest audience reach in history.” Despite Ms. Kardashian’s ringing endorsement, not everyone was happy with their purchase of EthereumMax. In a class action lawsuit, investors claim the influencer and other celebrities made false statements about the cryptocurrency through social media, which led to investment losses.

BILL CARA / STOCK MARKET LITERACY

In addition, Ms. Kardashian found herself in hot water with the U.S. Securities and Exchange Commission (SEC). The SEC fined her $1.26 million for failing to disclose that she was paid to endorse EthereumMax. As the SEC Chair stated, “this case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto-asset securities, it doesn’t mean that those investment products are right for all investors.” Financial services regulation is paid a concern that is getting worse. At what point does influencing become selling, and should paid influencers be required to register as salespersons? When Humongous Bank & Broker (HB&B) can do pretty much anything to us as socalled financial advisors when most of its staff is unregistered, anybody can call themselves financial advisors. What’s good for the goose is good for the gander. Isn’t that what our laws say? Decades ago, I advised the accountancy profession not to go down this road. When they refused, I quit two of their professional organizations on principle. Then when I saw securities regulators taking this same slippery slope, I complained. But they also ignored my concern. For years I have been saying that the United States Securities Act of 1933 and the Investment Advisers Act of 1940 are collections of outdated and unworkable laws. The investment industry has changed drastically in the past almost 100 years. Changes to rules and regulations are now woefully inadequate to deal with the most fundamental matters of conflict of interest and terminology. With capital markets’ nomenclature now devolving into street slang, the quality of people joining is poor, frauds are soaring, and rising regulatory costs are out of control. Years ago, I explained the difference between statute and civil law as being almost black and white versus securities law, which is primarily gray. In the case of securities law, all matters are subject to civil service and industry regulatory authority, which are highly politicized. The framework that, while not perfect, once did work; but is not working well today. The financial services industry even ignores or inefficiently applies the most basic rules, regulations, and jargon like “Best Interests,” “Fiduciary,” and “Bank.” There is little or no enforcement against non-licensed others who are self-branded as financial advisors. The regulatory modus operandi is to wait until financial accidents happen before prosecuting crimes or issuing new guidelines. The financial services industry is a mess; the biggest losers are capital market stakeholders. A fundamental point that most people fail to understand is that the capital market is not the financial services industry. The capital market is where the owners of stocks, bonds, and currency exchange assets. The services industry is a capital market intermediary, supposedly improving efficiencies and not controlling what belongs to the owners of capital. But the financial services industry has put itself into its controlling position by making the system so complex and inefficient that they have become essential parties to every transaction.

Financial advice versus financial advisor

Why can’t we have a simple system where conflicts of interest are impossible? We could start where (1) a Buy-side Securities Investment Adviser is exclusively licensed to give securities investment advice, (2) a Buy-side Financial Advisor is licensed to give only non-securities financial advice, and (3) a Sell-side Broker-Dealer is exclusively licensed to sell investments. It’s not happening because banks do not want it to happen. There should also be a clear line of delineation between licensed and non-licensed people, whether they be broadcasters/publishers or individuals in the public who are known as social media influencers. Lawmakers could start by legislating a new Bank Act that terminates the possible reliance on all so-called Chinese Wall conflict of interest defenses. That well-established concept is simply laughable in practice. I want to think that a licensed Advisor is an individual’s or family’s most trusted ally for decisions related to investing, but sadly that is no longer the case. Even when dealing with licensed persons, the public may get the opposite of what they think. They might unknowingly be getting a salesperson. The problem is that most people do not know what a Financial Advisor is. In a new securities act, the term Investment Advisor (IA) should refer to a securities industry registrant who holds a license to trade in securities on behalf of a client. Sounds straightforward, but it isn’t. Investment law under the current act also enables that agent to be a principal, developer, distributor, and direct seller of financial products and services that the client may not need or even want. Even the financial services industry defines Investment advisors incorrectly. They say it is a stockbroker. But a stockbroker is a person who is licensed only to sell securities, not advise in securities. Their compensation is based entirely on sales production. The bottom line is that registered advisors should not be salespersons, and salespersons should not be able in any way to legally advise or manage securities on behalf of others. In almost all countries, there is, in fact, a licensing distinction between Stockbroker and Investment Advisor/Portfolio Manager. The latter must serve the client strictly as a Fiduciary. It’s impossible to ask or expect a salesperson to be a fiduciary to the customers they are selling to. Sadly, too few countries have well-defined fiduciary regulations in their securities laws. Even worse, the United States Securities and Exchange Commission is under much political pressure to keep its “Best Interest” rules blurred. It should be a simple matter to discern the difference between who “should” and who “must” best serve the client, but political pressures make a simple matter complex and seemingly never about to get solved. In most countries, the industry legally operates with blatant conflicts of interest. So-called advisors are asset gatherers employed by financial services companies. The full range of services of these companies is all-encompassing. Instead of just advising clients, the firms are also selling mutual funds and other products and trading in capital market securities,

BILL CARA / STOCK MARKET LITERACY

including their own securities positions and positions of different clients, all perhaps in the same transaction, without the client knowing. These impossible situations for the owners of capital are fully known to the world’s securities regulators. The governments understand because the regulators are agents of the governments that have enacted such ridiculous investment laws. So the governments and the regulators are both intimately knowledgeable of massive fraud due to such conflicts of interest. The charade continues despite the so-called (but worthless) financial industry protection mechanisms to prevent deceit and the theft of client monies. Fraud directly results from policies and decisions made by financial company executives, often done for their benefit. When confronted, the response is that lowly employees are the problem. The buck never stops with the industry leaders. Seldom are these financial services companies prosecuted, the ones with names such as Fidelity Advisor, BlackRock, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Schwab, T. Rowe Price, USAA, Vanguard, and Wells Fargo. And when they are, the fines amount to chump change. There is seldom a criminal prosecution of any person in executive authority at Humongous Banks & Brokers (HB&B). The source of the problem is undeniable. In addition to serving the public, these financial services companies are agents for and advisors to the US government and its central bank. Moreover, they are also advisors to other governments and central banks that are competitors. Being all things to all people has plagued the securities industry with conflicts-of-interest cancer. In the formal hearing of the Canadian Securities Administrators to determine electronic trading guidelines, I pitched a simple logical structure that my friend, the Ontario Securities Commission executive director, found incredulous. It was, in his view, not practical. I believe he acknowledged that banks had more power than the owners of capital. The regulators asked me to be the public’s sole representative for that formal hearing of securities regulators. I had recommended that an independent depository hold all securities of an owner, which would require a three-way transaction to settle. If the buyer needed a loan, there would be a four-way transaction involving a lender. The system should enable owners of capital to choose depositories and, if needed, lenders and broker agents. In other words, the principals should have complete control of their transactions rather than the Humongous Bank and Broker intermediaries. If a seller offers 1000 shares of a company at a price and the buyer meets the price with good funds, there is no need for an intermediary. With the system now in place, intermediaries control all transactions and have a clear advantage over all owners of capital. The system is medieval. The banks are the feudal lords, and the owners of capital are obligated to pay them fees.

Financial advice versus financial advisor

In every sense of the word medieval, the system is wrong. But my recommendation to terminate the feudal system was dismissed when even 20 years ago, electronic communications and software at the time made my request possible. Blockchain and newer technologies made it instantaneous and secure a few years later. Eliminating conflicts of interest is essential to market integrity. Still, I knew that financial services companies would never go for it because their “Know Your Customer” KYC rule was not just for self-protection but to know how to trade against the customer. Even the head of the country’s senior securities regulator acknowledged that “money talks” and banks are the ones making money. The system designed for self-dealing is a matter of fraud ready to happen. In cases where fraud on the public by a financial services company is suspected, the regulators issue a notice of investigation. The companies typically respond with a “no contest” response and pay a fine to end the matter. In the case of the largest financial services companies, individual penalties have ranged from millions of dollars to humongous multiple billions. Yet the parties who pay these fines are the actual shareholders of these financial services companies and subsequently the thousands of employees that management lays off to try to repair the shareholders’ damaged bottom line, which the managers do to stay in control. The wrongdoers never pay. Such is the situation in our capital markets. My formal session complaints to the chairpersons of all the major Canadian Provincial Securities Commissions caught the Canadian government’s attention. Subsequently, on behalf of the public, I was invited to address the Senate of Canada Banking Committee in a nationwide hearing. I am but one voice of many addressing these atrocious laws, rules, and regulations. But my arguments are all for naught because money talks. Big money embraces the political status quo and rejects activism. Sadly, the world’s Humongous Banks & Brokers (HB&B) have bought and paid for our elected representatives and law-making governments. The financial services industry giants now control the once-free capital market. As a direct consequence of the investment laws and regulations they have successfully lobbied for, the most egregious behavior of bankers has mainly gone unchecked, giving rise to the term Too Large to Fail (or prosecute). My colleague independent Buy-side Investment Advisors and Portfolio Managers are at the lowest end of the financial service food chain. We feel that Sell-side favoring securities laws and regulations must change. Ultimately, capital markets must return to the control of the owners of capital we serve solely in a fiduciary capacity. All Financial Advisors must be agents only, not principals in any role. Lawmakers around the world must get that message. As a minimum, every investor requires a broker to execute their trades. Some investors use electronic brokers, and some use full-service brokers.

BILL CARA / STOCK MARKET LITERACY

I have been employed by and have used many brokers in my investing career. A trusting personal relationship matters most if the investor requires more service than an electronic broker, where the quality and useability of the trading platform matter most. There is little difference when choosing among top-rated user platforms. Some companies charge a tad more or less, but overall the best firms are closely comparable. Fig. 15.1 Investopedia.com article ranks the best US online brokerage services and trading platforms. • Best Overall: Fidelity Investments • Best Broker for Beginners: TD Ameritrade • Best Broker for Mobile: TD Ameritrade • Best Broker for Options: tastyworks • Best Broker for Low Costs: Fidelity Investments • Best Broker for Advanced Trading: Interactive Brokers • Best Broker for International Trading: Interactive Brokers • Best Broker for ETFs: Charles Schwab

As an advanced trader who requires international trading services, I’m pleased that my broker, Interactive Brokers (IBKR), and their TWS platform rank number one. I have used IBKR for decades, later dropping my number two choice Charles Schwab, which I found to be excellent but redundant as their international trading service is lacking. Bottom line: Securities law does not require a person who invests or trades in securities to have a Financial Advisor. A broker/agent is necessary, whether an electronic broker or a full-service broker who is a licensed salesperson. Neither is a Registered Investment Advisor who is a fiduciary manager of an investor’s wealth, required by law, at all times, under all circumstances, to act in the client’s best interest. Bankers, brokers, and newsletter writers are businesspersons who sell financial services for profit. It is impossible to be a fiduciary to the people you sell to. I extended this chapter to new investors who want to trade securities on a level playing field within clear guidelines. Nothing’s perfect, and improvements are slow because everything is political. However, if my concerns continue to be ignored by lawmakers, the entire system will eventually collapse. In the interim, the best the public can do is ignore the problems and stick to learning and practicing good investing and trading. That is the message I want readers to take away from this book.

CHAP TE R 16

Automated advice A recent development in securities trading is a financial technology called a Robo-Advisor. Securities regulators missed the opportunity of calling them Robo-Brokers. Still, that complaint is part of why I have always spoken, blogged, and made presentations in securities industry-related hearings in opposition to what I refer to as Humongous Bank and Broker. HB&B is a business enterprise that has taken control of the stock market away from the owners of capital. This seizure happened because banks have long lobbied to and now control our securities regulators, whose motto is to serve and protect independent investors. The Robo-Advisor is just one more commercial service masquerading as Financial Advisor. Financial technology, called Fintech, has produced many changes in the financial services industry, some good and some bad, for a couple of decades. Examples of fintech applications include Robo-banking with ATMs, Robo-advisors, payments apps, peer-to-peer (P2P) lending apps, investment apps, and crypto apps. Before I start to discuss Robo-Advisors, some background may be helpful. While drafting this book in 2022, the capital markets have suffered significant declines from recent highs, and the personal financial services marketplace worldwide is a mess. Look at the typical mutual fund performance results. Their Investment Managers are underperforming, and these financial services firms are destroying client wealth. But the problems for investors, for the most part, are not due to traditional investing processes but to the fact that the S&P 500 first-half 2022 performance is the worst in 100 years. Robo-advisors have not helped. Neither do Robo-banking ATMs help bank account owners in a recession. I attribute market problems partly to inflation, economic growth issues due to the Covid-19 pandemic, and the Russian invasion of Ukraine, all self-correcting, but also to interventionist issues that are bad and getting worse. I am not concerned about self-correcting markets. However, the politicization of the market by interventionists is a different matter. Interventionists are capital market players who have and continually seek power and control over the people’s assets. I refer to the privately-owned Central Banks, their customer-facing Commercial Banks and Investment Bank divisions, and a new type of ETF manager.

BILL CARA / STOCK MARKET LITERACY

For years, these privately owned commercial organizations have been intervening in capital markets with policies, programmed trading operations, and traders designed, integrated, and operating to make their profits, which come at a substantial cost to the rest of us. These Interventionists who have been telling us that passively managed (i.e., indexed) Exchange Traded Funds are what we need are now directing us to a type of ETF that has become highly controversial. ETF managers now have political agendas like Climate Change and Environmental, Social, and Governance (ESG). These are the same people who turned personal banking services into another fintech product, the ATM. The loss of customer independence and opposition to Humongous Bank and Broker is palpable. My views on HB&B not always doing the right thing for the customer are well known. My February 27, 2008, article and another one on May 26, 2008, outlined the issues. Shortly after Seeking Alpha and the Wall Street Journal widely published my opinions through 2006-2008, the US equity market collapsed because of banker deceit, which caused the global financial system to fail. Since 2008, the financial services industry has treated me as a pariah for daring to speak out. Internet searches of my articles, which had been top-rated until then, suddenly could not be accessed as if I had disappeared. This chart is proof that my warnings to the public were timely. HB&B people who today hold total power and control over capital markets would like independent, freedom-seeking, truthful writing to disappear. Because the financial services industry had been poorly serving the owners of capital in 2008, a new financial service called Robo-Advisory sprung up. They claimed it would create market efficiencies. So immediately following the collapse of the global financial system, the same HB&B organizations and small fintech companies began to use their computers to offer what they called Robo-advice tied directly to their Exchange Traded Funds (ETFs). A dozen years later, because of the power of HB&B marketing, Robo-Advisors and ETFs gained a significant and growing share of the $42 trillion global equity market. By 2Q2022, the ETF market has assets totaling about $12 trillion, and the Robo segment is about $1.8 trillion. But Robo-Advisors are growing market share at a +25% CAGR which is many times faster than the global equity and ETF markets. If you have not heard by now, the Robo-Advisor industry defines itself as a low-cost, online wealth management service that provides automated, algorithm-based portfolio management services without using human investment advisors and financial planners. At least, that is their message. But we know it’s another tool to pool and control people’s funds.

Automated advice

When I looked into it initially, I discovered that Robo-Advisors and the higher-cost traditional human advisors and financial planners were using similar software to support their services to clients. The only real difference I could see is that most Robo firms do not get involved in certain aspects of wealth management, like advising or doing client taxes, retirement, or estate planning. The capital owner may not require these additional services in any event. By 2016, Schwab Intelligent Portfolios, Wealthfront, and Betterment.com were the Robo industry leaders in gathering assets in the USA. Other industry names at the time were: FutureAdvisor, Personal Capital, Financial Guard, Nutmeg.com, SigFig, WiseBanyan, AssetBuilder, Blooom, Covestor, Edelman Financial, FlexScore, Folio Investing, Hedgeable, LearnVest, MarketRiders, Motif Investing, Motley Fool Wealth Management, RebalanceIRA, and Vanguard VPAS. Soon, some of those Robo-Advisory services failed, and banks bought some. What are the reasons for choosing a Robo-Advisor? Robo-Advisory, the industry says, is well suited for the following people: • Investors like Generation X and Y or entrepreneurs who are comfortable utilizing online tools. They are used to researching online and managing without needing or wanting human interaction. • Those who want to delegate some or all of their portfolio management to a professional team. The investor may not have the time to manage assets personally or doesn’t want to worry about it. • Those who have not yet accumulated enough assets to meet the account minimums traditional financial advisors require. When an investor is just starting to develop a nest egg. • For those whose financial situation is simple. On the flip side of the equation, they say, Robo-Advisors are likely not well-suited for the following people: • Individuals who want involvement in the investing or trading process. • Individuals who need personal relationship support during prolonged downturns in markets. • Individuals who need financial advisory related to retirement or saving for a house or car. • Individuals who must pay off credit card debt or build contingency funds before investing. There are now hybrid services. Some Robo-Advisors have found relationships with traditional financial planning and wealth management firms for clients needing comprehensive assistance. That’s where the big umbrella of HB&B comes in.

BILL CARA / STOCK MARKET LITERACY

To help compete with the Robo-Advisors, some traditional advisory firms have built better technology to help scale their businesses and reduce account minimums and charges. Using other people’s money, HB&B has the funds to “build better technology,” so you know where this is going.

My response The Robo industry in its present form is not a revolution, as the industry claims, but merely an evolution in the bank-controlled financial services industry. Banks moved from tellers to cash machines and from mutual funds to ETFs and are now organizing customers into ETFs or investments that banks control and exploit using their programmed trading models. Based on their description, almost none of these Robo firms are true investment advisors. As I understand it, their actual service as financial or investment advisers is negligible. These Robo firms do not protect investor capital from significant market downturns by choosing and sticking with mainly passively managed instruments like ETFs. Ask the account owners who used them in January 2016, February 2020, and June 2022 if you doubt me. Most Robo-industry clients watched as their account value dropped by -20% or more in a couple of weeks. According to research from Parameter Insights, the use of Robo-Advisors dropped from 27.7% of US investors in 2021 to 20.9% in 2022. The fact is that when markets drop, so does the value of the assets administrated or managed by HB&B, whether those funds are administrated or managed in ETFs, Mutual Funds, or by Robo-technology. For proof, let’s look at the performance of the Mutual Fund managers of HB&B for the week ending June 10, 2022. In my weekly analysis of 944 Mutual Funds offered by a dozen prominent US Humongous Bank & Broker members, only 15 (1.59%) were winners that week. For the week ending September 16, 2022, only 12 (1.27%) were winners. The biggest losers in my June report, with zero winners, were Vanguard (0 for 201 funds), T Rowe Price (0 for 130), Wells Fargo (0 for 54), Merrill Lynch (0 for 60), Schwab (0 for 32), USAA (0 for 32), and ING (0 for 13). Five firms outperformed — if you can call it that: Fidelity (7 winners of 117 funds), JP Morgan (3 winners of 67), Goldman Sachs (3 winners of 110), Morgan Stanley (1 winner of 45), and BlackRock (1 winner of 83). At least they had some winners. Not many, but some. The September report shows the biggest losers: Vanguard 0 for 201, T Rowe Price 0 for 130, Fidelity 0 for 117, Merrill Lynch 0 for 60, Wells Fargo 0 for 54, Morgan Stanley 0 for 45, USAA 0 for 32, and ING 0 for 13. The winners were also big losers: JP Morgan had 8 winners of 67, BlackRock 2 of 83, Goldman Sachs 1 of 110, and Schwab 1 of 32. The performance of these mutual funds is before fees and expenses. There is no excuse for HB&B performance. These mutual funds cover all asset classes, all parts of the world, and the full range of Value, Growth, and Income, as well as Large-, Mid-, and Small-Cap profiles. Yet, they couldn’t find winners.

Automated advice

Would their Financial Advisors – sorry, salespersons – admit it? Do you think their Robo-advisors would do better? But you can rest assured that they will blame it on the Robo-Advisor because that’s a technology, not a human. Same thing with a bank teller versus the ATM. Suppose there is an error. Which one gets blamed? ETFs and Mutual Funds are poor risk management tools because these pooled funds invest in some “bad” companies as well as “good” companies and some “bad” stocks” as well as “good” ones. An ETF, I believe, is a tool for interventionists and entrepreneurs who are pouring billions of dollars into technology designed to exploit the dumbed-down millions of investors who are relying on them. This process is classic financial engineering in the hands of a few people like BlackRock’s Larry Fink, who now have unacceptable control over capital market prices. Ultimately, investment execution will drive the Robo industry development — or its demise — because people want performance. It’s what they need. I believe that in seeking superior results from ETFs and Robo-Advisors that trade them, investors are looking in the worst place possible. A Robo-Advisor is, in fact, not an Advisor. It’s an Administrative Assistant. Robo-Advisor clients today are paying primarily for administrative systems and services. The Robo industry today is little more than a financial dating service. Most firms limit investors to selecting passively managed ETFs rather than allowing the client to invest in individual stocks. Robo costs are low, but ETF costs (Management Expense Ratio) are an added cost. In addition, some Robo firms do not offer tax-advantaged accounts, and most need venture capital to survive, and many will not. The more substantial firms will soon acquire the weaker ones, which means the banks will quickly own them all. The Robo industry is a competition between Venture Capitalists to back the Robo-Advisory firms that can grow Assets Under Management (AUM) the fastest, intending to sell out to Humongous Bank & Broker. Another severe deficiency in the Robo business model is that, as noted, they are essentially specialized financial services that offer the same back-office service in a marketplace quickly becoming competitive. Soon, as I say, the Venture Capitalists who control them will sell the Robo winners (the ones that have gathered the most AUM) to HB&B names like BlackRock, and HB&B will then look at their new automated service as merely an extra marketing channel. The hybrid model (i.e., combining the Robo firm with a financial planning service) is deficient because most people do not require sophisticated tax, estate, or retirement planning. Those who do require specialized financial services already have personal relationships with such providers and, if not, can easily find a list of independent specialists. Others with limited assets can turn to banks and specialized financial services companies for a full range of planning services.

BILL CARA / STOCK MARKET LITERACY

Regarding investing in liquid instruments, most people know if they need capital growth or income from their capital. If not, a simple questionnaire will help the DIY investor create their risk profile. A Robo firm is unnecessary for that. Bottom line: Robo-Advisors will succeed or fail, like all advisors, on their success in meeting the performance needs of their clients. Because of the reasons given here, I cannot see how that is possible with Robo-Advisor software. Venture capitalists have funded all Robo-Advisors as asset-gathering vehicles. The VC exit strategy is always to sell to an acquisitor. These firms will ultimately end up under the control of HB&B, which presently trades its capital against the Robo customer and will buy those accounts.

C H A P T E R 17

Corporate filings Regulatory filings of all issuers include news releases and financial summaries, and the most important one is the Management Discussion & Analysis. The MD&A is a quarterly report of the business conditions, operating results, and financial risks, as stated by executive management. Unless you are an institutional analyst, you are unlikely to read the multi-pages of these reports for any large-cap company. Even for the smallest companies, the amount and detail of the data and information are overwhelming for most investors. But, if you are going to invest and not just trade, you must get to know the companies and obtain a framework for risk. Because of the homework involved in reading an MD&A every quarter for every holding, independent investors must keep the number of holdings to a minimum. Nevertheless, the information you need is comprehensive and well laid out. After I wrote the original Lessons from the Trader Wizard in 2007, the world changed dramatically. The global financial system collapsed in 2008, and central banks, with the help of new government legislation, soon flooded the banking system with new money the likes of which the world had never seen. In just one year, 2008, the US money supply doubled from $848 billion in January to $1.671 trillion in December. On just one day that year, November 28, the US Treasury and Fed announced $800 billion in funding to re-open credit markets. Much of that new money designated for lending programs went into private equity that invested in high-risk small and innovative companies that were intent on building new mousetraps and catering to new interests. Bank-connected investors seized new opportunities such as the Internet of Things, robotics and artificial intelligence, lithium-ion, hydrogen, cleantech, genomics and biotech, hallucinogenic drugs like cannabis and psilocybin, blockchain-based cryptocurrencies, Non Fungible Tokens (NFTs), and the Metaverse. The winners were essentially new billionaire entrepreneurs and their venture capitalist funders. Alternative investments in new industries appealed to youths and others eager to change old systems failing to keep up with the world’s needs. That meant a vast increase in new problems for lawmakers and regulators, involving risks for investors.

BILL CARA / STOCK MARKET LITERACY

The one consistent factor facing investors was the need to understand capital risk with the small high-risk companies that chose to go public. A greater need had developed for the public to read the quarter-yearly corporate regulatory filings required of all securities issuers. An essential filing is the MD&A. Wiki describes the Management Discussion & Analysis document like this: MD&A typically describes the corporation’s liquidity position, capital resources, results of its operations, underlying causes of material changes in financial statement items (such as asset impairment and restructuring charges), events of unusual or infrequent nature (such as mergers and acquisitions or share buybacks), positive and negative trends, effects of inflation, domestic and international market risks, and significant uncertainties. Investors are in the business of pricing risk, and management must explain those risks every quarter. The law requires facts in these documents to support all public securities promotion. Every corporation in business and finance is materially affected by corporate, industry, and macroeconomic data, which we address in this book. Investors need to read the MD&As to understand the companies whose stocks they trade. Anyone with funds can buy a price without understanding the data, but you cannot invest. Every company owned by public shareholders must engage independent Auditors to render an opinion on whether their Financial Summaries are presented fairly, in all material respects, per the financial reporting framework. However, an auditor’s report is typically an extremely brief opinion only and, I believe, should be reviewed if only for the smallest and riskiest of companies. But the financial summaries contain the information investors need. However, the companies’ figures in these financial summaries can never tell the whole story. It would help if you listened directly to management and industry analysts who are interviewing management. Fortunately, that is not a difficult task. Unless an investor’s time horizon is to trade for minutes or days, the MD&A is where I recommend getting a big-picture understanding of the companies whose stock they own. Because management is representing company-produced facts and opinions for the record that could be subject to a regulatory, civil, or criminal complaint and legal action, the public can expect to rely on them. The MD&A is a “must” reading as the only genuinely reliable-worthy document. However, they are long and complex, and most investors today lack time, so they prefer to hit the lazy button by listening to salespeople and talking heads in the media, many of whom are grifters or shills for somebody. The problem is that the regulated Sell-side of the Financial Services industry tells its stories loosely based on information published in the company data and MD&A, but with their slant. Promoters then stretch the truth. So, investors on the Buy-side need legitimacy in the details on which to base their decisions. They could try to make this task easier by following links to an example company’s latest SEC-filed MD&A report.

Corporate filings

First, for all companies whose stock trades in the United States, go to the website of the US Securities & Exchange Commission EDGAR tab. EDGAR is an acronym for the SEC Electronic Data Gathering, Analysis, and Retrieval system. An almost identical system in Canada from the Canadian Securities Administrators is called SEDAR, which stands for the System for Electronic Document Analysis and Retrieval. You want to read the most currently filed data via this link to US company filed data. The entire MD&A contains an incredible amount of detail. Still, investors only need to briefly review the contents to conclude whether management seems on the right track and to see if their description of their company’s strengths, weaknesses, opportunities, and threats aligns with yours. Let’s say you are looking into the solar energy industry. In that case, First Solar (NASD: FSLR) is a big player, so enter “First Solar” in the window. There is a list of many filed items, but you want the First Solar Quarterly Filing at this link. Item 2 is Management’s Discussion and Analysis of Financial Condition and Results of Operations. In my case, in reading the First Solar MD&A, I agree that China’s massive production has been consistently lowering panel prices, which is impacting global market prices. Some companies have dealt with that challenge effectively, while others have not. For instance, I reported that SolarEdge (NASD: SEDG), a holding of mine when I did a review on 2016-09-04, was not doing a good job handling low-priced China competition at the time. First Solar had a stock price that reached $325 in 2008, dipping below $12 in June 2012, recovering a bit to $75 in 2014, and again earlier in 2016 at $38, so I decided that management was not dealing with the China problem they described. Regarding the solar industry, Oil price trends and cycles are a more significant factor in stock prices than management filings. This relationship with Oil helped the price of SEDG because in mid-year 2019, when Oil prices started to rise sharply, SEDG soared from about $50 to over $350 in 18 months. Bottom line: Whether an investment is for $10,000, $100,000, or millions, it pays to read the MD&A information before purchasing a stock. You’d be surprised by how much you can learn in just a matter of minutes, which is the knowledge that might save or make investors a lot of money.

CHAP TE R 18

Seasonality data There are times when the trend and cycle price patterns of stocks, industries, and sectors are predictable. Companies experience seasonal changes in employment, inventory building, natural resources drilling, or fishing, for example, due to the seasons, weather conditions, school vacation periods, or cultural festivities. Predictably prices may be caused by fluctuating demand and supply among investors. Businesses and investors that best understand and deal with Seasonality tend to be more profitable. Originally published at billcara.com on Oct 28, 2009, and edited on April 10, 2022 Bill Cara Every day in these pages, I speak of cycles. Thirty years ago, my mentor, the late Ian Notley, taught me that equity prices are materially affected by the laws of nature. Out of respect, I often quote Ecclesiastes 3, “To everything, there is a season and a time to every purpose under the heaven….” So I was surprised when a schoolteacher asked me, “Could you comment on this for my students and me regarding seasonal investing?” Immediately I turned to the latest annual Stock Trader’s Almanac for suitable quotes about seasonality. Yale Hirsch founded this publication in 1968. On the front cover of his 2009 edition is a quote from William O’Neil, Chairman & Founder, Investors Business Daily: “Historical price patterns continue to work because human nature doesn’t change ….” The Almanac editors Jeffery Hirsch and Yale Hirsch have published seasonality trends since 1968. Nobody does it better. Here are some quotes from the 2009 Almanac: We discovered that while stocks do indeed fluctuate, they do so in well-defined, often predictable patterns. These patterns result too frequently to be the result of chance or coincidence. How else do we explain since 1950, practically all gains in the market were made during November through April compared to almost nothing from May through October?

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Seasonalit y data

October: • Known as jinx month with crashes in 1929 and 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, and Friday the 13th in 1989. • Yet “October is a “bear killer” and turned the tide in 11 post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, and 2002. • First October Dow top in 2007, 20-year 1097 Crash anniversary -2.6%. • Worst six months of the year-end with October. • Best DOW, S&P, and NASDAQ month in the last 15 years. • October is a great time to buy. • Big October gains five years 1999-2003 after an atrocious September. November: • #1 S&P month and #3 on Dow since 1950, #2 on NASDAQ since 1971. • Start of the “Best Six Months” of the year, NASDAQ’s Eight Months and Best Three. • Day before and after Thanksgiving Day combined, only 11 losses in 56 years. • Week before Thanksgiving Dow up 15 of last 15. • Dow down only 3 Novembers in the last 14 post-election years, S&P down 4. November, December, and January Year’s Best Three-Month Span A 1968 Merrill Lynch study showed that buying seven industry groups and sectors around September or October and selling in the first few months of 1954-1964 tripled the gains of holding them for ten years. The Almanac extended this study to create the Sector Index Seasonality Strategy Calendar. Today, you can track seasonality in long-term data (2003-2022) at StockCharts.com. Percentage bullishness is shown in various tables at StockCharts.com and reflects a bullish historical trading pattern that favors the period from September-October through MarchApril-May. Fig. 18.1 Sector and Industry Seasonality Seasonality–Banking – October through May

$BKX

Seasonality–Broker-Dealer – October through March

$XBD

Seasonality–XCI Computer Tech – November through February

XCI

Seasonality–Sr Goldminers – October through May

GDX

Seasonality–Healthcare Providers – October through March

IHF

Seasonality–Materials – November through May

XLB

Seasonality–Semiconductor – October through March

$SOX

Seasonality–Transports – October through March

$TRAN

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Although it may not be the latest year’s version, many public libraries carry the Stock Trader’s Almanac, a helpful guide to seasonality. For a holiday gift, it’s a good one. Similarly, you might try The Little Book of Stock Market cycles by Jeffery A. Hirsch. In 2013, accessed in this link, StockCharts.com founder Chip Anderson wrote a blog on seasonality. Seasonality patterns in the stock market are not like clockwork. Most cycles are not precise like, say, a lunar cycle. They are more like Punxsutawney Phil, who may or may not see his shadow on February 2, or a woman’s period, which may be early, late, or missing, but a cyclical pattern. Many stock market timing systems evolve around cycles, including one of the most popular, the Halloween Indicator, better known by the saying “Sell in May and go away” – until Halloween. Seasonality is an exciting subject but lacks the precision most investors require as an essential basis for trading real money. Many investment experts believe that some ETFs and the media take the concept too far. For instance, my mentor Ian Notley once told his students about the analyst who opined the best time to buy a beer stock was before the summer. Then he held up charts of two beer stocks with similar price patterns. But he said (back in the early nineteen-eighties when the point was relevant) the one was Budweiser and the other Fosters, and both charts were quite similar. But, when spring in the US, it’s fall in Australia, where at that point, Fosters was not selling most of its beer. Bottom line: Using common sense, a student of the market should take the time to understand the seasonality concept. There are often excellent reasons investors favor certain industry groups and specific companies in the market during certain times. For example, a mining company forced by winter conditions to stop drilling its flagship project cannot publish news that typically builds investor and trader interest.

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CHAP TE R 19

Market study 1: advance-decline data This chapter starts a series of profiles that many investors consider in their assessment of the big picture before they dig deeper into the necessary data to review when considering an investment in individual stocks. The Advance-Decline line of the broad market is an indicator of market sentiment. If the market sentiment is toxic and not showing signs of going Bullish, then stocks face resistance. During intense Bear phases, the smart move is to stand aside until the negative sentiment reverses. If you are satisfied that the low prices of the shares are below intrinsic value and you want to buy to average down or start a new position priced well below the three-month average, then you buy into weakness on extreme down days. Market Sentiment is a reference to the Bullishness and Bearishness of market prices. The Indicator that best shows Market Sentiment is the Advance-Decline Line (or A/D line). A/D is a ratio of the number of stocks on the exchange, or the trade volume, usually for one day, that has advanced versus declined, expressed as a percentage. The chart from StockCharts.com in this link shows how closely the Advance-Decline line tracks the Nasdaq Composite Index. When the percentage of rising issues declines while the index is still growing, this condition, called Divergence, shows investors that the Bull Trend may be terminating and a Bear Trend starting. The following table of A/D data charts from StockCharts.com covers the major GICS Sector ETFs. The charts should be viewed in monthly or weekly time frames over one or two-year periods to show how the ETF cycle bottom follows after the A-D line reaches -100 and follows a cycle high after the A-D line hits 100.

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BILL CARA / STOCK MARKET LITERACY

Fig. 19.1 Broad Market Advance-Decline Indices by Number Advance-Decline Indices

Symbol

AMEX - Advance-Decline Issues (Intraday)

$AMAD

AMEX - Issues Advancing (Intraday)

$AMADV

AMEX - Advance-Decline Volume (Intraday)

$AMUD

AMEX - Volume Advancing (Intraday)

$AMUPV

AMEX - Advance-Decline Issues (Weekly)

$AMADW

AMEX - Issues Advancing (Weekly)

$AMADVW

DJIA Advance-Decline Percent (EOD)

$DOWADP

DJIA Volume Advance-Decline Percent (EOD)

$DOWUDP

Dow Transports Advance-Decline Percent (EOD)

$DJTADP

Dow Transports Volume Advance-Decline Percent (EOD)

$DJTUDP

Dow Utilities Advance-Decline Percent (EOD)

$DJUADP

Dow Utilities Volume Advance-Decline Percent (EOD)

$DJUUDP

Nasdaq - Advance-Decline Issues

$NAAD

Nasdaq - Advance-Decline Issues (Weekly)

$NAADW

Nasdaq - Advance-Decline Volume

$NAUD

Nasdaq - Issues Advancing

$NAADV

Nasdaq - Issues Advancing (Weekly)

$NAADVW

Nasdaq - Volume Advancing

$NAUPV

Fig. 19.2 Broad Market Advance-Decline Indices by Percent Nasdaq 100 Advance-Decline Percent (EOD)

$NDXADP

Nasdaq 100 Volume Advance-Decline Percent (EOD)

$NDXUDP

S&P 1500 Advance-Decline Percent (EOD)

$SUPADP

S&P 1500 Volume Advance-Decline Percent (EOD)

$SUPUDP

S&P 400 Advance-Decline Percent (EOD)

$MIDADP

S&P 400 Volume Advance-Decline Percent (EOD)

$MIDUDP

S&P 500 Advance-Decline Percent (EOD)

$SPXADP

S&P 500 Volume Adv-Decline Percent (EOD)

$SPXUDP

S&P 600 Advance-Decline Percent (EOD)

$SMLADP

S&P 600 Volume Advance-Decline Percent (EOD)

$SMLUDP

104

M ark e t s tudy 1: advance - d ecline data

Sector Analysis is vital because market prices tell investors whether a GICS industry group is expanding or contracting in the economy. Fig. 19.3 Sector Advance-Decline Indices by Percent SPDR Energy Advance-Decline Percent (EOD)

GICS 10

$XLEADP

SPDR Energy Volume Advance-Decline Percent (EOD)

GICS 10

$XLEUDP

SPDR Materials Advance-Decline Percent (EOD)

GICS 15

$XLBADP

SPDR Materials Volume Advance-Decline Percent (EOD)

GICS 15

$XLBUDP

SPDR Industrial Advance-Decline Percent (EOD)

GICS 20

$XLIADP

SPDR Industrial Volume Advance-Decline Percent (EOD)

GICS 20

$XLIUDP

SPDR Consumer Discretionary Advance-Decline Percent (EOD)

GICS 25

$XLYADP

SPDR Consumer Discretionary Volume Advance-Decline Percent (EOD)

GICS 25

$XLYUDP

SPDR Consumer Staples Advance-Decline Percent (EOD)

GICS 30

$XLPADP

SPDR Consumer Staples Volume Advance-Decline Percent (EOD)

GICS 30

$XLPUDP

SPDR Health Care Advance-Decline Percent (EOD)

GICS 35

$XLVADP

SPDR Health Care Volume Advance-Decline Percent (EOD)

GICS 35

$XLVUDP

SPDR Financial Advance-Decline Percent (EOD)

GICS 40

$XLFADP

SPDR Financial Volume Advance-Decline Percent (EOD)

GICS 40

$XLFUDP

SPDR Technology Advance-Decline Percent (EOD)

GICS 45

$XLKADP

SPDR Technology Volume Advance-Decline Percent (EOD)

GICS 45

$XLKUDP

SPDR S&P Telecom Advance-Decline Percent (EOD)

GICS 50

$XTLADP

SPDR S&P Telecom Volume Advance-Decline Percent (EOD)

GICS 50

$XTLUDP

SPDR Utilities Advance-Decline Percent (EOD)

GICS 55

$XLUADP

SPDR Utilities Volume Advance-Decline Percent (EOD)

GICS 55

$XLUUDP

SPDR Real Estate Advance-Decline Percent (EOD)

GICS 60

$XLREADP

SPDR Real Estate Volume Advance-Decline Percent (EOD)

GICS 60

$XLREUDP

Bottom line: The time to buy is during a cycle bottoming cycle in the advance-decline line in a sector of a company you are targeting. You can combine this analytical study with a review of the Bullish Percent. The Bullish Percent Indexes for all the Sector Indexes and the Gold Miners are available daily at StockCharts.com. On August 17, 2022, the Bullish Percent Index for Goldminers, as shown in the Senior and Junior Gold Miners industry, available at StockCharts, was 10.34, which reflects an Accumulation Zone (chapter 77).

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CHAPTER 20

Market study 2: moving average data The Moving Average (MA) is perhaps the most straightforward and frequently used calculation in Technical Analysis is the Moving Average (MA). Average measures smooth data such as Prices, Volumes, and Costs that are fluctuating so that it’s easier to spot trends. Trend Analysis predicts future prices based on the idea that prior price motion is likelier than not to continue. Investors use the 50-day MA to determine the short-term trend and the 200-day MA for the long-term trend. The key here is that investors always try to keep long positions on the right side of a rising trend, i.e., above it, and short positions below a falling trend. Moving Averages have been used for years to indicate essential support and resistance levels. Investors usually use 50-, 150-, and 200-day Moving Averages. Investors also use the calculations for Weekly and Monthly data, but typically these are Daily data calculations. Many investors and financial media use MA data more than I do. However, in Lesson 64, I discussed the Moving Average Convergence-Divergence (MACD) Indicator, which is the gap between MAs of different duration. I learned MACD as Moving Average Departure. It is a Momentum Oscillator that quickly became one of my favorite tools. As explained earlier in the book, Momentum Investing is a trading strategy to keep positions on the right side of the trend. Some MA-based indicators use an Exponential Moving Average (EMA) rather than the Simple Moving Average (SMA). Note that some charts are for the numbers in the index that are higher than the MA. Others are for the percentage of the total stocks in that index that are higher than the MA.

106

Market study 2: moving average data

Fig. 20.1 Indices of stocks that are over their Moving Averages Moving Average Study

Index

Symbol

S&P 500 Percent of Stocks Over 50-Day Moving Average (EOD)

S&P500

$SPXA50R

S&P 500 Percent of Stocks Over 150-Day Moving Average (EOD)

S&P500

$SPXA150R

S&P 500 Percent of Stocks Over 200-Day Moving Average (EOD)

S&P500

$SPXA200R

S&P 500 Stocks Over 50-Day Moving Average (EOD)

S&P500

$SPXA50

S&P 500 Stocks Over 150-Day Moving Average (EOD)

S&P500

$SPXA150

S&P 500 Stocks Over 200-Day Moving Average (EOD)

S&P500

$SPXA200

Nasdaq Percent of Stocks Over 50-Day Moving Average (EOD)

Nasdaq

$NAA50R

Nasdaq Percent of Stocks Over 150 Day Moving Average (EOD)

Nasdaq

$NAA150R

Nasdaq Percent of Stocks Over 200-Day Moving Average (EOD)

Nasdaq

$NAA200R

Nasdaq Stocks Over 50-Day Moving Average (EOD)

Nasdaq

$NAA50

Nasdaq Stocks Over 150-Day Moving Average (EOD)

Nasdaq

$NAA150

Nasdaq Stocks Over 200-Day Moving Average (EOD)

Nasdaq

$NAA200

Dow Jones Industrials Average Percent of Stocks Over 50 DMA (EOD)

DJIA

$DOWA50R

Dow Jones Industrials Average Percent of Stocks Over 150 DMA (EOD)

DJIA

$DOWA150R

Dow Jones Industrials Average Percent of Stocks Over 200 DMA (EOD)

DJIA

$DOWA200R

Dow Jones Industrials Average Stocks Over 50 DMA (EOD)

DJIA

$DOWA50

Dow Jones Industrials Average Stocks Over 150 DMA (EOD)

DJIA

$DOWA150

Dow Jones Industrials Average Stocks Over 200 DMA (EOD)

DJIA

$DOWA200

Nasdaq 100 Index Percent of Stocks Over 50-Day Moving Average (EOD) NDX

$NDXA50R

Nasdaq 100 Index Percent of Stocks Over 150 Day Moving Average (EOD) NDX

$NDXA150R

Nasdaq 100 Index Percent of Stocks Over 200 Day Moving Average (EOD) NDX

$NDXA200R

Nasdaq 100 Index Stocks Over 50-Day Moving Average (EOD)

NDX

$NDXA50

Nasdaq 100 Index Stocks Over 150 Day Moving Average (EOD)

NDX

$NDXA50R

Nasdaq 100 Index Stocks Over 200-Day Moving Average (EOD)

NDX

$NDXA200

S&P 100 Index Percent of Stocks Over 50-Day Moving Average (EOD)

OEX

$OEXA50R

S&P 100 Index Percent of Stocks Over 150 Day Moving Average (EOD)

OEX

$OEXA150R

S&P 100 Index Percent of Stocks Over 200 Day Moving Average (EOD)

OEX

$OEXA200R

S&P 100 Index Stocks Over 50-Day Moving Average (EOD)

OEX

$OEXA50

S&P 100 Index Stocks Over 150-Day Moving Average (EOD)

OEX

$OEXA150

S&P 100 Index Stocks Over 200-Day Moving Average (EOD)

OEX

$OEXA200

The percentage of stocks that are over their Moving Averages is an indicator of bullishness. By clicking on the symbol link, you will get the up-to-date chart from StockCharts.com.

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BILL CARA / STOCK MARKET LITERACY

This discussion will refer to the information provided in other chapters, e.g., chapter 60 (Technical Support and Resistance), as an indication of how investors and traders apply the knowledge obtained in this book. Investors use Moving Average as a simple tool for identifying areas of technical support and resistance for a stock. Such analysis may not be as relevant for an individual stock as for peer group studies. Operating and financial conditions can change at any time for a company, causing investors to buy or sell its stock. Some of those times are when the price is near a popular Moving Average, like 50 or 200 days. But this circumstance is improbable to happen to all companies in a peer group simultaneously. When prices of a peer group intersect one of these popular Moving Averages, the cause is likely to have industry or sub-industry implications, possibly due to market sentiment. Investors in a company must understand the nuances of price dynamics at these times. To study market sentiment regarding the broad market and sectors and Gold Miners, investors should monitor the Bullish Percent Indexes at StockCharts.com. First, click on the Market Summary tab and then go to the bottom of the list to Bullish Percent Indexes, of which there are almost two dozen studies. There are equal buyers and sellers when a $BP index is 50. When the index gets to around ten, as it is for Gold Miners ($BPGDM) in July-August 2022, the investor sentiment is unusually negative, and there are many sellers and not many buyers. That’s when the Gold Miners industry group is over-sold and in the Accumulation Zone. When it’s over 85, as it is at this time for Energy ($BPENER), the sector is overbought and in the Distribution Zone. Stocks can remain in an Accumulation or Distribution Zone for a lengthy period before a Trade Alert or Buy/Sell Signal happens, so the Zone is only meant to be a time to start monitoring stocks on a watchlist. Bottom line: Depending on an investor’s time horizon, whether short or long, staying long in a position above the 50-day or 200-day Simple Moving Average is their most important objective. However, be wary of whipsaws when the price gets close to the Moving Average line. That is an excellent time to check Technical Support.

108

CHAPTER 21

Market study 3: PE ratio data This chapter discusses the Price-Earnings Ratio, the most popular metric used by investors to study a company’s value but with numerous limitations as a valuation tool. It is inferior to looking at total earnings in any case. The PE Ratio equals the Per Share Stock Price divided by the EPS. Price-to-Earnings Ratio (PER) is the technical metric most investors use to study a company’s value. The use of Earnings by itself would be more helpful but would also require more work to do. EPS is much easier to display and, therefore, more popular. The best use of PER is to compare one company to another or to an industry benchmark, which is Relative Value, but not to determine other forms of value such as Absolute Value, Fair Value, Intrinsic Value, and Net Book Value, and not what investors are currently willing to pay, which is Market Value PE has numerous limitations as a Valuation tool. For one, PE does not reflect intangible assets that can materially impact a company’s valuation. This limitation is one of the main reasons why average PE Ratios vary from industry to industry and in industries within sectors. Moreover, market conditions such as Interest rates, commodity prices, and macroeconomic factors impact the market prices of companies and industries differently; therefore, PE Ratios are varied. Within the Oil & Gas Exploration and Development industry, for example, when Oil prices are low and interest rates high, then earnings are low. In those conditions, companies reduce their capital expenditures and dividends, which impact valuation. Many investors who consider ‘Value’ Stocks will seek companies that trade with low Priceto-Earnings Growth (PEG). PEG Ratio = the Price divided by Earnings Per Share, then by the EPS Growth Rate. The EPS Growth Rate could use a historical growth figure or an estimated future growth figure, both of which are ok if used consistently. Still, the essential factor in making decisions is that investors always consider the future. Investors considering ‘Growth’ Stocks will seek companies that trade with high growth in Earnings Per Share (EPS) based on a five-year outlook by investment analysts. Again, the essential factor in investor decision-making is the future.

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Another factor in using EPS in decision-making is the need to use Fully Diluted Shares in the calculation. The New York University (NYU) Stern School of Business offers an excellent Price-Earnings Ratio database for 94 industries (incorrectly calling them sectors). You can download the excel file with this link: https://www.stern.nyu.edu/~adamodar/pc/datasets/pedata.xls If you are looking for low PEG (as of January 2022), then NYU Stern ranked these 15 industries best. Fig. 21.1 Price-Earnings Ratios for various industries

Industry Name

No. of firms

Current Trailing Forward PE PE PE

Aggregate Mkt Cap/ Net Income (all firms)

Broadcasting

7.05

8.83

24.99

24.44

8.19

164.52%

0.05

Chemical (Basic)

34.82

14.70

9.09

34.04

7.35

37.89%

0.19

Real Estate (Development)

270.18

494.99

711.91

135.58

9.92

49.00%

0.20

Chemical (Diversified)

16.16

11.75

11.59

11.85

11.03

42.10%

0.26

Homebuilding

17.59

13.48

10.43

11.02

9.61

36.88%

0.26

Metals & Mining

48.19

49.01

20.82

113.95

16.11

53.86%

0.30

Fin Service Nonbank/Insurance

223

42.92

21.86

21.55

18.93

8.97

24.72%

0.36

Trucking

39.29

20.71

20.79

22.84

61.90%

0.37

Steel

27.55

13.18

8.52

5.46

14.14%

0.39

Auto Parts

397.01

30.43

17.35

18.61

45.48%

0.41

Brokerage/Investment Banking 31

108.53

12.62

12.82

19.31

10.94

24.03%

0.46

Recreation

46.62

28.21

20.58

1393.05

19.50

39.64%

0.49

Oil/Gas (Integrated)

22.84

9.88

22.84

45.00%

0.51

Shipbuilding & Marine

17.27

10.48

9.65

6.50

12.00%

0.54

Insurance (General)

40.72

54.65

29.71

266.12

14.87

25.85%

0.58

110

Aggregate Mkt Cap/ TTM Expected Income (profit- growth in EPS able firms) - next 5 years

PEG Ratio

Market study 3: pe r atio data

Fig. 21.2 A selection of high-rated industries based on 5-year EPS Growth

Forward PE

Aggregate Mkt Cap/ Net Income (all firms)

Aggregate Mkt Cap/ TTM Expected Income (profit- growth in EPS able firms) - next 5 years

PEG Ratio

8.83

24.99

24.44

8.19

164.52%

0.05

39.29

20.71

20.79

22.84

61.90%

0.37

48.19

49.01

20.82

113.95

16.11

53.86%

0.30

Hotel/Gaming

637.19

78.21

52.39

68.84

53.25%

1.29

Real Estate (Development)

270.18

494.99

711.91

135.58

9.92

49.00%

0.20

Air Transport

7.47

3708.23

26.36

99.75

45.60%

2.19

Auto Parts

397.01

30.43

17.35

18.61

45.48%

0.41

Oil/Gas (Integrated)

22.84

9.88

22.84

45.00%

0.51

Retail (Online)

50.28

144.26

113.80

72.57

43.94

44.52%

0.99

Chemical (Diversified)

16.16

11.75

11.59

11.85

11.03

42.10%

0.26

Recreation

46.62

28.21

20.58

1393.05

19.50

39.64%

0.49

Chemical (Basic)

34.82

14.70

9.09

34.04

7.35

37.89%

0.19

Homebuilding

17.59

13.48

10.43

11.02

9.61

36.88%

0.26

Semiconductor

113.32

582.02

66.29

40.88

29.70

30.14%

0.99

Construction Supplies

29.10

724.66

20.55

34.62

21.43

29.65%

0.72

Industry Name

Number of firms

Current PE

Trailing PE

Broadcasting

7.05

Trucking

Metals & Mining

For investors looking for high expected 5-year EPS Growth (as of January 2022), NYU Stern ranked these 15 industries best. FinViz.com publishes the Price-to-Earnings Ratios (PER) for Sectors.

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Fig. 21.3 PE data and other important fundamentals data for each GICS sector, dated May 4, 2022, by FinViz.com

Sector Name GICS

Market Cap ($Billion) PE

Fwd PE PEG

P/S

P/B

P/FCF

Sales past 5Y

EPS past 5Y

EPS next 5Y

Energy

3,782

13.37

8.74

1.03

1.05

17.19 10.73% 40.02% 12.95%

Basic Materials

2,195

10.52

12.15

0.89

1.56

2.20

21.11 12.38% 29.82% 11.87%

Industrials

4,713

21.61

15.66

1.47

1.88

3.82

31.49 5.76%

Consumer Cyclical

6,782

24.57

13.32

1.01

3.15

40.92 21.39% 29.59% 24.29%

Consumer Defensive

3,900

24.59

21.89

2.79

1.44

3.98

50.41 4.68%

Healthcare 35

7,477

23.01

15.00

2.27

2.11

3.46

27.95 15.10% 15.98% 10.14%

Financial

9,435

12.03

12.59

1.14

2.76

0.01

16.16 7.29%

Technology 45

13,112

28.38

20.39

1.83

4.71

6.86

32.79 15.08% 23.07% 15.55%

Communication Serv 50

6,681

18.93

15.65

1.11

2.85

2.84

31.75 19.64% 19.54% 17.12%

Utilities

1,499

27.43

3.54

3.87

1.89

1.45

87.06 5.50%

1.93%

Real Estate

1,786

30.45

29.58

2.96

5.61

2.45

60.98 9.85%

10.76% 10.27%

16.43% 14.65%

8.19%

8.82%

20.07% 10.55%

7.10%

By clicking on this FinViz.com link, the current data will show for this table. By clicking on the Sector Name link, the current data will show for that Sector. Note that as of May 2022, Basic Materials had the lowest Price-to-Earnings Growth ratio due to the sell-off of the Metals and Precious Metals since August 2020. Investors seeking Value stocks would start searching in that sector, followed by Consumer Cyclical and Energy. But Value would not be seen in the Utilities or Real Estate sectors as Fed Quantitative Tightening policy, and higher rates were starting to happen. Those sectors are always relatively debt-heavy, and as they roll over debt, their new obligations become more expensive, which will exert downward pressure on future valuations. Take note that the Consumer Cyclical sector EPS Growth for the next five years is highest, followed by the Communication Services and Technology sectors; investors would be seeking Growth stocks there and not in the Utilities or Consumer Defensive sectors. As of May 2022, note that EPS has been much higher for the past five years than analysts anticipate for the next five. So, analysts are expecting slower growth. The trailing 5-year EPS for all sectors is + 19.6%, whereas the Forward 5-year EPS data is much lower at +13.0%. This lower figure would be caused by the end of eleven years of Fed Quantitative Easing and the expectation that the Fed will tighten and raise rates in future years, which started in 2Q2022.

112

Market study 3: pe r atio data

The more experience you have as an investor, the more you will learn to stop listening to carefully crafted narratives from those encouraging you to buy Sectors and Industries that they no longer want. Remember, they are the wholesalers, and you are considered retail. As in any major purchase, learn to pay wholesale, which is possible by studying only relevant and material data. Bottom line: The study of a company’s total earnings is much more critical than EPS.

113

CHAPTER 22

Market study 4: yield data This chapter is vital to investors seeking income from invested capital. They can choose between dividend or interest returns, both of which are known as Yield. The Yield may be fixed as in the case of bonds or fluctuating as it does for stocks. Investors may sell a stock or bond any time, so the investor is interested in the Total Return Yield. That’s when the dividends or interest received is added to the price increase or contraction from the point of purchase (i.e., the market price less cost basis). After selling the instrument, the Realized Yield (aka Net Realized Return) is the Total Return divided by the amount invested and shown as a percentage. Investors who seek income via interest from Bonds, Bond ETFs or Real-Estate must understand the Yield Curve. A Yield Curve is a plot of interest rates of equal credit and different maturities, such as the spread between the US Treasury 10-year vs. 2-year or 3-month. The yield curve indicates strengthening or weakening in the US economy. In the case of Stocks, comparing high-yielding instruments must be compared to averageyielding instruments, noting that the prices and the dividend payments are in constant flux. Investors who seek income via dividends from companies can at any time start their search by checking on two blue-chip sources: 1. Dogs of the Dow, which are the ten highest dividend yields of the Dow 30, and 2. Dividend Aristocrats of the Standard & Poor 500 Index Companies, those with a track record of paying and raising dividends for 25 or more consecutive years. Fig. 22.1 Yield-related market indices DJIA 10 High-Yield Dividend

$MUT

DJIA High Yield Select 10 Index

S&P 500 Dividend-Aristocrats

$SPHYDA

S&P 500 High Yield Dividend Aristocrats Index

10-year – 2-Year Yield Spread

$YC2YR

Yield Curve – 2-Year Bonds (EOD)

10-year – 3-Month Yield Spread

$YC3MO

Yield Curve – 3-Month Bonds (EOD)

Income-seeking investors should monitor the indices in Fig. 22.1 and search for articles like this, which discuss the highest dividend-paying stocks. New investors often have misconceptions about high dividend-yielding stocks, which articles like this discuss. The truth is that the highest-yielding stocks are not always the best, and dividend stocks are not always safe. Conditions of the market dictate. 114

Market study 4: yield data

During a severe market sell-off, yields soar, which may appear quite attractive for income purposes; however, companies often cut dividends to conserve cash when falling equity prices indicate a possible economic recession and challenging business conditions soon. Any study of yield, which is a static number used to compare one instrument to another, should also monitor the result of a single instrument over different maturities, known as a yield curve. Fig. 22.2 A healthy yield curve for US Treasury Securities, dated Dec. 12, 2015

In a healthy, growing economy, there is a steep yield curve. In rare times like 2006-7 and as recently as April 2022, the yield spread of the US 10-2-year Treasury is an inverted curve, i.e., goes negative. That’s when short-dated bonds pay more interest than long-dated bonds, which would not happen in a healthy economy. Usually, it’s riskier to hold a bond longer than shorter. In that event, anticipate an economic recession shortly. A recession did occur in 2Q2022. Fig. 22.3 A graph that depicts an ‘unhealthy’ downward-sloping yield curve

115

BILL CARA / STOCK MARKET LITERACY

Fig. 22.4 A point in 3Q2019 when the spread barely went negative, and then in 1H2022, it did.

Bottom line: Decisions on income-yielding investments require understanding how the returns differ with different risk and how it changes over time. US Treasury Bond yield spreads can identify the risk of economic recession, during which times the trend uses Bearish for most stocks.

116

CHAPTER 23

Market study 5: volume data This chapter discusses the importance of Average Daily Trading Volume (ADTV). Investors should investigate Daily Volume much higher or lower than the Average Volume over a week or a month. There may be material changes in microeconomic data like corporate fundamentals or macroeconomic data. Also, low ADTV may not meet an investor’s liquidity needs. The daily Volume of a stock is the number of shares traded on an exchange in one day between the open and close. Turnover is the value exchanged. More critical than market volume studies, which reflect the condition of the market, are volume studies of individual stocks. Investors invest in stocks, not the broad market. Substantial volume changes require investors to review the earnings reports calendar, economic calendar, and news releases for possible breaking news. Investing.com offers upto-date information on earnings and financial reports. The best volume indicator is the difference between the volume in a day and its Average Daily Volume because substantial charges reflect breaking news that is important enough to investigate if the investor holds the stock. Investors must investigate Volume linked to abnormal price changes. The higher the Volume with a substantial change in price over the same period implies a significant reason for the change, which the investor must examine. Thinly traded stocks, i.e., a small average volume of trading, give rise to liquidity issues that may affect the investor, particularly those who may need to raise cash at any time. Volume speaks to liquidity. Illiquidity, which is the opposite of liquidity, will give the active investor poor fills due to wide bid-ask spreads and can also lead to extreme price moves and increased volatility when buying or selling larger-than-average numbers of shares. So, illiquidity is a clear disadvantage to investors needing to enter large orders. As well as capital gains considerations, the greater the volatility, the greater the capital risk, so investors should understand stock price volatility. This study leads the investor to understand risk avoidance and reduction concepts.

117

BILL CARA / STOCK MARKET LITERACY

Fig. 23.1 Broad market volume-based indices NYSE

NYSE - Total Volume

!TOVOLNYA

NYSE

NYSE - Volume Advancing

!UVOLNYA

NYSE

NYSE - Volume Declining

!DVOLNYA

NYSE Amex

AMEX - Total Volume

$AMTV

NYSE Amex

AMEX - Volume Advancing

$AMUPV

NYSE Amex

AMEX - Volume Declining

$AMDNV

NYSE Amex

AMEX - Volume Unchanged

$AMUDU

Nasdaq

Nasdaq - Total Volume

$NATV

Nasdaq

Nasdaq - Volume Advancing

$NAUPV

Nasdaq

Nasdaq - Volume Declining

$NADNV

The table in Fig. 23.1 includes links to current StockCharts.com charts of exchange Volume. The FinViz.com screener, under the Performance tab, offers daily updates on Average Daily Volume and the Daily Volume percent difference, which they call Relative Volume. This data is updated daily for all ~8500 stocks and ETFs traded on NYSE and Nasdaq. Investors can see the most significant changes in the market by sorting on the Relative Volume column. When writing this part of the book (August 25, 2022), Vaccitech plc, a UK biotech company, exhibited a remarkable Relative Volume of 3669.51. Its volume on Nasdaq was 28,714,583 shares versus its Average Daily Volume of just 7,830. There was a price gain of +34.84% on the day. There had been breaking news. Investors also use Money Flow Index (MFI), which adds price to volume, and perhaps is a superior strategical application of Volume as an indicator. This article is relevant. Bottom line: In the context of overall stock exchange trading, Volume is a Sentiment Indicator. Market Sentiment is vital to investors as there is a saying in markets that a rising tide lifts all boats and vice versa. In the context of an individual stock, a substantial change in Relative Volume indicates breaking news or at least company developments that owners of the stock must investigate.

118

CHAPTER 24

Market index study 6: bearish data Market prices fluctuate between periods characterized by bullishness (i.e., relates to greed) and bearishness (i.e., speaks of fear). Still, because the Sell-side financial services industry dominates the market conversation, investors seldom hear a negative word like bearish. Investors must learn to deal with reality. The Sell-side even reinforces the positive mindset by using incorrect words to define negatives. For example: • Financial TV uses the word laggard to describe Dow 30 stocks that have dropped in price when they should be called losers. • Even though prices may have been falling for months, Wall Street will not say it’s a Bear Market until the major market indexes have fallen by 20%, which is an arbitrary number. Indeed, the world economy is continuously growing except for the occasional recession and a rare depression. So, investors are typically bullish. The words Bear, Bearishness, and Bear Market make people uncomfortable. But there are times investors must think bearishly. There is always a turning point to every significant price increase in capital markets when investor bullishness turns to bearishness. It’s always the same process at work. There is a Stock Cycle of four phases: 1. Wholesale Accumulation 2. Markup 3. Distribution to Retail 4. Markdown Bearishness is never permanent; otherwise, the Wholesalers of Wall Street would all be out of business.

119

BILL CARA / STOCK MARKET LITERACY

Fig. 24.1 Four phases of a stock cycle: Accumulation, Retail Markup, Distribution, Retail Markdown

Fear always drives bearishness to a point where it becomes unsustainable. Later, common sense prevails. Future expectations change. Investors start to look for opportunities. Then, following the Market Cycle bottom, the emotional pendulum swings to greed. The following Indices, available from Yahoo Finance, are studied to help assess Market Cycle bottoms, the point in the Market Cycle where bearishness terminates as sellers get tired and buyers get inspired, and where bullishness weakens and bearishness begins. Fig. 24.2 Indicators of Market Bearishness Total Market

AAII Bears

!AAIIBEAR

Total Market

Cumulative Cash Flow Bear + MM

!CCFBEARM

Total Market

Cumulative Net Cash Flow Bear Funds

!CCFLBEAR

Total Market

Net Cash Flow Rydex Bear Index Funds

!NCFLBEARI

Total Market

Total Assets Rydex Bear Index Funds

!ASETBEARI

Total Market

Wall Street Sentiment Bears

!FFBEAR

Nasdaq

Nasdaq - Eliades Sign of the Bear (EOD)

!BINAESOB

Toronto Exchange

TSE - Eliades Sign of the Bear (EOD)

!BITOESOB

Market Sentiment is a powerful force in capital markets. When a stock price is pushed or pulled

to extremes, investors must carefully monitor it because a reversal of sentiment is the best time to buy and sell. Bottom line: In the 1H2022, the US broad market indexes have been bearish. The S&P Index has fallen more than 20% from a recent top, a classic definition of a Bear Market. But there is always an end to bearishness. For over 100 years, the market has been primarily bullish, so we should study the data that tells investors when the market is extremely bearish and make decisions to buy stocks that are appropriate for the times and best meet our needs and interests.

120

CHAPTER 25

Market index study 7: bullish data For the majority of the time, the market is bullish. Prices are rising. But, because every share someone sells is bought by someone else, prices will increase until no one is prepared to pay the next higher price. Then, prices start to fall when sellers step in to protect their gains. Bullishness turns to bearishness. Market prices fluctuate between periods characterized by bullishness to bearishness (i.e., relates to fear), but usually, investors only hear the word bullish. A Bull phase is a period of rising prices, which is good because those are the times when investors most easily accomplish their capital growth objectives. But Bullishness after rising prices often leads to extreme upside momentum. That circumstance relates to greed. Greed drives investors to a point where the rising costs to new investors become untenable, which is called a bubble. There is a breaking point in every price bubble. The best opportunity to avoid capital loss is to make decisions to sell at extreme prices before the bubble pops, which happens to be when the investors are still buying. I call it selling into strength. The best opportunity for capital gain is to make decisions to buy at low prices, which happens when most investors have been selling. I call it buying into weakness.

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BILL CARA / STOCK MARKET LITERACY

A table of Bullish Indices is available from Yahoo Finance and StockCharts.com. Fig. 25.1 Indicators of Market Bullishness DJIA

DJIA Bullish Percent Index

$BPINDU

DJTA

DJTA Bullish Percent Index

$BPTRAN

SPX

S&P 500 Bullish Percent Index

$BPSPX

Nasdaq

Nasdaq Composite Bullish Percent Index

$BPCOMPQ

Nasdaq

Nasdaq 100 Bullish Percent Index

$BPNDX

OEX

S&P 100 Bullish Percent Index

$BPOEX

Sector 10

S&P Energy Sector Bullish Percent Index

$BPENER

Sector 15

S&P Materials Sector Bullish Percent Index

$BPMATE

Sector 20

S&P Industrials Sector Bullish Percent Index

$BPINDY

Sector 25

S&P Consumer Discretionary Bullish Percent Index

$BPDISC

Sector 30

S&P Consumer Staples Sector Bullish Percent Index

$BPSTAP

Sector 35

S&P Healthcare Sector Bullish Percent Index

$BPHEAL

Sector 40

S&P Financial Sector Bullish Percent Index

$BPFINA

Sector 45

S&P Technology Sector Bullish Percent Index

$BPINFO

Sector 50

S&P Telecom Services Sector Bullish Percent Index

$BPTELE

Sector 55

S&P Utilities Sector Bullish Percent Index

$BPUTIL

Gold

Gold Miners Bullish Percent Index

$BPGDM

Investors can study Bullish data to help assess the Market Cycle topping process. There are sector charts to look at because not all market sectors compete simultaneously as the broad market. Charts show that the more extreme the bullishness, the closer the market, sector, or industry is to the top. Studies in investor psychology show that it’s easier to buy than sell, even for astute investors, which is to say that investors should not wait for bearish data to convince them the time is right to sell. It might be too late to meet one’s investment objectives by then. As market prices get closer to a cycle top, you will hear the market cliché that “Bulls**t Baffles Brains.” Believe it. Common sense goes missing, which mostly happens as crowds act in concert. This natural phenomenon is a frequent criticism of Technical Analysis. One of the most popular investment books is Extraordinary Popular Delusions and the Madness of Crowds. In discussing behavior psychology, the author postulated that people, including investors, think and function as a crowd and go mad as a crowd. No other book speaks to investors more about the need for independent thinking.

122

Market inde x study 7: bullish data

Some would have you believe that independent thinking means contrarian thinking, but that is wrong. There is the wisdom of crowds, but the public is sometimes wrong, and the bigger the group that is wrong, the greater the loss of capital; investors must think independently to avoid the crowd’s mistakes. My mentor defined the market as people acting like people, and I had to think and act for myself because the crowd often gets misled. As investor relations and stock promotions become more sophisticated, and pretense and falsehoods replace truth and facts, people’s common sense becomes overwhelmed by the bad behavior of the crowd. Bottom line: Independent thinking requires patience when deviating from the crowd but is crucial to investor success. Studies of Bullishness require a more acute sense of market awareness than Bearishness. In an intense Bull phase, most traders think they are brilliant. Investors must be cautious at extremely bullish times. The book explains that selling is more challenging for investors than buying. But if everybody is buying, there will soon be a time when there are no more buyers, and that is when traders who are aware decide to sell.

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SECTION 3

Funds and Non-Stock Assets 26 The ETF 27 The Inverse ETF 28 Investing in Closed-end Funds 29 Investing in Mutual Funds 30 Investing in Bonds 31 Bond Yield or Dividend Yield 32 Currencies 33 Cryptocurrencies

124

CHAPTER 26

The ETF The ETF, which stands for Exchange Traded Fund, has been the most significant development in capital markets in recent years. I write a lot about the subject here, including my grave concerns. An ETF is a stock market construct to replace a Mutual Fund on account of large financial services companies, the ones I call Humongous Bank & Broker (HB&B), wanting to get daily access to what to them is dead capital in a Mutual Fund. ETFs are trading vehicles; they are not investments. Investors buy the shares of individual companies by studying corporate fundamentals and securities prices. That’s not possible with an ETF, so it’s not an investment. If you buy it, it’s a holding, a price that investors cannot analyze for risk because it’s a pooling of good, bad, and ugly companies that are represented in the market by good and bad stocks. There is no reason for an investor to buy bad and ugly. You don’t do it when shopping for essentials, so why do it with your investment capital? People do it because HB&B has brainwashed them, companies like BlackRock, and the significant Banks and Brokers on Wall Street, who make fees and most of their trading profits from their clients. This chapter discusses pooled funds, particularly the Exchange Traded Fund (ETF) and a type of ETF -- the Exchange Traded Note (ETN). The ETF, ETN, and Mutual Funds are all pooled funds that investment bankers have created with the stated objective of giving the investor access to more opportunities, and they say with less risk than investing in single stocks. ETFs are invested either in an index or directly in a basket of securities that may be equities, bonds, commodities, currencies, or other assets. The Fund may be Passively managed Index-related funds or Actively managed funds. An ETF does not have a term, trades like a stock, and is secured by securities. Dividends that are paid result in dividend income and not capital gain. Some dividend-paying ETFs pay monthly, but most pay quarterly. There are some ETFs that are leveraged and inverse. Similar to ETFs are Exchange Traded Notes (ETN). The problem is that most buyers of ETNs do not understand the ETN-ETF difference. ETNs are debt instruments secured only by the credit of the issuing financial services company. The company tracks a basket of securities like the ETF but does not buy and sell

125

BILL CARA / STOCK MARKET LITERACY

those securities and hence does not have tax-related issues until the holder sells the ETN. The ETN passively tracks an index of securities for a set time. It trades like an ETF with no dividend payments and a bond with no periodic interest payments. After paying management expenses, the remainder is paid to the investor at maturity. Gains or losses on payout are capital gains or losses for tax purposes. Wall Street created ETF and ETN securities to trade on a major stock exchange as alternative investment vehicles to Mutual Funds and Closed-End Funds. Most people know that a Mutual Fund does not trade on an exchange, but they do not know it is not a security. It’s a product created to enable pooled funds to be invested directly in assets or securities. The Mutual Fund is sold to an investor by a prospectus in units redeemable at the aggregated holdings’ Net Asset Value after the market closes each day. There are sales charges and investment management fees, and expense charges. Issuers of securities have also organized a unique type of security known as a Closed-End Fund that holds a basket of assets where the components could be stock, bond, or commodityrelated. Unlike an ETF, this is an Investment Holding Company. These instruments typically own a portfolio of company investments and trade at prices that usually fluctuate between discount and premium to the aggregate valuation of the underlying assets. For our purposes, now that we have explained the difference, we will refer to an ETN as an ETF.

The popularity of ETFs is growing, and Mutual Funds are declining. For many, ETFs play a role in their overall wealth management strategy. If you are interested in ETFs, you will receive a variety of opinions as to what factors are essential to your decision. These might be: 1. active or passive management, 2. recent returns, 3. brand of the issuer, 4. commission or commission-free, and 5. management expense charges. A report published in the Journal of Financial Planning indicates that registered investment advisor financial planning firms favor passive strategies and consider management costs called the Expense Ratio (ER) or Management Expense Ratio (MER). In contrast, representatives of Sell-side broker-dealers prefer to focus on recent returns. I’m afraid I have to disagree with that finding because financial planners are not investment advisors and do not wish to advise on returns, so they naturally focus on expenses. But, on the other hand, I agree that management fees can be excessive and should be considered. Collectively these intermediary fees cost investors billions of dollars annually. The value in return is highly debatable.

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T h e ETF

The findings of the Brown Brothers Harriman 9th Annual Global ETF Investor survey of 386 respondents are interesting. They discovered that the manager Expense Ratio is no longer the crucial factor that US-based advisors and institutions cite in choosing ETFs. The number one criterion on the Buy-side is now the brand of the ETF issuers, putting ER cost second. In third place, which jumped from sixth place, is trading liquidity. The brand is key to sales because ETFs are sold and not bought. People who buy ETFs are doing so to trade them and look first at popular brand names they trust. With investments, investors have specific needs and survey the whole market to find companies or assets that meet them. Nevertheless, if you want to buy any investment pool, you must be wary of administrator and investment manager costs, performance returns, and commission charges.

Pooled funds of any type may or may not be for you. To answer this question depends on your perspective. Are you in the Financial Services industry creating and selling Funds to investors or buying them for an investment account? Are you an investor or a trader? The sell-side is highly pleased because they are easy to sell, and the Assets Under Management (AUM) growth has been substantial. BlackRock, the biggest ETF manager, now has over US$10 trillion AUM. Vanguard Group, the second-largest issuer of ETFs, is also the largest issuer of Mutual Funds. Here is an important article: Vanguard ETFs vs. Vanguard Mutual Funds as ETFs and compared to Mutual Funds as created and sold by Vanguard. But during Bear market phases, ETF market risk is no different than single stock risk as ETF prices often collapse, dropping 20% or more in a week or two, and the owners become unhappy. Mutual Fund valuations are no different; however, the owner of a mutual fund has a longer-term investment perspective and tends to be less concerned with short-term valuation changes. For years, ETFs have been traded more actively in the market than individual company stocks. ETFs represent about 12% of equity assets in the US but 35-40% of total equity market notional volume traded, which proves that ETFs are of interest to traders, including excessive risk-takers and not single stock investors. Another fact is that more ETFs quietly cease to operate than people understand. A few years ago, I looked into this phenomenon. At the end of 2016, Morningstar counted 1,934 US ETFs with $2.4 trillion in total assets. That was up from 1,770 ETFs and $2 trillion in total assets at the end of 2015 and 1,648 ETFs with $1.9 trillion in total assets the previous year. However, this [2016-09-06] article in Investment News provides some surprising information that ETFs were shutting down at a record clip. Some Financial Advisers saw this development as the natural evolution of a market saturated with too many funds. It was more likely that some ETFs were no longer attractive to investors, and some managers quit.

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Forty-one ETFs shut down in August 2016, and 11 more closed in September. That compared to 40 closings through the first seven months of the year. The article reported, “This kind of thing is long overdue because we need a really good healthy ETF cleansing,” said Paul Schatz, president of Heritage Capital Management. “We need a whole lot more to close because there are way too many ETFs out there,” he added. Theodore Feight, the owner of Creative Financial Design, attributed the picked-up pace of closings to a growing distaste for ETFs following the 2015 ‘flash crashes,’ which were a black eye for the ETF industry. “After they screwed up last summer, investors lost confidence because they figured it was a rigged investment,” Mr. Feight said. “I think people are still very upset about last August.” However, despite the occasional setback, the ETF growth phenomenon continued. By the summer of 2021, the US ETF market had grown to $6.6 trillion. By year-end, the total was $7.2 trillion. Globally, the ETF market was over $10 trillion. As of June 2022, there were about 2900 ETFs that traded in the US. The NYSE had 2,584 listed domestic and international companies, while the Nasdaq had 3,790. With the substantial decline in equity prices in 1H2022, the worst first half in the past 100, these values fell. ETFs and Mutual Funds were down as much as the S&P 500, which proves that risk diversification is a false marketing narrative. I will further suggest that Wall Street uses the ETF structure to drive prices down and lift them sometimes. They are profit-making organizations keen to exploit the public, including their clients.

ETFs are not as advertised There are attractive features to all pooled funds but also downsides that financial services companies are sometimes reluctant to disclose. For example, in mid-July 2022, the SEC approved five single-stock ETFs for leveraged long and short trading in the securities of these companies. The same practice has been in place since 2018 in Europe. So, Wall Street’s argument they created ETFs to eliminate single-stock risk is no longer valid. Another argument is that financial services companies created ETF securities as liquid alternatives to Mutual Fund products only after investors complained of high costs and bad mutual fund performance. At least, that is the ETF marketing narrative. In reality, there is no improvement in the long-term wealth improvement of an ETF over a Mutual Fund. If the average holding period of a Mutual Fund is applied to an ETF, the repetitive trading in the ETF will likely prove more costly. With trading mistakes, the average performance of an ETF-centric portfolio is probably lower. I think it’s more the case that people have been educated to seek liquidity as their top priority in a fast-paced world. But that’s where the more sophisticated traders of Wall Street are taking advantage of the less sophisticated public.

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As an investor, I am opposed to ETFs I agree with people’s needs for Mutual Funds, but not ETFs. Mutual Funds are effective devices for savers, much like owning a home. The reason for my opposition to ETFs is more fundamental to the principles of investing. Because the ETF is a Sell-side creation, and I represent the independent Buy-side, I urge investors to understand the different approaches to investing between Buy-side and Sellside. Investors need to understand the instruments they buy because the Sell-side does not always adequately explain them. In the absence of Fundamental Analysis, which is needed to measure a security’s intrinsic value, the main driver of ETF buys and sells in the market is Technical Analysis. But Technical Analysis of ETFs is not investing as the analysis does not enable investors to meet the standard of understanding intrinsic value. Therefore, I strongly recommend avoiding ETFs and sticking to individual stocks. Sell-side marketers disagree, so let’s examine the ETF features they sell. Exchange Traded Funds are replacing Mutual Funds for many reasons, mainly because they are easier to sell. Mutual Funds are not securities and cannot be traded during the day or shorted. They are investment products priced at the end of the day (EOD) Net Asset Value (NAV). For most investors, however, the extra liquidity is not a sufficient reason to sell the Mutual Fund and buy an ETF. Investors’ most significant problem with Mutual Funds lies in their costly sales commissions. Perhaps because of concerns over single stock risk, or maybe it’s the effective marketing by the fund managers, it’s a fact that most individual investors do trade pooled Funds on the market. I do not because I am an investor. There are readily available facilities to help me analyze companies and their stocks in detail, so I invest in the shares of companies. I do not trade the shares of a fund of multiple company securities where there is no way to study individual corporate fundamentals. As I see it, most people do not have the time or want to take the time to put in the work to study fundamentals. I think it’s important, so I do. Many people hold a portfolio of too many securities because they succumb to sales pressures, including the diversification pitch. Then they find they lack time to study all of them properly. Warren Buffett would tell you there is nothing wrong with holding a small portfolio of 4 to 6 stocks if that is all the time you have to monitor them. While there may be a time and place for ETFs, most experienced investors avoid them. None of the best investors of the modern era – people like Sir John Templeton, Warren Buffett, Peter Lynch, Carl Icahn, and Bill Ackman -- invest in ETFs. The reason should be apparent. An ETF is a basket of stocks. In every basket, there are some fundamentally weak companies. There are fundamentally sound companies that are in Bear phases. Why own Bad companies and Bad stocks? It’s that simple. 129

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I don’t see how any Index Fund can compete with individual stocks. We don’t buy a city; we buy a house there. The same principle applies to our weekly shopping. Buying indexes that contain stocks of bad and good companies and stocks in declining Price Cycles, on the wrong side of the Price Trend, would be like buying the first dozen bananas we find on the shelf in a retail store. We all know that every shopper carefully avoids terrible bananas. Besides, even the selection of bananas is personal. With bananas, some of us want them ready to eat, while others wish them not to be quite so ripe. So, why would an investor prefer the ETF when they could easily select only the good companies and the good stocks? In other words, why does a person who is a careful consumer act entirely differently as an investor? For this reason, I select only the companies I want and trade them when it’s timely. I use ETF and index data only for use in the decision-support analysis. And since our aim is capital growth or income, investors look for companies that offer Growth, Value, or Income. Investors seek those of the highest Quality. When they enter trades, they try to do so only on the right side of the Price Trend. Such simplicity is the Keep It Simple Stupid (KISS) investing method. For the individual who is short of expertise, time, or money to trade in securities the way professionals and experienced investors do, I recommend you stick with Mutual Funds and call it savings. If you want to learn to invest, consider only a small portfolio of stocks. Please get to know these companies and stick with them. With the knowledge gained from this book, you can buy on Trendline breakouts and sell on Trendline breakdowns. That is a straightforward and effective system. My dad was such an investor. He held only a few stocks. His were an auto manufacturer that made his car and the bank where he had an account, a diversified mining company where his golf partner was CFO, a steel company because he was a union man, and one or two more. He bought shares only when they were out of favor and sold when he thought the economy was going into recession, and money would be tight. He invested this way until his mid-eighties when his health failed. Every second day I visited Dad in the nursing home in his final year, and we talked about market cycles. He knew what he invested in, and ETFs were not for him.

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Bottom line: Re-capping my concerns about ETFs: Exchange Traded Funds are instruments marketed by large financial services companies to traders and not investors, as investors are interested in intrinsic value, and ETFs are merely market prices. In addition to the fact that ETFs are not appropriate for investors, my concerns are as follows: (1) pure trading is not how independent investors – the most successful investors -seek capital appreciation using the price discovery function of capital markets, (2) the indiscriminate trading in ETFs causes excessive and extreme broad market volatility, (3) 2x and 3x leveraged ETFs, which I cover in Chapter 27, are instruments for gamblers, most of whom exacerbate the leverage by trading on margin, (4) ETF traders are exploited by Wall Street’s use of computer bots, programmed algorithms, and high-frequency trading, in conjunction with manufactured narratives and paid media to deceive the independent investor, (5) self-serving interventionists like Humongous Bank & Broker promote them and then trade against the public, including their clients. ETFs trade in many countries. Some of these ETFs will be for domestic securities, and some will cover global or regional international markets. Fig. 26.1 Links to ETFs for all countries Argentina - ETFs

France - ETFs

Mauritius - ETFs

Singapore - ETFs

Australia - ETFs

Germany - ETFs

Mexico - ETFs

South Africa - ETFs

Austria - ETFs

Greece - ETFs

Netherlands - ETFs

South Korea - ETFs

Belgium - ETFs

Hong Kong - ETFs

New Zealand - ETFs

Spain - ETFs

Brazil - ETFs

Hungary - ETFs

Nigeria - ETFs

Sweden - ETFs

Bulgaria - ETFs

Iceland - ETFs

Norway - ETFs

Switzerland - ETFs

Canada - ETFs

India - ETFs

Pakistan - ETFs

Taiwan - ETFs

China - ETFs

Indonesia - ETFs

Peru - ETFs

Thailand - ETFs

Colombia - ETFs

Ireland - ETFs

Poland - ETFs

Turkey - ETFs

Croatia - ETFs

Israel - ETFs

Portugal - ETFs

UAE - ETFs

Denmark - ETFs

Italy - ETFs

Qatar - ETFs

UK - ETFs

Egypt - ETFs

Japan - ETFs

Romania - ETFs

US - ETFs

Euro Zone - ETFs

Kazakhstan - ETFs

Russia - ETFs

Vietnam - ETFs

Finland - ETFs

Malaysia - ETFs

Saudi Arabia - ETFs

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The inverse ETF An inverse ETF is an Exchange Traded Fund that trades on the basis that the instruments have short rather than long positions. Therefore, as most component instrument prices fall, the inverse ETF price increases, and vice versa. Knowing that most investors and traders are reluctant to short-sell securities, the Financial Services industry decided to make it easy by enabling them to go long a short position. The desired effect is to create more volatility to be taken advantage of by Wall Street’s massive investment in computer trading technology and its ability to manipulate investor emotions via published narratives. Managing market sentiment is an example of what I refer to as the unfair advantage where financial services companies should be serving customers as agents, not trading against them. I have trouble believing that Inverse ETFs have anything to do with investing. ETF managers do not short the related stocks but “trade financial instruments including futures contracts that, in combination, their advisors believe should produce daily returns consistent with the fund’s investment objective.” The stage-set ETF prices cause real investors to change their opinions of underlying securities and related decisions. So cause-and-effect has to do with technology and not the valuation of a company’s securities. This gambit is trickery, hard to prove, and hence overlooked by regulators. Investing.com presents up-to-date prices, Market Cap, and Total Assets Under Administration by clicking on the Fund name link. By clicking on the Ticker link, you will find the current StockCharts.com chart.

The leading Inverse ETFs Fig. 27.1 The 24 top-volume Inverse ETFs that trade in New York

Inverse Exchange Traded Fund

Ticker

Performance Inverse 1- Year to Ratio 2022-04-10

ProShares UltraPro Short QQQ

SQQQ

-33.09%

25.25%

5.70%

6.70%

ProShares Short S&P500

-11.90%

4.33%

1.37%

1.51%

ProShares Short QQQ

PSQ

-9.03%

10.71%

1.92%

2.18%

ProShares UltraShort S&P500

SDS

-23.38%

7.99%

2.68%

2.97%

132

Performance YTD 2022 to 04-10

Volatility Weekly

Volatility Monthly

T h e i n v e r s e ETF

ProShares UltraPro Short S&P500

SPXU

-35.04%

9.88%

4.02%

4.52%

ProShares Short VIX Short-Term Futures ETF

SVXY

0.5x

9.70%

-10.92%

3.22%

2.86%

Direxion Daily Small Cap Bear 3X Shares

TZA

1.34%

25.67%

5.88%

5.97%

Direxion Daily S&P 500 Bear 3X Shares SPXS

-35.15%

10.38%

4.04%

4.51%

Direxion Daily 20+ Year Treasury Bear 3X Shares

TMV

8.16%

54.30%

3.84%

4.09%

ProShares UltraShort QQQ

QID

-20.09%

19.50%

3.78%

4.41%

ProShares Short Russell2000

RWM

4.37%

9.77%

1.92%

1.94%

ProShares UltraPro Short Dow30

SDOW

-22.46%

7.92%

3.83%

3.93%

Direxion Daily S&P 500 Bear 1X Shares SPDN

-11.52%

4.41%

1.30%

1.44%

ProShares Short Dow30

DOG

-7.01%

3.09%

1.24%

1.27%

Direxion Daily Semiconductor Bear 3X Shares

SOXS

-42.26%

43.51%

8.17%

9.92%

ProShares UltraPro Short Russell2000

SRTY

0.25%

25.64%

5.83%

5.94%

ProShares UltraShort Bloomberg Crude Oil

SCO

-79.85%

-56.71%

6.73%

6.29%

ProShares Short 7-10 Year Treasury

TBX

6.05%

9.52%

0.50%

0.52%

Direxion Daily CSI 300 China A Share Bear 1X

CHAD

3.19%

14.60%

0.59%

1.06%

Direxion Daily Financial Bear 3X Shares

FAZ

-37.98%

1.36%

4.21%

4.94%

ProShares Short High Yield

SJB

0.38%

6.02%

0.80%

ProShares UltraShort Russell2000

TWM

4.85%

18.62%

3.85%

3.92%

ProShares UltraShort Dow30

DXD

-14.05%

6.03%

2.53%

2.58%

Direxion Daily Technology Bear 3X Shares

TECS

-42.30%

26.46%

5.58%

6.66%

For some investors, Inverse ETFs might play a role in risk management by hedging against falling prices. However, if bought during a rising market trend and held too long, the performance result could be a disaster. Long-term charts of the 2x and 3x inverse leveraged ETFs show disappointing performance. For most investors, the key to using a 2x or 3x Inverse ETF effectively is to hold it only for a week or less. The problem is the greed factor, which leads many buyers of leveraged ETFs to speculate or gamble. Fig. 27.2 Smaller Cap Inverse ETFs that trade in New York

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BILL CARA / STOCK MARKET LITERACY

Inverse Exchange Traded Fund

Ticker

Performance Inverse 1- Year to Ratio 2022-04-10

AdvisorShares Ranger Equity Bear ETF

HDGE

3.48%

3.61%

2.33%

2.05%

Direxion Daily S&P Oil&Gas Exp&Prod Bear 2X S

DRIP

-82.75%

-59.13%

7.54%

6.71%

MicroSectors FANG+ -3X Inv Leveraged ETN

FNGD

-24.09%

16.09%

8.40%

10.05%

Direxion Daily Jr GoldMiners Index Bear 2X Shs

JDST

-34.52%

-33.92%

6.40%

6.17%

Direxion Daily Gold Miners Index Bear 2X Shares

DUST

-44.91%

-41.18%

5.82%

5.61%

Direxion Daily S&P Biotech Bear 3X Shares

LABD

29.99%

31.51%

10.62%

12.15%

Direxion Daily FTSE China Bear 3X Shares

YANG

12.00%

-23.58%

5.50%

12.56%

ProShares Short MSCI EAFE

EFZ

-0.59%

6.47%

0.92%

1.08%

MicroSectors US Big Oil Index -3X Inverse ETNs

NRGD

-90.47%

-73.01%

8.79%

7.38%

Direxion Daily S&P 500 High Beta Bear 3X Shares

HIBS

-40.03%

6.66%

6.68%

7.59%

Direxion Daily 7-10 Year Treasury Bear 3X Shares

TYO

19.39%

31.17%

1.66%

AdvisorShares Dorsey Wright Short ETF

DWSH

-6.87%

0.71%

1.94%

2.12%

Direxion Daily MSCI Real Estate Bear 3X Shares

DRV

-54.55%

0.12%

4.89%

4.88%

Direxion Daily Energy Bear 2X Shares

ERY

-74.58%

-55.83%

5.49%

4.71%

Direxion Daily MSCI Emerg Mrkts Bear 3X Shares

EDZ

23.06%

12.76%

3.25%

4.66%

ProShares Short MSCI Emerging Markets EUM

9.92%

6.29%

1.04%

1.46%

Tuttle Capital Short Innovation ETF (Anti-ARK)

SARK

34.71%

5.13%

5.71%

ProShares UltraShort Silver

ZSL

-19.17%

-18.44%

3.79%

3.28%

Direxion Daily Cloud Computing Bear 2X Shares

CLDS

-0.59%

35.77%

3.13%

4.08%

ProShares UltraShort FTSE China 50

FXP

29.13%

-3.27%

3.47%

6.89%

ProShares UltraShort Oil & Gas

DUG

-74.28%

-54.62%

5.10%

4.43%

ProShares UltraShort MSCI Brazil Capped

BZQ

-50.11%

-48.72%

4.27%

4.24%

134

Performance YTD 2022 to 04-10

Volatility Weekly

Volatility Monthly

T h e i n v e r s e ETF

Inverse Exchange Traded Fund

Ticker

Performance Inverse 1- Year to Ratio 2022-04-10

Performance YTD 2022 to 04-10

Volatility Weekly

Volatility Monthly

Direxion Daily Dow Jones Internet Bear 3X

WEBS

34.34%

49.71%

8.65%

9.43%

ProShares UltraShort Nasdaq Biotechnology

BIS

-3.63%

13.66%

2.64%

3.84%

ProShares Short MidCap400

MYY

-3.16%

6.55%

1.02%

1.39%

ProShares UltraShort Financials

SKF

-24.27%

3.75%

2.17%

2.54%

ProShares UltraShort Real Estate

SRS

-35.23%

7.77%

2.80%

2.94%

ProShares Short FTSE Europe

EPV

-8.29%

12.71%

2.15%

2.62%

ProShares Short Real Estate

REK

-18.94%

4.32%

1.39%

1.42%

ProShares UltraPro Short MidCap400

SMDD

-16.39%

16.00%

3.39%

4.13%

ProShares Short Financials

SEF

-12.24%

2.15%

1.02%

1.21%

ProShares Decline of the Retail Store ETF

EMTY

-11.45%

3.32%

2.13%

1.76%

ProShares Short FTSE China 50

YXI

21.93%

3.66%

1.40%

2.98%

ProShares UltraShort MSCI Emerging Markets

EEV

17.82%

11.44%

1.73%

2.65%

ProShares UltraShort Technology

REW

-26.74%

22.41%

3.85%

4.41%

DB Gold Double Short ETN

DZZ

-23.49%

-12.83%

1.38%

2.03%

ProShares Short SmallCap600

SBB

-1.61%

8.02%

1.08%

1.22%

ProShares Short Oil & Gas

DDG

-47.36%

-31.84%

2.51%

2.63%

ProShares UltraShort MSCI Japan

EWV

18.14%

22.61%

1.59%

1.78%

MicroSectors US Big Banks -3X Inverse ETNs

BNKD

-33.45%

13.08%

4.96%

6.17%

ProShares UltraShort Semiconductors

SSG

-37.71%

26.42%

4.84%

6.09%

DB Gold Short ETN

DGZ

-14.96%

-5.38%

0.28%

0.55%

ProShares UltraShort SmallCap600

SDD

-6.49%

15.56%

2.09%

2.24%

ProShares UltraShort Industrials

SIJ

1.49%

18.55%

1.95%

1.94%

ProShares UltraShort MidCap400

MZZ

-7.92%

12.64%

0.75%

1.27%

ProShares UltraShort Health Care

RXD

-34.93%

-2.77%

2.07%

1.83%

ProShares UltraShort Basic Materials

SMN

-34.84%

-9.17%

2.16%

2.84%

ProShares UltraShort MSCI EAFE

EFU

-2.03%

14.29%

1.37%

1.97%

ProShares UltraShort Utilities

SDP

-36.98%

-15.99%

2.66%

2.17%

In Fig. 27.2, I linked these ETFs to the files at FinViz.com and charts at StockCharts.com. The ones at the bottom of the list have tiny market caps and Assets Under Administration (AUA).

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The Leveraged ETF Most Inverse ETFs are 2x and 3x Leveraged ETFs. The Financial Services industry understands that many investors own cash accounts only as they do not want to be leveraged on margin, which is a loan against the portfolio’s value. So, the industry first created the Inverse ETF, and then to attract the interest of the most aggressive of these investors, they introduced a leveraged ETF product, both long and short (i.e., inverse). As a result, most inverse ETFs are traded based on two or three times the value of a particular market index. The following illustration is a small selection of 2x and 3x Leveraged ETFs from over 200 leveraged ETFs. Fig. 27.3 A list of Volatile 2x and 3x Leveraged Bull and Bear ETFs that trade in New York Performance 1- Year to 2022-04-14

Performance YTD 2022 to Volatility 04-14 Weekly

Volatility Monthly

Leveraged Exchange Traded Fund

Ticker

Leverage Ratio

Direxion Daily Energy Bull 2X Shares

ERX

163.05%

103.41%

4.39%

Direxion Daily S&P Oil & Gas Exp & Prod Bull 2X Shs

GUSH 2x

196.24%

114.36%

5.27%

6.15%

Direxion Daily Junior Gold Miners Index Bull 2x Shs

JNUG

-6.99%

40.90%

5.85%

5.89%

Direxion Daily Gold Miners Index Bull 2x Shares

NUGT 2x

19.76%

56.06%

5.11%

5.35%

Direxion Daily Financial Bull 3X Shares

FAS

1.91%

-20.76%

5.00%

4.75%

MicroSectors FANG+™ Index 3X Leveraged ETN

FNGU 3x

-53.28%

-55.74%

8.34%

8.52%

Direxion Daily S&P Biotech Bull 3x Shares

LABU

-80.03%

-60.72%

10.71%

11.38%

Direxion Daily Semiconductor Bull 3x Shares

SOXL

-40.09%

-62.34%

8.74%

9.25%

Direxion Daily S&P 500 Bull 3X Shares

SPXL

9.84%

-24.24%

4.53%

4.11%

Direxion Daily Technology Bull 3X Shares

TECL

-7.93%

-44.81%

6.76%

6.19%

Direxion Daily Small Cap Bull 3X Shares

TNA

-39.39%

-32.76%

5.74%

5.70%

Leveraged ETFs may be used to capture capital gains in fast-moving markets but are also expensive in terms of the promoter’s management fees. If the buy and sell decisions are untimely, they might also be incredibly costly in capital losses.

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T h e i n v e r s e ETF

Fig. 27.4 Enormous cost of Leveraged ETFs illustrated

In Fig. 27.4 above, the unleveraged long Nasdaq QQQ ETF (green) and the 3x leveraged long Nasdaq TQQQ ETF (black) were up just over +50%. Compare that to the SQQQ (3x Inverse Nasdaq) (red), which wasn’t down by just over -50%. SQQQ plunged by -94% after three years (and -98% after five years). Investors should be aware that all Leveraged ETFs have “humongous” price decay, as shown in the previous illustration. Over three years, because of fees, TQQQ was not up 3x QQQ.

Who uses leveraged ETFs? Trading Leveraged ETFs is a massive challenge for unsophisticated traders. Many people believe that 2x and 3x leveraged ETFs are a form of gambling, while others think it is also the Financial Services industry’s capturing the public’s propensity for greed. I think the Financial Service industry’s largest corporations, with unlimited financial resources, designed leveraged ETFs to use profitably in trading against the Average Joe. Wall Street has multi-billion-dollar investments in sophisticated computer technology that, combined with their inside knowledge of the client accounts and the mindset of the owners of these accounts, is used to take unfair advantage of the retail client. If you want to gamble, go to the casino, where the house edge is typically 2.5% to 10%. The Wall Street rake on Leveraged ETFs is the opposite. It’s 90% to 97.5% for those who keep their money on the table.

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Single-Stock ETFs In mid-July 2022, the SEC approved eight leveraged and inverse Single-Stock ETFs for trading on Nasdaq. Europeans have traded such instruments since 2018. AXS Investments launched eight single-stock ETFs for Tesla Inc. (TSLA), Nvidia Inc. (NVDA), PayPal Inc. (PYPL), Nike Inc. (NKE), and Pfizer (PFE). Fig. 27.5 Single-Stock ETFs that trade in New York as of mid-July 2022 • AXS TSLA Bear Daily ETF (TSLQ) • AXS 1.25X NVDA Bear Daily ETF (NVDS) • AXS 1.5X PYPL Bear Daily ETF (PYPS) • AXS 1.5X PYPL Bull Daily ETF (PYPT) • AXS 2X NKE Bear Daily ETF (NKEQ) • AXS 2X NKE Bull Daily ETF (NKEL) • AXS 2X PFE Bear Daily ETF (PFES) • AXS 2X PFE Bull Daily ETF (PFEL)

As with most ETFs, the trader buys a computer-generated index, not a long or short investment in the stock. Note the volatility. European traders who use equity markets to roll the dice play the Airbus 3x long (3lar) or 3x short (3sar) on the Paris Exchange. https://www.investing.com/etfs/3lar-chart https://www.investing.com/etfs/3sar-chart All leveraged and inverse ETFs are costly to the trader. In cases where there are long-term charts available, long or short positions both decline over time because of the charges involved. So participants are urged to trade for short periods only actively. These instruments are not for long-term holds. Investing.com and StockCharts.com are excellent services for active traders. They offer the user a wide variety of Types of Charts, Overlays, Technical Indicators, and Parameters. I set up my charts with the features I use consistently. Depending on the level of service you purchase, from free to advanced levels, the time horizons can be Monthly, Weekly, and Daily, down to Hourly and Minutes. If you plan to trade leveraged and inverse ETFs, you will spend lots of time on minute bar charts. If you are not such a trader, avoid them. Bottom line: Investor beware. Anybody who studies the performance of Inverse and Leveraged ETFs will quickly see investors lose their capital. The Wall Street financial services firms that created them use them for profitable trading against their client.

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Investing in closed-end funds What differentiates a closed-end fund (CEF) from an open-end fund (aka mutual fund) is that the open-end fund trades in units of a pooled holding based on Net Asset Value (NAV) calculated daily. Unlike the open-end Mutual Fund, a closed-end fund is a corporation whose shares are bought and sold on a securities market, like any stock, including the Exchange Traded Fund (ETF), at the continuous bid and ask prices that have no direct link to NAV. But unlike an ETF, a closedend fund is an investment holding company managed as a business. Closed-end funds are investment companies. They are not like Exchange Traded Funds, i.e., ETFs. ETFs are pooled investment vehicles designed to track an index’s performance. In contrast, CEFs actively seek capital growth and achieve leverage via debt and preferred shares like any business corporation. On the other hand, ETFs cannot issue debt or preferred shares. Portfolio transparency is relatively high with an ETF and not as high with a Closed-End Fund. In the case of the listed investment holding companies, the price of the shares changes during the day based on the supply and demand for the shares and not the asset value of the underlying holdings. A closed-end fund typically trades at a discount to the net asset value of its holdings, which could make it more attractive to some investors. This article on Closed-End Funds might be helpful to new investors. I like closed-end funds depending on the quality of management, liquidity, and purchase discount. I want them in the form of country funds, gold funds, and other specialized funds for the diversification factor, similar to mutual funds. Mostly I like being able to buy them on an exchange like the NYSE for a cheap discount-broker commission of less than one cent per share.

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Fig. 28.1 Closed-End Fund Companies that trade in New York

Closed-End Fund (CEF) Company

Country

Market Cap ($ Billion)

DNP Select Income Fund Inc.

USA

4.06

DNP

Eaton Vance Tax-Managed Global Diversified Equity Income Fund

USA

2.88

EXG

Cohen & Steers Infrastructure Fund, Inc

USA

2.72

UTF

Eaton Vance Tax-Managed Diversified Equity Income Fund

USA

2.10

ETY

Nuveen Municipal Value Fund, Inc.

USA

1.93

NUV

BlackRock Science and Technology Trust

USA

1.40

BST

Eaton Vance Limited Duration Income Fund

USA

1.36

EVV

Virtus Dividend, Interest & Premium Strategy Fund

USA

1.33

NFJ

Kayne Anderson Energy Infrastructure Fund, Inc.

USA

1.16

KYN

Aberdeen Asia-Pacific Income Fund, Inc.

USA

0.83

FAX

Ticker

I prefer using limit orders but occasionally want to buy in a second or less through a market order when I see an offered quantity and price that I seek. That way, the broker can’t use the time float or the knowledge of my market order to their advantage. This situation often happens with thinly traded CEFs. In the above illustration, the current comprehensive file from Investing.com will appear by clicking on the name. And by clicking on the ticker symbol, the current FinViz.com snapshot will appear. Unfortunately, analysts do not do ratings on Closed-End Funds, Mutual Funds, or ETFs. To monitor US Equity-related Closed-End Fund investments, use the FinViz.com program. This link of the largest market cap Closed-End Fund companies investing in Equity that trade on the NYSE and Nasdaq will get you started, and from there, the Performance tab will show the performance over various periods. To monitor the Closed-End Fund US Debt-related investments, use the FinViz.com program. This link of the largest market cap Closed-End Fund companies investing in Debt that trade on the NYSE and Nasdaq will get you started, and from there, the Performance tab will show the performance over various periods. To monitor the Closed-End Fund that has Foreign investments, use the FinViz.com program. This link of the largest market cap Closed-End Fund companies investing in Foreign assets that trade on the NYSE and Nasdaq will get you started, and from there, the Performance tab will show the performance over various periods. Bottom line: Closed-end funds are investment management companies. They own a portfolio of income-generating assets. They have issued a fixed number of nonredeemable shares, unlike open-end mutual funds or Exchange Traded Funds.

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Investing in mutual funds Mutual Funds are also known as Open-End Funds because there are no legal restrictions on the number of shares the fund will issue. If demand is high enough, the fund may continue to issue shares no matter how many investors there are. Open-end funds also buy back all the shares that investors wish to sell. What differentiates the mutual fund from a closed-end fund is that the mutual fund is a product created by a financial services company and sold by an associated distributor. The product trades in units of a pooled holding based on Net Asset Value (NAV) calculated at the end of the day. In contrast, the closed-end fund is a security, an Investment Holding Company whose shares trade on a securities market with no direct link to NAV. There is a fundamental difference between Mutual Funds and funds that trade on a stock exchange. This difference is highlighted in TV commercials by the Vanguard Group, the world’s largest mutual fund provider, with its slogan: “Invest in what you own.” What you own is NAV. NAV is the dollar value of a single mutual share, based on the value of the fund’s underlying assets minus its liabilities, divided by the number of shares outstanding. Investors who sell closed-end fund shares on the market find that the price may be at a premium or discount to NAV. To summarize, a Mutual Fund (MF) is a product, not a price, whereas an Exchange Traded Fund (ETF) is a price. The mutual fund investor buys an asset class no different than buying a home, a car, or a piece of art, which are relatively illiquid investments. Most people are confused because they believe that an Exchange Traded Fund is a Mutual Fund that trades on the market. However, a Mutual Fund is a pass-through vehicle. It’s an asset that purchases shares of companies. An ETF is a security created to track anything from the price of a commodity (without actually buying it) to a diverse collection of company shares (without purchasing the shares). A passively managed ETF is a financial fiction. ETFs also track specific investment indexes, some of which the ETF manager also creates and manages. They even track investment strategies, like 2x or 3x bull or bear strategies of an index. The bottom line is that Mutual Funds were designed for investors and ETFs for traders. As an investor, I want to invest in the shares of specific companies that meet my needs and interests and that, from my homework, I believe are high Quality. If I wanted to invest in a

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pool of company securities, I would go to a Mutual Fund. On the other hand, if I wanted to trade financially engineered securities, I would go to an ETF or a derivative like a financial futures contract. In my case, that will never happen because I am an investor in individual company stocks. In recent years, ETFs have surpassed the once-great popularity of Mutual Funds. The world’s largest financial services companies create and sell all funds, i.e., open- and closedend funds and ETFs. Different companies operate investment management and fund sales. BlackRock motivates the investor to frequently trade their ETFs, thereby earning more income to pay the sales distributor more fees – even if there are no commission costs on the ETF trades. The industry reality is that ETF trading has become excessive risk-taking – even gambling – which has led to extreme market volatility. Worse, the stock exchanges are paying the ETF managers for order flow (PFOF), which is another cost to the investor because they are not getting the at-best fill they would get by trading directly on the exchange without this profit-making middleman. As an investor who actively trades securities, I would rather pay service costs to the agent broker to deliver the best-price trades. Mutual Funds are best suited to investors but only to those with no interest in trading securities. Before investing, Investors in Mutual Funds and ETFs should investigate management fees and fund performance. It’s helpful to track a Fund’s daily and weekly results—even for those who don’t buy funds – to observe money flows into and out of market segments and industries. Interactive Brokers published this Beginner’s Guide to Mutual Funds, which you may find helpful. Fig. 29.1 The world’s four largest Fund companies (aka asset managers) (to begin 2022) BlackRock (US$9.5 trillion) Vanguard (US$8.4 trillion) Fidelity (US$4.2 trillion) (Capital Group) American Funds (US$1.9 trillion)

BlackRock was founded in 1988 as Blackstone Financial Management but changed its name in 1992 to BlackRock. It merged with PNC in 1995, listed on the NYSE (BLK) in 1999, and started acquiring investment managers such as State Street Research and Management (2005), Merrill Lynch Investment Managers (2006), Barclays Global Investors (2009), and FundAdvisor (2015).

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Investing in mutual funds

The asset management business as described by BlackRock: Fiduciary to Clients Asset managers, also known as investment managers, are hired by asset owners to invest assets on their behalf. As such, asset managers act as fiduciaries, which means acting in the client’s best interests and faithfully executing the investment mandate provided by the client. Asset managers invest within the guidelines specified by their clients for a given mandate, as set out in the investment management agreement (IMA) or established by the offering or constituent documents that establish the fund. Importantly, the investment results, whether positive or negative, belong to the client. Client Assets held by Custodians The assets under management (AUM) are owned by clients. They are held by third-party custodians selected by – and with contractual obligations to – these clients. The thirdparty custodian maintains the official books and records and facilitates trade settlement with counterparties. As such, asset managers do not have physical control or direct access to clients’ assets. Likewise, the client, not the asset manager, is the counterparty to trades. Consequently, asset managers have small balance sheets relative to other types of financial institutions. You can monitor Mutual Funds from all countries by using the free tools at Investing.com, starting at https://www.investing.com/funds/world-funds Then you can select the Mutual Funds from the Americas, Europe, Asia, or wherever, such as: https://www.investing.com/funds/usa-funds?&issuer_filter=0 https://www.investing.com/funds/canada-funds?&issuer_filter=0 https://www.investing.com/funds/uk-funds?&issuer_filter=0 The Investing.com information includes Profile, Historical Prices, Holdings, Charts, News & Analysis, and Technical Analysis for each Mutual Fund. Here is an example of the Vanguard 500 Index Admiral Fund The Vanguard 500 Index Admiral Fund info and charts are also available at Finance. Yahoo.com. The Vanguard 500 Index Admiral Fund charts are available at StockCharts.com. Investors can analyze the performance of Mutual Funds by accessing this Investing.com link. Fund performance is also available at Finance.Yahoo.com, linked in the table below for 100 US Mutual Funds that were the largest when writing this book. Fig. 29.2 The 100 largest US Mutual Funds in Net Asset ranking as of February 22, 2022 US Mutual Fund

Net Assets ($ Billions)

Chart

Vanguard 500 Index Admiral

429.58

VFIAX

Fidelity 500 Index Institutional Prem

387.09

FXAIX

Vanguard Total Stock Market Index Admiral

321.58

VTSAX

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BILL CARA / STOCK MARKET LITERACY

Vanguard Total Stock Market Index Institutional Plus

289.35

VSMPX

Fidelity Government Money Market Fund

230.36

SPAXX

Vanguard Total Stock Market Index I

230.26

VITSX

Fidelityֲ® Government Cash Reserves

226.13

FDRXX

Vanguard Total International Stock Index Inv

188.28

VGTSX

Vanguard Institutional Index Institutional Pl

167.72

VIIIX

Vanguard Total Bond Market II Index Fund Investor

134.58

VTBIX

Fidelity Contrafund

128.94

FCNTX

Fidelity Contrafund K

128.94

FCNKX

Vanguard Total Stock Market Index Inv

126.55

VTSMX

American Funds Growth Fund of America A

122.09

AGTHX

Vanguard Institutional Index I

120.59

VINIX

Vanguard Total Bond Market II Index I

114.48

VTBNX

Vanguard Total Bond Market Index Adm

113.48

VBTLX

Vanguard 500 Index Institutional Select

112.87

VFFSX

Vanguard Wellington Admiral

107.05

VWENX

American Funds American Balanced A

99.86

ABALX

Dodge & Cox Stock

98.70

DODGX

Vanguard Cash Reserves Federal Money Market Fund A

91.16

VMRXX

Vanguard Intermediate-Term Tx-Ex Adm

83.38

VWIUX

American Funds Income Fund of Amer A

82.32

AMECX

PIMCO Income Institutional

82.30

PIMIX

American Funds Europacific Growth R6

80.34

RERGX

Vanguard Total Intl Stock Index Admiral

77.21

VTIAX

American Funds Washington Mutual A

73.83

AWSHX

American Funds Investment Co of Amer A

73.71

AIVSX

Fidelity Total Market Index Institutional Prem

73.22

FSKAX

Dodge & Cox Income

69.93

DODIX

American Funds Capital Income Builder A

67.24

CAIBX

Vanguard PRIMECAP Adm

66.32

VPMAX

Schwab S&P 500 Index

66.13

SWPPX

American Funds Fundamental Investors Class A

63.99

ANCFX

Vanguard Growth Index Adm

61.83

VIGAX

Strategic Advisers Core

61.69

FCSAX

Vanguard Mid Cap Index Adm

59.82

VIMAX

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Investing in mutual funds

American Funds New Perspective A

58.55

ANWPX

Fidelity US Bond Index Institutional Prem

58.42

FXNAX

American Funds Capital World Growth &Income A

57.47

CWGIX

Vanguard Institutional Target Retire 2030 Institutional

55.45

VTTWX

PIMCO Total Return Institutional

55.25

PTTRX

Vanguard Wellesley Income Admiral

54.79

VWIAX

Vanguard Short-Term Investment-Grade Adm

54.20

VFSUX

Vanguard Dividend Growth Inv

54.19

VDIGX

Vanguard Institutional Target Retire 2035 Institutional

50.89

VITFX

Vanguard Small Cap Index Adm

50.78

VSMAX

Vanguard Institutional Target Retire 2025 Institutional

50.73

VRIVX

Vanguard International Growth Adm

50.46

VWILX

Vanguard Total Stock Mkt Index Institutional Sel

50.00

VSTSX

Metropolitan West Total Return Bd I

49.14

MWTIX

Vanguard Total Bond Market Index I

48.07

VBTIX

Vanguard Equity-Income Adm

47.44

VEIRX

Vanguard Institutional Target Retire 2040 Institutional

47.41

VIRSX

Strategic Advisers Core Income

46.85

FPCIX

T. Rowe Price Blue Chip Growth

46.65

TRBCX

Fidelity Blue Chip Growth

46.40

FBGRX

Vanguard Windsor II Admiral

46.36

VWNAX

Dodge & Cox International Stock

45.42

DODFX

Vanguard Balanced Index Adm

45.40

VBIAX

Fidelity Growth Company

45.36

FDGRX

American Funds American Balanced R6

44.35

RLBGX

Fidelity Balanced

42.26

FBALX

Fidelity Balanced K

42.26

FBAKX

Vanguard Total Intl Stock Index I

41.97

VTSNX

Vanguard Institutional Target Retire 2045 Institutional

41.37

VITLX

American Funds Growth Fund of Amer R6

41.34

RGAGX

Fidelity International Index Institutional Program

40.22

FSPSX

Vanguard Health Care Admiral

39.93

VGHAX

Fidelity Series Investment Grade Bond

39.63

FSIGX

Vanguard Target Retirement 2025 Fund Investor Shar

39.50

VTTVX

DoubleLine Total Return Bond I

39.25

DBLTX

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Fidelity Extended Market Index Institutional Program

38.84

FSMAX

American Funds AMCAP A

37.72

AMCPX

Baird Aggregate Bond Inst

37.40

BAGIX

Vanguard Ltd-Term Tx-Ex Adm

37.06

VMLUX

Vanguard Target Retirement 2035 Inv

36.86

VTTHX

PIMCO Income P

36.75

PONPX

T. Rowe Price Capital Appreciation

36.64

PRWCX

Franklin Income A

36.50

FKINX

Vanguard Target Retirement 2030 Inv

35.81

VTHRX

Vanguard Total Bond Market Index Institutional Pls

35.52

VBMPX

American Funds American Mutual A

35.42

AMRMX

Vanguard US Growth Admiral

35.29

VWUAX

BlackRock Strategic Income Opportunities Institutional

34.35

BSIIX

Vanguard Intermediate-Term Investment-Grade Adm

34.01

VFIDX

Vanguard Institutional Target Retire 2050 Institutional

33.95

VTRLX

DFA International Core Equity I

33.80

DFIEX

Bridge Builder Core Plus Bond

33.75

BBCPX

American Funds Washington Mutual R6

33.53

RWMGX

Fidelity Advisor Total Bond A

33.34

FEPAX

Fidelity Advisor Total Bond C

33.34

FCEPX

Fidelity Advisor Total Bond I

33.34

FEPIX

Fidelity Total Bond

33.34

FTBFX

DFA US Core Equity 2 I

32.86

DFQTX

American Funds Growth Fund of Amer F2

32.22

GFFFX

T. Rowe Price Blue Chip Growth I

31.87

TBCIX

Vanguard (with 44), Fidelity (18), and American Funds (16) lead the list of the 100 largest US Mutual Funds (1Q2022). Regarding capitalization, the largest asset manager, BlackRock, has only one USMF in the top 100, and so does Schwab. These asset managers (1) offer a variety of smaller Mutual Funds and (2) guide their marketing and sales to Exchange Traded Funds (ETFs). Big names like BlackRock, Fidelity Advisor, Vanguard, Schwab, and others are influential marketing organizations. Financial Entertainment Television networks interview the CEOs, who appear to be wise investors. In reality, that’s the power of their advertising backed by customer assets. Most have no records of accomplishment other than in the boardroom. Fund manager size does not equate to performance. Investors must study public records to discover a fund’s performance since its marketing literature is slanted.

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Investing in mutual funds

Investors who check the factual data over the past one, three, five, and ten years compared to the S&P 500 benchmark index will find the actual performance of Mutual Funds and Exchange Traded Funds to be lacking. All of this information is available at https://www.investing.com/funds/major-funds In addition to recorded performance, there are tax considerations, selling costs, and expense ratios that alter the income that investors might have earned or the value received from these instruments. In selling Mutual Funds, the salesperson, for many months and years at a time, is unlikely to show a prospective investor the Technical Analysis of these Mutual Funds, as I show in the current links below. It’s all freely available investment information if you know where to look. https://www.investing.com/funds/major-funds. For the day I was writing this content for the book, April 10, 2022, the Technical Analysis Buy/Sell summaries of the Major Funds were looking dismal. Fig. 29.3 Major Fund Buy/Sell summaries of Technical Indicators, Investing.com, April 10, 2022 Mutual Fund

Daily

Weekly

Monthly

American Funds AMCAP A

Strong Sell

Neutral

American Funds American Balanced A

Strong Sell

Neutral

American Funds American Balanced R6

Strong Sell

Neutral

American Funds American Mutual A

Strong Sell

Strong Buy

American Funds Capital Income Builder A

Strong Sell

Neutral

Strong Buy

American Funds Capital World Growth & Income A

Strong Sell

Neutral

American Funds Europacific Growth R6

Strong Sell

American Funds Fundamental Investors Class A

Strong Sell

Neutral

American Funds Growth Fund of Amer F2

Strong Sell

Neutral

American Funds Growth Fund of Amer R6

Strong Sell

Neutral

American Funds Growth Fund of America A Strong Sell

Strong Sell

Neutral

American Funds Income Fund of Amer A

Strong Sell

Strong Buy

American Funds Investment Co of Amer A

Strong Sell

Neutral

American Funds New Perspective A

Strong Sell

Neutral

American Funds Washington Mutual A

Strong Sell

Strong Buy

American Funds Washington Mutual R6

Strong Sell

Strong Buy

Baird Aggregate Bond Inst

Strong Sell

BlackRock Strategic Income Opportunities Institutional

Strong Sell

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BILL CARA / STOCK MARKET LITERACY

Bridge Builder Core Plus Bond

Strong Sell

DFA International Core Equity I

Strong Sell

Buy

DFA US Core Equity 2 I

Strong Sell

Buy

Dodge & Cox Income

Strong Sell

Dodge & Cox International Stock

Strong Sell

Neutral

Strong Buy

Dodge & Cox Stock

Strong Sell

Neutral

Strong Buy

DoubleLine Total Return Bond I

Strong Sell

Fidelity 500 Index Institutional Prem

Strong Sell

Strong Buy

Fidelity Advisor Total Bond A

Strong Sell

Fidelity Advisor Total Bond C

Strong Sell

Fidelity Advisor Total Bond I

Strong Sell

Fidelity Balanced

Strong Sell

Neutral

Fidelity Balanced K

Strong Sell

Neutral

Fidelity Blue Chip Growth

Strong Sell

Neutral

Fidelity Contrafund

Strong Sell

Fidelity Contrafund K

Strong Sell

Fidelity Extended Market Index Institutional Program

Strong Sell

Neutral

Fidelity Government Money Market Fund

Sell

Neutral

Fidelity Growth Company

Strong Sell

Sell

Does any investor think a salesperson trying to sell you such an investment product will show you such information? Because of the relative sophistication and size of the US financial system and the economic wealth of its people, the United States Mutual Funds (USMF) are the most extensive in valuation and number of products. But Mutual Fund managers in many countries offer them for domestic sale. Fig. 29.4 Plethora of information on the significant Mutual Funds in 63 countries via investing.com Andorra - Funds

France - Funds

Luxembourg - Funds

Russia - Funds

Australia - Funds

Germany - Funds

Malaysia - Funds

Saudi Arabia - Funds

Austria - Funds

Gibraltar - Funds

Malta - Funds

Singapore - Funds

Bahrain - Funds

Greece - Funds

Mauritius - Funds

Slovenia - Funds

Belgium - Funds

Hong Kong - Funds

Mexico - Funds

South Africa - Funds

Bermuda - Funds

Hungary - Funds

Monaco - Funds

South Korea - Funds

Brazil - Funds

Iceland - Funds

Namibia - Funds

Spain - Funds

Canada - Funds

India - Funds

Netherlands - Funds

Sweden - Funds

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Investing in mutual funds

Cayman Islands - Funds

Indonesia - Funds

New Zealand - Funds

Switzerland - Funds

Chile - Funds

Ireland - Funds

Norway - Funds

Taiwan - Funds

China - Funds

Israel - Funds

Oman - Funds

Thailand - Funds

Czechia - Funds

Italy - Funds

Pakistan - Funds

Turkey - Funds

Denmark - Funds

Japan - Funds

Philippines - Funds

UK - Funds

Emirates - Funds

Latvia - Funds

Poland - Funds

US - Funds

Estonia - Funds

Liechtenstein - Funds

Portugal - Funds

Vietnam - Funds

Finland - Funds

Lithuania - Funds

Qatar - Funds

Personal view: Although I understand and appreciate the reasons why hundreds of millions of investors in the world buy mutual funds, I avoid them because: i. they are financial products the Sell-side sells to unsophisticated consumers who may not need them and, in particular, should not want them at certain times ii. in addition to high expense ratios, there may be high front-load costs charged iii. all pooled investments hold ‘good’ and ‘bad’ companies and ‘good’ and ‘bad’ stocks, and as a sophisticated investor, I invest directly in individual companies that I determine to be ‘good’ quality and attractively priced iv. mutual funds lack the liquidity of a security, although this is not a factor for all people because they can redeem a Mutual Fund at the end of the day Net Asset Value. Compared to Exchange Traded Funds, I believe most people in the world would be better off financially if they were to find a high-quality Mutual Fund product from a trustworthy salesperson. Look for one that meets your needs and interests and buy it when prices are low. That could be crucial to making one of life’s most important decisions. Bottom line: My purpose is to show that investors in Mutual Funds should not believe the marketing brochures of the world’s most influential financial services companies nor applaud the performance of their investment managers. Investors need to do the homework before making important investment decisions. An asset manager’s marketing and salesforce will not do it for you. But if you find a Fund that meets your needs and do not wish to trade its price in the stock market, then a Mutual Fund is an appropriate investment product to buy and hold. If you find an objective Mutual Fund salesperson from the many available, be sure to communicate all your needs and interests to ensure that person is helpful and committed to you in the future.

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Investing in bonds A bond is the debt of a company or a government. Each bond instrument carries a coupon rate determined at the point of issue based on the quality of the issuer, the security behind the debt, the term of the debt, and market interest rates for similar securities offered at that time. Things like the issuer’s quality, the asset’s backing value, the remaining term, and the market interest rate, all change over time. What changes by far the most over time is the interest rates in markets, so I say that investing in bonds is primarily an investment in interest rates. All government securities are treasury debt instruments backed by the goodwill of the issuing country (the full faith and credit concept) and the ability of the country’s treasury department to pay the interest and repay the debt at the end of the term. A country’s central bank establishes treasury debt rates when issued by controlling the funds available to private banks to buy them. Corporations also issue debt instruments, but the government treasury market is the most crucial debt market. The US government debt securities are issued in terms of months, called bills, a few years, called notes, and 10 to 30 years, called bonds. For simplicity’s sake, let’s refer to corporate and sovereign debt as bonds. After the issue of corporate or sovereign bonds, all the pricing factors change, and the bond price rises or falls in the market. Corporate bonds, such as convertible, municipal, and high-yield (junk), appeal to various investors. A municipality issues tax-free bonds to pay the costs of essential local services. These instruments also carry elevated risk in many cases. Convertible bonds are convertible into a predetermined amount of the company’s stock at certain times during the bond’s life. When the conversion feature is at the company’s discretion, it is called a retractable bond, and if at the holder’s discretion, it is called a redeemable bond. High-yield or junk bonds pay a high interest rate when issued. The issuing company has a lower credit rating than investment-grade corporate, municipal, and Treasury bonds. Because of the higher risk of default, these bonds must pay a higher yield than investmentgrade bonds.

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Investing in bonds

Based on the two leading credit rating agencies, high-yield bonds carry a rating of ‘BBB’ or lower from Standard & Poor’s and ‘Baa’ or lower from Moody’s. Bonds with ratings above these levels are considered investment grade. Credit ratings can be as low as ‘D’ (currently in default), and most bonds with ‘C’ ratings or lower carry an elevated risk of default; yields will typically be remarkably high to compensate for this risk. Fig. 30.1 Credit Ratings of the principal rating agencies

Investment Grade

Junk

Moody's

S&P

Fitch

Meaning

Aaa

AAA

Prime

Aa1

AA+

Aa2

Aa3

AA-

A+

A-

Baa1

BBB+

Baa2

BBB

Baa3

BBB

BBB-

Ba1

BB+

Ba2

Ba3

BB-

B+

B-

Caa1

CCC+

Substantial Risks

Caa2

CCC

Extremely Speculative

Caa3

CCC

CCC-

CC+

High Grade

Upper Medium Grade

Lower Medium Grade

Non Investment Grade Speculative

Highly Speculative

In Default

CCD

In Default w/ Little Prospect for Recovery

DDD

The New York Stock Exchange trades a wide selection of bonds.

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BILL CARA / STOCK MARKET LITERACY

Fig. 30.2 Germany, Japan, UK, and US Treasury Bonds Instrument

Other Info

Country

StockCharts Chart

10-Year German Treasury Yield

10-year govt Yield

Germany

$DET10Y

10-Year Japan Treasury Yield

10-year govt Yield

Japan

$JPT10Y

10-Year UK Treasury Yield

10-year govt Yield

$UKT10Y

10-Year US Treasury Yield

10-year govt Yield

USA

1-Month US Treasury Yield

US Treasury Yield

USA

3-Month US Treasury Yield

US Treasury Yield

USA

6-Month US Treasury Yield

US Treasury Yield

USA

$UST6M

1-Year US Treasury Yield

US Treasury Yield

USA

$UST1Y

2-Year US Treasury Yield

US Treasury Yield

USA

$UST2Y

3-Year US Treasury Yield

US Treasury Yield

USA

$UST3Y

5-Year US Treasury Yield

US Treasury Yield

USA

7-Year US Treasury Yield

US Treasury Yield

USA

10-Year US Treasury Yield

US Treasury Yield

USA

20-Year US Treasury Yield

US Treasury Yield

USA

30-Year US Treasury Yield

US Treasury Yield

USA

^TNX

$UST10Y $UST1M

^IRX

^FVX

$UST3M

$UST5Y $UST7Y

^TNX

$UST10Y $UST20Y

^TYX

$UST30Y

The site Investing.com/rates-bonds provides current rates on most world government bonds. Go to the tabs for Americas, Europe, Middle East, Asia/Pacific, and Africa. Then after selecting your choice, you will see a dropdown menu for many countries. You will also have your choice of maturity from overnight to 30-year. Investors can also use the investing.com site to obtain historical yields on these bonds.

Current State of the Credit Markets The February 2022 Russian invasion of Ukraine and the liquidity crisis caused by the soaring US Dollar in mid-year 2022 put sovereign credit markets in a state of emergency. The rapid decline in equity prices in 2022 roiled credit markets further. Fig. 30.3 Highest Sovereign Credit ratings

South Korea

S&P

Moody’s

Fitch

Aa2

AA-

Aa3

Macau

DBRS

Taiwan

AA+

Aa3

Hong Kong

AA+

Aa3

AA-

Isle of Man

N/A

Aa3

United Arab Emirates

Aa2

AA-

United Kingdom

Aa3

AA-

152

90 90 AA (high)

Investing in bonds

France

Aa2

AA (high)

New Zealand

AA+

Aaa

AA+

Austria

AA+

Aa1

AA+

AAA

Finland

AA+

Aa1

AA+

AA (high)

European Union

Aaa

AAA

Singapore

AAA

Aaa

AAA

United States

AA+

Aaa

AAA

Norway

AAA

Aaa

AAA

Sweden

AAA

Aaa

AAA

Australia

AAA

Aaa

AAA

100

Canada

AAA

Aaa

AA+

AAA

100

Denmark

AAA

Aaa

AAA

100

Germany

AAA

Aaa

AAA

100

Liechtenstein

AAA

Luxembourg

AAA

Aaa

AAA

100

Netherlands

AAA

Aaa

AAA

100

Switzerland

AAA

Aaa

AAA

100

Moody’s

Fitch

DBRS

100

Fig. 30.4 Lowest Sovereign Credit ratings S&P Puerto Rico

Belize

B-

Caa3

Belarus

Lebanon

Sri Lanka

Venezuela

N/A

Ukraine

CCC+

Caa3

Armenia

B+

Ba3

B+

Russia

Argentina

CCC+

CCC

Cuba

Laos

Caa3

Mali

Caa2

CCC

15 15

CCC-

15 15

Suriname

Caa3

El Salvador

CCC+

Caa3

153

BILL CARA / STOCK MARKET LITERACY

Investors are more concerned about sovereign debt failure now than ever since 2011. The lowest credit-rated countries are the biggest worry. Investors watch the credit markets of large economies too, like Turkey, Brazil, and Mexico.

Investing in International Debt Investing in international debt is a legal, simple, safe, and inexpensive process if facilitated by the broker. The same is valid for investing in global equities. But the stable income from bonds is often the investment choice for risk-averse cross-border investors. After account approval and setup, investors can buy electronically or through the advisor the securities denominated in the local currency. Investors may reside in a country where inflation, government stability, or policies regarding the seizure of assets is a concern. In these cases, they may be able to retain an investment advisor in another country, say the UK or the US, to manage the account for safekeeping in that country. Interactive Brokers (IBKR) accepts clients from more than 220 countries and territories with transactions done in 23 currencies. IBKR provides access to over one million bonds.

Words of Warning about Debt Beware of debts that seem sensible during periods of prosperity. When a crisis comes, individuals, companies, and even governments that ran up deficits during the boom usually suffer the most.

“If there is one common theme to the vast range of the world’s financial crises, it is that excessive debt accumulation, whether by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.” —Carmen Reinhart (Cuban-born American Economist)

Bottom line: Bonds are an investment in interest rates, but other factors are involved. The stability of the issuer and the currency denominating the instrument are important issues too. Treasury debt of the most advanced economies with the highest credit ratings is not a concern, regardless of the debt levels of these countries.

154

CHAP TE R 31

Bond yield or dividend yield Investors in securities who seek income can do so in the form of yield from either the stock market or the bond market. Yield is the percentage return from capital invested in an instrument over a fixed period, whether a stock or a bond. Investors will switch back and forth between instruments depending on yield attractiveness. If the instrument is a bond, there is a fixed maturity date and an interest rate. Since an investor may sell a marketable bond at any time before maturity, the yield to maturity depends on the price paid. As interest rates fall, bond prices rise and vice versa, so the investor may sell the bond at a premium or discount. Despite the interest payment being fixed at the same amount each period, the current yield is essential to investors who buy the bond in the market or sell the bond before maturity. Yield to maturity is, therefore, the most frequent reference. Suppose income is from company dividends. In that case, the money amount of a dividend paid by the company frequently changes, and there is no maturity date like a bond has, so there is no dividend yield to maturity. The dividend yield depends on the dividend amount and the stock’s current or purchase price. Investors in stocks must understand the difference between yield and total return. Since the current price and the purchased price of the stock are probably different, the realized gain or loss on the sale plus the growth in the dividend payments received add up to the stock’s total return, which is an important concept. As bond interest yields exceeded dividend yields for centuries, bonds were the preferred source of income. But market prices for both stocks and bonds fluctuate for many reasons, and so does the inflation rate. In periods of high inflation, the real rate of return (i.e., actual yield net of inflation) becomes an essential concept to investors. Since the 1980s, for at least 35 years, Bond yields have been falling as bond prices continued to lift.

155

BILL CARA / STOCK MARKET LITERACY

The following chart shows the Trend in the 10-year US Treasury Bond Yield is down, falling from a high of well over +9% in the late 1980s to a high of about +8% in 1994, to +7% in 1999-2000, to just over +5% in 2006-2007, to +3% in 2013-2014 and slightly above +3% in 2018. In 2Q2022, bond yields are starting to lift. As the bond yield plunged, each new low was spectacular, particularly to begin the 3Q2020, when the Yield on the 10-year US Treasury Note had dropped to +0.50%, a record low and well below the inflation rate. See the 35-year chart of the Yield on the 10-year US Treasury Note. That continuous 35-year decline in bond yields was not always the case, and for a healthy economy and financial system, it should not be. It’s a phenomenon that usually occurs when governments run continuous deficit budgets and build up debts that central banks cover by creating excessive amounts of money. Each new period of money growth starts a new cycle in debt and equity markets. After the global financial crisis of 2008, government spending and central bank money creation took on a whole new life. The Fed manipulated treasury yields (and imitative corporate bond yields) to a series of fresh record lows, which meant that bond yields were insufficient to cover rising inflation. Investors needed to get a higher result from stocks. The more inflation threatens returns, investors have turned to dividend yields for income. When US Bond Yields hit their record low, more than $13 trillion was invested worldwide in negative-yield government bonds. Private investors were not interested in such low and negative yields, which made them pay the borrower instead of receiving income from the borrower of their funds. So most government bonds had to be bought by central banks. The fact that central banks would pay more than $25 billion in charges to Treasury departments to hold these negative yield bonds is a testament that the global financial condition was deplorable. The European Central Bank bought these European bonds with negative yields because their regional banks had a bad financial situation. The central bank buyers of negative yield bonds believed: 1. that losing a bit of income is better than the significant capital loss that would occur should their strongest commercial banks fail, as was feared through those years might be the case with the major German banks, Deutsche Bank and Commerzbank 2. that inflation would fall a lot or even start a period of deflation will be worse than the negative yield rate, facilitating their future sale at a profit, or 3. that future rates, if and when raised, would not increase much. During those years of negative-yielding sovereign bonds, central banks talked of targeting two percent inflation rates, and when inflation was growing much faster, they opined that inflation was “temporary.” Later that unusually high inflation was merely “transitory.” How wrong they were. The Covid-19 pandemic eliminated jobs and made paying mortgages and buying food challenging for many people, so governments started relief payments to the public, or what many people saw as the government handing out free money.

156

Bond yield or dividend yield

During those times when the money supply was growing too quickly – soaring as interest rates plummeted, investors became warier of risk. They tended to invest more in bonds, pushing rates even lower. That entire process also ultimately worsened inflation, which requires investors to seek more income to compensate for the loss in the value of money. As rates continued to fall, the Fed and the Bank of England warned the public that a new Quantitative Tightening policy would lift rates in the future. They did this in 2018 and again in 2022. They say it’s an inflation-fighting measure, but in the Fed’s case, it’s because they cannot afford to buy more US Treasury bonds. They want the public to buy them. If central banks valued their Bonds and Mortgage-Backed Securities (MBS) on a mark-tomarket basis, they would be insolvent. Mark-to-market accounting values an asset’s current market price instead of its historical cost. At some point, the Treasury yields become too low for new bond investment by private investors, so the Treasury must increase the coupon rate to sell new bonds to investors who would otherwise turn to higher dividend yields from equities. In late 1Q2022 and early 2Q2022, the Fed, after having bought all or most of the Treasury’s bonds for several years, said they now had to sell their bonds, not buy more from the Treasury. So with a new round of Quantitative Tightening, interest rates lifted. With the higher yields, investors started buying the new Treasury bonds while selling equities. Interest rates that rise may be attractive to the income-seeking investor. Still, rates that rise too quickly can also have dire consequences for the global financial system, economy, and the US Treasury, which has to pay the interest. As the Dollar strengthens, it could lead to a Liquidity Crisis. It also causes a problem for private investors holding significant bond positions for safety and income purposes, who may then wish to sell those bonds before maturity. One study of bond yields shows that a +1% increase in coupon rates would cause an -8.7% drop in the price of the existing 10-year US Treasury Note and a -19.2% drop in the 30-year US Treasury bond. At all times, Yields from dividends are the alternative. Every time investors make a mass exit from bonds into stocks, the broad stock market indexes balloon. As an aside, Treasury debt, whether it be called bonds, notes, or bills, it’s all debt, and the only difference is the time to maturity. Short-term debts are bills, mid-term are notes, and long-term are bonds. But for our purposes, notes are called bonds. As investors buy stocks at increasing prices, when dividends remain flattish, dividend yields drop. But if stock prices remain flattish while the Dividends grow over time, the dividend yield increases. In addition to yield spread, investors must be aware of the levels of rates. During 1Q22, rates started to lift due to Fed monetary policy they said was intended to fight inflation. For practical reasons, however, the Fed and most other central bankers must keep interest rates low, or else high rates would push their economies into recession. That was the concern with Quantitative Tightening in 2018. Stock prices that had increased since 2011 began to stumble.

157

BILL CARA / STOCK MARKET LITERACY

Nearing the end of 1Q2022, I saw in my dividend-yielding portfolio that as the stock prices increased, the stock yields had dropped about a half percent in just a couple of months. That was happening as bond prices were falling and bond yields were soaring. In addition to the Yield Spread between stocks and bonds, there is a Yield Spread between Bonds of different duration. For example, in my March 18, 2022, blog, I wrote: The yield spread on bonds has also been in continuous decline. The 2-year Treasury yield was as high as 2.044 yesterday and closed at 1.957%, which is moving up much faster than the 10-year. The 10-2 year yield spread is now just 0.26% vs. its long-term average of 0.93%. If and when the yield curve inverts, then recession is sure to come. Something to watch. Chart included. Fig. 31.1 10-2 Year US Treasury Bond Yield Spread chart, October 26, 2022

Investing.com link to current 10-2 US Treasury Yield spread. 158

Bond yield or dividend yield

To avoid equity dilution, some corporations issue bonds that pay attractive yields to investors. The interest cost is a pre-tax expense, lowering taxes and the net income. Companies that raise the same amount of capital by issuing stock pay dividends from their post-tax net income but have a higher tax expense and more outstanding shares. To an investor in a Growth company, the bottom line looks better when financed by bonds. Corporate profits are zero or negligible in its formative years, so the investor is not concerned. But debt must be serviced, which could lead a company with insufficient operating cash flow to issue more debt or more stock to raise funds to service the old debt, sometimes causing investors to refer to this debt as Death Spiral Debt. In recent years, governments needing to fill their coffers (using debt, as they cannot sell equity) have squeezed out the corporate bond market to a large extent, so in 2022 interest rates on corporate bonds are much higher but still at near-historic lows. Bond income, as received by the owner of capital, is typically taxed at a higher rate than dividend income. Hence, investors generally prefer the more tax-friendly Dividend Yield to Bond Yield unless the Bond Yield is substantially higher. But an excessively high Dividend Yield could be a concern. The higher the yield, the higher the risk, whether from corporate stocks or bonds. The high-yielding corporate bonds, called High Yield Bonds, are also called Junk Bonds. At only one time in memory did I recommend buying bonds for income. In the Spring of 1982, Canadian government-issued Savings Bonds (CSB) yielded a historic high of 15%. That CSB situation in 1982 was the “Buy of the Generation,” perhaps the halfcentury. Suppose gold bullion gets priced at an extremely high figure like $5,000, and bond yields move to a correspondingly high double-digit figure in the future. In that case, a similar ‘Buy Bonds-Sell Gold’ market condition is likely to occur. Such conditions are likely to happen in the lifetime of young people but unlikely in the near term despite the concerns expressed with today’s +8-10 percent inflation. One of the reasons is that the US is no longer, like in 1980, a debtor nation. It is now a massive creditor nation, with trillions of dollars in debt to the world. Any substantial increase in Treasury rates from 4Q2022 levels will bankrupt the government. So, for many years, Dividend Yield is probably the preferred vehicle for investors seeking income. Bottom line: Investors are likely to favor a company that consistently pays a dividend that results in a Total Return that equals or exceeds the annual inflation rate more than they would a company or government that offers income via bonds. That’s because, over time, interest payout on a bond remains flat, and dividends (and stock prices) tend to increase.

159

CHAPTER 32

Currencies Cross-border trade in goods and services is affected by changes in one country’s currency relative to another, but most international trade is negotiated and settled in US Dollars. Charts of currency pairs are helpful in broad economic studies and policy positions of the central bankers. A currency pair favoring one country indicates the country’s relative economic and financial strength. Still, it could also show that that country’s central bank is raising rates. In that respect, the EUR/USD pair is the most important. The Foreign Exchange market (Forex or FX) is a global over-the-counter market, the largest and most liquid trading market in the world, bigger even than the credit market. The largest international banks are the main participants. It is an unregulated market. Currencies are always traded in pairs. The FX market determines the relative value of two currencies by setting the market price of one if paid for with the other. For example, with GBP/USD, one US Dollar is paid for by 0.86 Pound sterling on October 30, 2022, 2:08 pm UTC. Alternatively, for USD/GDP, one Pound sterling is paid for with 1.16 US Dollars. When Country A’s exchange rate increases relative to Country B’s, the price of Country A’s goods and services becomes more expensive for Country B to purchase. Ultimately, Country A’s exports decline as well as its inbound tourism. With the more powerful currency, Country A’s imports tend to increase, and so does their outbound tourism. Fig. 32.1 The US Dollar is used in 88% of global transactions, per BIS 2022 Triennial Survey

160

Currencies

US Dollar Index and US Dollar Index Futures (USDX) USDX futures trade on the Intercontinental Exchange (ICE). ICE was founded and operated by Jeffrey Sprecher in Atlanta, Georgia. The US Dollar Index contains six component currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. Initially, the index was trade-weighted, but that is no longer true. Sweden and Switzerland are not significant players with the US on a trade basis. China, Mexico, and South Korea are, yet their currencies are not in the US Dollar index. In addition to trading in goods, the US is the most prominent services transactor in the world. In 2021, the top six suppliers of US goods imports were: China ($506 billion), Mexico ($385 billion), Canada ($357 billion), Japan ($135 billion), Germany ($135 billion), and South Korea ($95 billion). The top six buyers of US goods were: Canada ($308 billion), Mexico ($276 billion), China ($151 billion), Japan ($75 billion), South Korea ($66 billion), and Germany ($65 billion). In the following table, the links in the FX Trading column are to information and charts at Investing.com. The links in the Chart column are to StockCharts.com charts. For my purposes, I set up charts from StockCharts.com with my choice of Technical Indicators and chart parameters. Fig. 32.2 Forex Pairs Trading and Indices Currency Pair

Chart

Australian Dollar – Philadelphia

$XAD

Australian Dollar – Philadelphia

$XDA

Australian Dollar to British Pound Sterling (NBD)

$AUDGBP

Australian Dollar to Canadian Dollar (NBD)

$AUDCAD

Australian Dollar to Euro (NBD)

$AUDEUR

Australian Dollar to Hong Kong Dollar (NBD)

$AUDHKD

Australian Dollar to Japanese Yen (NBD)

$AUDJPY

AUD/JPY

Australian Dollar to New Zealand Dollar (NBD)

$AUDNZD

AUD/NZD

Australian Dollar to Singapore Dollar (NBD)

$AUDSGD

Australian Dollar to Swiss Franc (NBD)

$AUDCHF

AUD/CHF

Australian Dollar to US Dollar (NBD)

$AUDUSD

AUD/USD

British Pound – Philadelphia

$XBP

British Pound – Philadelphia

$XDB

British Pound to Australian Dollar (NBD)

$GBPAUD

161

FX Trading

AUD/CAD

GBP/AUD

BILL CARA / STOCK MARKET LITERACY

British Pound to Canadian Dollar (NBD)

$GBPCAD

British Pound to Euro (NBD)

$GBPEUR

British Pound to Hong Kong Dollar (NBD)

$GBPHKD

British Pound to Japanese Yen (NBD)

$GBPJPY

British Pound to Mexican Peso (NBD)

$GBPMXN

British Pound to New Zealand Dollar (NBD)

$GBPNZD

British Pound to Singapore Dollar (NBD)

$GBPSGD

British Pound to Swiss Franc (NBD)

$GBPCHF

GBP/CHF

British Pound to US Dollar (NBD)

$GBPUSD

GBP/USD

Canadian Dollar – Philadelphia

$CDW

Canadian Dollar – Philadelphia

$XDC

Canadian Dollar to Australian Dollar (NBD)

$CADAUD

Canadian Dollar to British Pound (NBD)

$CADGBP

Canadian Dollar to Euro (NBD)

$CADEUR

Canadian Dollar to Hong Kong Dollar (NBD)

$CADHKD

Canadian Dollar to Japanese Yen (NBD)

$CADJPY

CAD/JPY

Canadian Dollar to Swiss Franc (NBD)

$CADCHF

CAD/CHF

Canadian Dollar to US Dollar (NBD)

$CADUSD

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Hong Kong Dollar to Australian Dollar (NBD)

$HKDAUD

Hong Kong Dollar to British Pound (NBD)

$HKDGBP

Hong Kong Dollar to Canadian Dollar (NBD)

$HKDCAD

Hong Kong Dollar to Euro (NBD)

$HKDEUR

162

GBP/CAD

GBP/JPY GBP/NZD

EUR/JPY EUR/NZD

Currencies

Hong Kong Dollar to Swiss Franc (NBD)

$HKDCHF

Hong Kong Dollar to US Dollar (NBD)

$HKDUSD

Japanese Yen – Philadelphia

$XDN

Japanese Yen – Philadelphia

$XJY

Japanese Yen to Australian Dollar (NBD)

$JPYAUD

Japanese Yen to British Pound Sterling (NBD)

$JPYGBP

Japanese Yen to Canadian Dollar (NBD)

$JPYCAD

Japanese Yen to Euro (NBD)

$JPYEUR

Japanese Yen to US Dollar (NBD)

$JPYUSD

Mexican Peso to British Pound Sterling (NBD)

$MXNGBP

Mexican Peso to Euro (NBD)

$MXNEUR

Mexican Peso to US Dollar (NBD)

$MXNUSD

New Zealand Dollar (EOD)

$NZD

New Zealand Dollar to Australian Dollar (NBD)

$NZDAUD

New Zealand Dollar to British Pound (NBD)

$NZDGBP

New Zealand Dollar to Canadian Dollar (NBD)

$NZDCAD

New Zealand Dollar to Euro (NBD)

$NZDEUR

New Zealand Dollar to Japanese Yen (NBD)

$NZDJPY

NZD/JPY

New Zealand Dollar to Swiss Franc (NBD)

$NZDJPY

NZD/CHF

New Zealand Dollar to US Dollar (EOD)

$NZDUSD

NZD/USD

Norwegian Krone to US Dollar (NBD)

$NOKUSD

Singapore Dollar to Australian Dollar (NBD)

$SGDAUD

Singapore Dollar to British Pound Sterling (NBD)

$SGDGBP

Singapore Dollar to Euro (NBD)

$SGDEUR

Singapore Dollar to Swiss Franc (NBD)

$SGDCHF

Singapore Dollar to US Dollar (NBD)

$SGDUSD

South African Rand (EOD)

$ZAR

Swedish Krona to Euro (NBD)

$SEKEUR

Swedish Krona to US Dollar (NBD)

$SEKUSD

Swiss Franc – Philadelphia

$XDS

Swiss Franc – Philadelphia

$XSF

Swiss Franc to Australian Dollar (NBD)

$CHFAUD

Swiss Franc to British Pound (NBD)

$CHFGBP

Swiss Franc to Canadian Dollar (NBD)

$CHFCAD

Swiss Franc to Euro (NBD)

$CHFEUR

163

NZD/CAD

BILL CARA / STOCK MARKET LITERACY

Swiss Franc to Hong Kong Dollar (NBD)

$CHFHKD

Swiss Franc to Japanese Yen (NBD)

$CHFJPY

Swiss Franc to Singapore Dollar (NBD)

$CHFSGD

Swiss Franc to US Dollar (NBD)

$CHFUSD

US Dollar to Australian Dollar (EOD)

$USDAUD

US Dollar to Brazilian Real (EOD)

$USDBRL

US Dollar to British Pound Sterling (EOD)

$USDGBP

US Dollar to Canadian Dollar (EOD)

$USDCAD

US Dollar to Chilean Peso (EOD)

$USDCLP

US Dollar to Chilean Yuan (EOD)

$USDCNY

USD/CNY

US Dollar to Danish Krone (EOD)

$USDDKK

USD/DKK

US Dollar to Euro (EOD)

$USDEUR

US Dollar to Hong Kong Dollar (EOD)

$USDHKD

USD/HKD

US Dollar to Indian Rupee (EOD)

$USDINR

USD/INR

US Dollar to Japanese Yen (EOD)

$USDJPY

USD/JPY

US Dollar to Mexican Peso (EOD)

$USDMXN

USD/MXN

US Dollar to New Zealand Dollar (EOD)

$USDNZD

US Dollar to Polish Zloty (EOD)

$USDPLN

US Dollar to Russian Ruble (EOD)

$USDRUB

USD/RUB

US Dollar to Singaporean Dollar (EOD)

$USDSGD

USD/SGD

US Dollar to South African Rand (EOD)

$USDZAR

USD/ZAR

US Dollar to Swedish Krona (EOD)

$USDSEK

USD/SEK

US Dollar to Swiss Franc (EOD)

$USDCHF

USD/CHF

US Dollar to Turkish Lira (EOD)

$USDTRY

USD/TRY

CHF/JPY

USD/CAD

US Dollar pairs trading The leading US Dollar pairs trade is the Euro to US Dollar, and the Index ($EURUSD) is prevalent. In May-June 2022, there were early signs of a possible liquidity squeeze in the interbanking world. Investors sold Stocks, Bonds, and especially Cryptocurrencies to raise cash. The S&P 500 experienced the worst first-half-year performance in many generations. From June 2021 through July 2022, the Euro dropped remarkably from 1.22 to below USD par.

164

Currencies

Fig. 32.3 EUR/USD trading chart reflects the Euro Bear

Investing.com link to the current EUR/USD chart. The major problem with the Euro relative to the US Dollar has been the interest rate differential and differences in pandemic-related central bank policies. The American economy was reopening faster. In mid-2021, the US Dollar Index (DXY) began a new Bull phase that reached its highest level in over 20 years by 3Q2022. Fig. 32.4 35-year chart of the US Dollar Index

165

BILL CARA / STOCK MARKET LITERACY

More important than the US Dollar Index is the Eurodollar futures. Fig. 32.5 Chart of plunging Eurodollar futures in 2022

The chart in Fig. 32.5 clearly shows the plunge in Eurodollar futures to start 2022, which coincided with the start of the S&P 500 Bear phase that soon reached Bear Market status. Investing.com link to current Eurodollar futures. The Eurodollar is the best indication investors have for changes in interest rates charged by the world’s largest banks. Eurodollars are US Dollar-denominated deposits outside the United States, including branches of US commercial banks, and are not regulated by the US Federal Reserve Board. For more sophisticated investors of currencies, investing.com provides Forward Rates. Bottom line: The currency pairs between primary goods trading nations are more important than the US Dollar Index. As well as trade in goods and services and levels of tourism, fluctuations in specific currency pairs affect and are affected by country differentials in inflation, economic growth rates, interest rates, and inbound and outbound foreign direct investment. But probably the most important chart, and the one that US commercial banks pay the most attention to when setting interest rates, is the Eurodollar. 166

CHAPTER 33

Cryptocurrencies Cryptocurrency is a misnomer. Except in El Salvador, where it has limited usage, no country in the world accepts Cryptocurrency as a sovereign currency. It is a tradeable asset that securities regulators have deemed taxable, regulated security. Cryptocurrency exists because of a supposedly secure, private database technology called Blockchain. IBM describes Blockchain as a shared, immutable ledger that facilitates recording transactions and tracking assets in a peer-topeer business network. The PwC consultancy adds that participants can confirm transactions using this technology without a central clearing authority. Potential applications can include fund transfers, settling trades, voting, and other issues. Not all Crypto applications are successful; many will take years to develop. Cryptocurrency Whether you believe Cryptocurrencies are a fad or a new investment trend, some Cryptos like Bitcoin (BTC) and Ethereum (ETH) have entered the mainstream of finance and capital markets despite having no intrinsic value. Ethereum and Bitcoin Cryptocurrencies are today traded and used in domestic and international business transactions. Here is a table with links to the charts at StockCharts.com and the FX trading pages at Investing.com. The first data point for $BTCUSD was in April 2014, and $ETHUSD was in August 2015. Fig. 33.1 Links to Bitcoin and Ethereum trading in US Dollars Ethereum to US Dollar

$ETHUSD

ETH/USD

Bitcoin to US Dollar

$BTCUSD

BTC/USD

Bitcoin to Euro

BTC/EUR

As of May 2022, Interactive Brokers (IBKR) provides Cryptocurrency trading via PAXOS Trust trading services in Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC). PAXOS holds all client positions, but IBKR Account owners use one IBKR account for cryptocurrency, international currencies, and stock positions. Here is the link to the current BTC-USD chart and ETH-USD chart.

167

BILL CARA / STOCK MARKET LITERACY

Crypto is strictly trading for high-risk-taking accounts that trade only for maximum capital gain with minimal consideration for value. That is not to say there are no price drivers for Crypto because there are, which I discuss in this lesson. The extreme volatility in the Crypto market led to huge 2022 trading losses. On September 20, 2022, Bitcoin BTC traded at US$19,050, but in June-July 2021 was trading close to US$70,000. BTC is the biggest Cryptocurrency, and Ethereum is the second biggest. Along with Bitcoin, ETH also took losses. The crypto Bear Market led many skeptics to believe Crypto is a quickly ending fad. Fig. 33.2 Chart showing the rapid rise and fall of Bitcoin

Investing.com link to current Bitcoin chart. Without any intrinsic value backing, the Cryptocurrency universe is a very high-risk proposition.

168

Cryptocurrencies

Fig. 33.3 Listing with links to charts of the USD-denominated Cryptocurrencies on my watchlist Coin

Chart Symbol

DigiByte to US Dollar

$DGBUSD

Litecoin to US Dollar

$LTCUSD

Decred to US Dollar

$DCRUSD

BinanceCoin to US Dollar

$BNBUSD

Monero to US Dollar

$XMRUSD

Ethereum to US Dollar

$ETHUSD

Bitcoin to US Dollar

$BTCUSD

Cardano to US Dollar

$ADAUSD

Chainlink to US Dollar

$LINKUSD

Ethereum Classic to US Dollar

$ETCUSD

ZCash to US Dollar

$ZECUSD

BitcoinCash to US Dollar

$BCHUSD

Dogecoin to US Dollar

$DOGEUSD

TRON to US Dollar

$TRXUSD

XRP to US Dollar

$XRPUSD

EOS to US Dollar

$EOSUSD

Dash to US Dollar

$DASHUSD

Stellar to US Dollar

$XLMUSD

Earlier in 2022, I decided to open a small account for trading Crypto. Factors that went into my decision: 1. Regulators had approved Cryptocurrency assets for trading as securities. 2. Major financial institutions trade it and recommend it to clients. 3. When completed, I believe that my proprietary trading system would be helpful in the high-frequency trading activity that I think is a requisite to success in cryptocurrency trading. 4. The Fed and the Bullion Banks had destroyed the integrity of commodity-based equity prices in the narrow markets I have traded for 50 years, which is thoroughly off-putting. Trading prices is hard enough as it is without manipulation by parties like central banks and commercial banks that we were raised as children to trust. 5. I am interested in learning, which is the number one reason. To start my initial Crypto client account, I put several cryptocurrencies and blockchain equities on my watchlist. I knew this watchlist would grow, and it has. My brokerage firm now provides the facilities to trade four Cryptocurrencies (the top four

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in the following illustration) and all listed Blockchain equities, of which fewer than ten are of interest to me. Three of the Blockchain companies are tiny ‘nano-caps’ in Canada. All of them are highly speculative. Fig. 33.4 Trading permitted at IBKR in Cryptocurrencies plus possibilities. Blockchain stocks I trade Name

Mkt Cap

Symbol

Bitcoin to US Dollar

Large

$BTCUSD

Ethereum to US Dollar

Large

$ETHUSD

Litecoin to US Dollar

Large

$LTCUSD

BitcoinCash to US Dollar

Large

$BCHUSD

Aave

Large

$AAVEUSD

BinanceCoin

Large

$BNBUSD

Chainlink

Large

$LINKUSD

Polygon

Large

$MATICUSD

Uniswap Protocol

Large

$UNIUSD

Core Scientific

Large

CORZ

Marathon Digital Holdings

Large

MARA

Riot Blockchain

Large

RIOT

HIVE Blockchain Technologies

Small

HIVE.V

DeFi Technologies

Nano

DEFI.NE

Tokens.com Corp

Nano

COIN.NE

Coinsmart Financial

Nano

SMRT.NE

I am fascinated to learn its believers see a concept like Crypto as a store of value, which until recent years had required physicality like precious metals, fine wine, classic cars, stamps, and paintings of famous artists. With a view to the big picture, I have had a sense of an existential societal change underway for years based on disbelief and non-acceptance of longstanding precepts. People increasingly distrust all levels of authority regardless of culture, religion, or political system. I now see Crypto as the primary instrument of the Countermovement. In addition to thinking there was a counterculture, I saw that I was becoming a part of it. When I started my billcara.com blog in 2004, it quickly attracted the interest of Barron’s, Forbes, and Wall Street Journal editors, who saw something different. I wasn’t an outsider, yet I was warning everybody that the system was corrupt, a rip-off to investors. I was viewed as being counterculture and applauded by prominent thought leaders in mainstream media. Since childhood, I have tried to see why things happen as they do when natural law says they shouldn’t. My breakthrough came later in life after studying the big picture and figuring out how I fit into it. In 2006, the financial media paid me incredible attention, and my world changed. BillCara.

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com was growing faster than I imagined, and I could not cope. So, I asked a business associate and close friend Peter Simmons to explain what he thought was going on. Peter had worked as an analyst in the office of the Chairman and CEO at General Electric headquarters. He excelled at analyzing vital issues faced by the C-suite. I wrote up his report to me in a blog on July 7, 2007, entitled, “Understanding Life is the Essence of Investing.” Sadly, less than three years later, a still-young Peter Simmons passed away unexpectedly. But in his report, he was the person who told me what I had become: Disclosure: the extensive data summaries from which the following findings and conclusions were “divined” did not exist before this study and have been seen by no one (for the record, not even Bill Cara). My confidence in the picture that has emerged is strong. Your Commentary and Community Culture are Counterculture Yes, your commentary and community culture are counterculture — counter to the built-in conflicts of interest within the investment community. You regularly point out the inherent problems in “advisors” also selling; however, a worse internal dilemma pervades communications, associations, and interpersonal relations in the field. This paradox of sorts can foster feelings of dissonance. Your readership feels them. A good portion of your Information Portfolio suggests that much of the “flack” you have experienced can be related to this issue. More specifically, when we hear — the investment industry is just one big casino – that is as far as risks, and the structure of bets go. Outside the casino is a “hospitality-like” industry that has always been based on the premise that to sell something, you need to routinely convince clients that you know far more than they do – otherwise, how could they judge that you are capable of making money for them? In fact, in such cases where “expertise” is sold as a commodity, there is a need to ensure that the client never feels confident enough to “enter the casino” without the “expert/tour guide” at hand. Peter opined in his lengthy report that ‘the System’ would take care of business, and somebody would soon minimalize my influence. He recommended that I not become an activist but just a coach. In the years that followed, my website server logs and independent service bureau managers told me how successful we were in terms of unique followers from over one hundred countries. But I could see the industry ‘taking care of business.’ My postings were being de-linked on industry-controlled social media. I received telephone threats from the head of global law at two major financial services firms and the California legal head at another, all names of companies you know and the world admires. However, they are not the kind of organizations most people think they are. Later, after a few years of health breaks in the Bahamas and Cuba, countries that are not the centers of the financial universe, I returned to business with one exception. I have never done any marketing or used my email list of over 100,000 persons who personally contacted me over the past 18 years. I decided to keep a low profile and, in my remaining years, do what Peter Simmons advised: to be a coach to people who, like me, are students of the 171

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market but have less life experience. The world is changing quickly. The countermovement has adopted Crypto, and the System is working to stop it. In socio-political terms, this is 1960s redux. However, today’s countermovement is not a few hundred thousand people; it’s now hundreds of millions who, like in the 1960s, are unhappy and anti-government. They opt out of sovereign debtbased financial systems and even traditional employment. As I see it, if they can accept the inevitability of taxation, this generation has the numbers to win. But they need independent financial education, apart from the ‘system.’ Today, there are many markets for trading Cryptocurrencies and traditional exchanges like the NYSE for trading Blockchain company stocks. At Interactive Brokers (IBKR), clients place spot trading Cryptocurrency orders with Paxos Trust Company, and Paxos, not IBKR, holds the positions. Paxos is a New York-based financial institution and technology company that trades Cryptocurrency. ItBit, a bitcoin exchange run by Paxos, was the first to be licensed by the New York State Department of Financial Services, granting the company the ability to act as a custodian and securities exchange for customers in the United States. Paxos also operates the same services in Latin America and Asia. Being a Financial Advisor with fiduciary responsibilities that are challenging at the best of times, I cannot recommend a Cryptocurrency. Still, like a stockbroker, I can legally receive an unsolicited order from the client on their initiative without recommendation. While I do not trade Crypto because I am a client account manager and not a broker, I recently started trading Blockchain stocks. However, I must admit that the performance, during what in 2Q2022 is a crushing Bear market for all Crypto assets, is dismal. Like 90% of Financial Advisors, I am often asked about such Blockchain technologies as the Metaverse, Non-Fungible Tokens (NFT), and Decentralized Finance (Defi). That level of interest tells me that the public believes growth is probable. Although I do not yet see intrinsic value in most of these new digital technologies, I try to learn from experts. For the simplest explanation of the Metaverse, I blogged the answer given to me by Andrew Kiguel, CEO at Tokens.com. Andrew Kiguel is an accomplished investment banker turned Blockchain entrepreneur and one of the most frequently interviewed executives in the industry. Bottom line: Increased regulation of Cryptocurrencies is a foregone conclusion because governments and central banks are concerned about the massive build-up in the asset class, its use for purposes of tax evasion, and the levels of Crypto-related debt, mostly highly leveraged, which poses a systemic threat to the global financial system. Most experts believe that increased regulation would be good because more institutional investors might get involved, and the extreme volatility might decline and provide investors with a more stable holding. Bill Cara is not an expert in Crypto and Blockchain, but one who understands why so many millions of people are enthusiastic about holding digital assets as an investment. I think Crypto’s present form as a privately managed asset will never be a universally accepted currency. Still, the creativity around Blockchain is a true game-changer.

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SECTION 4

Essential Economic and Financial Data 34 Economic data that investors must understand 35 Economic data that moves market prices the most 36 Macroeconomic study 1: US Consumer data 37 Macroeconomic study 2: US Jobs data 38 Macroeconomic study 3: US Housing data 39 Macroeconomic study 4: US Corporate & Business data 40 Macroeconomic study 5: US Economy Data 41 Financial study 1: US Treasury data 42 Financial study 2: US Federal Reserve Data

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Economic data that investors must understand Business economic data is classified as “Macro” or “Micro.” Nanoeconomics refers to a family or person. Each type of data has a role to play in securities analysis. But the more critical the data, the bigger the misrepresentations of fact and the greater the bias in reporting. This chapter discusses the reality. Like everything in life, economic data is likely to grow in sophistication. Back in the day, our music played on vinyl records at 78 RPM. And like radio music in my youth, traditional Classical, Pop, Jazz, Country, and Blues were the popular genres. Today, broadcasters like Sirius XM offer 500 or more unique categories. Imagine. My youth had no smartphones, satellite radio, or even jet-powered airplanes. Personal contact was limited. Today, eyeglasses and watches are communication devices. We belong to many-to-many electronic networks that span the globe. Increasingly, data sophistication matters. We live in the age of analytics. Investors study Microeconomic data as it relates to companies. We call it corporate fundamentals. This data, when added together for all companies, becomes Macroeconomic data. What we call Big Data is human and corporate data collected by governments and trade associations sourced from public and private segments of the national and international economy. In some manner, Big Data impacts the finances and operations of companies, ultimately becoming corporate data. All vital data is collected and reported by governments for investors in the United States and abroad. Many private companies and organizations do a good job, but government prevails because they demand to control the narrative. The US government data agencies are the Bureau of Labor Statistics and the Bureau of Economic Analysis. I select independent reporting and analysis of Big Data from two sources. One is the Economic Calendar at Investing.com, and the other is the Rick Davis report at Consumer Metrics Institute. Econoday was my favorite source, but it is no longer accessible to the public via a Nasdaq link. Data analysis for wealth management purposes is the same for business owners, executives, and private investors. Despite the publicly reported data’s poor quality, investors need a

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basic understanding to interpret and forecast investing conditions and make betterinformed decisions. Macroeconomic data is just as defined — summarized all-encompassing data — which is only a superficial Indicator of important underlying business and investing conditions that we need to understand and analyze. A single Economic number, called a data point, is not itself a trend, nor can it signify a reversal of a trend, which is the information we need to base important decisions. So data by itself, aka datum, is not information. However, data in a data series with analytics and opinions rendered becomes valuable information. Sometimes information is fact-based and helpful. Sometimes it’s inaccurate and misleading. In aggregating statistically based data, often there are erroneous assumptions, which results in misinformation. Some data is disinformation. For example, government pensions use Cost of Living Adjustment formulas that do not accurately reflect the Cost of Living. Social agencies of government then reduce expenditures below what the law intended. This corrupt process is legal because the data comes from a government agency. When done by the government, most data is not factual. It is not inflation-adjusted, but it is also biased. Investors receive most economic and financial data from vested interests who spin it to serve their purposes. For example, because macroeconomic data is so imprecise, if leading people in the financial services industry want capital market prices to rise, they use the reported data to paint a positive picture. But they use the same data to paint a negative image if they want to lower prices. The interpretation of data is all in the storytelling, which is another way of saying statistics lie. Often, these storytellers work in harmony in mindset if not from the same organization. It’s a serious matter that data provided and spun by people and organizations against whom we trade influences our opinions. We must learn to retrieve and analyze information in our interests because the economic and financial analysis is vital to securities analysis.

Understanding interrelationships in the data is the key. Financial markets are dynamic and slowly but constantly evolving in Trend and Cycle patterns due to changes in the underlying economic conditions. In this connecting the dots process, we must consider the interrelationships between the economic conditions and securities prices rather than focusing on one data series. It helps if you can think of capital markets in terms of nature. All things in nature – phenomena such as emotions and physical things – are affected by time and space. That includes market prices as they occur between buyers and sellers. New students of the market must understand that domestic economic data is only part of the picture. Just like corporate business managers, investors increasingly deal with a global economy. Push and pull forces on stock prices — like interest rates, commodity prices, and currency rates — now operate in the international arena. 175

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Today, every government and central bank action or speech is grist for the mill to direct interest rates, the US dollar, and savings versus investment in support of economic policies and political interests. But they do so globally as the central bankers of other significant nations compete, fighting the same battles to protect and evolve their economies. In any discussion of macroeconomics, one must start from the premise that “those with the money set the rules.” So in the United States, the commercial banks and their bank, the US Federal Reserve System (the Fed), is where to start one’s analysis. That is where most of the world’s money is created. Commercial bank lending creates money that facilitates personal and business spending. Excessive spending leads to inflation. Since the Federal Reserve Board (FRB) controls the funds needed for bank lending in the US, it controls factors that create and destroy inflation in the United States. In doing so, all countries are impacted. But ultimately, all central banks direct their policies to control consumer demand. Stock market prices may run up or down in tandem with the economic cycle, or they may run counter-cyclical to it, but both have a cycle, and the conditions are set by or permitted by the Fed. Bank lending is key to the economic and stock cycles by driving loans’ cyclic expansion and contraction. Lending can’t grow beyond the limits set by commercial bank reserves, so when the Fed wants to boost the economy or the stock market, it encourages banks to lend more by increasing their reserves. This process is Quantitative Easing (QE). Banks’ reserves shrink when the Fed reverses the QE process in what they call Quantitative Tightening (QT). To control bank reserves, the Fed, through its Federal Open Market Committee (FOMC), buys and sells securities on the open market or with commercial banks. Buyers and sellers independent of commercial banks also deposit or withdraw some of the transaction funds in their banks. Hence, the banking system reserves grow from both sources. This continuous cycle of money expansion and contraction results from policy decisions by unelected people intervening in our capital markets, often supporting political and business interests that oppose our interests. This conflict of interests, more than anything else, is the reason for much social unrest. Increased commercial bank reserves expand the money supply, given that banks can or want to find borrowers. Banks create money through loans simply by crediting their borrowers’ deposit/checking accounts when they make those loans. All commodities have a market price, and the interest rate you must pay to borrow is the price of money. So money is a commodity. Its price fluctuates according to the laws of supply and demand, depending on its use. The use of money is what macroeconomics discussion is all about. Governments spend it differently than would you and I. For government services we disagree with, it is a problem. There are always consequences to spending money – some intended, some unintended. If money builds armaments for warfare, that’s inflationary. Warfare destroys wealth. Over

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hundreds of years, affecting all markets, wartime has been the only cause of severe inflation for otherwise stable economies. Under the control of free markets during peacetime, the economic cycle is typically disinflationary. When a country’s Gross Domestic Product (GDP) grows, the demand for money increases, and interest rates rise because consumers and businesses often need to finance increased spending. GDP can expand when the business cycle is disinflationary or inflationary. Spending is financed by savings, selling assets, or (as we said), notably, borrowing from banks. Every few years, the price of things, including money, gets too high to finance spending from bank borrowings or diminished savings levels, so personal and business spending cannot keep up with the supply of available goods and services. Therefore, inventories build, business investment slows, and the economy goes into a recessive phase. This is the free market at work. Recession and disinflation, you can see, are pretty much different. A recession is bad. Low inflation and periods of disinflation are good. Disinflation is a suitable environment for investing, particularly in low-interest rate beneficiaries, such as banks and mortgage companies, REITs, and companies that hold lots of bonds and bank debt as liabilities, like regulated telephone companies, other utilities, and insurance companies. For political reasons, the traditional definition of a recession is now debatable. I define a recession as a period of contracting GDP lasting one quarter. Most Wall Streeters would say two quarters because that seldom happens and is bad for business. An economic depression would be when the GDP is contracting beyond four quarters. In contrast, people in the financial services industry will say that it only happened once 90some years ago and, for many reasons, will never happen again. But never say never because it could happen and therefore ought to be considered. Indeed, four consecutive quarters for an advanced economy to contract would have dire consequences. As for inflation, the Fed says it should be +2% annually as a target. But what level of inflation is good? If over 108 years (1914-2022), the annual US inflation averaged +3.26% (per government calculations that understate actual inflation). But most Americans believed the economy to be consistently good over this time, so annual inflation of at least 3.26% must be considered reasonable. The mean average conceals periods where inflation was terrible. So we have to look at history to tell us when inflation was unacceptably high. As noted, warfare has always been linked to severe inflation. Those were the times investors most needed inflation-hedged investments in their portfolios. There is, as we say, a cycle to anything in nature. There are several important business, economic, and market price cycles. As a recessive economy starts to recover, savings are re-built, financial assets accumulated, and debts paid down. Cash becomes plentiful again. Interest rates begin to fall as the supply of funds exceeds the demand for funds at current rates.

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Central bankers have created distorted rates today. Accordingly, we live in a mixed-up world; but I think history lessons are necessary so that people can understand what our markets should be doing in normal times. Past is prologue, so examining history is the best way to acquire a common-sense perspective that enables future success. Look at the economic picture leading up to 3Q1998, for instance. With higher bank reserves and a low enough interest rate to attract borrowers, bank loans started to rise, leading to higher spending, which, in turn, increased total demand and economic expansion. Internationally, the US economy took the lead in 1998 (it doesn’t always), and by late 1999 other major industrialized nations were beginning to follow. Excessive credit expansion led to inflation as the higher demand for goods and services exceeded supply. All other considerations aside, the Fed stepped in to reverse the cycle. Beginning in 1999, the Fed started to raise its rates to commercial banks several times until a recession. If the Fed were to abandon its mission to keep inflation in check, the US dollar would fall in price during periods of high inflation. Then the cost of imported goods — to a nation that is a heavy net importer like the US — would rise, causing inflation to spiral higher. However, because the US is a debtor nation, the Fed also tries to perform a balancing act between interest rates and foreign exchange rates and their combined impact on US jobs. The dollar would get too strong if US interest rates rose too much. That would cause businesses to stop spending on capital programs locally and start importing more goods from foreign vendors. Workers would lose their jobs. But if rates fell too quickly, the dollar would get too weak, causing imports to become needlessly expensive and inflation to return. History is full of examples of failed Fed policies. In 2003, more business and consumer spending was needed to boost the US economy. So to ramp up jobs and avoid the potential for deflation, the Fed began to force interest rates down to 1%. We learned that this Fed rate was well below reason, and the US dollar rate against significant currencies collapsed. The Dollar didn’t rebound until other central banks followed similar currency-weakening policies. That rush to depreciate currencies was the spark to turn the Gold Bear into a Bull. Some economists believe that the Fed’s sole mandate should be to maintain a narrow trading range between the US Dollar and other G20 currencies and allow the free market economy to manage itself. Money supply and demand must remain in approximate balance. However, for many years under Chairman Alan Greenspan and Ben Bernanke, the Fed played a controversial role in moving Monetary Policy too far in one direction or the other. That policy benefitted Wall Street traders who, with sophisticated technology, thrived on the volatility that stumped the public. With political pressure from the White House and Congress and self-interest pressure from Wall Street, the Fed has a difficult job. Current Governor Jay Powell would agree. Many investors never want the Fed to tighten money supply and borrowing conditions. But stocks must fall, and companies must fail for progress to follow. Planned obsolescence is the basis of American capitalism.

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Many different schools of economic theory exist today, from the Keynesian/monetarist/ demand-siders to the Kudlow-Laffer/supply-siders. All believe that various factors in the business and financial cyclic process have varying degrees of importance. That is a political discussion. But the basic equation for the cycle, as outlined above, remains the same. Economic data and statistics are as rife today in the investment world as the stats listed on the sports pages of daily newspapers. Some of it is important. The consumer and business spending aggregates are important economic numbers. Investors need to monitor big-picture top-down analytical studies of the overall economy and bottom-up studies of corporate fundamentals, such as revenues and earnings. All Economic data needs to be studied because all market instruments are interconnected. Prices are pushed and pulled by changing economic data. Investors must obtain and review that information to decide on Asset Allocation and Trading Strategy. The essential data for consumer spending on durable and non-durable goods and services are auto sales, consumer credit, and new permits/housing starts. For business spending, the most critical data are capital and operating expenditures and inventories. The effects on the capital markets of changes in data related to retail sales, employment, personal income and outlays are harder to analyze. However, this data is helpful when analyzing individual stock groups such as specialty retailers and service sectors like recreation and leisure stocks. Investing.com reports all this data as a free service. Every morning, one of my first steps is to check their Economic Calendar. To summarize this lengthy discussion, there are: Fig. 34.1 Seven economic analysis protocols investors should follow to see the big picture 1. “Fed Watching” as Quantitative Easing or Tightening impacts the stock, bond, commodity, and currency markets. 2. Interest rates affect the bond, stock, and currency markets. 3. Currencies affect certain stock groups, ETFs, mutual funds, gold, and commodities. 4. Consumer spending Indicators and the impact of rising or falling spending behavior on stock group beneficiaries. 5. Business spending Indicators and the impact of rising or falling spending behavior on stock group beneficiaries. 6. Inflation Indicators and point-of-cycle studies for stock groups, interest rates, and commodities. 7. Financial assets (i.e., stocks and bonds) versus hedged holdings (such as gold, cash, equities short-selling, and real estate).

Bottom line: Different economic studies give a unique global and regional perspective. As investors routinely analyze this information and connect the data relationships, a clearer picture of the economy emerges. The result can be better investing decisions.

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Economic data that moves market prices the most Economic data reporting on Financial Entertainment Television is more theatrical games and casino talk than investment related. The summarized numbers and wide-ranging accompanying stories are either substantially incomplete, inaccurate, or misleading. Yet it forms the basis for most investment decisions, which is a ludicrous approach to managing wealth. How we receive and use economic-related market data is crucial because the information does move prices. Consumer Price Index (CPI) data is factually incorrect and misleading. Yet, the Talking Heads dutifully report it every month to the glee of those who love being entertained. The US Bureau of Labor Statistics CPI program calculates that $1,000 spent by consumers on all items in April 1955 would cost $10,828.05 in April 2022. Did the cost of living increase by less than eleven times in 67 years, which is what the Government is telling us is fact? That number sounds huge, but a moron knows better. Inflation is always higher than what is reported by the government. The Truflation service is a more accurate source of inflation-adjusted data. Considering price increases over long periods is best to see incredible cost growth. Apples to apples, I can compare today’s prices of consumer items to what they would have cost 67 years ago in my pre-teen years. Let’s look at some examples. Fig. 35.1 Family purchase items used to compare inflation over 67 years Housing Food and beverages Telecommunications & print media Auto, maintenance & insurance Mass transit School tuition & books Medical-dental care Life & disability insurance Social & Recreation 180

Economic data that moves market prices the most

The house my parents bought for $13,500 was priced at about $1 million 67 years later, about 75 times higher. The BLS calculator shows inflation grew by less than 11 times or $146,178 for that house. The Coca-Cola I bought as a teenager in the local service station vending machine now costs 25 times as much. The average price per gallon of fuel for the car cost about 29 cents then and is close to $6.00 now, which is 20 times higher. The weekly newspaper is 32 times costlier. The movie theater costs 30 times more. A mass transit ticket has increased 30 times in price. Today’s cost to watch my favorite Toronto Maple Leafs is mind-blowing. In 1955, fans paid about $80 for a season’s ticket or $2 a game. Today the price is $150 for a single game. In addition, the average food and beverage cost is $35 per fan, and parking is $25 to $30. Teams pay sports players much more today. In 1955, my favorite hockey player, Jean Beliveau of the Montreal Canadiens, was paid C$21,000 per season (call it US$16,000 today). In contrast, my favorite player today, Auston Matthews, earns 750 times more for hockey and perhaps millions for endorsements. I could go on, but why bother? Flawed CPI data is the subject of entire books. The public knows that the annual Cost of Living increases far exceed government-produced inflation numbers. The Internet today is a valuable networking and information-sharing tool. Investors access potentially useful economic data and independent summaries at no cost. Where we go wrong is to overlook facts and focus on TV personalities who interpret data for broadcast media. Media reporters are well-educated, intelligent analysts who are biased or paid to say what they say. We get stories. Investors need fact-based information. What happens when a US Government agency like the Bureau of Labor Statistics of the Department of Commerce publishes data such as Employment and CPI, for example, is that the mass media reads these numbers like sports scores coming hot off the wire. Much of this economic data is delivered in the style of a casino’s blackjack dealer pulling a face card, or not, from the deck. The Sell-side pathetically leads the audience into a buy or sell decision simply because this number is up or down a tenth of a percentage point from consensus expectation. And the consensus is a guestimate itself. Bear with me. My following comments are based on 50 years of experience from a newbie professional accountant to the corner office of the penthouse floor of the stock exchange tower and onto semi-retirement. Misleading data and contrived narratives are a cause of bad investment decisions. Storytelling, you would know if you have read my two decades of blogging, has been taken to a new level of sophistication. I say the more significant the organization, the bigger the lie. Why? The answer is because those who make rules are sure to make them in their favor and hide their conflicts of interest. Big Banks, the ones I call Humongous Bank and Broker (HB&B), and Big Government serve many stakeholders. Because of conflicts, they are Big Liars to at least some of them. The less well-organized private sector is more likely to be truthful.

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Any financial services firm that has both Sell-side and Buy-side axes to grind in addition to personal ones cannot be trusted to protect the interests of the Buy-side. Legislation and Self-Regulatory Organizations (SRO) enabled personally risky partnerships, where they couldn’t lie to themselves, into publicly owned companies where lies are part of the culture. Their storytellers profit by legally speaking from both sides of their mouths, which is why some employees joined the industry. Within a securities law framework, SRO rules are the foundation of capital markets. Who do these rules help the most? Wall Street bosses and their close-knit networks of friends and family take full advantage of their expansive power and influence. Accordingly, only a few people trading in securities get wealthy, and most do not. Industry insiders take the gold while the clients, employees, contractors, the public, and the taxpayers get the shaft. As life has become more sophisticated, we can see that it is now about the power to make the rules, tell the stories, and influence opinions so that the rest make the wrong decisions. Social equity is needed, the right to be treated fairly by those who make the rules.

Cause and Effect Economic data is our subject today. Over the long run, economic data is the most significant factor that moves broad market prices. In any discussion of price series data, you will encounter the topic ‘trends and cycles.” As prices move over time, the average price rises, moves sideways, or falls. That is the trend. The price trend is what interests us most. Between points A and B, the prices will rise above and fall below the trend line. That movement is a cycle. In the early chapters, we referred to economic cycles, which are distinct from price cycles. In our search for reasons why prices move in trends and cycles, we must consider economic cycles, which is the subject of this lesson. Economics is the study of global, regional, national, and local business conditions and employment, corporate and individual incomes and costs, and producer and consumer price inflation levels and changes. The more you understand these factors and their influence on price motion, the likelier you will succeed as an investor. Capital market prices tend to rise and fall in groups that exhibit distinguishable patterns of behavior, which we call cycles. To understand cyclic behavior, we examine the market-related economic data that could be a causal factor underlying that price motion. All economic data that would affect the price of a stock depends on time and space. It follows that investors have to match a company’s stock with their time-frame interest, but also with an understanding of the space in which the company does business. An investor’s horizon may be minutes, hours, days, weeks, months, or years. That’s time. 182

Economic data that moves market prices the most

Investors may have interests in companies doing business worldwide (e.g., Coca-Cola or Nike), in regions of the world (e.g., Walt Disney or JP Morgan), mainly confined to one country or two (e.g., UnitedHealth Group or Home Depot), or a municipal region (e.g., Banc of California). That’s space. From a stock cycle perspective, like there are good stocks and bad, there are good companies and bad from a fundamentals perspective. Our job is to find the good companies and then, within that group, the good stocks. Market data we examine is often Peer Group data because that is where we see prices of bad companies rising and falling along with the good ones. Studying both the good and the bad companies, it’s easier. Fig. 35.2 The primary datasets used to observe the impact of the economic factors on market prices Commodity Prices Interest rates Foreign exchange (currency) rates Producer Prices Consumer Prices Employment Housing

In the demand and supply equation, there is always a two-way factor in all economic and financial data series that investors must consider. For example: 1. Commodity futures contracts for oil and gas, chemicals, industrial metal and precious metal, meat and agricultural products, and a few others affect and are affected by demand and supply, which are determined by many factors, including interest rates and currency exchange rates. 2. Interest rate derivative contracts affect and are affected by corporate and consumer debt levels, money demand and supply, capital market prices, and a few others. 3. Foreign exchange rates affect and are affected by the type and level of cross-border financial and trade-related transactions, central bank policies, commodity prices, interest rates, economic expansion or contraction, and a few others. 4. Commodity prices, interest rates, and currency exchange rates affect the producers of goods and services, affecting consumers. 5. Producer prices affect and are affected by commodity prices, basic material costs, labor costs, building costs and rents, interest rates, tax rates, and a few others. 6. Consumer prices both affect and are affected by producer prices, labor costs, interest rates, tax rates, and a few others. 7. Jobs data, including the unemployment rate and Labor Productivity, affects and is affected by corporate revenues, economic expansion or contraction, unemployment, personal spending, and a few others.

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8. Housing Construction data and the House Price Index affects and is affected by employment, personal savings, building costs, and a few others. It’s up to investors to connect the dots. That is not an easy task because the data is constantly changing. But at the end of the day, just like good companies, there are good investors. The good ones tend to have a broad awareness of demand and supply implications in the economic data. The market is also a network model system, so it pays to understand the dynamics of manyto-many relationships. To start the learning process, readers should click on the links to grasp the subject content and try to figure out the meaning of my statement that we do not trade in a vacuum, as every market price that changes affects other market prices. Most changes are influenced by the economic factors covered here. While the work of economists may provide well-written, helpful information, some of it is particularly important because investors believe it is part of what is called market-moving news. Market-moving information is where facts and narratives collide. Investors always observe the actions of other investors. It helps (if we can afford the cost) to have a few different objective sets of eyes that scan the immense mass of data in our capital markets world. Every quarter year and on the first Friday of every month, the financial entertainment media puts its followers through massive spin cycles. These are the US Gross Domestic Product (GDP), and US Nonfarm Payroll (aka Jobs Report Friday) reports. But the figures in government-produced reports are almost meaningless because they are biased estimates. The Bureau of Labor Statistics (BLS) and Bureau of Economic Analysis (BEA) are managed politically by the White House-controlled US Department of Commerce. Besides, the first reported data is constantly revised. White House reported data is in a single decimal place, so the US GDP, which in 2022 will be about $25.4 Trillion, could be written as growing at +3.0 %, but that could be +2.950% or +3.049%. The rounding difference here could be as much as $250 Billion. As that would exceed the combined GDP of Vermont, Wyoming, Alaska, Montana, and South Dakota, the rounding difference is significant. However, what Jobs, CPI, and other market-moving data do is add much grist to the Sellside mill. Washington–Wall Street highway is ever-shortening. The acute focus on these two reports – Jobs and CPI data summaries — is because people have a stake in their jobs if they are fortunate to have one. Most people feel the cost of getting to the end of the month, hoping not to be a dollar short. Well-informed investors and traders understand stock prices better than economists, script-reading media people, and central bankers, almost none of whom are expert investors in securities.

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Asking five economists and managing directors of Wall Street banks to define a recession and a depression, which should not be rocket science, will get at least a dozen answers for each. I think these people are more concerned with their own income and expenditures than those of the broad economy. Economists, statistics, economic analysis, and reports are ubiquitous. I don’t believe much of what I hear and read. Some of this data is important, and we’ll discuss that in this book. After applying the results of their analysis to the market, investors get quick feedback in the form of gains and losses. So they are likely to understand the broad topic of Macroeconomics better than most economists and even the research and leadership staff at central banks. The latter work in discrete areas of the whole, whereas investors need to see the big picture, and unlike economists and central bankers, they know that their mistakes are costly. If one economist asks, “What is the state of the economy today, and why are central bankers taking their current actions?” answers are never the same as from another. A common joke is that ten economists will give you 11 different answers. Even the Governors of the US Federal Reserve System (FRS) are often split on the most basic economic discussions. Bottom line: The job of a central banker is to keep domestic currency and interest rates stable so that the nation’s business sector can remain globally competitive. It’s not to manage the markets. An investor’s primary job is to determine the likely impact of economic data on the business environment and health of the private sector and its publicly traded securities. Understanding the market condition requires a big-picture perspective and common sense. All of us can do that.

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Macroeconomic study 1: US consumer data Macroeconomic data plays a vital role in investment analysis and trading strategy. Among hundreds of reports from many sources, we cover five Macroeconomic studies in this chapter and the following four. Most of this data, for better or worse, is produced by government agencies and some by other organizations: #1: Consumer data #2: Jobs data #3: Housing data #4: Corporate Business data #5: US Economy data Macroeconomic data is monitored daily in our search for Quality. We do it to find companies likely to meet our capital growth or income needs and to determine Trends, i.e., market direction, which we do for market timing purposes. This chapter focuses on US Consumer data because the US consumer is the number 1 driver of the US and global economy. My holistic approach to securities analysis includes many data studies as follows: 1. Fundamental (corporate financial statements) 2. Quantitative (statistical) 3. Qualitative (subjective or perceptive) 4. Macroeconomic (business conditions in which corporations must function). A large part of an investor’s job is to link economic data metrics to specific capital market sectors, industries, and companies. With macroeconomic data, a higher-than-expected level is positive/bullish for the US Dollar. In comparison, a lower-than-anticipated level is negative/bearish for the Dollar. Changes in the currency affect consumers in many ways. It’s best to look at the data presented in this chapter through the lens of the consumer as they make spending and personal investing decisions that are important to investment analysis.

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When needing both buyer (demand) and seller (supply) perspectives when analyzing stocks, investors include Consumer data in this chapter 36 and Corporate and Business data in chapter 39. Macroeconomic data changes impact stock prices and business operating conditions of entire industries. Newly reported macroeconomic data will often move stock prices by plus or minus five percent or more in a whole industry within minutes. Economic texts state that prices of consumer goods and services rise and fall based on demand and supply. But government agencies and central banks also set policies that significantly influence prices. Consequently, many believe excessive intervention leads to a Command Economy or, at the least, to a higher degree of Socialism. In any case, all those who trade prices must deal with these realities. Today we look at Consumer-related data, which is, by far, the largest segment of the US economy. Note that Jobs data is included with Consumer data because employment is a crucial factor in consumption. While the list seems lengthy, there are only a few monthly reports to study. The time to review each takes only five minutes, so the time demand is not much. The essential Consumer-related reports for our purposes are as follows. US CB Consumer Confidence Conference Board Consumer Confidence measures the level of consumer confidence in economic activity. It is a leading indicator as it can predict consumer spending, which plays a significant role in economic activity. Higher readings point to higher consumer optimism. US Month over Month (MoM) Core Consumer Price Index (CPI) The Core Consumer Price Index (CPI) measures the changes in the price of goods and services, excluding food and energy. The CPI measures price change from the perspective of the consumer. It is a meaningful way to measure changes in purchasing trends and inflation. US MoM Core Retail Sales Core Retail Sales measure the change in the total sales value at the retail level in the U.S., excluding automobiles. It is an important indicator of consumer spending and a pace indicator for the US economy. US MoM Retail Sales Retail Sales measure the change in the total sales value at the retail level. It is the leading indicator of consumer spending. US Unemployment Rate The Unemployment Rate measures the percentage of the total workforce that is unemployed and actively seeking employment in the previous month. This report considers that those out of work for a certain length of time are no longer

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part of the workforce, which is untrue because millions of highly trained workers refuse to take mundane low-paying jobs. US JOLTs Job Openings JOLTs is a US Bureau of Labor Statistics survey to measure job vacancies. BLS collects data from employers about employment levels, job openings, recruitment, new hires, and separations. JOLTS defines job openings as unfilled on the last business day of the month. A job is “open” only if it meets all three of the following conditions: 1. A specific position exists, and there is work available for that position. 2. The job could start within 30 days, whether or not the establishment finds a suitable candidate during that time. 3. There is active recruiting for workers from outside the establishment location that has the opening. My biggest concern with this report is that the government uses it to claim job seekers are in huge demand when that is likely not the case. For instance, a technology company like Microsoft will post one job opening in all 50 states, so I suspect the summary data is false. US BLS Nonfarm Payrolls Nonfarm Payrolls measure the change in the number of people employed during the previous month outside the farming industry. The report is based on statistical assumptions further weighted by past seasonal hiring. The Bureau of Labor Statistics is an agency under the oversight of a White House cabinet political appointee. ADP Company publishes a more accurate US jobs report based on surveys from about 400,000 US companies. Mainstream media wants the public to rely on the biased BLS report. US Existing Home Sales Existing Home Sales measures the change in the annualized number of existing residential buildings sold in the previous month. This report helps to gauge the strength of the US housing market and is a crucial indicator of economic stability. US New Home Sales New Home Sales measures the annual number of new single-family homes sold during the previous month. This report tends to have more impact when released ahead of Existing Home Sales because the reports are tightly correlated. US NAR MoM Pending Home Sales The National Association of Realtors (NAR) Pending Home Sales Report measures the change in the number of homes under contract to be sold but still awaiting the closing transaction, excluding new construction.

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The Daily Economics Calendar at Investing.com highlights these reports. Click on the headings links to get the latest information. For a critical assessment of government reports related to the Consumer, I defer to the commentary and conclusions of Rick Davis at the Consumer Metrics Institute. For years, his work has been exceptional. It’s free, but premium reports can be subscribed to by members who want access to a deeper analysis of sub-sectors of the consumer market. Bottom line: Investors must understand each key macroeconomic report as they impact capital market prices. But the various US consumer data reports are the most important, so I also review the independent Consumer Metrics Institute report.

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Macroeconomic study 2: US jobs data In this chapter, we look at US Employment-related data. Employment impacts both the producer of goods and services and the consumer. To the producer, employees affect revenues, costs of production, and sales expenses, which affect earnings. Employment income affects one’s ability to live a satisfactory lifestyle, affecting consumer spending and saving. Non-government employment levels rise and fall depending on economic activity from the private or public sector. Assessing the US labor market supports an investor’s belief that the economy is either growing, in a slowing growth situation, stagnant, or declining. US government agencies and other organizations produce data on Consumer and Producer Prices, Housing, Interest Rates, and Jobs. Like a juggler of balls understands, each one is important. Employment prices are a function of market supply and demand in the economy and minimum wage laws. All investors of capital market prices must deal with these realities. As the US is still the world’s economic engine and political policy driver for many countries, US Jobs data is the most important. Below are the most critical US Employment-related Indices that we watch. US BLS Nonfarm Payrolls Nonfarm Payrolls measure the change in the number of people employed in the previous month outside the farming industry. This report summarizes statistical assumptions further weighted by past seasonal hiring. The Bureau of Labor Statistics is an agency under the oversight of a White House cabinet political appointee. The ADP Company publishes a more accurate US jobs report. US ADP Nonfarm Employment Change The ADP National Employment Report measures the monthly change in private nonfarm employment based on payroll data of approximately 400,000 US business clients. The release is a good predictor of the government nonfarm payroll report as it is two days ahead of the government data. The change in this indicator, however, can be exceptionally volatile. 190

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US Initial Jobless Claims Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the past week. This report is more frequent than weekly US economic data, but the market impact varies greatly. US Unemployment Rate The Unemployment Rate measures the percentage of the total unemployed workforce in the previous month and those actively seeking employment. US JOLTs Job Openings This US Bureau of Labor Statistics survey measures job vacancies. It collects data from employers about their business employment, job openings, recruitment, hires, and separations. JOLTS defines Job Openings as all unfilled positions on the last business day of the month. A job is “open” only if it meets all three of the following conditions: 1. A specific position exists, and there is work available for that position. 2. The job could start within 30 days, whether or not a suitable candidate is found. 3. There is active recruiting for workers outside the establishment location that has the opening. As noted in the previous chapter, I have doubts about the integrity of this data and the political and mainstream media reporting. US Building Permits Building Permits measure the change in the number of new building permits issued by the government. Building permits are a vital indicator of demand in the housing market. It is essential to familiarize yourself with these reports as they impact capital market prices. Trends and cycles in the US Jobs Market affect consumer spending. Spending is the primary driver of the Consumer Discretionary and Staples segments. During high employment and consumer spending cycles, expect long-term bullishness for the stocks in the GICS-coded industries listed below and bearishness when the economic data is weak. Fig. 37.1 Industries likely to be most impacted by trend reversals in economic data Auto Parts & Equipment Manufacturers

25101010

Automobile Manufacturers

25102010

Motorcycle & Bicycle Manufacturers

25102020

Consumer Electronics Manufacturers

25201010

Housebuilders

25201030

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Household Appliances Manufacturers

25201040

Housewares & Specialties Manufacturers

25201050

Leisure Products Manufacturers

25202010

Apparel, Accessories & Luxury Goods Manufacturers

25203010

Footwear Manufacturers

25203020

Textiles Manufacturers

25203030

Casinos & Gaming Services

25301010

Hotels, Resorts & Cruise Line Services

25301020

Leisure Facilities Services

25301030

Restaurants

25301040

Education Services

25302010

Advertising Services

25401010

Broadcasting & Cable TV

25401020

Movies & Entertainment

25401030

Publishing

25401040

Internet Retail

25502020

Department Stores

25503010

Apparel Retail

25504010

Computer & Electronics Retail

25504020

Specialty Stores

25504040

Automotive Retail

25504050

Home-furnishing Retail

25504060

Drug Retail

30101010

Food Distributors

30101020

Food Stores

30101030

Hypermarkets & Supercenters

30101040

Brewers

30201010

Distillers & Vintners

30201020

Soft Drinks

30201030

Agricultural Products

30202010

Packaged Foods & Meats

30202030

Tobacco

30203010

Household Products

30301010

Personal Products

30302010

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Long-term charts of the US Automotive Retail industry companies show similar trading patterns because consumer buying conditions affect all auto manufacturers. When a chart such as Copart, Inc [CPRT], which is in the auto online auction business, is more bearish than industry manufacturers like General Motors [GM], it’s time to investigate. I discovered in October 2021 that Copart company sales and earnings over five years and projected for the next year were significantly higher than GM’s, so the problem with CPRT stock weakness was elsewhere. To start 3Q2021, investors became concerned about the supply chain, gasoline price inflation, and Quantitative Tightening issues. Supply chain problems would hurt the manufacturers’ production of new cars and cause prices of used cars to rise, reducing sales turnover in the auction companies. Gasoline prices were rising, so car buyers would likely buy the more efficient new vehicles. Quantitative Tightening would lead to fewer bank loans, but new cars were dealer financed. You can often follow the dots between economic changes and stock prices. Any time there is a strong Employment report from the Bureau of Labor Statists (BLS), which is always on the first Friday of the month, go to the FinViz.com Screener and then to Industry. Then go through my list of companies in the Consumer segments. Click on charts (a line chart of weekly data) to see how the peer group reacts. For US economic reports, look for the smaller US-centric companies because the most prominent companies are multinationals. Bottom line: I always try to link the dots between the most vital macroeconomic reports and companies that are likely to be affected. Investors who try to understand the cause-and-effect phenomena in capital markets are more likely to succeed.

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Macroeconomic study 3: US housing data This chapter discusses Housing-related data, a significant segment of the US economy. All told, the entire Real Estate industry represents about 20% of the US economy, and the Residential Construction segment is a significant piece. So, along with Consumer spending, housing is the biggest driver of the world’s largest economy. The Housing data and small list of residential construction companies that trade on the market could be a valuable study for investors, one that many American investors have a good grasp of. Houses are either owner-occupied, rented from owners, unoccupied, or under construction. Costs to build new houses and the selling prices of new and old houses may be rising, stable, or falling. That may happen city by city, regionally, or nationally. A house may have a mortgage or not. Wealthier homeowners tend to be mortgage free. In recent years, the heirs of affluent persons were inclined to sell them or put mortgages on them for various reasons. Investors will study these housing market reports to assess the impact of changes in the data on capital market prices. US Building Permits Building Permits measure the change in the number of new building permits issued by a government. Building permits are a important indicator of demand in the housing market. US Housing Starts Housing starts measure the change in the annualized number of new residential buildings that began construction during the month. It is a leading indicator of strength in the housing sector.

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CFTC Copper speculative net positions Copper is a significant component of new house construction. The Commodity Futures Trading Commission’s (CFTC) weekly Commitments of Traders (COT) report breaks down the net positions of Copper traders in US futures markets. The data is released each Friday at 3:30 pm Eastern Time to reflect the traders’ positions on the prior Tuesday. US Existing Home Sales Existing Home Sales measures the change in the annualized number of residential buildings sold in the previous month. This report helps to gauge the strength of the US housing market and is a crucial indicator of economic stability. US New Home Sales New Home Sales measures the annual number of new single-family homes sold during the previous month. This report tends to have more impact when released ahead of Existing Home Sales because the reports are correlated. US MoM Pending Home Sales The National Association of Realtors (NAR) Pending Home Sales Report measures the change in homes under contract to be sold but awaiting the closing transaction, excluding new construction. In addition to the Residential Builders, we watch the prices of stocks in the Mobile and Manufactured House industries and related retail industries like Household Appliances, Housewares, and Home Furnishing. Below are the essential US Housing-related indices that we watch. Fig. 38.1 Industries likely to be most impacted by trend reversals in housing data Housebuilders

25201030

Household Appliances Manufacturers

25201040

Housewares & Specialties Manufacturers

25201050

Home-furnishing Retail

25504060

Household Products

30301010

During high real estate development and consumer spending cycles, expect long-term bullishness for the stocks in the industries listed in the table above and bearishness when the economic data is weak. For example, if you look at the long-term charts of the US Residential Construction industry, you will see similar trading patterns.

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Fig. 38.2 Econoday Graph showing the impact of falling Mortgage Rates on New Home Sales

Fig. 53.2 illustrates New Home Sales for three years through July 2016, showing how sales dropped as mortgage rates increased. After 2016, mortgage rates dropped again, and New Home Sales picked up. In 4Q2021, the first round of Quantitative Tightening in years hiked rates, leading to substantially higher mortgage rates. After December 2021, exchange-listed House Builder stocks fell from 15% to 25%. From 2022 until June 6, the major House Builder ETFs, ITB and XHB, plunged more than -26.5%. This link to the housebuilder company and stock data will be helpful for review purposes. As can be observed from the peer group charts, the stocks of many Housebuilder companies were under-performers in 2022. During the 2010-2020 economic growth period, interest and mortgage rates were low and fell, while construction data was bullish. Thus it is understandable that the related stocks were bullish. Whenever mortgage rates increased, new home sales plummeted. Bottom line: As economic conditions change, so do the share prices of stocks in Home Building and related industries.

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Macroeconomic study 4: US corporate & business data Corporate & Business data related to goods and services prices affect the broad economy —prices of goods and services impact both the producer and consumer. To the producer, changing prices affect revenues, costs, and expenses, which affect earnings. To the consumer, prices affect the Cost of Living, which affects their spending, saving, and investing. Each of these reports influences capital market prices. Below are the essential US Corporate & Business data indices we watch. Consumer data (chapter 36) is often included along with Corporate and Business data (this chapter) when investors need both buyer (demand) and seller (supply) perspectives to analyze stocks. The data presented in this chapter should be seen through the lens of the business executive who organizes production, manages costs, and sets prices. While the list seems lengthy, there are only one to two daily reports to study, taking only five minutes. US CB Consumer Confidence Conference Board Consumer Confidence measures the level of consumer confidence in economic activity. It is a leading indicator as it can predict consumer spending, which plays a significant role in economic activity. Higher readings point to higher consumer optimism. US MoM Core Retail Sales Core Retail Sales measure the change in the total sales value at the retail level in the U.S., excluding automobiles. It is an important indicator of consumer spending and a pace indicator for the US economy. US Existing Home Sales Existing Home Sales measures the change in the annualized number of residential buildings sold in the previous month. This report helps to gauge the strength of the US housing market and is a crucial indicator of economic stability.

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New Home Sales New Home Sales measures the annual number of new single-family homes sold during the previous month. This report tends to have more impact when released ahead of Existing Home Sales because the reports are correlated. US Building Permits Building Permits measure the change in the number of new building permits issued by the government. Building permits are a leading indicator of demand in the housing market. US MoM Producer Price Index (PPI) The producer Price Index measures the change in the price of goods that manufacturers sell. PPI is a leading indicator of consumer price inflation. US ISM Manufacturing Purchasing Managers Index (PMI) The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) Report on Business is based on monthly replies to questions asked of purchasing and supply executives in over 400 industrial companies. For New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers Inventories, Employment, and Prices, this report shows the percentage reporting each response, the net difference between the number of responses in a positive or negative trend and the diffusion index. Responses are raw data and are never changed. The PMI is a composite index based on the seasonally adjusted diffusion indices for five indicators with varying weights: New Orders –30%, Production –25%, Employment –20%, Supplier Deliveries –15%, and Inventories – 10%. US MoM Core Durable Goods Orders Core Durable Goods Orders measure the change in the value of new orders for long-lasting manufactured goods except for transportation items. Because airplane orders are volatile, the core number gives a better gauge of ordering trends. A higher reading indicates increased manufacturing activity. US Unemployment Rate The Unemployment Rate measures the percentage of the total workforce that is unemployed and actively seeking employment in the previous month. US BLS Nonfarm Payrolls Nonfarm Payrolls measure the change in the number of people employed during the previous month, excluding the farming industry. Job creation is the primary indicator of consumer spending, which accounts for most economic activity. US JOLTs Job Openings The US Bureau of Labor Statistics survey measures job vacancies. It collects data from employers about their business employment, job openings, recruitment,

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hires, and separations. JOLTS lists unfilled positions on the last business day of the month. A job is “open” only if it meets all three of the following conditions: 1. A specific position exists, and there is work available for that position. 2. The job could start within 30 days, whether or not a suitable candidate is found. 3. There is active recruiting for workers from outside the location that has the opening. As noted in the previous chapter, I have doubts about the integrity of this data and the political and mainstream media reporting. My biggest concern with this report is that the government uses it to claim job seekers are in huge demand when that is likely not the case. For instance, a technology company like Microsoft will post one job opening in all 50 states, so I suspect the summary data is false. US QoQ Gross Domestic Product (GDP) Gross Domestic Product (GDP) measures the annualized change in the inflationadjusted value of all produced goods and services. It is the broadest measure of economic activity and the key indicator of the economy’s health. There are three versions a month apart - Advance, Second release, and Final. The usual effect: Actual > Forecast = a stronger US Dollar. In each case, a higher-than-expected level is positive/bullish for the USD, while a lowerthan-expected level is negative/bearish for the USD. Fig. 39.1 Supplementary list of significant corporate and business-related data to be monitored CFTC Copper speculative net positions Investing.com S&P 500 Index US ADP Nonfarm Payrolls US API Weekly Crude Oil Stock US Baker Hughes Oil Rig Count US Consumer Price Index (CPI) MoM US Consumer Price Index (CPI) YoY US Core Consumer Price Index (CPI) MoM US Core Consumer Price Index (CPI) YoY US Core Producer Price Index (PPI) MoM US Core Producer Price Index (PPI) YoY US Crude Oil Inventories US Cushing Crude Oil Inventories US Durable Goods Orders MoM US Federal Open Market Committee (FOMC) Meeting Minutes US Gross Domestic Product (GDP) Price Index QoQ

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US Housing Starts US Industrial Production MoM US Industrial Production YoY US Initial Jobless Claims US ISM Non-Manufacturing Purchasing Managers Index (PMI) US Manufacturing Purchasing Managers Index (PMI) US PCE price index MoM US PCE Price index YoY US Pending Home Sales MoM US Personal Income MoM US Personal Spending MoM US Producer Price Index (PPI) YoY US Retail Sales MoM US Retail Sales YoY US Services Purchasing Managers Index (PMI)

Because the media announces the data with an entertainment flair, and the reports are based on estimates, inexperienced investors should not overreact but exercise patience while observing how others react to the announcements. Remember that professional investors, as a rule, buy into weakness and sell into strength. That means that the implications of immediate reactions in the market may be misleading. Bottom line: Capitalism has made America the world’s leading and most prosperous economy. US corporations create more US wealth than any other economic segment because they employ people, cause investment, and pay taxes that fund consumer and government expenditures. Presently, of the total US$18.5 Trillion GDP, Consumers account for $12.7T (68.8%), Investors $3.0T (16.2%), Government $3.3T (17.7%), and International Trade (exports minus imports) -$0.5T (-2.7%). But the corporations make it happen.

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Macroeconomic study 5: US economy data This chapter discusses the US economy because the US GDP (i.e., economy) is the biggest and most important in the world. Investors study the GDP to understand the overall business conditions affecting the financial situation and operations of the companies they invest. When China’s economic and capital markets systems further mature, we will study that economy in greater depth. Fig. 40.1 Gross Domestic Product (GDP) equation GDP = private consumption + gross private investment + government spending + (exports - imports) or, as expressed in algebraic shorthand : GDP = C + I + G + (X-M)

Investors are told the most important economic data reports on Prices, Jobs, Housing, and Interest Rates are produced by government agencies. We wish the private sector produced the data we rely on in a free market economy to make important financial and investment decisions. Investors watch the US economic big picture because the US economy is the world’s most important. We try to understand the overall business environment that affects a company’s financial condition and operations, today and in the future, of the companies whose shares we trade. Many of our investments are in foreign companies trading in foreign markets, but in terms of money and investing, the US is the global leader, and when the US sneezes, the rest of the world catches a cold. Below are the essential US Economy Indices that we monitor. US CB Consumer Confidence Conference Board Consumer Confidence measures the level of consumer confidence in economic activity. It is a leading indicator as it can predict consumer spending, which plays a significant role in economic activity. Higher levels point to higher consumer optimism.

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US QoQ Gross Domestic Product (GDP) Gross Domestic Product (GDP) measures the annualized change in the inflationadjusted value of all produced goods and services. It is the broadest measure of economic activity and the key indicator of the economy’s health. There are three versions a month apart - Advance, Second release, and Final. The usual effect: Actual > Forecast = a stronger US Dollar. US Housing Starts Housing starts measures the change in the annualized number of new residential buildings that began construction in the month. It is a leading indicator of housing sector strength. CFTC Copper speculative net positions The Commodity Futures Trading Commission’s weekly Commitments of Traders (COT) report provides a breakdown of the net positions for “non-commercial” (speculative) traders in US futures markets. The COT report is considered an indicator for analyzing market sentiment. Many speculative traders use the data to help them decide whether or not to take a long or short position. The data is released each Friday at 3:30 pm Eastern Time, pending a holiday, to reflect the positions held on that Tuesday. US Unemployment Rate The Unemployment Rate measures the percentage of the total workforce that is unemployed and actively seeking employment in the previous month. US BLS Nonfarm Payrolls Nonfarm Payrolls measure the change in the number of people employed in the previous month, excluding the farming industry. Job creation is the key indicator of consumer spending, which accounts for most economic activity. US MoM Producer Price Index (PPI) The Producer Price Index (PPI) measures the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, accounting for most of it. US MoM Core Consumer Price Index (CPI) The Core Consumer Price Index (CPI) measures the changes in the price of goods and services, excluding food and energy. The CPI measures price change from the perspective of the consumer. It is a way to measure changes in purchasing trends and inflation. US S&P 500 Index The Investing.com series of capital market indexes are developed in-house. Each index measures exposure to major currency pairs, commodities, and indexes, using data from futures exchanges and OTC providers on all long and short open

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positions. A reading above 50% means that more than half of traders hold long positions for that instrument. A reading between 50%-70% is bullish for indices, and a reading between 30% and 50% is bearish. A reading above 70% indicates overbought conditions, and a reading below 30% indicates oversold conditions. The S&P 500 Index is a leading indicator. The reading was 48.1% on June 6, 2022. The previous reading was 50.8%. In other words, investors changed to a negative view of the US economy then. Each of these macroeconomic reports affects capital market prices. As only a few essential reports are published daily, investors require about five minutes daily to review the data. Investors can study the data in many ways to suit different objectives, but what you are looking for is to determine how changes in the economy are impacting an entire industry as reflected by changes in the share prices. We focused on the US macroeconomic data and the Fed in these last few chapters, but global inflation has changed the world’s economic outlook in 2022. McKinsey & Company published a series of charts in July 2022 that underscores growing concerns for investors. Bottom line: Everything that happens in the economy is a matter of cause and effect. Changes in the economic data as it relates to the consumer and the producer are correlated to operating conditions and, ultimately, to prices in the stock market.

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Financial study 1: US treasury data US Treasury management impacts all equity and debt market prices in the world. Treasury debt and deficits affect US economic expansion and contraction, trade balances, inflation and deflation, commercial lending rates of private banks, and international currency rates. The agency website defines the US Treasury as “the steward of U.S. economic and financial systems and an influential participant in the world economy.” Role and Mission of the US Treasury. The U.S. Department of the Treasury’s mission is to maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combating threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively. The Treasury Department is the executive agency responsible for promoting economic prosperity and ensuring the financial security of the United States. The Department is responsible for various activities, such as advising the President on economic and financial issues, encouraging sustainable economic growth, and fostering improved governance in financial institutions. The Department of the Treasury operates and maintains systems critical to the nation’s financial infrastructure, such as the production of coins and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government. The Department works with other federal agencies, foreign governments, and international financial institutions to encourage global economic growth, raise living standards, and predict and prevent economic and financial crises to the extent possible. The Treasury Department also performs a critical and far-reaching role in enhancing national security by implementing economic sanctions against foreign threats to the U.S., identifying and targeting the financial support networks of national security threats, and improving the safeguards of our financial systems.

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Why does the Federal Reserve Bank claim to have the same role as Treasury? Which organization is accountable and responsible to the American people? This issue is a serious matter the US Congress should debate. The Fed is a non-governmental organization aiming to manage US currency rate stability. Its policies relate to the financing and operations of US commercial and international banks using the Federal Reserve System. The US Treasury’s primary function is to finance the money requirements of the government. There is always a difference between taxes, which depends on fiscal policy, and spending programs, which rely on political platforms and the government’s ability to enact spending laws. The net result of taxing and spending determines the government’s need for cash. The greater the deficit, the higher the rate of interest the Treasury must pay. The annual deficit accumulates and increases the debt, which also must be serviced as the debt holders need to be paid. Investors must study Treasury rates and the yield curve when investing in Bonds/Fixed Income markets worldwide and the stocks of high-debt companies. All borrowing of money is competitive and based on the assessment of risk. The interest rate market is massive. Interest rate derivative specialists are challenged to engineer new financial products to meet the needs of governments, companies, and individuals that spend more than they earn. All governments of the leading nations are in debt because they spend more than they raise in taxes. The national debt among nations is now a matter of a political inclination to spend more than tax. The Current Account Deficit vs. Trade Deficit also impacts the US Treasury. So is the country’s status as a debtor vs. creditor nation. Until 1980, the US enjoyed a massive capital account surplus. Americans held more investments in other countries than all the countries in the world in total held in the US. This creditor nation status meant that Americans enjoyed dividends and interest payments that made up for the declining savings rate, kept the US Dollar strong, and favored the US in international trade agreements. Without that financial strength, the US Fed could not have raised its policy rate to 20% in 1980 to kill the country’s double-digit inflation. The downside was that foreigners then demanded US risk-free assets in such numbers that by 1986, the US became the biggest debtor nation in the world. Foreign investments in the US soon eclipsed the total US investments abroad. US interest payments and dividends were flowing out of the country. From that point, the US debt service became a problem for the Treasury Department, and the Fed was forced to continually lower its policy rate as the government deficits and debt grew in leaps and bounds.

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Fig. 41.1 Seventy-year history of Fed rates

Following the global banking system collapse in 2008, the Fed dropped rates to zero. In response, other countries went to negative rates and continually dropped the exchange rate of their currencies to the US Dollar. In 2022, however, the Fed started to raise rates to fight the worst inflation since 1980, which is now creating enormous problems for the US Treasury. If Treasury debt were marked-to-market, it would be bankrupt. Because of the total amount of debts involved, a government’s Treasury rates, called Yields to investors, are the most important. Treasury rates directly affect bond prices and the US Dollar, which affects the equity prices of investors. Treasury rates also affect commercial bank lending rates. Those affect a company’s revenue or expenses depending on if it is a lender or borrower. Higher rates disadvantage the borrower and advantage the lender. Lower rates are the opposite. If investors borrow money, they do so against the value of securities. In this case, the lender calls the debt margin. The total margin of investors affects stock and bond prices. Excessive margin is inflationary. Treasury rates worldwide have been inadequate for years and, in many cases, even negative.

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Fig. 41.2 Total value of negative-yielding bonds rising since 2015 peaked in 2021

This Financial Times chart shows that in 4Q2020, more than US$18 trillion of global government and corporate-issued debt was yielding less than zero. In 3Q2022, Treasury rates turned positive in most countries, which is a condition that is likely to continue. On May 4, 2022, Reuters reported the Bloomberg Global Aggregate Negative Yielding Debt Index had dropped from 4500 securities in 2021 to only 100 negative-yielding bonds. Negative yields cause commercial bank lenders to extend loans, presumably increasing money flows in the economy and probably helping prevent global deflation. Investors watch the Trends of the world’s most important Treasury yields and interestrelated Indices. Fig. 41.3 List of information sources for global interest rates and debt instrument prices World Government Bond Comparisons World Government Bond Yields and Spreads World Bond Indices (Price, Performance, Technical Assessment) Real-Time Streaming Financial Futures (Price, Performance, Technical Assessment)

Investing.com is a good source of free information on all global interest rates and debt instruments. Investors will appreciate their real-time streaming of technical (buy/sell) indicators. Familiarizing yourself with the trends of bond prices is crucial as they impact equity market prices. My business partner published an opinion piece In April 2018 directed to his concerns that rising Treasury yields were the one factor most likely to signal an end to the long-running Equity Market Bull. Bond/Fixed Income is also a category of Exchange Traded Funds (ETF). ETFs may be helpful in investors finding an income stream from a pooled investment that meets their needs. Investors can also use the ETF data to locate attractive individual bonds. 207

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Fig. 41.4 The ETFdb.com database gives access to all types of Bonds Money Market Government Bonds International Government Bonds Emerging Markets Bonds Corporate Bonds Preferred Stock/Convertible Bonds High-Yield Bonds Inflation-Protected Bonds Mortgage Backed Securities National Munis California Munis New York Munis

Click on the subject heading in Fig. 41.4 table to see the Bond classifications. Then you can click through the information to get the Fact Sheets and the significant holdings of individual Bonds. Bottom line: Governments compete with corporations for money. While governments tend not to go bankrupt, corporations do. As Treasury rates rise, corporations must also pay higher rates as they issue new debt. Many then find they cannot service the debt.

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Financial study 2: US Federal Reserve data In 2022, with the inversion of the 10-2-year Treasury Yield curve inversion, there is much talk (and evidence) of recession. Now the Fed says it’s their job to fix the economy, which is not true because they are not employers or consumers and pay no taxes. The Fed is not part of the GDP equation, which by the way, equals Consumption plus Investment plus Government plus the net of International Trade, i.e., exports minus imports. But – and this is important – in its oversight of commercial banks, the Fed can harm the economy. Their Quantitative Tightening policies can lead to demand destruction. But their Quantitative Easing does not add to increased demand because they cannot force a commercial bank to lend money or individuals and companies to borrow it just because bank credit is available. We previously covered Interest Rates in capital markets used by governments, government agencies, and other organizations. Today we look at the US Federal Reserve System (FRS). Like it or not, the Fed is the most significant influence in global financial markets, including worldwide debt and equity markets. To me, that’s not a good thing because the Fed has been managed poorly for years by academicians who publish theories or perish. Those are not market-smart people. In recent years, the Fed has been increasingly influenced by another market-dumb group, the politicians. The major investors in the world know this is a financial accident ready to happen. Not many years ago, in 1992, billionaire currency and commodities traders George Soros and his partner Jim Rogers beat the central bank of England for at least $1 billion when realizing the British Pound was in trouble. A review of the Fed website is necessary. On its website, the Fed describes its mission. The Federal Reserve System is the central bank of the United States. Congress founded it in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. Today, the Federal Reserve’s duties fall into four general areas: • conducting the nation’s monetary policy by influencing the economic and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates 209

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• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers • maintaining the stability of the financial system and containing systemic risk that may arise in financial markets • providing financial services to depository institutions, the US government, and foreign official institutions, including playing a significant role in operating the nation’s payments system. The ”founded by Congress” statement is misleading. Congress and a private organization agreed that the non-governmental organization would have the mandate to control the financial and monetary system of the United States. Despite continuous failures to meet its obligations, the Fed maintains control. The US Federal Reserve Bank is the organization whose policies and actions affect – some say control – all Macroeconomic data. I’m afraid I have to disagree. But the Fed’s bully pulpit does affect the US financial markets. Fed policies from the Federal Open Market Committee, speeches of its governors, and Open Market Operations are also helpful tools. Fig. 42.1 List of Fed-related reports Fed Balance Sheet Fed Chair Press Conference FOMC Forecasts FOMC Rate Monitor Tool FOMC Minutes Money Supply Bank Reserves Current Account Treasury International Capital Beige Book Atlanta Fed Business Inflation Expectations

Familiarizing yourself with these reports is crucial as they impact capital market prices. If the Fed did not control interest rates, the rates would rise or fall depending on the economy’s private market demand and supply of money. The Fed has two rates. 1. Fed Funds Rate is the interest rate banks, savings and loans, and credit unions depository institutions charge each other for overnight loans. That doesn’t increase commercial bank interest rates or make them lend more. 2. Fed Discount Rate is the interest rate the 12 regional Federal Reserve Banks charge when they make overnight collateralized loans directly to their region’s depository institutions. This Discount Window rate is unimportant to financially sound banks. 210

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Only the weakest banks that need liquidity that other commercial banks will not lend them will go to the Fed’s Discount Window. All commercial banks must maintain liquidity levels, even via short-term borrowing. It’s done in some cases to stave off a bank failure. Money is a commodity controlled by private sector depository financial organizations that operate within the liquidity requirements of the Fed. Commercial banks underwrite loans to companies and individuals. The amount of loans affects the turnover (i.e., velocity) of money, which sometimes puts pressure on the Fed to alter its policy on the money supply. The US Fed maintains the world’s most extensive and sophisticated financial system. Its Dollar is the basis of the world’s reserve currency, money set aside by all central banks to be used for international transactions. If a Mexican company purchases grain from a Canadian supplier, they do not pay in Pesos or Loonies. Their central banks ensure the trade is completed in US Dollars. In recent years, the global payment system has also used yuan, rubles, and euros as payment for trade in goods and services. Markets today are global. International transactions are affected by ongoing events in financial marketplaces outside the United States. That requires a study of other central banks. Here is a list of websites of the world’s central banks. The world’s central bank for 63 country central banks is the Bank for International Settlements (BIS) in Basel, Switzerland. The US, UK, Germany, France, Italy, and Belgium are BIS permanent members. International banks closely watch the Eurodollar futures market. That’s the measure they use to set interest rates. Commercial banks, hedge funds, and major corporations trade the EUDUSD contract to offset changing interest rates with contracts many years in the future. Currency futures and options trading described on the CME website is beyond the scope of this book. Currency pairs trading is discussed in another chapter. EUDUSD contracts at Investing.com is the most vital futures contract to watch. At this point, the EUDUSD is in a steep decline that started in early January 2022. The inverse USDEUD would show it as a rapid increase. A soaring USDEUD rate means the US commercial banks are driving interest rates higher. Partly that’s a result of the Fed’s Quantitative Tightening pressure on the Money Supply. When interest rates rise, the Treasury competes with corporations to access credit markets. It’s normal for the USDEUD and US interest rates to grow slowly, but when they soar, there is a Liquidity Squeeze. Illiquidity can feed on itself to drive rates higher and faster until there is a significant default in the credit markets. We have seen that happen with giant hedge funds and countries that cannot find the cash to service their USD-denominated debt. Illiquidity recently caused a prominent Crypto fund to fail. And countries like Turkey, Argentina, Sri Lanka, Lebanon, Suriname, Belarus, Zambia, and maybe a dozen more are on the brink. Some investors are concerned with Brazil and Mexico, despite their higher credit ratings.

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Earlier in 2022, US-led international sanctions almost caused Russia to default, but higher Crude Oil and Gas prices saved it. Besides the Fed, the most important central banks in the world are the European Central Bank, People’s Bank of China, Bank of Japan, and Bank of England. The central banks of Australia, Canada, and Russia are less important to global investors. But they are to commodities investors in those commodity-rich countries. The Federal Reserve Bank of New York, via its Open Market Operations (OMO), is the primary driver of capital market prices. The Fed of NY is one of 12 branches of the US Fed, but by far, it is the most important. The following is their statement. OMOs can be divided into two types: permanent and temporary. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account (SOMA), the Federal Reserve’s portfolio. Permanent OMOs are traditionally used to accommodate the longer-term factors driving the expansion of the Federal Reserve’s balance sheet–primarily the trend growth of currency in circulation. During and after the (2008) financial crisis, permanent OMOs were used to adjust the Federal Reserve’s holdings of securities to put downward pressure on longer-term interest rates and make financial conditions more accommodative. Currently, permanent OMOs are used to implement the FOMC’s policies of reinvesting principal payments from agency debt and mortgagebacked securities (MBS) holdings in agency MBS and rolling over maturing Treasury securities at auction. Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos or RRPs). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent to a collateralized loan by the Federal Reserve, in which the difference between the purchase and sale prices reflects interest. Under a reverse repo, the Trading Desk sells a security under an agreement to repurchase that security in the future. A reverse repo is the economic equivalent of collateralized borrowing by the Federal Reserve. Overnight reverse repos are currently used as a tool to help keep the federal funds rate in the target range established by the FOMC. China is now the leader in global trade. Accordingly, the Chinese Yuan Renminbi (CNY) is becoming a world reserve currency like the US Dollar, and the People’s Bank of China is a central bank that will soon rival the Fed. This book is based on the world’s most important financial and capital market systems as they exist today, which are US-centric. In five years, I will write much more about China. In the future, expect to hear less of the term Reserve Currency and much more of Payment Currency. International trade is based on payment systems. Individuals, businesses, and governments will increasingly transact goods and services with payment in renminbi (yuan), rubles, and euros, as well as US Dollars. 212

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Following the invasion of Ukraine and sanctions against Russia, Russia offers discount deals for Oil and Gas if paid in yuan or euro. In return for providing so much financial support in Africa and South America, China wants their exports paid in yuan, not USD. Bottom line: The Federal Reserve system underlying the US-controlled Old World Order is losing influence as other economies grow more powerful. The Fed will remain strong because no other country has the sophistication of its credit system, and the global bond market is much bigger than the equity market.

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Fundamental Analysis of Companies 43 Corporate Fundamentals Overview 44 Financial Strength of a company 45 Profitability of a company 46 Earnings Quality 47 Quality of Financials 48 Business Predictability 49 Volatility and Beta 50 Earnings and EPS revisions 51 The Price Earnings Ratio 52 Dividend Yield 53 Enterprise Value compared to Market Value 54 Corporate Reporting 55 Analyst Ratings 56 Analyst Price Targets

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Corporate fundamentals overview Corporate Fundamentals are the business data relating to a company’s Assets, Liabilities, and Equity on its Balance Sheet and Revenue, Costs, Expenses, and Profit on the Income Statement. Management prepares the financial summaries for quarterly presentation to stakeholders in a befitting manner constrained by limits set by the public accounting profession and securities regulators. There is an annual audit required of all Reporting Issuers. By studying the data, investors can determine if the company is an appropriate business to invest in for Value, Growth, or Income. Bear with me while I tell you why it is essential to understand the Company’s fundamentals with a particular perspective if planning to hold the position for many weeks, months, or years. I first wrote about this in my 2007 book Lessons from the Trader Wizard. It’s not something you will likely hear from the Sell-side or academicians, for that matter. But perspective matters when investing your own money. Because we seek performance, most investors think of themselves as individuals, like someone in sports who scores goals or stops them. But investing is not a one-shot deal. In reality, our primary task is to seek optimal portfolio management. So rather than a solo striker or defender, the key to success is to feel like the team owner. Owners have broad goals and objectives, strategies, and tactics. Whether it’s a sports team, a business, or your capital market account, you must know a little about everything. You must know the economy, the customers, the competition, and the company. You will likely flounder if you know only customers and sales and nothing about purchasing, manufacturing, quality control, shipping, and finance. You need to know how to maintain and grow your business. But the financial services industry does not want you to think like an owner. They want you to feel like a player who will rely on their vision, strategy and tactics, and support. They are in business to sell you their products and services. They even call you a retail buyer. On the other hand, your investments are your wealth. You are the owner. With liquid financial assets, you have a portfolio management business to run, and you must have an ownership vision and operate with your strategy and tactics.

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So, in this matter, who wins and why? Without proper education, people are stock market illiterate. They willingly take the financial services industry’s lead. The principal, in effect, turns control over to the agent. But what happens is that the industry then plays the players. They use those who lack investing and trading knowledge to their advantage. They do so by appealing to the players’ senses of fear and greed. They tell the public that investing is a sprint where prices are going up and down but that they can tell you which is which. I find that laughable. After being in the industry for 40 years, from the C-suite in a big-name firm operating from the penthouse of a prominent stock exchange tower – a business I built from scratch – down through the ranks, I know things. I worked in retail and institutional sales, research, trading, portfolio management, and electronic brokerage. I know that the people I worked with supported ‘bad’ companies that were subjects of the firm’s research or clients of their investment banking group. These people never knew when prices would go up or down in any security, nevertheless all of them. Mostly they followed the actions of their colleagues. But, with some stock market literacy, I know anyone can build a successful portfolio. It involves picking High-Quality companies that meet their interests and needs, whether Growth, Value or Income. People only need common sense and patience to stick with their investment plan. They don’t need an agent to tell them stuff the agent doesn’t even know. Like the schedule of the team you own, your portfolio, the market is a journey. That journey can be as short or long as you want because it’s your money and your goals. But you can achieve these goals only if you know where you are starting from and where you want to go. You will also need knowledge and skill, which takes time to get. No financial services firm knows you as you do. So if you have the time, take control. With an owner’s mindset, you must start each day with a plan, aka a playbook, to get you where you need to go. Nothing in business, teaching, or most jobs is different here. The trading part of the playbook is the daily setup. You watch the key factors that drive prices in various markets and focus on what is happening to your stocks. Your stocks are the players you have on the field, called holdings, and the ones on the bench called your watchlist. Your players could be Oilers, Miners, Industrialists, Retailers, Doctors, Bankers, or Techies. Most likely, it’s an All-Star team. Instead of running, passing, blocking, and tackling, you need Corporate Fundamentals, which are Assets and Liabilities on the Balance Sheet for your defense and Revenues and Expenses on the Income Statement for your offense. You must understand their strengths, weaknesses, threats, and opportunities to know your team’s competitive position. You build on your strengths, correct deficiencies, defend against threats and prepare to exploit opportunities.

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But this isn’t a game; it’s your money. You are not a player; you are the owner. The learning process depends on your needs. Fig. 43.1 For trading Growth-oriented companies, the corporate fundamentals to focus on: • Revenue Growth • Profitability Ratio • Quality of Earnings • Analyst Target Prices (i.e., Price Potential) Fig. 43.2 For Value-oriented companies, focus on: • Valuation • Dividend Growth Rate • Earnings Yield Fig. 43.3 For Income-oriented companies, focus on: • Dividend Yield • Financial Structure • Volatility Fig. 43.4 For all companies, the most important financial ratios to understand are: • Debt-to-Equity Ratio [Total Liabilities / Shareholders Equity] • Current Ratio [Current Assets / Current Liabilities] • Quick Ratio [(Current Assets – Inventories) / Current Liabilities] • Return on Equity (ROE) [Net Income / Shareholder's Equity] • Net Profit Margin [Net Income / Net Revenue]

These are the Corporate Fundamentals of your players, the basics reported in a company’s 10-Q (quarterly) and 10-K (annual) filing. You will also find the market competition data you need to know in the company data. ETF traders lack this information. They rely strictly on Technical Analysis, which is not enough to succeed. Based on my experience, I assure you that your competition in ETF trading is bigger and better. Wall Street computers are more powerful than yours. Bottom line: Corporate Fundamentals are facts, not stories, opinions, or squiggly lines. On matters of importance, Joe Friday in the 1950s TV show Dragnet always focused people’s attention when he said, “Just the facts, Ma’am.” When you get them, you have all you need to succeed.

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Financial strength of a company There are two assessments that every investor should consider before investing. One is Balance Sheet Strength, and the other is Operating Cash Flow Margin. Financial strength comes from the Balance Sheet, while Operating performance comes from the Income Statement. The Income Statement is a film of the critical events each quarter year. The Balance Sheet is a snapshot at the end of every quarter year. Reviewing a company’s finances and financial performance seems daunting to the uninitiated. The data looks overwhelming. But let me tell you, it needn’t be. The quality of a company is the most crucial factor in considering an investment in the securities of the company. Quality is a function of solid finances and financial performance. Location is key to successful real estate investment, and so is the company’s quality to investors. Companies that sell shares to the public file Financial Summaries with securities regulators. Investors can find the Quality of a company in the Financial Summaries. In the United States, the Financial Summaries are in the 10-Q (quarterly) and 10-K (annually) filed with the Securities and Exchange Commission (SEC) and are easily accessible. Canadian companies file with the Canadian Securities Administrators, and the files are available at Sedar.com. These detailed reports are often simplified and reproduced on free websites. If you owned a football team, you would want the most innovative coaches, the fastest and most agile running backs, the most efficient quarterback, the protection of the best blockers, and the fiercest tacklers. You will not have all the best of these. But you must get the most out of what you have. You need such resources to work well together as an integrated whole. This big picture is what you must consider for an overall impression of potential winners versus losers. Most importantly, a company’s financial strength comes from having (1) more Assets and fewer Liabilities than the companies they directly compete against in business, as well as (2) efficient operations. In any industry, the most robust company’s financials are a big part of Quality.

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For a business, you look for an intelligent board of directors and management team, efficient real property (like factories) or intellectual property (like proprietary designs for hardware and software), and staffing (like architects, engineers, machine and warehouse operators, constructors, sales, and marketing). These are the resources needed to execute a successful plan. Financial strength comes from cash in the bank, raw materials to make things with, machinery and equipment, and inventory to sell. Sales revenues and profitability from the sales to replenish and grow the assets result from skillful operations management. Having a small Debt or none is financial strength. So is having the right Asset mix. Asset/ Liability management is vital because unproductive assets like excessive Cash on the balance sheet or excessive Liabilities represent Financial Weakness. Sub-optimal Financial Performance and inefficient Operations Management are burdens to many companies, the ones of the lowest Quality. So always look to own the stock of the companies most likely to succeed in business. A general understanding of Quality factors is key to achieving long-term success. A broad understanding of a company’s Financial Ratios will help an investor determine its Quality. If you have difficulty getting into accounting nitty-gritty, take the simple path. Investigate a company through a free (or inexpensive) aggregator data service like MarketBeat.com. MarketBeat.com information for Apple (AAPL) is under tabs such as Profile, Analyst Ratings, Chart, Competitors, Dividend, Earnings, Financials, Insider Trades, Institutional Ownership, Headlines, Options Chain, SEC Filings, Short Interest, and a couple of others. It’s essential to review the consensus ratings of Wall Street analysts at MarketBeat.com and FinViz.com. That is especially true if many analysts follow the companies that interest you and may meet your needs. You can find these ratings. As we are all busy, I use these information services every day. Newcomers to securities investing might start by combining a review of the Dow 30 companies with the information at FinViz.com. Click on the FinViz.com screener, and then on the drop-down window for Exchange, click on DJIA. The many tabs will enable you to compare each company’s finances and financial ratios in the Dow 30. Analyzing some companies is more complicated than others. Determining a bank’s Quality is a task best left to experienced investors and investment analysts. They monitor detailed information like Bank Ratings. Understanding the creditworthiness of banks is particularly difficult, so analysts often refer to data and rankings produced by Credit Rating Agencies. Moody’s and Standard & Poor’s services include a Bank Financial Strength Rating (BFSR). To understand the creditworthiness of banks, this 2010 article from the Bank for International Settlements may be helpful. Bottom line: If you consider only the critical items on a Balance Sheet and an Income Statement, you can gain an overall impression. It may take several attempts, but even if you are not a professional accountant or office clerk, you will soon be able to say that Company A is financially stronger than Company B. 219

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Profitability of a company Discussing profitability means understanding profit margin. Accountants list many margins, but investors must focus only on Gross and Net margins. Net Margin is the bottom line. It’s net earnings because that remains on the Income Statement after deducting all expenses and costs, including taxes, from revenues. Management can operate a company for years without profits but not without a positive Gross Margin. Gross Margin is the money the company retains after paying the direct costs to produce its goods and services. If it doesn’t make a Gross Margin, management has no money to pay general, selling, and administrative costs. They cannot meet debt obligations or invest further in the business. That’s a flawed business model and why some companies must continually raise new risk capital to remain a going concern. If you drive a vehicle, Profitability is the gas you put in the tank. You must drive safely and know where you are going to get where you want to go. But, without gas, you will fail. Profitability is the power of a company to generate earnings from its resources. Profitability Ratios assess the ability to grow those earnings in the future. Profit Margin (PM) is the most significant determinant of Profitability. Of the many types of margins listed in an accounting dictionary, Gross Margin and Net Margin are the only two important ones to investors. Other terms used for Margin are profit and earnings, but the word margin best explains the concept. Net Margin (NM) is the ratio of net income divided by revenues (or, if you wish, net profits or net earnings divided by sales). Do you see how words can be confusing? Net Margin, displayed as a percentage, measures how much out of every dollar of sales a company has in earnings. That is the bottom line, or what’s left after deducting all expenses and costs, including taxes. A 20% net profit margin means the company has a net income of $0.20 for every dollar of revenue. The average investor does not understand how much financial engineering creates an important accounting figure like Net Margin.

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Without a reasonable Net Margin, no amount of investor relations will keep investors and lenders happy. So, companies often create an expense that may exist in the future, which lowers earnings, and then reverse all or part of that expense, which increases earnings in the following year. In that way, management controls the amount of reported net income. Banks, in their use of Bad Loans Reserves, are particularly adept at financial engineering, but all companies do it to some extent. Despite Generally Accepted Accounting Principles (GAAP), the auditors of a company will go along with management decisions or lose the client. Such a disagreement with management happened to me in my auditing career. In charge of an inventory count in a scrap steel yard, I took a Polaroid camera, which, back in the day, was all we had to take instant pictures. The other team members went through the yard with the management and accepted their word. I went with the crane operator and had him write the estimated tonnage on the back of every photo, which I told the complaining managers would be the official count. Inventory, you see, is a significant profit determinant. Minutes later, the partner called me off because those managers had been insulted. I had refused to accept their ridiculous figures. I learned about ethics in the accounting profession that day. Experience teaches independence. You don’t take garbage from anybody. When you see it, you know people have a purpose and plan different from yours. As everything is relative, the best Margin for investors to rely on is the Gross Margin. That’s because it tells you if it’s even possible for a company to make a profit in business. Gross Margin (GM) is sales less the Cost of Goods Sold (COGS). Gross Margin is the money a company retains after incurring the direct costs associated with producing its goods and services. The higher the Gross Margin, the more capital is available to pay expenses, debt obligations, or investment plans. Gross Margin is applicable when comparing companies in similar businesses. Many Cannabis companies, for instance, cannot make a profit because their Cost of Goods Sold exceeds Sales revenue. When this happens, I say the company has a lousy business model. Isn’t a sign of insanity hitting your head against the wall expecting a different outcome? Avoid these companies. A low Gross Margin is acceptable in food retailing or steel manufacturing industries because they do not have extensive Soft Costs like Research and Development to be covered by revenue. In the pharmaceutical or semiconductor industries, a low Gross Margin is unacceptable. So Gross Margin analysis is only done when comparing industry competitors. A relatively higher Gross Margin within an industry indicates that a company has better management control over the costs incurred to generate sales. To summarize: Despite the varying degrees of its construction, Profitability is a measure of Quality.

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Fig. 45.1 Gross and Net Margins of Dow 30 companies Company

Ticker

Sector

Industry

Gross Margin

Rank Net Margin Rank

Goldman Sachs Group GS

Financial

Capital Markets

84.10%

32.50%

Visa Inc.

Financial

Credit Services

79.90%

50.40%

Amgen Inc.

AMGN

Healthcare

Drug Manufacturers

75.20%

22.70%

salesforce.com, inc.

CRM

Technology

Software - Application

73.50%

5.50%

Merck & Co., Inc.

MRK

Healthcare

Drug Manufacturers

72.80%

26.80%

Microsoft Corp

MSFT

Technology

Software Infrastructure

68.80%

38.50%

American Express Co

AXP

Financial

Credit Services

68.60%

18.50%

Johnson & Johnson

JNJ

Healthcare

Drug Manufacturers

68.20%

22.30%

Cisco Systems, Inc.

CSCO

Technology

Communication Equip. 63.30%

22.90%

The Coca-Cola Co

Consumer Defensive

Beverages - Non-Alcoholic

60.30%

25.30%

Verizon Communications

Communication Services

Telecom Services

57.90%

16.50%

Intel Corporation

INTC

Technology

Semiconductors

55.40%

25.10%

IBM

Technology

Info-Tech Services

54.90%

10.00%

McDonald’s Corporation

MCD

Consumer Cyclical

Restaurants

54.20%

32.50%

Procter & Gamble Co

Consumer Defensive

Household & Personal

49.30%

18.20%

3M Company

MMM

Industrials

Industrial Products

46.90%

16.70%

NIKE, Inc.

NKE

Consumer Cyclical

Footwear & Accessories

46.20%

13.00%

Apple Inc.

AAPL

Technology

Consumer Electronics

43.00%

26.60%

Chevron Corp

CVX

Energy

Oil & Gas Integrated

42.70%

10.00%

Walt Disney Co

DIS

Communication Services

Entertainment

34.30%

4.20%

The Home Depot, Inc. HD

Consumer Cyclical

Home Improvement Retail

33.60%

10.90%

Honeywell International

Industrials

Industrial Machinery

32.00%

16.10%

HON

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Profitabilit y of a company

Caterpillar Inc.

CAT

Industrials

Farm/Construct Machines

30.40%

12.70%

Walmart Inc.

WMT

Consumer Defensive

Discount Stores

25.10%

2.40%

Walgreens Boots Alliance

WBA

Healthcare

Pharmaceutical Retailers

21.50%

4.70%

Dow Inc.

DOW

Basic Materials

Chemicals

19.60%

11.40%

The Boeing Company BA

Industrials

Aerospace & Defense

4.80%

-6.70%

JPMorgan Chase & Co.

JPM

Financial

Banks Diversified

80.40%

Travelers Companies, Inc.

TRV

Financial

Insurance - Prop & Casualty

10.40%

UnitedHealth Group Inc

UNH

Healthcare

Healthcare Plans

6.00%

Table of Dow 30 companies, ranked from 1(best) to 30 (worst) for Profitability [March 4, 2022] This Profitability table ranks the Gross Margins and Net Margins of Dow 30 companies for 2021. The higher the ratio is, the better the rating is. When analyzing a company for Profitability, it’s essential to study its Industry Peer Group and compare Gross and Net Margins. That’s easier than a standalone study of each company. For example, judging the speed of a racehorse is difficult if not watching it in a race against peers. The Dow 30 is a peer group because it is a popular market index, but industry group studies are more important. For example, comparing JP Morgan’s margins to Nike, 3M, and Chevron from the Dow 30 makes no sense. JP Morgan is best compared to other banks like Wells Fargo, Bank of America, Citi, TD, HSBC, and Royal Bank of Canada. These are the largest cap diversified banks that trade on the NYSE. MarketBeat.com has such a bank peer group comparison. Diversified banks by FinViz.com is a study of 22 banks, although Net Margins vary because many are smaller and less diversified. Some have less competition than others. Profitability is an essential corporate fundamental, especially for companies known for Value more than Growth. In price and market sentiment, investors often beat down Value stocks. Some are out of favor, although sometimes for a good reason. So I want to be assured they are profitable. On the other hand, a Growth company may be unprofitable while focusing on increasing sales and market share. That is my assessment, not somebody else’s. But let’s say all other investment factors in the equation were equal. If I select one company from a choice of several, the nod will go to the highest rated by Profitability. 223

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Ultimately, we need to understand the instruments we invest in, even if our holding is only for weeks or months. You cannot do that when trading ETFs or basing decisions solely on Technical Analysis. I recall an example of the importance of understanding Gross Profit Margin and why Profitability is more critical than Growth when a business is pretty new. I was once the financier of a small technology company that made what I called tumbling logos and images of the brand names you see on TV. This company was innovative, and the entrepreneur was the son of the president of one of the biggest technology companies in the world, Northern Telecom (now Nortel Networks). At its peak 30 years ago, Nortel traded at a $380 billion market cap, making it the most valuable company in Canada. Nortel had grown to almost 35 percent of the value of the entire TSE 300 Composite Index group of companies. To build my interest in this tiny technology company, I asked the Nortel president to go on the Board with me, along with a leading Canadian IT consultant, a man who ran all the computers for the government of British Columbia and other humongous organizations. I also recruited a proven manager who had been president of one of the top two companies in Los Angeles that made these complex 3D computer-animated graphics. Our little company raised $800,000 privately from some individuals who ran the country’s biggest telephony and tech companies. We quickly snagged TV graphics contracts for one of the world’s biggest banks, the CBC National News magazine program, and the NHL Hockey All-Star Game. To my chagrin, I discovered that our average revenue per contract was a measly $5,000, but our Cost of Goods Sold could not drop below $25,000. The industry had fundamentally changed. To compete with us, students in IT had started using cheap but high-end computers, some from their universities, at no cost. During the next Board meeting, I motioned that we shut down the Company and return the remaining cash to the investors. The vote carried. The Nortel president at the time then asked me to step out of the room, where he told me if I wanted to meet for business; I had an open invitation. He said he had seldom experienced such quick and sound business decision-making. But, to me, it was simple bookkeeping. If a company cannot make a satisfactory Gross Margin, how can it pay all the other general, administrative, and selling expenses? Bottom line: Nothing can fix a flawed business model. Every business requires minimal profitability that enables it to operate through thick and thin.

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CHAPTER 46

Earnings quality Earnings Quality refers to multiple concepts. Earnings can outperform but are they consistent and contain few surprises? Are bad earnings covered up by mergers and acquisition deals and share buy-backs? is management displaying different values under GAAP vs. non-GAAP accounting principles? Individual investors do not need to go to extremes to discover earnings they can count on when deciding to buy or sell the company’s securities. It’s easy to examine a company’s quarter-yearly earnings releases compared to the consensus estimates of industry analysts to find companies whose earnings outperform. Companies that consistently exceed estimates have superior Earnings Quality because their earnings are more dependable. Consistency is key. Analysts assign a higher rating to consistently outperforming companies. Those that typically underperform have a lower rating. Reported earnings that perform close to what analysts anticipate are given an average earnings quality rating, which I think is wrong. I like it when earnings come in as expected. A higher or lower Earnings Surprise results in an overreaction by investors, which we know is unsustainable. The so-called surprise is no big deal but is only made to seem so by market players looking to sell into the price strength or buy into the weakness in the market. Another consideration regarding Earnings is when a company uses its capital to repurchase shares in the open market. This Share Buyback results in a higher Earnings Per Share (EPS) figure but is the same earnings divided by fewer shares. Because there is no increase in Earnings, a higher EPS via Share Buy-back is not a sign of Earnings Quality, which is an attribute of Financial Strength. Growth in total dollar earnings is needed to impress investors. The action of companies that promote their EPS figure after share buy-backs is akin to what we call applying lipstick to a pig. Many analysts regard Share Buy-Backs as evidence that a company cannot use its funds effectively to grow its business, which may or may not be valid. Companies mostly do it to increase EPS to create a misleading impression of growth. Earnings internally generated from business operations, rather than those that companies financially manufacture, is an important consideration — knowledgeable investors watch market over-reactions to puffed-up EPS reports. Buy-Backs have other considerations too. Most companies buy in blocks of stock, typically held by family, friends, and preferred clients, at higher prices than those large sellers 225

BILL CARA / STOCK MARKET LITERACY

would achieve if they were to dump large amounts of stock in the open market outside a Buy-Back program. These buy-back programs too easily lead to situations where company insiders strip assets from the company. And they often do because insiders often are self-interested. Fig. 46.1 (June 24, 2016) Personal ranking of the Dow 30 companies (best to worst) for Earnings Quality NAME

SYMBOL

EARNINGS QUALITY RATING

Universe Rank

Boeing Co

98.4

Home Depot Inc

98.3

Travelers Companies Inc

TRV

97.2

Apple Inc.

AAPL

96.4

Goldman Sachs Group Inc

93.9

UnitedHealth Group Inc

UNH

93.5

Pfizer Inc.

PFE

90.9

Verizon Communications Inc.

83.6

Nike Inc

NKE

81.9

McDonald's Corp

MCD

81.5

JP Morgan Chase & Co.

JPM

79.8

Visa Inc

74.9

Intel Corp

INTC

63.0

Exxon Mobil Corp

XOM

51.3

Wal-Mart Stores. Inc.

WMT

50.1

3M Co

MMM

49.9

Caterpillar Inc.

CAT

49.5

E I Du Pont De Nemours & Co

44.9

Cisco Systems. Inc.

CSCO

42.5

Walt Disney Co

DIS

42.1

Chevron Corp

CVX

42.0

Johnson & Johnson

INJ

35.5

Microsoft Corp

MSFT

34.3

United Technologies Corp

UTX

27.9

American Express Co

AXP

19.6

General Electric Co

16.3

Procter & Gamble Co

12.1

Merck & Co.. Inc.

MRK

8.4

Coca-Cola Co

8.3

International Business Machines

IBM

8.2

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Earnings quality

In a Share Repurchase program, the company’s broker, not the marketplace, arranges the stock purchases and sales. These are pre-arranged set-up trades, aka intentional crosses. Securities trading regulations cover such transactions, but companies often evade the rules where the stakes are enormous. Something we all saw in recent years was the case of the massive $10 billion stock buy-back done by Lehman Brothers when that company’s stock price was at a high point in its Cycle. I questioned it in my blog. Soon afterward, without cash in the treasury, the Lehman Brothers firm collapsed, leading to the global financial crisis of 2007-2008. Who do you think benefitted? Egregious behavior surrounding share buy-backs reflects the culture of greed on Wall Street, the subject of many populist movies in the past few decades.

Share purchases by inter-related companies are also a problem Here is a true story reflecting my concerns about company share purchases, so bear with me. I participated in a round-table discussion in a well-known magazine early in my career. I was an investment industry newcomer, invited only because of my prior connection to that publisher. The other two on the panel had impressive CVs. One was the chairperson of his well-known investment firm and former Energy Minister in government. The other was the Executive VP of Finance and Chief Financial Officer of one of the country’s largest companies. Following our taped discussion, we had lunch at the Toronto Press Club. In conversation, I commented about market integrity involving set-up trades, particularly between two closely related Large-Cap companies. Immediately, the well-known corporate leader loudly challenged me to put up or shut up. I was embarrassed but not deterred. After lunch, I contacted the Securities Commission to produce all block trades of this company whose shares were sold to the related company. As a portfolio manager with the country’s most prominent financial services firm, the regulators granted my request. The data was sent to me a few hours later. In every transaction, I discovered the trades were mispriced. I then photo-copied the evidence and delivered the results to my antagonist in a nearby building. An hour later, he telephoned to apologize for his earlier outburst. He said he saw my seriousness and invited me to do business with his company. After that experience, he and I became good friends, and we often took the train to work together. The company that overpaid for those shares later went bankrupt, the largest company in the country to do so. I knew who got their cash. Bottom line: Quality of Earnings is an important concept that requires your attention. Never expect companies whose securities you own or financial services companies that operate as their agents to present anything other than the best case. Have the maturity and the independence of mind to discover the accurate picture so you understand risk.

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CHAPTER 47

Quality of financials We might presume that financial records are factual and their reporting is accurate and straightforward, but that is not always the case. Companies hide facts or misrepresent them. Some are scams. So evaluating the Quality of Financials is a meaningful discussion. We have covered studies of macroeconomics relationships to market prices and monetary policy and regulation of financial markets. Now we turn to individual companies and their financial statements. Here are 12 things that investors need to know about corporate financial statements I refer to the distinguishing features of a company’s quarterly reported data as the Quality of Financials. Quality is reflected in (1) the accounting straightforwardness and clarity of presentation, (2) the consistency and reliability of the data series over many years, and (3) a predictable reaction by capital market investors. Public companies use independent external auditors, and the regulators file criminal charges against fraudsters, so the public does rely on financial statements. But they should do so cautiously. Most people are surprised to hear that securities law happens to be gray. It’s not black and white like the laws of the land. So we should not blindly accept everything we read just because it has been filed with a securities regulator. Regulatory agencies are merely the recipients of filings. They do not approve or disapprove of the contents. They only set rules and guidelines for reporting and make the contents available to the public. Quarterly reporting is an essential public service. The next time you read that a Wall Street tycoon wants less disclosure in such reports, you’re staring at the enemy. It is a fact of life that corporate managers will always present the best presentation to all stakeholders. Sometimes the data is exaggerated and even manipulated. Financial statement manipulation is not typical of reports filed with a securities regulator, but it does happen. Not being a corporate insider or auditor, we are unlikely to spot fraud in a company’s data, although that also occurs. I recognized fraud twice during my time as a securities industry executive. Having five years of public auditing experience in the Canadian headquarters of two major international firms helped.

228

Quality of financials

Once, I saw an actively traded company on the Venture Exchange had an auditor who signed off on “Generally Accepted Accounting Principals.” ‘Principals’…really? That was an inexcusable typo of the word ‘principle.’ It was part of a certified accounting statement. So, I contacted the securities exchange to say the reports were dubious. Within minutes the Exchange called a trading halt. Those securities – the previous year’s most active traders on that exchange – never traded again. It was, in fact, a fraud. As a senior broker-dealer executive, I questioned the drilling results of a penny-stock oil company that had reported a “gusher.” My reason for checking was that the promoter had left me an envelope of his company’s securities in bearer form “as a business gift.” I immediately forwarded those certificates to my legal department to be returned to the company. Then I telephoned the geological department for that particular State, where the administrator confirmed, as I thought, that only small wells occurred. Worse, he stated that the Well number filed with our securities regulator was reported to his State as a “dry hole.” So, I forwarded the information to the regulator, and that stock was permanently halted because it was a fraud. Investors need transparency in financial statements as well as accuracy. Otherwise, it’s impossible to climb the Data Pyramid to glean information from the facts. Public accountancy organizations and securities regulators set reporting guidelines, but investors still need to assess the quality. We grade the Quality of Financials as good or bad, exceptional or dubious, or whatever. But the interpretation is subjective, which primarily relates to our risk predisposition. In other words, if we take more risks, we should emphasize high-quality financials. We would also want to understand a company better to spot nuances in the company’s detailed information. Fig. 47.1 Characteristics of companies with High-Quality Financials • High and consistent analyst ratings • Low volatility • Low float short • Consistent dividends • No open market share repurchases

Quality of Financials criteria tend to apply to large, well-established corporations, and the data is readily available. Quality of Financials is paramount when buying stock for Value or Income. While they are lower in risk, there is also likely a longer holding period than if your objective is Growth. If you plan to hold a trade long-term, you need to base your decision on a corporate track record of able management as reflected by dependable revenue and earnings data. In addition to clarity, you want to see fewer intangibles on the Balance Sheet. 229

BILL CARA / STOCK MARKET LITERACY

It’s harder to find a high level of consistency in unseasoned securities in newly listed companies and generally in Growth companies. Small-Cap companies tend to have lower Quality Financials and more volatile stock prices. Note that Small-Cap in this discussion may also refer to Micro-Cap (i.e., under $300 million in cap) and Nano-Cap or Tiny-Cap (i.e., under $100 million). Volatility is what you look for if you seek short-term capital gains. Because of the opportunity to catch a quick profit, your high-risk trades tend to be held for a shorter duration. You will accept a lesser Quality of Financials. Rating banks and money lender companies is a near-impossible task. Forget it for Dow 30 large-caps like JP Morgan, Goldman Sachs, Travelers Companies, and American Express. These financial services companies often widely change provisions for bad debts, which impacts earnings and sets up remarkable earnings surprises. If you are looking to purchase, and possibly hold for the long-term, a position in a SmallCap company, particularly one you hope might develop into a Growth company, you need solid due diligence. For the Small-Cap companies that are also not seasoned securities, including larger-cap ones, I would start the study by comparing the PE ratio to that of the established companies in the same industry. Be wary if the multiple is much lower (caused by doubts in the marketplace?) or much higher, which is more likely to happen as new stocks are under heavy promotion. A company’s management-prepared but unaudited Financial Statements are of less quality than those that are independently audited. If Financial Statements are audited, always start by reading the auditor’s report, which precedes it. Determine from independent auditors just how reliant the company may be on its need to raise new capital to sustain its operations. Many dot-com companies in recent years had good management and business plans. Still, they could not find investors with funding to tide them through the economic slowdowns when banker and venture capital money was scarce. As soon as trading volume dried up, prices plummeted. This Finviz.com link shows the lowest monthly volatility for Dow 30 stocks on June 2, 2022. The Analysts’ consensus rating (1 is the lowest) is offered too. This link shows the Float Short on the same day. On June 2, 2022, Johnson & Johnson had the lowest monthly volatility and Float short and was the 14th highest rated of the 30. UnitedHealth was highest rated, had the 3rd lowest Float Short, and was 14th lowest in monthly volatility. Both companies are considered to be top-quality blue-chip stocks.

230

Quality of financials

For analyzing developing stage companies, the following notes might be helpful: • Read the annual report backward. The auditor’s report at the beginning and footnotes following the financial summaries tell you if the company is a going concern. They also say if there are significant financial or operating problems, such as unfavorable long-term commitments. • Find a ratio of two times or higher current assets to current liabilities. That ratio indicates the company will likely be able to get the funds needed to withstand tight credit markets that will occur in the future. • Look for a low debt ratio with long-term debt under 35% of total capital. That shows the company has staying power and could be around long-term. • Look for stocks of companies that sell at half their growth rates, with solid management, relatively little debt, and an internal rate of return (IRR) on capital invested high enough to generate long-run staying power. Remember, it usually does if the “it” can happen with small and new companies, so extra due diligence is required. It’s your responsibility to understand what you are investing in. Bottom line: Quality of Financials is likely a more critical concept if your objective is to buy shares for Income or Value reasons. Those trades result in longer-term holds than if you are trading for capital gains in Growth companies. But the concept is essential for all financial statements.

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CHAPTER 48

Business predictability Some investors like stocks that trade with low volatility and low beta. Regulated power utilities and producers of consumer staples products are more or less predictable in quarterly revenues and earnings. Companies whose assets are mainly Intellectual Property intangibles, like in the Biotech industry, are unpredictable. Their shares are highly volatile and much higher in beta. Investors who like to sleep at night choose the former, while frequent traders choose the latter. Analysts study financial data and projections of companies to support their Buy, Hold or Sell recommendations. Many analysts are proficient at their craft. But there are issues to consider. Because market sentiment affects analyst rationale, investors must assess the recommendations’ underlying details. Understanding Business Predictability is one of the essential factors in determining which stocks will meet your needs, particularly as it applies to Value versus Growth. Portfolio managers use analysts to identify stocks with the most substantial upside potential. The more concentrated analyst estimates of revenue and earnings are for a company; the more confidence is in those projections and the target price they set for the stock. A single analyst following a stock is more than likely to have an extreme, mistaken view of a company. The more analysts that follow and report on a company, the better. That’s because most broker-dealer analysts hold themselves accountable to a peer standard. Investors should examine the range of views regarding revenues and earnings before relying on the consensus view if that stock price is considered undervalued. The biggest issue with analyst recommendations is whether they recommend a company or a stock. The greater the percentage of analyst recommendations for a Buy, Hold or Sell, the more likely I believe a Consensus recommendation. So, if 80% of analysts have a Buy rating, and they are rating the company and not the stock, it means the company is a ‘good’ one versus bad. Even for analysts who rate a company a Buy, the stock may not be ‘good’ and should not be bought at that time. Sometimes analysts recommend a new Sell when that may be a good company with an over-priced stock. A Sell recommendation by several analysts means that the company is of

232

Business predictabilit y

low quality with weak prospects of improvement. Broker-dealer analysts do not publish many Sell recommendations. The simple reason is that analysts cover stocks their firm’s clients hold, and there are in-firm political pressures to delay a Sell recommendation until most clients have already been encouraged to sell. Sell-side analysts are too often hard-pressed to publicly disclose negative opinions without losing their high-paying jobs. Their biases and primary loyalty tend to align with the employer and not the investor. But at the end of the day, a qualified analyst is a vital source for finding predictable companies. The narrowness of ratings and Price Target consensus is the key to Business Predictability, which is a key to investor confidence. Without a lot of confidence, we are speculating. If we have none when we trade, then we are gambling and might as well be a buyer of lotto tickets. Fig. 48.1 List of Dow 30 companies best able to predict earnings and analyst rating changes (2016) NAME OF DOW 30 COMPANY

SYMBOL

PREDICT RATING [V16]

Universe Rank

Verizon Communications Inc.

93.9

Visa Inc

90.9

3M Co

MMM

90.1

Wal-Mart Stores. Inc.

WMT

89.0

American Express Co

AXP

86.4

United Technologies Corp

UTX

83.5

JPMorgan Chase & Co.

JPM

82.2

International Business Machines

IBM

81.5

McDonald's Corp

MCD

79.1

Home Depot Inc

76.4

Nike Inc

NKE

76.3

Apple Inc.

AAPL

75.8

Intel Corp

INTC

75.6

Procter & Gamble Co

75.3

Coca-Cola Co

71.1

Travelers Companies Inc

TRV

70.7

Cisco Systems. Inc.

CSCO

68.6

Microsoft Corp

MSFT

62.9

Goldman Sachs Group Inc

60.6

Merck & Co.. Inc.

MRK

59.7

Walt Disney Co

DIS

59.1

Pfizer Inc.

PFE

56.1

UnitedHealth Group Inc

UNH

54.3

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BILL CARA / STOCK MARKET LITERACY

NAME OF DOW 30 COMPANY

SYMBOL

PREDICT RATING [V16]

Universe Rank

E I Du Pont De Nemours & Co

52.4

Exxon Mobil Corp

XOM

39.4

Caterpillar Inc.

CAT

39.0

Johnson & Johnson

JNJ

29.3

General Electric Co

21.7

Chevron Corp

CVX

19.6

Boeing Co

10.5

Table of Dow 30 companies, ranked from 1 (best) to 30 (worst) for Business Predictability [June 2016] Several years ago, my associate calculated the narrowness of analyst consensus ratings and Price Targets for Dow 30 stocks. He published the table used for Fig. 48.1. Performance predictability of Verizon, Visa, 3M, and Walmart was highest, whereas GE, Chevron, and Boeing were unpredictable. Verizon, which has predictable results, usually has the lowest Price Volatility. Boeing, which has unpredictable reported outcomes, usually has the highest Price Volatility. Boeing’s price volatility and business unpredictability (BA in black) differ significantly from that of Verizon (VZ). That link is an excellent example of Volatility. Bottom line: Business Predictability and Volatility are inversely correlated.

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CHAPTER 49

Volatility and beta Prices fluctuate. Fluctuation is another word for Volatility. Stocks fluctuate for reasons of demand and supply, which is a case of Volatility, but most times because of market moves, which is Relative Volatility, aka Beta. When prices trend down in a Bear phase, Talking Heads use Volatility as a negative. In a Bull phase, when prices trend up, Volatility is not reported as a negative. That is the entertainment aspect of financial television and illustrates why I define the market as a game that plays people. This chapter explains that Volatility is essential. It provides investors the basis for assessing both definite risk and potential reward. Volatility is the range of fluctuation of the price expected in a stock in a certain period, based on prior a week or a month performance. A stock with higher volatility fluctuates more than one with lower volatility. A Volatility Index is an indicator of Market Sentiment. While one might think securities prices are based on intrinsic value, and they are to a degree, it’s a fact that market sentiment plays a significant role in the pricing and volatility of securities. A highly volatile stock could be riskier or present more potential opportunities, depending on one’s perspective. There are several volatility Indexes in the data at Yahoo Finance. The most important is the Volatility Index (VIX) of the Chicago Board of Options Exchange (CBOE). If any item in a table is a symbol preceded by a Dollar ($) or Exclamation (!) sign, it’s an index. Indexes (or indices if you prefer) do not trade but have charts. If the item does trade, it’s called an instrument, and the reference to the chart is headed by the word ‘Ticker.’

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Fig. 49.1 Broad Market Volatility Indexes $VIX Volatility Index – New Methodology $VXO Volatility Index – Original Formula $VXD Volatility Index – CBOE DJIA $VXB Volatility Index – CBOE Jumbo $VXN Volatility Index – CBOE Nasdaq 100 $RVX Volatility Index – CBOE Russell 2000 $VXV Volatility Index – CBOE S&P 500 3-Month $OVX Volatility Index – CBOE Crude Oil $GVZ Volatility Index – CBOE Gold

This Stockcharts.com 3-month Volatility chart shows an inverse relationship between Industrial company stocks and the Volatility indexes in the short run, but the same association exists in the 6-month Volatility chart as well as the 12-month Volatility chart There is a reasonably high correlation between the Goldminers and the Volatility indexes, but often the Goldminers move in the same direction as the $GVC Volatility Index for Gold. I’m sure most investors are aware of Volatility. When I wrote this chapter on May 9, 2022, the market was volatile, and prices were under extreme pressure.

What is Beta? Beta is Relative Volatility, the relative movement of a stock price to a benchmark market index. People often say that a rising market lifts all stocks like a rising tide lifts all boats. But that’s not altogether true. They may move in the broad market direction, but some stocks rise and fall much faster. Beta is a great differentiator. Beta means a stock has historically moved a specified percentage for every 1.00% move in the S&P 500. If the Beta of different stocks is 0.60 and 1.94, these stocks move about 0.60% and 1.94% of the change in the S&P 500. In a rising market, the stock with a beta of 0.60 rises with the broad market, but not as fast as the stock with a beta of 1.94. On May 9, 2022, Merck (MRK) and Procter & Gamble (PG) presently have a Beta of 0.38. These were the lowest betas in the Dow 30 (DJIA) that day. That means they are relatively stable prices, moving much less than the typical stock in the Dow 30 benchmark index. The highest betas in the Dow 30 on the same day were Boeing (BA) at 1.47 and Goldman Sachs (GS) at 1.41.

236

Volatilit y and beta

Asset-allocating investors consider Beta when making trading decisions. Beta might help select Growth companies, which tend to have high Beta, or Value companies, which are typically low Beta. As well as relative volatility, Beta is a measure of risk. A high positive Beta means the stock moves in the cyclical direction of the broad market Indices but much more. A negative Beta means the stock moves counter-cyclical in the extreme to the overall market Indices. So, risk-conscious investors also consider Beta when making trading decisions. Early in a market cycle, investors will buy high Beta stocks. They tend to avoid them as the bullish phase of the cycle gets extended and is considered riskier. Some of the market’s riskiest stocks have extraordinarily high betas and are sold when investors think the broad market is near a peak cycle high. The logic here is that when the market is moving higher, money is removed from stocks of companies that lack solid fundamentals and invested in more fundamentally sound ones. Goldminers Barrick and Newmont had relatively low betas of 0.33 and 0.66, respectively, on May 9, 2022. Investors often use them to hedge broad market risk. Note that Beta changes week to week. Beta also changes a lot over the years. For example, General Motors (GM) 35 years ago had a Beta of 0.70; then 15 years ago, it was 1.20. By 1Q2016, the GM beta was 1.74, which in May 2022, had fallen back to 1.22. In the economic cycle, when consumer discretionary spending is lower than its long-run average, the risk of investing in GM stock is higher than average, and the Beta is higher than 1.00. The volatility of Disney (DIS) is based on consumer discretionary spending. Families are less likely to spend money to see a movie or visit a theme park than to buy essentials when money gets tight. Thirty-five years ago, the Beta for DIS was 1.40, then it dropped to 1.20 fifteen years ago and 1.34 five years ago, and on May 9, 2022, it was 1.21. Most utilities stocks (GICS 55) have a low Beta because consumer and business spending on utilities is stable. Conversely, most high-tech stocks have a Beta of much more than 1. High beta offers the possibility of a higher rate of return during rising markets but also poses a greater risk when market prices fall. Bottom line: Volatility and Beta can be asset allocation and risk management tools.

237

CHAPTER 50

Earnings and EPS revisions Earnings Per Share (EPS) is the net after-tax profit of a company divided by the number of shares issued and outstanding in the market. A company’s EPS is one of the most significant influences on its stock price. Management provides EPS guidance, which influences the forecasts of the analysts who follow the company. Investors seeking Capital Growth are focused on that data. And since a company pays dividends from its earnings, the EPS figures are also important to investors seeking Income. A company’s Earnings Multiplier is its current stock price divided by Earnings Per Share (EPS). The Earnings Multiplier is the number of years of those earnings it takes to equal the stock price. That is to say to have your money converted by the company to profits and returned to you in value in the form of dividends or capital gain. If the stock price is $40 and its EPS is $4, then the Earnings Multiple is 10. But if the EPS is $1, then the Earnings Multiple is 40, which is a long time to get a return on your investment. Earnings Multiplier, an exciting concept, is not too meaningful to investors; however, EPS figures, management guidance, analyst estimates, and revisions of EPS are essential to investment analysis as this data is continuously changing, which changes valuation. Company earnings are reported quarter yearly. Management also publishes estimates of future earnings called ‘guidance.’ Analysts may edit management guidance higher or lower depending on how they see the economy and the changing business prospects for the company. EPS Revisions are noteworthy because they represent changes in management forecast. The new data demonstrates the company’s up-to-date understanding of its forward revenues and expenses. If management revises the EPS upward or downward, they believe the company’s business prospects are better or worse than expected from those recently published in the report. Some companies do not issue guidance, preferring to leave it to the market to wait for the quarterly filing and news release. But, if the report happens to be unexpectedly negative, even moderately so, the market tends to overreact in selling the stock. With changing company estimates, the analysts might upgrade or downgrade their Buy, Hold or Sell recommendations during the quarter. Analyst opinions affect the decisions of investors. 238

E a r n i n g s a n d EPS r e v i s i o n s

Many investors enter changing EPS forecasts in their valuation models, which affects their view of the stock price. When considering companies involved in share buy-back programs, less importance should be given to the EPS figures. They will be growing at a faster rate simply due to fewer shares used in the calculations. The increase or decrease in total earnings is much more critical. In an earlier chapter, I opined that if reducing the number of outstanding shares is funded by strong Earnings and Free Cash Flow growth, and not increased debt, and comes after a significant decrease in share price; a buy-back would be a good thing. Many investors prefer available excess funds used to increase Dividends. I do not like to see Share Buy-Backs done at price cycle highs regardless of the underlying corporate Fundamentals. Bottom line: Earning Per Share is less important to investors than growth in total earnings.

239

CHAPTER 51

The price earnings ratio This chapter discusses the most important financial ratio to investors, given that a company has actual earnings. It’s called the Price-Earnings ratio, which you may see printed as P/E or PE. This ratio is sometimes known as “earnings multiple” or “price multiple.” Its use as a valuation tool should be understood. A company’s Earnings Per Share (EPS), the estimated Forward Price-to-Earnings, and changes in the PE ratio are probably the three most important data that investors monitor and discuss. Fig. 51.1 Table of Dow 30 company PE ratios and Forward Price Earnings ratios as of April 5, 2022 Company

Ticker

Market Cap

Fwd PE

EPS this Y

EPS next Y

EPS past 5Y

EPS next 5Y

Goldman Sachs Group

109.43B

5.46

7.90

140.30%

4.96%

29.60%

11.41%

Walgreens Boots Alliance

WBA

38.32B

6.32

8.70

0.60%

-0.60%

-9.70%

3.09%

Verizon Communications

216.66B

9.92

9.37

23.70%

3.17%

10.60%

3.79%

Dow Inc.

DOW

46.38B

7.57

9.48

411.70%

-1.76%

7.80%

JPMorgan Chase & Co.

JPM

396.67B

8.69

10.65

73.10%

12.58%

19.90%

7.21%

Merck & Co., Inc.

MRK

207.90B

17.21

11.62

173.50%

-0.98%

28.20%

9.40%

IBM

115.80B

24.78

12.21

13.40%

7.11%

-16.20%

16.50%

Travelers Companies

TRV

43.21B

12.48

12.58

37.80%

12.90%

7.10%

8.94%

Amgen Inc.

AMGN

135.50B

23.72

12.77

-16.50%

8.62%

0.10%

7.13%

Intel Corporation

INTC

202.72B

9.91

12.99

-1.60%

4.69%

18.10%

3.38%

3M Company

MMM

84.29B

14.72

13.43

8.10%

6.80%

4.40%

7.15%

Cisco Systems, Inc.

CSCO

228.56B

19.64

14.72

-5.20%

8.30%

3.40%

7.14%

Chevron Corporation

CVX

315.46B

20.08

14.83

374.50%

-12.97%

100.80%

8.45%

Caterpillar Inc.

CAT

117.37B

18.35

14.95

121.20%

18.81%

153.50%

21.06%

Johnson & Johnson

JNJ

464.53B

22.74

16.08

44.70%

4.91%

5.70%

6.05%

American Express Co

AXP

140.27B

18.55

16.42

166.10%

16.44%

12.30%

23.13%

The Home Depot, Inc.

312.36B

19.65

17.60

30.10%

7.58%

19.20%

14.60%

Honeywell International

HON

131.75B

24.47

19.99

17.80%

12.51%

5.00%

10.54%

Walmart Inc.

WMT

411.04B

31.06

20.86

2.70%

7.38%

2.10%

8.35%

240

The price earnings ratio

UnitedHealth Group

UNH

484.67B

28.64

20.99

12.80%

14.12%

20.10%

14.57%

McDonald’s Corporation

MCD

183.33B

24.76

22.54

59.10%

10.21%

13.00%

12.97%

Coca-Cola Company

267.06B

27.75

23.70

25.60%

7.29%

8.50%

7.24%

Walt Disney Company

DIS

247.20B

78.80

24.11

170.70%

27.78%

-28.00%

43.75%

Procter & Gamble Co

365.16B

27.33

24.26

10.90%

8.05%

9.50%

6.84%

Boeing Company

108.25B

25.58

65.80%

129.99%

-23.80%

20.17%

Apple Inc.

AAPL

2861.80B

29.07

26.67

71.40%

6.47%

22.00%

14.85%

Visa Inc.

464.46B

44.92

26.74

15.00%

18.68%

13.60%

18.36%

NIKE, Inc.

NKE

210.83B

34.96

28.56

123.10%

24.62%

10.50%

15.34%

Microsoft Corporation

MSFT

2322.26B

33.08

28.84

39.70%

15.41%

25.70%

17.40%

salesforce.com, inc.

CRM

208.11B

140.00 36.40

-66.30%

24.04%

26.30%

15.13%

If you want to see the Price-Earnings ratios of the Dow 30 companies or the S&P 500 companies, the data is displayed by Finviz.com by using the screener option. PE history offers an essential lesson to observant investors. In the past 100 years, the Dow 30 average PE Ratio fluctuated from a low of about 7.5 to a high of 27.5. But the PE of this popular index seldom rises above 20 or drops below 10. Whenever PE exceeds these levels, market pundits will warn that the market is ‘overbought’ at >20 or ‘oversold’ at <10. The critical point is that the market can remain overbought or oversold for several years. With the Dow 30 Average at 34,640 on April 5, 2022, the Dow 30 PE ratio was 27.1, and the Forward PE was 18.2. The Forward P/E ratio is calculated by dividing the current stock price by the projected earnings per share. PE is based on actual 12-month’s trailing earnings, and Forward PE is the analyst’s consensus estimate of earnings for the next 12 months. On July 22, 2016, with the Dow 30 Average at 18,500, the PE ratio was 19.4, and the Forward PE was 17.7. That is a much narrower gap because investors either expect prices of Dow 30 stocks to rise faster than earnings in the next year or they expect future earnings to fall. Stock valuations of even the largest companies in the world, like the Dow 30 companies, for example, can often get very much out of line, but not for long. Sooner or later, there will be a reversion to the mean PE ratio. In recent years as markets observers were opining that the market was overbought, what was happening is called earnings multiple expansion. It was a significant one, something like what occurred in 1999 and back in the 1930s. In the 1930s, governments and central banks pumped the money supply to unprecedented levels to overcome a great deflation. That period in the United States is referred to as the Great Depression.

241

BILL CARA / STOCK MARKET LITERACY

In 1999, various authorities in government and scientific communities claimed to be worried that all computers in the world would stop working at the stroke of midnight as the year changed from 1999 to 2000. That event was called Y2K, i.e., the Year 2000. The global central banks printed money almost beyond belief to facilitate a trouble-free entry to the new millennium. To avert a liquidity crisis, people and companies could remove enough cash from bank accounts to get by financially without breaking the world banking system. Y2K was a dud, but the central bank solution became the problem. Excessive cash in the system led to enormous real estate inflation that collapsed as prices reached a point in 2007 where sellers rushed to take profits. The onset of heavily mortgaged real estate bankruptcies in 2008 led to a collapse of the global financial system as over-leveraged people failed to pay their debts. Going from one crisis to another, the Federal Reserve System and other major central banks of the world embarked on a policy of Quantitative Easing (QE). The money supply surged, and interest rates dropped to zero. Eventually, that decision by central bankers caused more problems. During 2010-2020, the global economy was transitioning from a labor to a digital base, resulting in enormous corporate earnings growth and causing employment problems and social unrest worldwide. Much of the money from corporate earnings, dividends, and QE was invested in the stock market, driving Price-Earnings ratios to historic high levels. With excessive cash, companies decided to buy back their shares in the open market. Because of the continuous reduction of outstanding shares, the increase in the PE ratio of many companies concealed their slower actual Earnings growth. Another issue with the Dow 30 PE arose when the Dow 30 companies changed. The average PE data is skewed whenever the Dow 30 composition changes, as it does over the years. The companies being added are likely to be more digitally based in their operations and growing faster than the old economy stocks the Dow removes. In the previous table, salesforce.com (CRM), a digital database service, has a Trailing 12-month PE of 140.0 and a Forward PE of 36.4. That is substantially higher than the average of the Dow 30 and the company it replaced. CRM joined the Dow 30 on August 31, 2020. Also added to the Dow 30 on that date were Honeywell (PE now is 24.5) and Amgen (PE now is 23.7). So, if you remove CRM data, the Dow 29 PE drops to 23.0; if all three are removed, the Dow 27 drops to 22.9. The Dow 30 PE today is 27.1. As noted above, on July 22, 2016, the average PE of the Dow 30 was 19.44. On July 22, 2015, it was 16.33. Obtaining accurate PE data for the major market indexes is difficult. So, if data is being compared to produce conclusions, ensure you’re dealing with apples to apples. Even today’s Apple is light-years different than the 1977 Apple II.

242

The price earnings ratio

Compare Dow 30 Price-Earnings Ratios with those of the S&P 500 and NASDAQ 100 indexes. In June 2021, the PE ratios of the Dow 30, S&P 500, and Nasdaq 100 were 30, 36, and 37. The multi-decade mean average PE ratios of the Dow 30, S&P 500, and Nasdaq 100 were around 16, 21, and 26. As of July 13, 2022, the PE ratios of the Dow 30, S&P 500, and Nasdaq 100 were 17.6, 16.0, and 22.0, respectively. As the indexes have fallen, so too have the current PEs. As Capital market prices hit cycle peaks, PE Ratios can rise so much that the market considerably over-values earnings. It can drop so much during price cycle troughs that investors undervalue earnings. Unless there are solid reasons for the variance from long-run normal levels, it’s best to hold more cash and fewer and smaller long positions when PE ratios exceed historical norms. Investors must also consider stock splits because they affect PE. I want to relate a personal story I wrote about shortly after it happened and a few times since. A long-term business associate had worked for General Electric Corporate in a strategic planning unit. He was a daily reader of my reports, passing to his former associates at GE headquarters whatever information he believed might be relevant. In 2000, my associate became concerned that I was discussing shorting GE stock. After a 15-point drop in GE stock, but with the price still in the high-$30s, my associate’s former GE colleagues wanted to know how much further I thought the stock might drop. I replied, “To the low $20 range”. I gave them my reasons, which happen to be ones I routinely publish in my blog. A process called ‘reversion to the mean’ follows the bursting of every market bubble. PE ratios return to historical norms, adjusted to a small degree by higher or lower interest rates. The broad market craze in 2000 had pushed GE stock from a long-term average PE Ratio in the low-20s to the 50s. That two-and-a-half times increase in PE was not sustainable. Even for a fast-growing company, a 50 PE Ratio is extraordinarily high, but GE was a mature, slow-growing company. To me, GE’s normalized earnings and cash flow multiples indicated a much lower PE Ratio that would sooner or later drop the stock price back to the low $20 range. That was about 40% of the $55 stock price when I did the initial assessment. The response of his GE associate was, “Gosh. I hope not. Our pensions couldn’t take it.” But what do pensions in that context have to do with anything other than hope? Hope springs eternal but has little to do with the long-term stock price. Employment-related pensions had been affected by a bubble that was bursting. In December 2002, I had a lengthy long-distance chat with my friend when I said that GE’s current $24-25 price was about what I had predicted for its low cycle. He replied, “No, you forecasted $22, and I told my associates (who were senior executives) that you were right on the mark when the stock touched that level in October.”

243

BILL CARA / STOCK MARKET LITERACY

On August 2, 2021, GE did a reverse split of 8 old shares to 1 new share. So, GE’s $62 price on July 15, 2022, would be about $7.75 pre-split. That’s a far cry from the $50-level when I discussed shorting it. A long-term chart shows that GE stock has collapsed over the years, which proves my analysis was accurate. Fig. 51.2 Chart of General Electric Company showing a two-decade-long decline in market value

General Electric has a long history of stock splits and reverse splits. During my years as a trader, GE has split eight times. A reverse split does give a higher price, which may appear to the casual observer that the company is doing better, but that is not the case. Pre-split or post-split, the corporation’s value or the stock’s market cap does not change.

Forecasting There are far too many crosscurrents in the markets for anybody to forecast accurately. While I profess stock trend and cycle expertise, I have never tried to pinpoint the price or approximate date of a high or low in the cycle. Bubbles may be easy to spot, but they can go for years. Forecasting the time they end is a pure waste of time. But when prices are extended to two or three standard deviation extremes, it’s safe to say that they will soon revert to the mean because people use their common sense in due course. The Price-Earnings ratio for any company can rise for various reasons, some good and some bad. However, an inflated PE for the whole market signifies a possible bubble. Insider sales, particularly after a stock price has dropped significantly, should also be a clear warning to the public.

244

The price earnings ratio

A meager PE ratio compared to its historical norm may indicate that insiders and other significant investors of that company’s stock have sold out. Check the insider trading data. In this chapter, I referred to a share split, actually a reverse share split for General Electric. A two-for-one split doubles the shares, which cuts the price of one share in half. A sharp price drop often confuses investors who are unaware of the split. They think the company’s stock price, operations, and finances have weakened. A reverse split like GE’s one-for-eight in 2Q2000 increased the price about eight times. Some investors thought that the Company was booming. But the valuation was unchanged. Investors should ignore any changing narratives that follow a split. The shares have changed, but the company is the same. Sometimes the whole company changes, which happens when it splits into segments. General Electric did this. In November 2021, the Company announced three new independent, separately traded companies for aviation, healthcare, and energy. Cases like that require further studies of valuations. Bottom line: The Price/Earnings ratio is simple to understand, but context is more important than the actual figures.

245

CHAPTER 52

Dividend yield Yield is key to stock and bond investors seeking income. It’s also essential to trend and cycle traders who rely on a principle called ‘reversion to the mean.’ For those seeking income, there is a time to buy bonds and a time to buy stocks. In volatile equity markets, the timing of trades is critical, as is the Total Return concept. Many investors, and analysts, only consider Bond Yields when considering an Income strategy. That may have been acceptable in a stable capital market. But with current interest rates near historic lows, investors have been seeking Income mostly from stocks, not bonds. A company’s Dividend Yield is the dividend payout amount relative to its stock price. But as interest rates impact bond yields, stock price volatility affects Current Yield. An income strategy is challenging to pin down with extreme equity market volatility. It is not enough to look at the current Yield. Share prices can swing yields sharply. For example, if a company’s share price drops significantly, but the amount of its dividend stays the same, the Dividend Yield increases a lot. A day or two later, that Yield could also fall a lot. Say the company pays a dividend of $1 when the stock price is $50. That is a dividend yield of 2%. But, if the stock price drops sharply to $40, the Yield drops to 2.50%. But that stock price drop and pop in the yield may be temporary. A price recovery would cause the yield percentage to plunge. So, the timing of the stock buy is essential. High yields can be a boon to a portfolio. But it makes sense to consider additional information if you are buying and holding a stock for an extended period, as most yield investors do. For example, a company dividend that increases yearly against the stock price paid a few years ago is a growing Dividend Yield. That means growing one’s income without paying for it – other than the time-consuming analysis you invested. One of the critical things a yield investor wants—beyond a high yield percentage and a growing dividend yield—is the company’s business stability. They want to know how stable the company’s earnings and revenues are. Dividend payouts rely on Profitability. So the more consistently profitable a company is, the more dependable its dividends become and the higher the potential for actual dividend increases.

246

Dividend yield

An income strategy is like a good growth strategy. When buying yield, investors should look to a company for (1) high Profitability, (2) steady or growing Profit Margins, and (3) predictable Revenue Growth. In combination, these factors sustain the long-term Dividend Yield needed by investors if they turn from bonds to stocks to earn the Income they seek. In the final chapter (120), I listed twenty companies as high quality when considering a global portfolio. Many pay a high Dividend. As of the April 2022 time of writing, here are some of the highest yields of a selection of High-Quality North American companies : Fig. 52.1 Dividend Yields of Some High-Quality companies (April 2022) • Enterprise Products Partners (EPD) 7.71% [Oil & Gas Midstream] • B2Gold (BTG) 4.61% [Gold Mining] • Chevron (CVX) 4.10% [Integrated Oil & Gas] • Canadian Natural Resources (CNQ) 3.63% [Oil & Gas Exploration & Production] • Marathon Petroleum (MPC) 3.23% [Oil & Gas Refining & Marketing]

These five natural resource companies trade in cyclical patterns, so the market timing of stock purchases is necessary for obtaining the best yields. Bottom line: Discovering a yield that meets your income needs is not as simple as choosing the highest figure. Your tolerance of risk and your tax situation are two factors. Market volatility, which impacts Total Return, is another factor. So too, is the financial strength of the payer source.

247

CHAPTER 53

Enterprise value compared to market value As market prices often fluctuate sharply, the Market Value of companies will rise and fall substantially. But Market Value is not the same as Enterprise Value, also called Intrinsic Value, Fundamental Value, or Take-Out Value. Fluctuating Market Value leads to trading opportunities for securities investors. Company value is critical to a company’s direct investors and players in the Mergers and Acquisitions business. Market Value (MV) is the Market Capitalization or Market Cap for short. The MV formula is the current stock price multiplied by the number of shares issued by a company that is outstanding and tradeable in the market. Enterprise Value (EV) is the value of a company’s assets, including intangibles minus liabilities, shareholder equity, and its discounted future earnings. Also called Intrinsic Value, Fundamental Value, and Take-Out Value, EV is a business valuation concept, not a stock valuation concept. We trade prices, and we do not buy companies, so let’s leave the discussion of take-out value on a fundamental level. But a simple understanding of going-concern Enterprise Value is vital if you are interested in trading the stocks of value companies. Because market prices fluctuate, there is always a difference between MV and the steadier EV. Sometimes the MV is at a premium to EV; sometimes, MV is at a discount. Often the gap is extreme. Stock investors often fail to recognize growing Enterprise Value. When MV trades at a discount to EV, there may be a short-lived opportunity to buy stock in a high-Quality company at a price that could soon rise. In time, the market usually recognizes and pays for the underlying Intrinsic Value. Why the discrepancy? The academic theory posits that the current price of all stocks in the market is the sum of all knowledge and hence is the actual value. We all have Cognitive Biases that cause us to misprice value, often to the extreme. Usually, our biased opinions have developed through the influence of the media. The media does not always get the facts right. As well, self-interested parties will pay the media to mislead us.

248

Enterprise value compared to market value

As I prepared a report early in 2016, my Value company screens showed me that auto and airline companies were undervalued. Those industries were nearly bankrupt a few years earlier, and many companies required debt restructuring. Their brand, which is an intangible asset, suffered. Over time, it’s a different story. In 2016, many companies like Ford, GM, United Continental, and Delta Airlines had solid balance sheets, new products, younger and more able management, and efficient business operations. But investors were still thinking in the past, like with Oil companies at the start of 2021. To seek opportunity, investors understand valuation concepts. We base our thinking on simple logic. If we wanted to buy the whole company, then Enterprise Value, or something higher than Market Value, is the approximate price we would have to pay. M&A Mergers & Acquisition professionals use that same low stock price logic. They also believe that the evolved company will have costs drop and profits rise in a business combination. So, they try to seize these opportunities in the market. When an acquisitor organization wants to merge with or take over ownership and control of a company, the purchase offer usually is at a substantial premium to Market Value. Suppose you own the stock of a company you believe is undervalued in the market, hoping for an acquisitor to make an offer or for other investors to recognize the valuation gap later. In that case, you may have a legitimate window of opportunity for capital gain. But getting involved in trading rumored or announced M&A deals is not, in my view, a good plan. Such deals seldom happen unless Wall Street financial services companies and the company players orchestrate them in their favor. Sell the rumor; buy the fact. I avoid M&A arbitrage deals. As I say, “Out of the room; out of the deal.” Based on years of experience, I call the typical M&A deal-making process and the arbitrage community a fraud engineering industry. Illegal insider trading abounds despite volumes of securities rules and regulations to prevent it. Securities regulators seldom prosecute the fraudsters of M&A fraud because most securities fraud is hard to prove. The fraudsters themselves are often well-connected people who have considerable legal resources at their disposal. There are few convictions. If I am already invested in the acquiring company, I almost always sell immediately in anticipation of many others selling. If I hold the company being acquired, I may wait a couple of days to see if a rescuer comes along. Otherwise, I will sell. Bottom line: Unless you are experienced in the M&A business or skilled in arbitrage, you should avoid participating in take-over plays. Trading success may come to those who can find high-quality companies whose stocks are timely to buy and then sell at the right time. Late in a market cycle, there are opportunities in Value companies whose fundamental corporate value exceeds market capitalization. 249

CHAPTER 54

Corporate reporting Investors base decisions on reported earnings more than for any other reason. So knowing when a company will release this information is crucially important. A news release that summarizes an earnings report is a reliable management representation of facts and guidance. It is a statement from company management to the securities regulator that the company says all stakeholders can rely on. Be aware that a securities regulator is not responsible for the accuracy of corporate filings. All filed documents can be sued for alleged errors and omissions. Every quarter year, an issuer of securities to the public must report its financial status and operating results. News releases and corporate filings must disclose any new relevant and material information that might affect an investor’s valuation of a company or decision to trade its securities. The company files these facts and opinions with Securities & Exchange Commission regulators. Investors and other stakeholders rely on them to make good decisions. You can find each public company’s financial data in the 10-Q and 10-K filings. What is a 10-Q? Here is the SEC link. What is a 10-K? Here is the SEC link. How you locate corporate filings for any US public company, which is free from the SEC EDGAR service, is shown in this link. Canadian companies file with the Canadian Securities Administrators, the equivalent of the SEC. All filed data is available free to the public at Sedar.com. Corporate filings include news release summaries of disclosed events, corporate presentations, and a quarter-yearly Management Discussion & Analysis (MD&A) report. In the MD&A, management discusses its performance, its reasons, and a statement of risks. At that time, the company also declares its next dividend on a specific date. More important than a news release disclosure that summarizes the earnings report is the full MD&A report. The MD&A filed by Mid-Cap and Large-Cap companies is typically complex for an average investor’s use. For small, emerging companies, it’s obligatory reading. These reports are reviewed and reported upon by investment analysts and by the media.

250

Corporate reporting

Note that relevant and material differences often exist between what is written in the MD&A and what is later opined in media articles. Investors need to read and act on the facts and not be guided by stories. Quarterly reports are essential to investors for the revenue and earnings data and the management guidance of future business operations. Investors need time to prepare for soon-to-be-reported data, not just for one company but also for its industry Peer Group. Business conditions for one company are the same as for many companies in an industry. A change in business conditions stated by an industry’s first reporting issuer, like auto manufacturers or airlines, has a similar effect throughout the Peer Group. Several information sources publish alerts to upcoming reporting dates. Here are links to the Earnings Calendar at NASDAQ.com and Yahoo.com Research. Some investors buy or sell stock positions ahead of important quarterly reports to avoid perceived risks. As the market is a dynamic process, pre-reporting trades in the stock also lead other investors to make decisions. This website helps monitor Dow 30 earnings news. You can also use the Finviz.com screener to list the next month’s Dow 30 company earnings reporting dates. The list of S&P 500 companies that are reporting soon is at FinViz.com. Bottom line: Close monitoring of management reports is important because these are the times that investors make most decisions to buy or sell. Often there are significant price changes, especially with excessive volume. That may indicate a shift in investor sentiment or a change in the price trend.

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CHAPTER 55

Analyst ratings This chapter covers the meaning and implication of a Consensus Estimate of a Company’s projected earnings and revenue and the stock’s 12-month price forecast, called a Price Target. The Consensus is the average of all the analysts who report their findings. Their research starts from the guidance and explanations provided by the Company. They adjust based on various analytical models of macroand microeconomic factors that may cause a different result. This data is then summarized and published by financial data aggregators like Finviz.com, Finance.Yahoo.com, and MarketBeat.com, among many other free services. The published information is necessary to investors, but so are the analysts’ changes and the reporting analysts’ perceived quality. After getting to know both sides during my lengthy financial services career, I discovered that some Analysts are as qualified in their job as CEOs of the companies they follow. So, I respect the good ones and pay attention to their “Buy,” “Hold,” or “Sell” Ratings. Analysts who work for financial services companies have more direct access to company management and published industry data than the public. The ones who work for the industry’s larger firms will typically have more staff and computer resources to manage, analyze and interpret the data. They study the companies they follow and have the training to author meaningful research reports. For investors who don’t have the time or skills needed to do personal research, it’s often best to study the Consensus data. Investors should give more credence to the Consensus recommendations and estimates where there are many Analysts than if the data comes from only a couple of them. Also, company results and guidance data are often wide-ranging, so a Consensus within a narrower range of estimates is given more weight by experienced investors. Study the Consensus Buy-Hold-Sell Recommendation of at least two Analysts for every stock on a watch list. Watch to see if revenue and earnings consensus numbers are strengthening or weakening. The Consensus data is used in some investor databases to determine a Quality score for each company. While consensus data is valuable, investors must understand that these are opinions. Opinions change. 252

Analyst ratings

Underlying all opinions are facts. The company reports absolute and growth data for revenues, cash flow, profit, dividends, assets, and liabilities. Any changing management guidance related to this actual data are also facts we need. Investors and analysts use this data and industry and economic data to make opinions. Biases and business realities affect opinions. Some realities may impact a Sell-side analyst’s views. Say the firm is an underwriter, or its salesforce promotes or avoids selling a stock. Perhaps the investment management division holds considerable stock. Maybe there are personal connections between the analyst and the Company. When reading the Consensus estimates, bias from holding a stock also affects the judgment of each investor. In any case, facts are more important than opinions. Analysts tend to be market trend followers, so Growth stock price volatility does affect the Analyst’s rating. Growth companies are typically more volatile than Value companies which trade closer to intrinsic value. Investors can watch Analyst Ratings via MarketBeat.com. Fig. 55.1 Highest to Lowest Analyst Consensus Ratings of Dow 30 stocks (April 5, 2022) Company

Ticker

Consensus Strong Rating Buy

Buy

Hold

Sell

Consensus Price Target

% Upside or (% Downside)

Microsoft Corp

MSFT

3.00

358.52

15.32%

UnitedHealth Group Inc

UNH

2.95

510.52

-1.40%

salesforce.com, inc.

CRM

2.89

304.68

44.99%

Apple Inc.

AAPL

2.84

190.61

8.88%

McDonald’s Corporation

MCD

2.83

279.32

12.40%

Visa Inc.

2.83

269.09

19.02%

Home Depot, Inc.

2.80

394.41

29.37%

NIKE, Inc.

NKE

2.80

171.67

29.76%

Coca-Cola Co

2.79

65.80

5.33%

Walt Disney Co

DIS

2.74

190.21

40.25%

Walmart Inc.

WMT

2.74

166.95

10.22%

Chevron Corp

CVX

2.70

157.52

-3.57%

Boeing Company

2.68

261.89

43.38%

Caterpillar Inc.

CAT

2.65

243.18

12.57%

Merck & Co., Inc.

MRK

2.60

91.40

9.17%

Johnson & Johnson

JNJ

2.56

182.00

2.47%

Procter & Gamble Co PG

2.54

161.33

4.34%

253

BILL CARA / STOCK MARKET LITERACY

Honeywell International

HON

2.50

231.46

20.62%

American Express Co AXP

2.47

199.67

7.70%

Goldman Sachs Group

2.47

438.94

35.49%

Cisco Systems, Inc.

CSCO

2.43

63.83

16.23%

JPMorgan Chase & Co.

JPM

2.39

167.82

25.86%

IBM

2.30

147.90

14.75%

Verizon Communications

2.20

59.20

12.16%

Amgen Inc.

AMGN

2.17

233.88

-4.37%

Dow Inc.

DOW

2.13

67.57

6.43%

Travelers Companies TRV

2.00

175.73

-3.12%

Intel Corporation

INTC

1.93

54.38

13.00%

Walgreens Boots Alliance

WBA

1.91

50.36

16.15%

3M Company

MMM

1.80

171.29

15.03%

Fig. 22.1 ranks the Dow 30 companies from 1 (best) to 30 (worst) for Analyst Consensus rating on April 5, 2022. You will access the latest information by clicking on the Company name link. Note that share prices change daily, and the Consensus Price Targets change frequently. So the percentage upside or downside changes every day. The study of Consensus recommendations is an example of Quantitative Analysis. In many of these Chapters, I show other types of Quantitative studies to show the importance of statistics in decision-making. In the Dow 30, perennial favorites of Wall Street analysts are Microsoft (MSFT), UnitedHealth (UNH), and salesforce.com (CRM). 3M (MMM), Walgreen Boots Alliance (WBA), and Intel (INTC) are frequently ranked at or near the bottom. The Financial Industry (Self) Regulatory Authority FINRA] guide gives insight into securities analyst recommendations. Here is the link. Bottom line: For the most part, it’s the job of a professional investment analyst to make the right call on Buy-Sell Ratings and Price Targets, and their group score is a good indicator. Consensus in anything can be a good or bad thing. It’s bad if it leads to Groupthink and the market gets it wrong. Thinking outside the box with critical reasoning often leads to a different opinion and trading decision.

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CHAPTER 56

Analyst price targets Nobody knows the future, so investors should not set price targets or Income goals. After selecting a company for investment and buying its stock, investors have the singular task of trying to stay on the right side of the Trend. Investment analysts set Price Targets, and investors can use that data to support their decisions. Setting price target guesses on future gains from an investment is fruitless. It’s like a hunter trying to skin an animal before killing it. The profit or loss is only meaningful with a complete buy-and-sell transaction. After studying fundamental data and business conditions of the companies they follow, analysts set one-year-out Price Targets. Market data vendors like Thomson Reuters obtain that data and sell the information to aggregators through Consensus Recommendations with average Price Targets. An excellent free (or inexpensive) source of aggregated data, such as Price Targets, is MarketBeat.com. Fig. 56.1 List of Analyst Ratings and Price Targets of Dow 30 stocks (April 2022) Company (2022-04-21 data)

Ticker

Overall Rating out of 5

User Strong Rank Divi

Owner

Analyst Analyst Earnings & Rating Analyst Price Valuation Score Rating Target

% Upside from Current Price

Apple Inc.

AAPL

3.06

5.0

3.30

1.70

1.90

2.81

Buy

$191.01

16.98% UP

Amgen Inc.

AMGN

2.65

4.9

3.30

1.70

1.30

2.17

Hold

$234.00

-7.02% DOWN

American Express AXP

2.64

4.1

2.50

1.90

2.40

Hold

$199.80

9.74% UP

Boeing

2.70

4.8

0.00

2.50

1.90

2.68

Buy

$256.37

44.30% UP

Caterpillar salesforce.com

CAT

3.32

4.3

4.20

3.30

2.50

2.63

Buy

$242.31

11.84% UP

CRM

2.76

5.0

0.00

2.50

1.90

2.89

Buy

$304.68

77.55% UP

Cisco Systems

CSCO

3.34

5.0

4.20

2.50

1.90

2.36

Hold

$62.59

21.18% UP

Chevron Corp

CVX

2.98

4.7

4.20

2.50

1.30

2.70

Buy

$160.90

-0.73% DOWN

Walt Disney Co

DIS

2.74

4.9

0.00

2.50

1.90

2.74

Buy

$187.42

57.59% UP

Dow Inc.

DOW

2.76

4.1

3.30

1.70

2.50

2.21

Hold

$72.64

6.19% UP

Goldman Sachs

3.43

4.1

2.50

3.80

2.50

Buy

$444.75

38.00% UP

Home Depot

3.45

4.9

4.20

2.50

1.30

2.83

Buy

$388.14

29.02% UP

Honeywell

HON

0.50

0.0

2.50

0.00

N/A

IBM

2.62

4.0

4.20

0.80

1.90

2.40

Hold

$147.25

5.93% UP

Intel Corp

INTC

3.23

4.7

3.30

1.90

Hold

$54.27

15.96% UP

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BILL CARA / STOCK MARKET LITERACY

Johnson & Johnson JNJ

2.79

4.4

4.20

2.50

0.60

2.56

Buy

$191.33

4.98% UP

JPMorgan

JPM

3.65

4.9

4.20

2.50

2.31

Hold

$164.71

29.53% UP

Coca-Cola

2.70

4.7

3.30

2.50

0.60

2.79

Buy

$65.80

0.14% UP

McDonald’s

MCD

3.42

4.9

4.20

3.30

1.30

2.83

Buy

$279.96

11.49% UP

3M Company

MMM

2.89

4.3

5.00

1.70

0.60

1.80

Hold

$169.86

13.37% UP

Merck & Co

MRK

2.66

4.5

4.20

1.70

0.60

2.60

Buy

$91.27

7.78% UP

Microsoft Corp

MSFT

3.61

5.0

3.30

1.90

3.00

Buy

$359.40

30.56% UP

NIKE, Inc.

NKE

3.42

5.0

3.30

2.50

1.90

2.83

Buy

$172.12

33.05% UP

Procter & Gamble PG

2.89

4.3

4.20

2.50

1.30

2.57

Buy

$165.64

2.03% UP

Travelers Cos

TRV

2.89

3.9

4.20

2.50

1.90

2.08

Hold

$178.50

2.45% UP

UnitedHealth

UNH

3.25

5.0

4.20

3.30

1.30

2.95

Buy

$558.43

6.78% UP

Visa Inc.

3.43

5.0

3.30

2.50

1.90

2.83

Buy

$268.91

28.37% UP

Verizon

3.26

4.0

5.00

3.30

1.90

2.20

Hold

$59.20

14.18% UP

Walgreens Boots

WBA

2.88

4.5

5.00

1.70

1.30

1.91

Hold

$50.31

10.01% UP

Walmart

WMT

2.88

4.1

4.20

2.50

1.30

2.74

Buy

$167.14

6.18% UP

Analyst Price Targets (PT) are usually well above current market prices. That happens because most Sell-side analysts want clients to buy the stocks of the companies their firms provide financial services to. Therefore, skeptical investors take this information with a grain of salt. However, when published as a Consensus average of many analysts setting a Price Target, this data becomes valuable information in two situations: i. when a group of analysts raises or lowers their Price Target at about the same time, which usually follows soon after a company files a quarter-yearly report with regulators, and ii. when analysts do this for a whole peer group. I like the Price Target information for peer groups. The MarketBeat.com link “Compare Stocks” provides data on about 59 groups. Users can modify and add up to ten stocks in a string in the stock selection boxes. Investors watch for universal agreement of demand or supply considerations in the collective judgment of the Sell-side analyst community. To find stocks with potential upside, investors look for Consensus Price Targets that are higher than the current price. But a high potential upside does not mean less risk. It should cause investors to look deeper into why that extreme upside potential exists. The MarketBeat.com link “Compare Stocks” provides up-to-date data, and clicking on and then adding the ten stock strings in the stock selection boxes (a maximum of 10 is permitted). Bottom line: Consensus information is essential, particularly in peer groups. Quantitative Analysis enables the investor to base investment decisions on comparative data.

256

SECTION 6

Technical Analysis and Market Timing Tools 57 The need to develop Timing skills 58 Introduction to Technical 59 Trends and Cycles Analysis and Application in Trading 60 Technical Support and Resistance 61 Point & Figure Charting 62 Introduction to Technical Indicators 63 The Moving Average Convergence Divergence (MACD) Indicator 64 The ROC Indicator 65 The Stochastic Oscillator 66 The RSI Oscillator 67 The importance of Volume in Technical Analysis 68 Volume-based Oscillators 69 Divergence between Indicator and Price is a vital Alert

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CHAPTER 57

The need to develop timing skills This chapter delves into when to buy and sell, the most challenging but essential decision every investor has to make. Back in the day, we were interested in buy-and-hold investing. Of course, 3% in and 3% out commission charges for every securities transaction says all you need to know on that score. Commissions are almost zero today and are not an influential factor. Electronic trading systems now circumvent human interaction, conclude a transaction in a heartbeat, and settle it in two days versus three to seven days. Increased trade volume and shortened hold periods have led to the extreme volatility of prices. Buy-and-hold is now flat-out dangerous. Market timing skill is a necessity. Trading is about the time and space of price motion. It is a matter of natural law. Prices are in constant motion. They never stop moving up and down because of opposing forces, some strong, some weak, some getting stronger, and some getting weaker. That is the reality of our world. When price series data is rising, that is an Uptrend. When falling, it is a Downtrend. A trader’s main aim is to be on the right side of a Price Trend, so we need to understand a bit about Linear Regression and use a time series analysis-based trading strategy. The literature is more confusing than common sense, so bear with me. There are simple technical indicators that do the work for us. All we are trying to do is (1) buy and sell prices through the stock’s changing price motion from one direction to its opposite direction and (2) hold long positions in an Uptrend and short or no positions in a Downtrend. Think of this point as throwing a ball in the air. When it’s rising, you are watching. Only when it reaches its peak and starts to fall would you get ready to catch it. In the markets, investors know that what goes up must come down, and the reversal point is when we get ready to trade. Tools like Trendlines and Technical Indicators help us make these decisions. After much practice, investors make more timely decisions. But it’s like knowing when your pressure on an avocado tells you the perfect ripeness. Timing takes practice. 258

The need to develop timing skills

When do we buy? The Trend and Cycles knowledgeable trader enters a Buy order (or the close of a short position) when the price motion has broken out of a Downtrend. We hold that stock, called a long position, while the price motion is upward through a pattern of successively higher cycle highs.

When do we sell? The knowledgeable trader enters a Sell order (or an opening short position) when the stock price motion has broken down from its Uptrend. We then take no position (or hold a short position) while the price motion is trending downward through a pattern of successively lower cycle highs.

Market Cycles Every investor needs structure in their research, decisions, and trading. The structure can be around asset classes, geography, or industry sectors. The Global Industry Classification Standard (GICS) is a tremendous help in researching the eleven industry sectors. The 8-digit coding system uses two-digit codes for each (i) Sector, (ii) Industry Group, (iii) Industry, and (iv) Sub-Industry. The stock market cycle, our primary focus of interest, and the economic cycle differ in timing. Stocks are usually late in a long-term Cycle, a few months or quarter years before the peak of the economic cycle. When stocks in the Basic Materials and Energy sectors reach long-term price Cycle highs, the companies encounter a more challenging time selling their products. Inventories start building as the economy slows. Investors are cautious when they take note of inventory builds. That is a time to be watchful of a company’s revenues. Fig. 57.1 An illustration of how the stock cycle usually leads the economic process, per Tackletrading.com

259

BILL CARA / STOCK MARKET LITERACY

Price Cycles Since it takes time for a Price Trend to mature and reverse, we study the trend movement of the price data, which varies over time, which we call a Cycle. We refer to this as the Trend and Cycles approach to trading. We buy on a Trend Breakout and hold through a series of Technical Resistance levels. That way, we stay on the right side of the Price Trend, our primary aim as investors. During the price Cycle topping or bottoming phases, we are alert for the price series Trend Breakdown or a failure of Technical Support. We study Trends and Cycles over the short-term, mid-term, and long-term depending on our time horizon. To do so, we use Intraday, Daily, Weekly, or (less likely) Monthly time series data. Investors study Time Series Data in different periods because we know that people have different time horizons and related trading behavior, influencing other investors. Fig. 57.2 Different Time Series Data Periods of interest to investors 1. The long-term is greater than 50 weeks, i.e., over 250 days 2. The mid-term is 20 to 50 weeks, i.e., 100 to 250 days 3. The short-term is less than 20 weeks, i.e., 100 days 4. The very short-term is less than 2 weeks, i.e., 10 days

Our objective as a trader involves Space as well as Time. The Space could be our interest in Growth, Value, or Income company stocks, in the US or another country or region of the world. Time and Space are linked. For example, a trader of Growth company stocks has a short-term to mid-term time horizon. A trader of Value company stocks has a mid-term time horizon. A trader of Income instruments (stocks or bonds) has a mid- to long-term time horizon. The answer to when we trade (i.e., Buy and Sell) depends on our Growth, Value, or Income needs (see Chapters 9 through 11) and our Trend and Cycle motion study. Unlike investors with a long-term time horizon, as most investors had years ago, investors now have to adapt to high levels of volatility. Our time horizons to study trends and cycles are now mostly (1) very short-term Day Trading (Intraday to under ten days), as well as Swing Trading based on (2) short-term (10 days to 100 days). We may not trade this frequently, but our study framework is over these times. Because of increased market volatility, I now tend to trade in a short-term window of about 20 weeks or 100 days. Increased trading frequency has required a smaller universe of stocks in a watch list. There is only so much time (1) to find High-Quality (the ones that others call Blue Chip), (2) do a relative assessment of corporate fundamentals as well as review similar information gathered from other stocks, (3) and study the price motion of stocks, commodities, 260

The need to develop timing skills

currencies, and interest rates that impact the prices of peer groups like ETFs and indices and their constituents. There is only so much time in a day to carry out these tasks and enter buy and sell orders. What better way to organize than to present these concepts through a market clock? We use a theoretical computer model for the market clock that shows risk and opportunity based on known Price Drivers in the market and the resultant price motion over time. The MCM concept from my colleague and trading mentor Ian Notley supports all my Buy and Sell decisions. All investors should try to understand and apply the logic. The Fig. 57.3 schematic illustration of the Market Cycle Model (MCM) is applied to a proprietary rules-based trading system of Market Cycles and Multiple Time Frames, which is well covered in the literature. The word ‘proprietary’ in this instance means I use my own set of parameters of the wellknown theoretical Notley MCM. We all understand the gap between theory and practice, so be cautious when interpreting any schematic. I rely on it extensively, but I am also mindful of other factors like important news events and market sentiment that distort natural price motion. Fig. 57.3 Ian Notley Schematic Market Cycle Model (MCM) showing Accumulation/Distribution Zones

https://www.youtube.com/watch?v=UBkI5isAYJ8

261

BILL CARA / STOCK MARKET LITERACY

As noted throughout the book, I base my investment and trading strategies and tactics on the theoretical Notley Market Cycle Model (MCM). I am not a technical investor or trader because my decisions come from the Quantitative (Statistical) analysis of price series data and Macroeconomic activity, Fundamental and Technical analysis. I use MCM theory only for Alert purposes (i.e., warnings) and not to Buy or Sell. For background, I worked closely with Ian Notley at Dominion Securities from 19811983. In 1986 I called Ian at his home in Connecticut, inviting him to dine with me in Toronto. Over dinner in a posh Toronto restaurant, I showed architectural drawings for the penthouse floor of the Toronto Stock Exchange tower. I presented the layout I had designed for “his” new data center and offices. Institutional investors recognized Ian Notley as the world’s number 1 technical analyst in global capital markets. I was hopeful, but before the discussion ended, Ian spoke to my partner in Vancouver, Peter Brown, confirming that we would support him with a $1 million investment if he joined our firm. That was the start of Yelton Fiscal (Notley spelled backward). It was payback for all Ian had given me over six wonderful years of learning. Now he was my colleague in trading. Until his passing, Ian Notley served clients of all types all around the world. There were Buy-side and Sell-side traders and investors, analysts and portfolio managers, currency and commodities traders, and financial and industrial companies managers. His work was renowned. What I learned most from Notley is that market dynamics in every trading situation require a holistic understanding. We need to view the market as an integrated system, not merely its bits and pieces. That need to study the big picture never changes. Bottom line: Market timing is anything but easy. It’s a skill we need to learn. A mentor helps. To this day, I think of Ian Notley and thank his memory for his priceless contributions to my life. He taught me, a professional accountant and management consultant, about price motion. These schematic models of cyclic market behavior are theoretical. In practice, the market prices are dominated by patterns of cycle failures but understanding the MCM logic and connecting the flowing prices to changes in corporate fundamentals and macroeconomic data is crucial to developing market timing skills. RIP Ian Notley (July 12, 1936 – May 28, 2008)

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Introduction to technical analysis Technical Analysis is a study of price and volume in securities markets. Its counterpart, Fundamental Analysis, studies a Company’s value as it trades in a market. Like all types of analysis, the subject can be as long, broad, and deep as people want to make it. But to me, Technical Analysis is primarily a mathematical study of price motion. Capital market prices constantly fluctuate, and there is always a rhythm to the movement, as in most natural phenomena. It’s up to students of the market to find the various rhythmic patterns in the price motion and try to exploit them. We must understand that capital markets are just people acting like people. Natural law is our guide. Most people understand rhythmic patterns in music, in ECG heart waves and EEG brain waves, in the four seasons, lunar cycles, and ocean tides. Suffice it to say that the capital markets also have rhythm because we are all part of nature, and human activity is a natural phenomenon. Capital markets have many rhythms in each of the various asset classes. Stock markets, for instance, have rhythms coming from the price movement of thousands of stocks in different industries, sectors, and geographic regions where the companies do business. Some of these rhythms are cyclic, whereas others are counter cyclic. That’s because some companies benefit from high prices and others are disadvantaged by the high costs. Mathematics is not an easy subject for many readers. I will keep it as simple as possible. Understanding investor behavior is a debatable subject. But the truth is that humans tend to do things consistently, whether by personality, training, or whatever. In other words, there are trends in human behavior that lead to movements in the prices of stocks in the markets we trade. For example, if the price this month is higher than last, we think next month’s price will be even higher. That’s natural law. A Trending Market is the general direction of the price of a market (or asset). The trend may be rising, falling, or flat. The trend may rise or fall more quickly than at other times. But the general direction remains unchanged for the price motion to be a trend.

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Within a trend, there are rhythms that investors refer to as Cycles. Many investors have difficulty understanding that a cycle differs from a trend, so I’ll return to the simple explanation I gave in Lesson 2. A trend is like a marriage; a cycle represents the times within a marriage that fluctuate between harmony and argument. Think of a Trendline as the midline of cyclic price movement – although a Trendline is not a Zero line in a chart, which is a different concept. Over time, the Cycle is inclusive of price action that rises above (i.e., the good times) and falls below (i.e., the bad times) the Trend’s Zero line (i.e., the typical days). Investors refer to the parts of a Cycle as Phases. In a complete Cycle, there are four phases. There is an up/rising phase, an advancing/topping phase to the cycle peak, a down/falling phase, and a bottoming/terminating phase to the cycle trough. It’s during the cyclic reversal of price series data and the possible trend reversal that investors must focus. I call it ‘Decision Time’ when investors use technical tools to help them decide when to buy and sell. The price series from pattern low to pattern high and back to pattern low completes the cycle, and the process starts again. Fig. 58.1 An uptrend is drawn as a line joining HL points and the downtrend as a line joining LH points

Fig. 58.2 Example of a Price staying on the right side of the Up Trendline

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Fig. 58.3 Graphic example of how Price Cycles differ from Price Trends

The choice of terminology is up to the individual. It’s easier to think of the price motion as being a wave. Fig. 58.4 Schematic of Cyclic Wave Motion

Fig. 58.5 Notley Market Cycle Model showing the structure of Cycles overlaying the Trend

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I do a multiple timeframe analysis of stock cycles, which is my most critical technical analysis. By overlaying the short, intermediate, and long-term charts, as illustrated in Fig. 58.5, I seek to find the Accumulation Zone (i.e., the best time to buy) and the Distribution Zone (i.e., the best time to sell). Unfortunately, the patterns of a Cycle are never like you see drawn in Fig. 58.5. They are something like snowflakes, pretty similar, but each a bit different in length and amplitude. In theory, a Cycle is like a Sine Wave, so investors refer to a market cycle drawing as a theoretical model. In the sine wave-looking MCM model for a single stock, using long-, intermediate-, and short-term cycles, the mid-cycle point is represented by a Cycle Zero line. The topping and bottoming phases represent the reversing condition. In multiple timeframe analysis, the long-term cycle reversals are more critical than shorter ones. Thirty to forty years ago, the typical long cycle of interest to investors was about 4.5 years. A rising and topping phase took an average of 3 to 3.5 years, and a falling-terminating phase took about 1 to 1.5 years. Technical Analysts use Monthly price series data to show the long cycle. They use Weekly price series data to show a series of three to five intermediate cycles of 20 to 50 weeks in duration. And within each intermediate cycle, there are one to three short cycles of 10 to 20 weeks. In the Market Cycle Model, the long cycle will contain from three to seven short cycles depending on market volatility and momentum. With today’s market action and the participation of more investors, more trading styles, and more extreme methods, market prices have become more challenging to trade. When I started trading in the 1960s, the “prudent man rule” of the securities industry required my broker to recommend stock buys based on Fundamental Analysis. Technical Analysis was a dark science in those years. The average holding period of a stock position was three or more years. The brokerage commission was 3% on the Buy and 3% on the Sell, causing few trades to happen and giving much time for the arduous task of Fundamental Analysis. In 1973, the Chicago Board of Options Exchange introduced put and call options on exchange-traded stocks. The subject of risk management and the use of options on market prices quickly grew in popularity. Investors became active buyers and sellers. They also made trades of greater size, which forced the stock exchanges to lower the commission costs. A one-eighth fraction became 12.5 cents after the introduction of the decimal system. With trading in pennies, the average position in the 1980s and 1990s dropped from several years to somewhat over a year. Technical Analysis became acceptable as a legitimate and, most believe, essential part of trading. In recent years, price increments are in basis points, which is one-hundredth of a point. Increasing market sophistication, including Exchange Traded Funds (ETF) and hedging practices, impacted the huge Mutual Funds market. Selling a risk management product to an investor for long-term holding then became marketing liquid ETF securities to investors.

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Excess trading in the 1990s led to a market bubble in 1999, and a crash and Bear Market soon followed. The new popularity of the internet led to Day Trading and Swing Trading based on Technical Analysis. Trading methods became more extreme. Investors began to use the old intermediate-term cycle (20 to 50 weeks) as the newest version of the long cycle. They used the old short-term cycle (10 to 20 weeks) as the new intermediate cycle. With much analysis now based on a short cycle of fewer than ten weeks, the average holding period dropped from years to a few months. And then to weeks. Today, with computer algorithms and algorithmic trading being the basis for half the entire trading volume of the major stock exchanges, the average holding period has dropped from weeks to a few days. Consequently, most investors today are Swing Traders, and many are Day Traders. Rather than taking a big picture long-term view as was typical in the past, today’s average investor has a daily routine that starts early each morning. Bottom line: Our belief in Trends and Cycles and the Market Cycle Model endures because investors try to assess risk in every trade, regardless of the anticipated holding period. This chapter shows that investing and trading are about time and space, all based on natural law.

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Trends and cycles analysis and application in trading In the previous chapter, you learned that it’s time for investors to focus on the cyclic reversal of price series data and the possible reversal of the trend. That is ‘Decision Time’ –investors need technical tools to help them decide when to buy and sell. This chapter explores the use of Trend and Cycle Analysis to discover trend breakouts and reversals. You have already learned that a Trend is a different characteristic of price motion than a Cycle. The Trend Line follows the rising or falling direction of the price series data. The Uptrend is a line joining the Cycle troughs (or valleys, if you will), whereas the Downtrend is a line joining the Cycle peaks in a Downtrend. The Price Trend tells investors if they should invest or hold a long position in a stock. Our analysis of the Price Trend results in our understanding that, yes or no, we should be in or out of a stock position. Investors call it being on the right side of the Trend. As opposed to a simple yes or no, our analysis of a Price Cycle tells us when we should be buying and selling. The timing of a trade is a difficult decision. Experienced investors look for Signals from different sources by using various investigative tools. Investors need to make early decisions because it is in the early part of the Cyclic Phase where much of the price motion occurs. There cannot be a Trend Breakout and Reversal without simultaneous Cyclic action in the price. Broken trendline events are the most important among various types of technical Buy and Sell Signals that I apply to trade decisions. A Trend Breakout is a price move from below a negative sloping Downtrend line to above.

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Fig. 59.1 Example of a downward Trendline that connects the lower highs to a January 2002 reversal

If there was a point 5 in the previous illustration, that Trend Reversal is a Buy Signal. That is one of a few different types of Buy Signals. In the following illustration, the price breakout from above an Uptrend line to below it is a Trend Breakdown. A Trend Breakdown is one of a few different types of Sell Signals. Fig. 59.2 Example of an upward Trendline that connects the lows to a December 2010 reversal

Most investors who use Trendline Reversals in their trading apply them to the stock prices, whereas I prefer to apply them to Technical Indicators such as the Relative Strength Index (RSI). Moreover, I use Trendline Reversals for multiple timeframes for a single stock. The subject of timeframe commonality is in a different lesson. In the last chapter, the Market Cycle Model graphic introduced the subject.

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Consider overlaying charts of the Monthly, Weekly, and Daily price data. The simultaneous points of troughs and peaks are when buy and sell decisions are made. The simultaneous troughs represent the Accumulation Zone, and the peaks are the Distribution Zone. Fig. 59.3 Illustration of selling peaks (i.e., strength) in an Up Trend and buying troughs (i.e., weakness) in a Down Trend

The Price Trend tells investors to be in or out of a stock position, whereas the Price Cycle tells the time to Accumulate and Distribute. Fig. 59.4 Schematic of the four Cyclic phases

We Buy at the termination of the Declining (Bear) phase early in the Up Phase and Sell at the termination of the Advancing (Bull) phase. There is a time to Buy (Accumulate when prices are weak and oversold) and a time to Sell (Liquidate/Distribute when prices are high and overbought).

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Fig. 59.5 Schematic showing to Accumulate when prices are Oversold and Distribute when Overbought

Note that a Bull phase has long rallies and short reactions. A Bear phase has the opposite. Fig. 59.6 Schematic showing the time to accumulate and go long rallies and the time to liquidate

Until his passing in 2008, Ian Notley was universally known as the world’s best Trend & Cycles analyst. It was a privilege to be trained by him and to become a close associate. His analysis and publications continued with protégé Jonathan Arter at Taniscott Capital, who works with institutional clients.

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Trend & Cycles analysis summary There is a reason for stocks trending higher or lower. Stocks are under overall Accumulation or Distribution during those times. The underlying price drivers may be Fundamental, Technical, Quantitative, and Macroeconomic. There may be psychological (i.e., market sentiment) factors for the trend to rise or fall more than the natural rate of change. Bottom line: It’s impossible to discuss Trends and Cycles without using graphs or charts to illustrate the concepts. Price Trend is a significant factor in our decisions. When prices are trending higher, we want to be holding long positions. When the trend is falling, we like short positions or no positions.

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Technical support and resistance Investors must learn to recognize (i) the trading zone when buyers are soon overcome by sellers and (ii) when sellers are getting exhausted and soon to be overcome by buyers. These are the points when Cycles reverse and when Trends change. Every successful investor will say that you must be most focused at those times. It would be best if you were on the lookout for Alerts and Signals, as that could be decision time. The previous chapter shows that a cyclic pattern of higher highs and higher lows is a Bull Phase. An extended Bull Phase becomes a Bull Market based on the price rise from the low point, commonly accepted at +20%. A cyclic pattern of lower highs and lower lows is a Bear Phase, which, if extended to losses of -20% from the peak price, would be a Bear Market. An essential part of an investor’s job is deciding when to hold long positions, have no positions, or hold short positions in a stock. Investors are increasingly using mathematical analysis to support their decisions. Software tools put the data into mathematical form expressed as a graph. Understanding the chart needs an understanding of price patterns. The most important patterns are Price Trendlines and Technical Support and Resistance levels. Computer algorithms instantly calculate these important patterns for any time series data, whether for stocks, bonds, commodities, or Indices. A stock price in a bullish phase has moved higher than its level of Resistance (i.e., in the previous cycle, there had been a reversal). This cycle indicates that there are more buyers and fewer sellers. The current price will move to a new cycle high before reversing from Uptrend to Downtrend. The latest cycle high becomes the new level of Resistance. Following a pullback, the previous Resistance becomes the new Support level, above which will be a new cycle low if the stock remains in its bullish Trend. Investors deal in probabilities trying to stay on the right side of the trend. The nearer a stock price moves toward an area of Technical Support or Resistance, it pays to be mindful of the narrowing Gap.

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When that Gap becomes relatively small in percentage terms, that is an Alert for the trader to study other Indicators (e.g., Moving Average Crossovers and RSI reversals). The weight of the evidence signals a Trend Reversal for that stock. Investors often study price patterns. Some patterns are more important than others. For example, previous trend reversals or breakouts’ price levels serve as potential decision points. Trend Breakouts and Trend Breakdowns are when we try to buy or sell a stock. I refer to the event as ‘Decision Time.’ Here are a couple of examples. Fig. 60.1 ‘Lower Low Breakdown’ Pattern

Fig. 60.2 ‘Cup and Handle’ Continuation Pattern

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The previous illustration shows a Cup and Handle pattern and a trading decision point. The famous ‘cup and handle’ technical indicator is not mathematics-based. Like with Divergence, interpreting a Cup and Handle is a matter of perception. Skeptics call it reading tea leaves. But, as explained in my zone-alert-signal decision system (chapter 77), I categorize a ‘Cup and Handle’ as a pattern in an Accumulation Zone. The breakout process takes an indefinite time to complete, but I believe in the usefulness of this indicator. Technical Support and Resistance points for possible buying and selling a stock are shown by Pivot Point indicators. The mathematics of standard deviation underlies this vital analytical and decision-support tool. Any price series has an average or mean value for data points that vary. Standard deviation is the square root of the variance. If the data behaves in a normal curve, 68% of the data points will fall within one standard deviation of the mean data point. Around 95% of scores are within two standard deviations of the 10-period mean, and approximately 99.7% are within three standard deviations of the mean. So as the price gets further from its mean, the more likely there is a Reversion to the Mean. This use of standard deviation is known as the 68–95–99.7 rule, one of the most valuable concepts in investing. There are many free investment aggregator sites that provide Pivot Points. I recently discovered a helpful data aggregator service from Europe called FinScreener.org. FinScreener.org offers a free Pivot Point (PP) and Support (S1, S2, S3) and Resistance (R1, R2, R3) service for all stocks, including S&P 500 and Dow 30 stocks. They offer the calculations in six different time frames. Daily data pivot point calculations give me a big-picture view. The 1-Hour and Daily data Support and Resistance Pivot Point calculations are helpful for trade execution. I prefer daily data calculations to avoid buying or selling too early in fast markets where volatility is extreme. At the time of writing, here is the Pivot Point Daily data from FinScreener.org for the Dow 30 stocks. Fig. 60.3 Pivot Point calculations for each Dow 30 company on April 20, 2022 Company (2022-04-20 data)

Ticker

Apple Inc.

AAPL

163.15

164.62

165.93

167.40

168.71

170.18

171.49

Amgen Inc.

AMGN

250.23

251.86

253.62

255.26

257.02

258.65

260.41

American Express

AXP

186.24

187.35

188.75

189.86

191.26

192.37

Boeing

180.10

181.83

184.58

186.31

189.06

190.79

177.35

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Caterpillar Inc.

CAT

229.19

230.89

232.98

234.68

236.77

238.47

240.56

salesforce. com, inc.

CRM

176.55

181.32

183.77

188.54

190.99

195.76

198.21

Cisco Systems

CSCO

50.70

51.43

52.22

52.95

53.74

54.47

55.26

Chevron

CVX

169.35

170.41

171.47

172.52

173.59

174.64

175.70

Walt Disney

DIS

120.10

122.10

123.34

125.34

126.58

128.58

129.82

Dow Inc.

DOW

65.87

66.45

67.00

67.58

68.13

68.71

69.26

Goldman Sachs

330.01

333.75

337.41

341.15

344.81

348.55

352.21

Home Depot

304.88

307.31

311.23

313.66

317.58

320.01

323.93

Honeywell

HON

191.58

193.79

195.07

197.28

198.56

200.77

202.05

IBM

128.43

130.91

134.61

137.09

140.79

143.27

146.97

Intel Corporation

INTC

47.03

47.50

47.81

48.28

48.58

49.05

49.36

Johnson & Johnson

JNJ

180.00

180.95

182.42

183.37

184.84

185.79

187.26

JPMorgan Chase

JPM

128.61

129.97

130.78

132.14

132.95

134.31

135.12

Coca-Cola

64.65

65.03

65.49

65.87

66.33

66.71

67.17

McDonald’s

MCD

251.55

253.18

254.52

256.15

257.49

259.12

260.46

3M Company

MMM

147.94

149.24

149.91

151.21

151.88

153.18

153.85

Merck & Co

MRK

84.35

84.91

85.69

86.25

87.03

87.59

88.37

Microsoft

MSFT

280.26

282.81

284.59

287.14

288.92

291.47

293.25

NIKE, Inc.

NKE

131.81

133.74

134.80

136.73

137.79

139.72

140.78

Procter & Gamble

156.46

158.23

160.94

162.71

165.42

167.19

169.90

Travelers

TRV

171.44

172.80

175.26

176.62

179.08

180.44

182.90

UnitedHealth

UNH

531.19

535.10

540.55

544.46

549.91

553.82

559.27

Visa Inc.

213.08

215.24

216.51

218.67

219.94

222.10

223.37

Verizon

53.12

53.41

53.91

54.20

54.70

54.99

55.49

Walgreens Boots

WBA

45.01

45.40

45.97

46.36

46.93

47.32

47.89

Walmart Inc.

WMT

156.45

157.37

158.50

159.43

160.56

161.48

162.61

Click the Name link for a comprehensive snapshot of the Company from FinViz.com. Click on the Ticker link to get the updated Technical Support and Resistance data from FinScreener.org. Investors use many pivot point formulas to determine the possibilities of a price trend 276

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reversal or a price trend continuation. Each formula’s pivot point is the average of the previous period’s high, low, and close. The only difference lies in calculating the projected Support and Resistance lines. Per the Finscreener.org website: “Pivot points provide key support and resistance levels when conducting technical analysis. Finscreener.org provides five types of pivots: Classic, Fibonacci, Camarilla, Woodie, and DeMark.” Here is a FinScreener.org list of all the files that the service covers. These links are to the Daily data. Users can choose “across six different time frames - ranging from 15 minutes to weekly - to get a full price-action picture”. Fig. 60.4 Links to Important Market Pivot Points US Markets Pivot Points S&P 500 Pivot Points NASDAQ 100 Pivot Points DOW 30 Pivot Points Russell 1000 Pivot Points ETF Pivot Points EU Stocks Pivot Points DAX 30 Pivot Points OTC Pivot Points Forex Pivot Points Major Pairs Pivot Points Commodities Pivot Points Indices Pivot Points Treasuries Pivot Points Cryptocurrencies Pivot Points

Bottom line: There are basic price patterns and price levels for investors to watch. There are many types and versions of analysis, but the key is to use a simple approach and do it consistently. I have met too many investors who do such a deep dive into mathematics that they miss the big picture altogether. In my career, I watched professional traders blow up a lot of capital because they relied on a technical indicator as if it were rocket science. Technical indicators are indications, not absolutes.

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Point & figure charting We have to this point, only discussed investing and trading in the context of time and space. But having a set of eyes on stock prices without regard to the amount of time passing can give an investor a different perspective on Price Trend changes. Point & Figure is a simple charting tool in Technical Analysis that pre-dates computers, which pre-dates computers. Computers with advanced mathematical programs now predominate the analytic scene; however, many oldtimer analysts and investors still use P&F like sailors who navigate via the stars. Call me old-fashioned. I still use Point and Figure (P&F) in my analysis and decisionmaking. Instead of charting by hand the way we once did, I rely on computer services like StockCharts.com. Technical indicators are studies based on time and space. P&F research relates only to price levels, i.e., space, and omits the function of time. P&F chartists plot rising prices in a column of x’s and falling prices in a column of o’s. When the price hits a certain higher level, an x is inserted in the graph, or at a lower level, an o. Because the x’s and o’s graph is easy to read, many investors like Point and Figure. Fig. 61.1 Point and Figure graph

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Point & figure charting

Point & Figure charts are helpful to confirm entry and exit points as price trends reverse. With StockCharts.com Gallery charts, graphs of other technical indicators accompany the P&F graph. That way, I can see how price-only moves align with price and time-based movements. I use Point & Figure to study several stocks’ long-term Trend Breakouts and Trend Breakdowns to see if the reversals are correlated. P&F graphs are handy in Peer Group studies where long-term trade entries and exits often happen as a group. Examples would be Airlines, Auto Manufacturers, and Cryptocurrency stocks. Financial services groups of the Dow 30 (JP Morgan, Goldman Sachs, and American Express) also have highly correlated prices. Currency pairs $USDAUD and $USDCAD would be another. If Ford Motor (F) appears to be reversing the trend, look to P&F for confirmation. Go to the P&F graphs for Toyota Motor (TM), General Motors (GM), Stellantis (STLA), Honda Motor (HMC), Volkswagen (VWAGY), BMW (BMWYY), Daimler (DMLRY), Mazda (MZDAY), Nissan (NSANY), and Volvo (VOLVY). If I were doing a complete study of auto manufacturers that trade in New York, I would add a more extensive list of Lucid Group (LCID), Rivian Automotive (RIVN), NIO (NIO), Li Auto (LI), PACCAR (PCAR), and Ferrari (RACE). This link at MarketBeat.com includes P&F charts for these auto manufacturers as a sub-tab under “Charts.” Bottom line: As a supplementary tool, investors should study Point & Figure patterns in combination with other Technical Indicator studies. The certainty in outcomes we crave in our research does not exist. A concept called the overall weight of the evidence helps us make decisions.

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Introduction to technical indicators A Technical Indicator is a computer program or algorithm used to predict future price movements. The fact there are so many indicators used today is a sign that people are searching for the holy grail to help them forecast the future. Investors who could predict the future would become wealthy indeed. But an indication of what’s coming is the best these indicators can do. Because there will always be opportunities and risks when investing, there will be a time and place for Technical Analysis. Before investing in the market, you must first decide what you need. It would be best if you had Growth, Value, or Income. Within what fits your needs, you also seek Quality. In searching for Quality in a universe of tens of thousands of securities, you use Fundamental and Quantitative Analysis. You are looking to find the Good Companies and avoid the Bad ones. Your search is for fundamentally sound companies with healthy financial statements. With market timing skills, you seek reasonable prices and avoid bad ones. There is constant change in market prices. In periods of high volatility called fast markets, the financial value of holdings suddenly rises and falls to extremes. Valuation changes impact personal financial decisions, such as the desire for financial independence, retirement, funds needed for a business, or asset purchases like real estate. For most investors, short-term price action in the stock market and the bond market is not the most crucial factor. But the changing prices and market conditions are often extreme, and this capital market volatility affects your changing personal needs and financial plans. So the Buy-and-Hold approach is no longer acceptable. We need to be actively buying and selling. Big picture political and social developments and Macroeconomic changes affect market prices. As prices fluctuate, a Good Stock (i.e., rising Trend) can become a Bad one (i.e., falling Trend). Although less likely, a Good Company can become a Bad one. A list of Good Companies will contain both Good Stocks and Bad Stocks. Fundamental analysis helps us to avoid Bad Companies. Mathematical tools called Technical Indicators help sort the difference to stay away from Bad Stocks. As we know, there is a difference between a Trend and a Cycle. The rising or falling direction of the price series data is a Trend, while the rhythmic motion above and below the trendline

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is a Cycle pattern. It takes a cyclic movement to reverse a trend, and those are the points when a trader buys and sells. There are many types of Technical Indicators, so it’s essential to understand the differences and how they might help you make trading decisions. Some Indicators are Oscillators, and others are not. Oscillators monitor changes in a Cycle. A non-oscillator, like a Moving Average, is used in Trend studies, looking for indications of a Trend Reversal. That’s when Stocks change from Good to Bad or Bad to Good. The primary aim of investors is to stay on the right side of Trends, thereby avoiding Bad Stocks. Technical Indicators can indicate changing trends and cycles, but indications are not absolutes. Art, as much as science, is needed in application and interpretation. The key Technical Indicators I find most helpful are: • Moving Average Convergence Divergence (MACD) Indicator • Rate of Change (ROC) Oscillator • Stochastic Oscillator • Relative Strength Index (RSI) Oscillator MACD is a Trend Indicator; the others here are Cycle Oscillators, which are studies in price momentum. I also use an Oscillator based on price and volume factors, such as the Money Flow Index (MFI) Oscillator. I also discuss the On Balance Volume (OBV) Oscillator, but I don’t use it. The literature covers everything written in this book about Technical Indicators. For background, StockCharts.com technical analysis school is the Best of the Web, in my view. The problem many investors discover is that there are too many indicators and too much written about them. Some descriptions may be well-written and helpful, and some are quite the opposite. Each day, we must strive to be better investors, never the best. If our performance is in the top one or two quartiles, then, considering the competition, we should be pretty satisfied. If we are not, we should be trying to discover the reasons. Investors use Technical Indicators to study trends and cycles of price motion that aid in the timing of Buy and Sell decisions. I rely on them and use them every day. I know it’s nonsense for anybody to say that the one Technical Indicator they use is the best and always produces winners. Technical Indicators seldom give excellent information for making decisions. You will never be 100 percent confident in any decision you make. And you will discover that a significant percentage of your decisions have resulted in losses.

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It’s also true that some investors and traders rely on them too much, treating them like rocket science versus the simple mathematics they are. When these people start smelling the rocket fuel, they will soon get burned and take huge losses. Bottom line: This chapter is an introduction. The following six Chapters cover the few technical indicators I use. That’s not to say my choices are the best, but I understand them and have been comfortable using them for decades. In time and with focus, one can appreciate nuances in the indicators, which can boost the quality of decisionmaking. Knowing their weaknesses, I look for the weight of the evidence from several technical indicators.

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The Moving Average Convergence Divergence (MACD) indicator A short-term Moving Average being more recent than a long-term MA is more indicative of the future. So investors use a Multiple Moving Average short-term vs. long-term graph to study possible changes in Trend. The term Multiple Moving Average doesn’t say much as a Technical Indicator descriptor, so in 1979 Gerald Appel called it Moving Average Convergence Divergence. MACD shows the evolving relationship between price series data of different periods. I prefer the term Moving Average Departure to describe the widening or narrowing of the gap between the MAs. Of the Technical Indicators I use daily, the MACD is a Trend Indicator, whereas the others are Cycle Oscillators used to study price momentum. A trader’s key to success is to keep all portfolio positions on the right side of the Trend. That sounds easy, but it’s not. On a trade entry, the Trend may be reversing from negative to positive, but the reversal process may take longer than expected, or it may never happen. Your decision may not be an accurate one. In any case, investors are always trying to look into the future by the study of recent Price Actions. The underlying logic is that the velocity of change in Price Motion, i.e., in the trend of the current data, is the best indicator of the future. Various Moving Average (MA) studies are used to stay on the right side of the Trend. Market prices would flow freely, and MACD would be more effective if non-investors like central bankers, government agencies, and others with a different motive than price discovery were not intervening. Trend analysis often doesn’t work. But they are helpful, so we call them indicators. A Moving Average (MA) is a Trend Smoother, not an Oscillator. Lookback periods for Backtesting are typically fixed at 5, 10, 20, 50, 100, and 200 days. The longer MAs are more helpful to investors who are long-term oriented. As Price Cycles have shortened considerably over the years, shorter MAs are probably more practical.

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A technical indication based on a long time horizon is more accurate than a shorter term. One extreme number in a short data series will skew the average more in a longer series. Say a 10-period Price Series is 1,1,1,3,2,3,4,5,4,6. The average is 3.0. But if the next price is 2, the 10-period becomes 3.1. The Trend has risen for the 10-period MA calculation; however, the Trend for the shorter-period MA is reversing. In this price series data, a 3-period lookback (5,4,6) would be an average of 5.0, which is considerably higher than the 10-period average of 3.0. If the next price were 2, the 3-period average of 4,6,2 would result in an MA drop from 5.0 to 4.0. That would indicate a reversal versus an increase from 3.0 to 3.1 in the 10-period MA. The short-term MA is recent and probably more indicative of the future, so investors use a short-term compared to the long-term in Multiple Moving Average studies to discover trends. As a descriptor, the term Multiple Moving Average doesn’t say much. Investors prefer to use MACD, which stands for Moving Average Convergence Divergence. Fig. 63.1 MACD and MACD Histogram

MACD is a simple and flexible Technical Indicator that shows the evolving convergingdiverging relationship between price series data of different periods. Some investors refer to it as Moving Average Departure, where Departure is the widening or narrowing of the gap between the MAs. The most common application of MACD, which comes from the trader who made it famous, subtracts the 26-day Moving Average (MA) from the 12-day MA. Then a 9-day MA of the MACD, called the “Signal line,” is plotted on top of the MACD to function as a trigger for Buy or Sell Signals. In using the MACD Indicator, some investors use a Simple Moving Average (SMA), and some use an Exponential Moving Average (EMA). The EMA assigns greater weight to the more recent data, believing it to be more critical than data from earlier periods.

284

T h e M o v i n g A v e r a g e C o n v e r g e n c e D i v e r g e n c e ( MACD ) i n d i c a t o r

What is a Moving Average Crossover (MAX) Signal? A MAX Signal occurs when a shorter-term Moving Average intersects a longer-term Moving Average. It is an essential tool because it is a simple Indicator easily seen on a chart many investors use. There is a risk in using Moving Averages or technical indicators as the basis of trading decisions. Large financial services companies use sophisticated computer algorithms today to force trading mistakes called Whipsaws. They encourage the mass market’s use of technical indicators and standard trading rules, so they design innovative programs that push trading prices across known signal lines. They then trade against the public’s order flow. For this reason, I seek confirmation of trading Signals from more than one Indicator. The best application of the Technical Indicator is not on the price series of one stock. It’s most effective when applied to Peer Groups. Say three of a 10-stocks Peer Group give simultaneous MA Crossover Signals. That event would be an essential consideration for buying or selling other stocks in that group.

MACD-Histogram The MACD is not an oscillator. In 1986, Thomas Aspray did create a MACD-based Oscillator called the MACD-Histogram. This histogram measures the distance between the MACD and the 9-day MACD Signal line shown as the Zero line. This indicator is a study of Momentum. Illustration 64.1 shows both the MACD and the MACD-Histogram. You can see that the Trend was still positive in the final days, but the Momentum dipped a bit. To keep positions on the right side of the long-term trend, use the MACD-Histogram Oscillator with Monthly data and other Oscillators (RSI, ROC, Stochastic).

Crossovers The literature will tell you that centerline crossovers are signals to buy or sell. While I agree, I don’t use them. Instead, I use the Indicator Trendline upside breakout for a Buy signal and Trendline downside breakdown for a Sell signal. This statement might be the most important one I make in the entire book! Moving Averages are also helpful in determining the strength of the Broad Market The percentage of stocks that trade above or below their 200-day Moving Average shows the market strength. One indication of a Bear phase is when more than 50% of the S&P 500 stocks are trading below their 200-day MA. That condition has existed for most of 2022 except briefly in February. On August 26, the red % line ($SPXA200R) was at 34.6%, which is highly bearish.

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Fig. 63.2 Chart of the % of S&P 500 stocks trading above their 200-day Moving Average

Short-term traders will use the 20-day MA to indicate going long or short. That is the $SPX20R Index. On August 26, 2022, that index showed that only 19.6% of S&P 500 stocks were above their 20-day Moving Average. Fig. 63.3 Chart of the % of S&P 500 stocks trading above their 20-day Moving Average

Bottom line: The MACD Technical Indicator is an essential tool for me. You can find the formulas in the literature. StockCharts.com offers a good description of MACD. Many traders use the 200-day and 20-day Moving Averages to determine whether to be long, out or short in the market.

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The ROC Indicator This chapter and the next couple discuss a type of Technical Indicator called a Momentum Oscillator. Investors use Oscillators to study Cycles, not Trends. In the previous chapter, I discussed the MACD Trend Indicator. Investors research Trends for investing on the right side of the Trend, but they study Cycles to determine the best timing to enter or exit a trade. The simplest Oscillator is the Rate of Change Oscillator, which I describe in this chapter more as an introduction than one that I use in trading. Rate of Change (ROC) is a simple Oscillator used to study Price Momentum and possible change in the direction of Price Motion. Here is the formula: ROC = [(Close – Close n periods ago) / (Close n periods ago)] * 100 Understand that the ROC Oscillator is only an indicator of Momentum over a set time. For example, the formula could use n at a low number like five and a higher number like 20. The 5-period ROC may rise, and the 20-period ROC fall, or vice versa. Momentum, a matter of motion, deviates from Trend, which is the direction. The Momentum may rise fast while the Trend slowly falls, or vice versa. Fig. 64.1 Investopedia chart showing Rate of Change (ROC)

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Information services like StockCharts.com do an excellent job of describing Technical Indicators. But they are not as helpful in showing the differences in the Indicators, the weaknesses, and the reasons for using them. Regardless of their construction, no Technical Indicator works to perfection. The ROC Oscillator suffers from the same weaknesses as other oscillators: • An extraordinarily high or low price at the start of the indicator window causes distortion. Thus a nine-day indicator will fluctuate abnormally if the tenth day is extraordinary. • Price motion is naturally more volatile for some stocks (and industries) than others. Also, excessive volatility in a stock can happen because of the overall market condition. So, the price series data used with the ROC Indicator is a factor. To compensate for varying Rates of Change in market prices, try shortening or lengthening the lookback period as appropriate, something I first wrote about 25 years ago. For example, I use the ROC-5 Day and the standard ROC-12 Day Oscillator to detect the possible onset of a Fast Market. In addition to ROC, I use several Oscillators, including the Stochastic Oscillator or the Relative Strength Index (RSI) oscillator. RSI is a simpler version of the Money Flow Index (MFI) Oscillator. I discuss those indicators in the following two chapters. Bottom line: To stay invested on the right side of the Trend, investors study Cycles to determine the best timing to enter or exit a trade. Use Oscillators to explore Cycles, not Trends. The simplest Oscillator is the Rate of Change. We study ROC as an introduction to the more complex Oscillators discussed in the following two chapters.

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The Stochastic Oscillator This chapter discusses the Stochastic Oscillator. All Oscillators are analytic tools that use price series data to forecast prices. The theory behind the Stochastic Indicator is that in an upward-moving market, prices tend to close nearer their high. During a downward-moving market, prices tend to close nearer their low for the period under review. At cycle highs, buyers get exhausted, and closing prices fall well below the day’s average. At cycle lows, sellers get tired, and closing prices are closer to the day’s highs. Some call this common sense. I call it natural law or natural science if you wish. “Study the past if you would define the future” was a saying of the great Chinese philosopher Confucius. All investors would like to know the future. If prices deviate much from the trend, then the Price Trend might reverse, meaning a buy or sell decision is required. The Rate of Change (ROC) Oscillator, the Relative Strength Index (RSI) Oscillator), and the Stochastic Oscillator are extrapolative or predictive indicators. They use price series data to study changes in Price Momentum. The Stochastic Indicator is an essential but imperfect tool that investors use to stay on the right side of the Trend, which is the investor’s primary aim. The theory is that in an upward-moving market, prices tend to close each day nearer their high, and during a downward-moving market, prices tend to close nearer their low. All investors have a different time horizon. Some want insights into the near future, while others are looking forward months and years. Short-term-oriented investors use lookback periods of days in their studies. Intermediateterm investors who are portfolio managers tend to apply weekly data (i.e., units of 5 days), and very long-term oriented investors use monthly data (i.e., units of 20 days). If the intention is to execute a trade, the investor’s future is minutes or hours. Fig. 65.1 The Stochastic Oscillator Indicator (%K) formula For a 14-day period, the RSI %K = 100 [(C – L14) / (H14 – L14)] Where C = most recent closing price L14 = the lowest price traded during the past fourteen periods H14 = the highest price traded during the past fourteen periods

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George Lane created the Stochastic Indicator in the 1950s before computers became ubiquitous in capital markets. His default setting is 14 periods. Computers use the decimal system rather than calendar periods So while some investors use a 7-day week, others use a 5-period week. The former would study in 7, 14, or 21 units. The latter would use studies of 5, 10, 20, and 50. If you are into computer programming, you use 5, 10, 20, 50, 100, and 200 units. But, if your studies are consistent, the choice of time frame is not significant. The %K in the Stochastics formula is problematic because investors of big accounts can cause price spikes at or near market closing times. They do that to camouflage their intentions, knowing that many technical traders follow these Indicators closely. Such deception goes on in markets, which is why investors need to use more than a single Indicator in their work. Analysts reduce Stochastic sensitivity to abrupt market movements by lengthening the period. They can also use a moving average of the result; a 3-period (or longer) internally smoothed slow Stochastic Indicator (%D) is more dependable. Fig. 65.2 The smoothed slow Stochastic Indicator (%D) formula %D = 100 [(K1 + K2 +K3) / 3]

While the Stochastic Oscillator can be erratic, it is an improvement on the ROC Oscillator that uses only the closing price to measure change. When using Stochastic Oscillators, the %K line compares the lowest low and the highest high of a given period to define a price range, then displays the last closing price as a percentage of this range. The %D line is a three-period moving average of %K. A Buy or Sell Signal occurs when the %K crosses through the %D. Fig. 65.3 Investopedia chart of Stochastic Oscillator

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The Stochastic Oscillator

Fig. 65.4 Example of Stochastic Cross-Over

StockCharts.com has done a superb job in education related to all forms of Oscillators. Bottom line: Investors are big fans of Stochastic Oscillators because natural law is the underlying logic.

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The RSI Oscillator This chapter discusses the Relative Strength Index (RSI), a technical Oscillator of Price Momentum. Like the Stochastics Oscillator, RSI attempts to determine overbought and oversold stock market conditions. But rather than the Stochastics intra-day study of highlow-close data, the RSI compares the magnitude of recent price gains to recent losses. The Relative Strength Index (RSI) Oscillator addresses weaknesses of other Oscillators like the ROC and Stochastics: it is smoother and not as susceptible to distortion from unusually high or low prices at the start of the window. Also, RSI oscillates on a scale between 0 and 100, which facilitates its use in decision-making. Welles Wilder Jr. introduced RSI in his 1978 book New Concepts in Technical Trading Systems. I started my career in the securities industry less than three years later. RSI became my favorite analytical tool. Fig. 66.1 The Relative Strength Index (RSI) formula An upward change U or downward change D is calculated for each trading period. Up periods are characterized by the close being higher than the previous close. Conversely, a down period is when the close is lower than the previous period’s close. Note that D is nonetheless a positive number. If the last close is the same as the previous, both U and D are zero. The average U and D are calculated using an n-period Exponential Moving Average (EMA). The ratio of these averages is the relative strength or relative strength factor: RS = EMA (U, n) / EMA (D, n) If the average of D values is zero, then according to the equation, the RS value would approach infinity, so the relative strength factor is converted to a relative strength index between 0 and 100. RSI = 100 – (100/(1+RS))

As noted, RSI compares upward movements in closing price to downward movements over a selected period. Welles Wilder used a 14-day default period and seven- and nine-day data to trade the short Cycle and 21 or 25 days for the intermediate Cycle.

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T h e RSI O s c i l l a t o r

If your interests are calendar based on minutes, hours, days, weeks, or months, then the most popular periods under consideration are 7, 14, or 21. I use RSI-7 because when I popularized this Indicator period early in my career, the markets had been more volatile and changing trends faster than in prior years. They are changing trends even quicker today. I do not use an RSI-5 because I want the calculation to go past a weekend. Sometimes there are slower-moving markets, and the RSI-14 or RSI-21 would be more valuable then. The FinViz.com service uses a standard RSI-14. I often see people frequently switching periods indiscriminately. The key to using any Indicator is to use it consistently. The discipline of using a regular period RSI protocol as a decision-support tool is more important than fiddling with the periods or the levels. Formulated to oscillate between 0 and 100 enables pre-set “overbought” and “oversold” levels. When used to determine what I call Buy/Sell Alerts, 30 is for oversold, and 70 is for overbought. Fig. 66.2 Example of using RSI Indicator to signal a Buy and Sell opportunity

In March 2021, Boeing (BA) crossed and then reversed the RSI 70 line with the price at close to $270, which signaled a Sell opportunity. Then in May 2022, with the BA price in the low $120’s, the RSI Indicator crossed the RSI 30 line, going to about RSI 25 before reversing. That signaled a Buying opportunity. By August 2022, BA had reached a high of $169.99. Early or late in a Bull or Bear phase or during periods of extreme or minimal volatility, I set the oversold or overbought levels at higher or lower than 30 or 70. I may use 20-80 in fast markets and 40-60 during market doldrums when neither bulls nor bears dominate. Note that the Relative Strength Index (RSI) Oscillator differs from the relative strength concept called Comparative Performance. RSI is a technical Oscillator of a price series. In contrast, Relative Strength is the Comparative Performance Index between two different price series, like a stock compared to a market Index, an ETF, or another stock.

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To avoid confusion, it would help if the Relative Strength Index (RSI) were called the Relative Strength Oscillator (RSO). Fig. 66.3 Online-sourced Chart of Relative Strength Index (RSI) Oscillator

In chapter 68, I discuss the MFI, a Momentum Indicator similar to RSI, except that it tracks a stock’s volume and price to help investors identify Trends and Trend Reversals. Fig. 66.4 Chart of Money Flow Index (MFI) Oscillator

Note the MFI (in a thin blue line) crossed an excessive 80-level peak in July-August 2021 and then weakened. The S&P 500 peaked in December 2021 and led the broad market lower in 1H2022.

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T h e RSI O s c i l l a t o r

Fig. 66.5 Table of RSI-14 of the Dow 30 stocks on April 22, 2022 Company (2022-04-22 data)

Ticker

SMA20

SMA50

SMA200

52W High

52W Low

RSI-14

Apple Inc.

AAPL

-5.74%

-3.28%

1.83%

-11.56%

32.34%

39.92

Amgen Inc.

AMGN

1.09%

5.91%

11.24%

-3.27%

26.03%

59.31

American Express

AXP

-2.58%

-2.28%

4.04%

-9.53%

28.33%

45.76

Boeing

-4.09%

-7.23%

-15.43%

-31.53%

5.57%

41.33

Caterpillar

CAT

-2.76%

2.46%

4.32%

-12.32%

20.39%

45.26

salesforce.com

CRM

-15.25%

-16.09%

-30.52%

-45.01%

-3.00%

28.04

Cisco Systems

CSCO

-4.76%

-6.23%

-9.01%

-20.11%

2.51%

36.36

Chevron Corp

CVX

-3.88%

2.13%

31.49%

-7.90%

73.33%

44.24

Walt Disney Co

DIS

-11.58%

-15.19%

-25.72%

-37.50%

-2.48%

27.63

Dow Inc.

DOW

6.52%

10.46%

14.58%

-4.68%

31.55%

69.49

Goldman Sachs

-2.72%

-5.06%

-15.07%

-24.96%

3.75%

41.8

Home Depot

-2.44%

-6.57%

-14.11%

-28.65%

2.22%

41.46

Honeywell

HON

-2.05%

0.19%

-9.63%

-19.52%

9.29%

45.32

IBM

6.36%

8.01%

6.63%

-5.30%

20.68%

70.04

Intel Corp

INTC

-4.21%

-2.55%

-9.22%

-27.18%

6.68%

43.94

Johnson & Johnson

JNJ

1.10%

4.85%

7.42%

-2.37%

16.58%

57.46

JPMorgan

JPM

-5.43%

-8.80%

-17.96%

-26.68%

1.43%

36.23

Coca-Cola

2.85%

5.52%

12.66%

-2.61%

24.81%

64.67

McDonald’s

MCD

0.27%

2.38%

1.15%

-7.74%

14.93%

53.02

3M Company

MMM

-0.32%

-0.02%

-14.66%

-28.61%

6.75%

48.86

Merck & Co

MRK

0.17%

5.51%

7.48%

-7.45%

21.77%

54.84

Microsoft Corp

MSFT

-8.00%

-7.07%

-10.18%

-21.63%

15.10%

35.81

NIKE, Inc.

NKE

-2.58%

-3.09%

-16.47%

-27.93%

10.55%

45.55

Procter & Gamble

2.73%

4.23%

7.69%

-2.48%

23.76%

60.15

Travelers Cos

TRV

-5.47%

-2.50%

6.59%

-7.91%

19.85%

37.29

UnitedHealth Group UNH

-1.10%

3.86%

14.24%

-5.85%

35.97%

49.64

Visa Inc.

-4.90%

-3.46%

-5.91%

-17.61%

11.52%

40.31

Verizon

-1.70%

-2.05%

-2.85%

-13.27%

4.48%

43.09

Walgreens Boots

WBA

0.25%

-2.09%

-5.81%

-18.62%

6.15%

48.18

Walmart

WMT

2.67%

8.40%

9.06%

-2.43%

18.82%

61.73

StockCharts.com does a magnificent job of writing up RSI, which by habit, is my favorite Technical Indicator. I ought to use MFI, which is superior. Bottom line: Investors are big fans of RSI Oscillators. The logic is simple, and the calculations range from zero to 100 rather than on an abstract number.

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The importance of volume in technical analysis There are many reasons why investors today ignore Volume, but they shouldn’t. Higher volume when prices are flat indicates that a substantial price change is likely to happen. Higher volume with rising prices is confirmation of a Bullish phase. Higher volume with falling prices is confirmation of a Bearish phase. With derivatives like options and futures, and multiple exchanges trading a stock today, it’s easy for large investors to hide their transactions. That’s unhelpful to investors who are analyzing prices. Volume can refer to the number of securities (i.e., shares, warrants, options, or futures) traded in the market over time (i.e., daily, weekly, monthly). Higher volume as prices increase is considered a healthy Bullish phase where investors expect a continuing rise in price. But this Bearish momentum is negative when prices fall on increasing volume. Investors expect the price to continue to fall. If Volume increases much more than average when the Price remains flat, investors anticipate a significant change in Price, either up or down. Investors need to pay closer attention. Securities regulators require full disclosure of trading activity. Before the advent of options and futures markets, Technical Analysis was in its infancy, and Volume was a more critical factor than today. It was easy for investors to spot Accumulation and Distribution phases and Trend Reversals in stocks. Today, there are more market instruments, electronic trading, exchanges, alternative markets, and interrelated trading tactics among various tools such as options and warrants, so it’s easier to hide Accumulation and Distribution. As a consequence, there are more pump-and-dump schemes. Despite the preceding, no one should surmise that the rationale for Volume-based studies no longer applies. Changes in Volume do precede changes in Price, as a rule. Investors today are always looking for evidence of abnormal trading interest. The easiest way is to watch Relative Volume (RVOL).

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The importance of volume in technical analysis

Fig. 67.1 Table of Relative Volume (RVOL) of the Dow 30 stocks on April 22, 2022 Company (2022-04-22 data) Ticker

Perf Week

Perf Month

Perf Quart

Average Average Today’s Relative Volume Volume Volume Volume (M) (M) (M) (RVOL)

Verizon

-3.57%

1.84%

-2.35%

24.87M

24.87

44.94

1.81

Walt Disney Co

DIS

-9.35%

-14.07%

-13.91%

11.88M

11.88

19.43

1.63

Caterpillar Inc.

CAT

-5.05%

-2.64%

1.03%

3.80M

3.80

5.05

1.33

Dow Inc.

DOW

4.60%

8.21%

20.77%

5.69M

5.69

7.44

1.31

salesforce. com

CRM

-9.49%

-18.80%

-21.59%

7.21M

7.21

8.84

1.23

IBM

9.24%

7.76%

6.88%

5.33M

5.33

6.50

1.22

Procter & Gamble

1.69%

6.92%

-0.84%

7.90M

7.90

9.39

1.19

UnitedHealth

UNH

-2.60%

3.52%

12.96%

3.20M

3.20

3.45

1.08

American Express

AXP

-0.34%

-2.95%

13.73%

4.29M

4.29

4.37

1.02

Goldman Sachs

-0.58%

-4.72%

-7.02%

3.08M

3.08

3.12

1.01

NIKE, Inc.

NKE

-3.29%

-2.95%

-9.71%

7.25M

7.25

7.32

1.01

Travelers Cos TRV

-6.04%

-4.69%

6.46%

1.52M

1.52

1.54

1.01

Johnson & Johnson

JNJ

0.91%

4.13%

10.11%

8.14M

8.14

8.00

0.98

Apple Inc.

AAPL

-2.12%

-4.95%

-0.38%

91.54M

91.54

84.60

0.92

3M Company

MMM

1.21%

1.01%

-13.60%

3.55M

3.55

3.15

0.89

JPMorgan Chase

JPM

0.55%

-9.28%

-12.59%

16.18M

16.18

14.30

0.88

Walmart Inc.

WMT

-0.14%

10.50%

11.89%

8.16M

8.16

7.01

0.86

Honeywell

HON

-2.34%

-0.89%

-7.06%

3.61M

3.61

3.04

0.84

Walgreens Boots

WBA

1.63%

-2.57%

-13.26%

7.11M

7.11

5.95

0.84

Amgen Inc.

AMGN

-1.44%

6.90%

9.94%

3.21M

3.21

2.62

0.82

Microsoft Corp

MSFT

-2.07%

-8.50%

-7.43%

35.68M

35.68

29.33

0.82

Cisco Systems

CSCO

0.37%

-5.73%

-9.39%

21.75M

21.75

17.69

0.81

-1.45%

-5.34%

-14.03%

5.06M

5.06

4.03

0.80

Home Depot HD

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Coca-Cola

0.35%

8.03%

7.94%

18.55M

18.55

14.88

0.80

McDonald’s Corp

MCD

-0.14%

5.95%

-1.74%

3.38M

3.38

26.39

0.78

Intel Corporation

INTC

1.90%

-3.58%

-10.57%

38.27M

38.27

28.19

0.74

Chevron

CVX

-6.20%

-2.96%

26.82%

17.05M

17.05

12.15

0.71

Visa Inc.

-2.17%

-3.03%

1.09%

8.82M

8.82

6.20

0.70

Boeing Company

-2.76%

-4.90%

-13.88%

9.49M

9.49

6.34

0.67

Merck & Co., Inc.

MRK

-2.67%

6.10%

5.76%

11.96M

11.96

7.91

0.66

To better understand the importance of Volume, review these links to StockCharts.com and Investopedia.com. Bottom line: Because an increase in Relative Volume is a predictive indicator of future price action, investors use Volume-based Oscillators to spot a possible Price Trend Reversal.

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Volume-based oscillators Oscillator-based studies of Volume data help investors estimate growing or weakening interest in a stock. Two well-known Volume Oscillators are Money Flow Index (MFI) and On Balance Volume (OBV). This chapter discusses both and shows why I use Money Flow Index, which MFI is an improvement over the RSI. MFI is a Momentum Indicator that tracks a stock’s volume and price to help investors identify Trends and Trend Reversals. StockCharts.com describes MFI well. Fig. 68.1 Money Flow Index (MFI) Indicator Formula

1. Determine the Typical Price over so many days, as follows: (High + Low + Close) / 3 (x of days) 2. Calculate the Raw Money Flow: Typical Price x Volume 3. Identify the Money Flow Ratio: (14-period Positive Money Flow) / (14-period Negative Money Flow). (Note: The positive money flow is the sum of positive money over several periods – usually 14 days. The opposite is true for the negative money flow values.) 4. Finally, arrive at the Money Flow Index. This is: 100 – [100/(1 + Money Flow Ratio)] When the MFI and Price move in opposite directions, that divergence can be a leading indicator of a change, and possible reversal, in the current Trend.

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Fig. 68.2 RSI and MFI indicators compared

As MFI combines the Volume with the price-based Relative Strength Index (RSI), it could also be called Volume-Weighted RSI. MFI tracks market momentum based on up-volume and down-volume changes and price changes. RSI only tracks changes in price movements. The volume-weighted MFI is a more ambitious indicator better suited for spotting Cycle changes that could lead to Trend Reversals than my favorite Oscillator RSI. RSI often leads to dubious Buy/Sell Signals. Fig. 43.1 from 2016 shows that RSI and MFI are pretty similar. Investopedia.com explains how MFI and RSI differ. MFI and RSI are Momentum Oscillators, but due to their simplicity, the RSI became more popular among investors and technical analysts. But since Volume changes typically precede Price changes, and since the MFI more carefully tracks buying and selling pressure based on trading volume fluctuations and price changes, MFI is the superior Oscillator.

On-Balance Volume On-Balance Volume (OBV) is another Volume-based Technical Indicator. Joe Granville, an entertaining analyst in the 1960s, developed OBV. He theorized that if Volume increased sharply at a Price Cycle low without a corresponding change in the stock’s Price, the Price would eventually move higher.

300

Volume-based oscillators

Granville’s OBV is calculated by summing the volume on an up day and subtracting the volume on a down day. If today’s closing Price for a stock is higher than yesterday’s close, then today’s volume is “Up Volume” and added to yesterday’s Accumulated Net Volume or OBV. But, if today’s close is down from yesterday’s close, today’s volume is “Down Volume” and subtracted from yesterday’s OBV. So, while Price is a factor in OBV, the Indicator is a study of Volume. StockCharts.com also has a good OBV write-up. Granville’s theory underlying the OBV Indicator is based on a presumed distinction between knowledgeable investors and less sophisticated ones. He theorized that as so-called smart money began to buy into a stock when most other investors were selling, the trading volume would increase even if the price remained level. Then as the public started to sell less of the stock, the increased buying volume from sophisticated investors would increase the price. At some point, the savvy money investors would begin to sell, and the so-called dumb money public would keep buying. Common sense tells us the average investor bought because the Sell-side encouraged the retail customer to buy. We see that all the time. Sell-side analysts start to follow a stock and increase its ratings and Price Targets only after a stock has already had a Bull run. Bottom line: MFI is a smoother indicator and more sophisticated than OBV, so there is no reason to use OBV.

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Divergence between indicator and price is a vital alert When the trend direction of a Technical Indicator uncouples from the Price trend, we call that Divergence. These patterns are essential Alerts to investors. Investors look for Divergences from various Technical Indicators, including RSI, MACD, and Stochastics. Seek confirmation from the weight of the evidence. Look for divergence in all three of these technical indicators. Trading divergence occurs when a Technical Indicator does not align with the Price. StockCharts.com has published articles on Divergence with many different indicators. Divergences between indicators and price trends are significant because it’s a trader’s job to stay on the right side of the Trend. If the Price Trend rises but the Money Flow Index falls, the two trends will eventually converge. Usually, the Indicator move precedes a Price move. Its slope indicates the future direction of the Price Trend. Investors would like to know the future or probability, so this Alert is helpful in their research. Functional, yes, but more of a warning than a signal. The chart below illustrates an example of IBM, where a 4Q2015 Divergence in the Money Flow Index (MFI) relative to Price forecasted a reversal in the Price Trend. That reversal did occur three or four months later in 1Q2016.

302

Divergence between indicator and price is a vital alert

Fig. 69.1 Example of Divergence in Money Flow Index (MFI) relative to Price

Divergence as a potential trend reversal warning system is one of my favorite technical tools. But there is an obvious issue with its application for market timing purposes. Divergences can remain in effect for longer than traders have patience. In addition, any Divergence investigation has pitfalls because one’s analysis involves interpretation, which is subject to bias. StockCharts.com publishes articles about Divergence as it pertains to Technical Indicators. Here is the link to one of these articles. Bottom line: Divergence is a process occurring over many months. A Divergence is not a market timing signal to buy or sell a stock. It’s only an Alert for the investor to be mindful of the likelihood of a Price Trend Reversal at some point.

303

SECTION 7

Trading 70 Is there a best investing style? 71 Investing defensively 72 Strategies for the higher risk-taking investor 73 Potential Upside 74 Peer Groups and why we study them 75 Using Technical Indicators when trading 76 Accumulation Zone, Buy Alert, and Buy Signal 77 Distribution Zone, Sell Alert, and Sell Signal 78 Analytics I use for research and to support investment decisions 79 Automating Decision Support for Trading

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CHAPTER 70

Is there a best investing style? There are different investor styles, but no technique has proven more successful than any other. Style comes down to a balance of many factors: (1) the investor’s needs and interests (Growth, Value, or Income securities), (2) preferred time horizon (Very short-, Short-, or Longterm) and Risk Tolerance, (3) investment studies (Macroeconomic, Fundamental, Technical, or Quantitative), (4) choices for Asset Allocation, and (5) timing and methods of trade execution. I repeat: no style has proven more successful than any other. Success comes to investors whose style aligns with their needs, personality, skills, experience, and common sense. The market is us, and we are as unique as snowflakes. We each have our own time and space interests, but when conditions, needs, and interests change, we must adapt. In doing so, we must not take a path laid out by Pied Pipers. If I could add one word to the synopsis of this chapter on investing style, that word would be consistency. By consistency, I do not mean following the herd. I refer to the avoidance of distraction. The Pied Piper Syndrome is a massive problem that investors must manage. Investors who know what they need and when and how to get it will often still decide to chase some random ideas. However, personal discipline is what makes good investors successful. If you decided to buy a three-bedroom house in a quiet scenic rural area for your spouse and two young children with sufficient room for visitors, why would you allow a salesperson to sell you a two-bedroom unit in a downtown high-rise condo? The sales pitch: Single level? Check. Beautiful views? Check. The walking score? Check. Amenities? Check. Wow factor? Check. Price? Check. I’m sure it’s luxurious, but it’s not what you want to meet your needs. Yet, that’s what people do when it comes to securities. They get distracted and succumb to the sales pitch. As I stated elsewhere in this book: stocks are not bought. Stocks are sold.

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Here is some simple advice on each of the style attributes I listed: 1. Needs and interests (Growth, Value, or Income securities) 2. If you never pay MSRP, don’t buy the hottest story in the market. If you need income, don’t look at Biotechs or Cannabis and Psychedelics companies. 3. Preferred time horizon (Very short-, Short-, or Long-term) and Risk Tolerance 4. If your risk tolerance is low, then understand that Buy and Hold will be painful during volatile market conditions. If your Internet service is spotty or excellent weather takes you regularly to the golf course, then forget day trading. 5. Investment studies (Macroeconomic, Fundamental, Technical, or Quantitative) 6. If you need to study corporate fundamentals, then don’t buy ETFs. If you do buy ETFs, then become an expert at Technical Analysis. 7. Choices for Asset Allocation 8. If you have limited financial resources, don’t write naked puts and calls. You shouldn’t, anyway. If you are saving for a car, focus on your job and keep your money in cash or Bank CDs. 9. Methods of trade execution 10. If you use Market Orders for Micro Cap Over-The-Counter stocks, you have no clue about Depth of Market, how wide the bid-ask spreads, or the lousy fill the market is giving you. Limit Orders may require patience, but they give you the best fills. There is no best investing style. There is just you and common sense. The best investor maybe of all time was Peter Lynch. Peter managed the Fidelity Magellan Fund from 1977 to 1990. During those years, his fund grew from $18 million to $14 billion. That was an average annual return of +29%. As the markets went from Bull to Bear over his time as Magellan Fund manager, Peter used whatever style he believed was appropriate. He said he only bought what he understood. That happened to be small-cap stocks of companies with solid Earnings Growth, a reasonable Price-to-Earnings Growth ratio, and low Debt-to-Equity. Warren Buffett is another successful investor. He typically buys significant positions in large companies, including board and management control. Buffett’s decisions use Return on Equity-based Fundamental Analysis. His Berkshire investment company’s shares have had an average +20% annual return from 1965 through 2020. That success enabled Buffett to grow his net worth to $125 billion (Forbes, April 19, 2022). Investors aspire to the long-term successes of Lynch and Buffett, people who earned success by staying focused on a particular investment style.

306

Is there a best investing style?

Random thoughts. Quantitative Analysis is appealing because (1) factual data speaks for itself – there is less need for interpretation, (2) the Analyst can reproduce the results independently, and (3) the analysis focuses on using all the data to discover statistically significant profit opportunities. For these reasons, I focus primarily on (1) Fundamental analysis for companies added to my watch lists, (2) Quant/Statistical studies for stock selections, and (3) Technical Indicators studies for trading decisions. When I stray into the other analytical modes, my biases too often lead me to inaccurate conclusions. InvestorWords.com of the Library of Congress defines Quantitative Analysis as “the process of determining the value of a security by examining its numerical, measurable characteristics such as revenues, earnings, margins, and market share.” But how is that different than traditional Fundamental Analysis? Forbes.com defines it more accurately as “using advanced econometric and mathematical valuation models to identify the firms with the best possible prospective.” It may be a moot point, but why not the ones that are “the worst possible” or the ones changing most rapidly? Investors should try to understand all the possible outcomes. Like a juggler of balls, you don’t ask which one has the highest priority. You use them all. Early in a rising long-term Market Cycle, Growth companies offer the best stock selection for investors who seek capital appreciation. Later in the cycle, when the stocks of the Quality Growth companies have already advanced, Value company stocks are likely to be the best. Bottom Line: Experience teaches that there is an appropriate time for all Fundamental, Quantitative, Technical, and Macroeconomic approaches to decision-making. Sometimes they favor the Value investors, and other times they favor those seeking Growth. Investors seeking Income understand that income is best from Bonds and, at different times, Stocks. The expression, “There are horses for courses,” comes to mind.

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CHAPTER 71

Investing defensively Every experienced investor will say that risk management is the key to success. The reason is simple. All investors have losses. The important thing is how we handle our mistakes. A mistake is different than a loss. We must recognize and learn from mistakes and keep our losses small and infrequent. Does that mean that we should always invest and trade defensively? No. You achieve your goals faster by making nine mistakes in one year than if you make one every year for nine years. You either learn from your mistakes, or you’ll have to quit. A fact of life is that we will always have losing trades, but we cannot have too many because that could lead to a loss of self-confidence. I always tell young people to gain self-confidence as soon as possible and never lose it. Your self-confidence is what defines you. To investors, risk management is vital for this reason. If you have ten straight wins averaging 10 percent each, your total capital will have gained almost +260%. But if you follow this magnificent string of successes by a single loss of 100%, you will have more wins than losses and nothing. The bigger the losses, the harder it is to sustain your self-confidence. Here is how I learned to accept losses early in my life. When I was young, I admitted to being a bad loser. Coming second was never acceptable to me. I was prone to fighting to overcome my failures, which upset them. One time after I had promised not to fight but did, they left me to take a bus home. Even when I played tournament hockey on the same ice as the Toronto Maple Leafs, my parents did not attend. Later I began to see the world as something much bigger than me, and my demeanor changed. I had to accept that I wasn’t the toughest guy in the room. I had to use my head. As an undergraduate at Waterloo Laurier University, the professor from whom I gained the best education was Dr. Basil Healey, Dean of the Business School. Students knew Professor Healey was a hard case. He never graded his students with marks like A, B or C, 70, 80, or 90. He rated student performances for every test or presentation with relative scores from best to worst among our peers. Dr. Healey taught me that my business school classmates were my competition. He also taught me that I didn’t have to be number 1 on any test, but I ought to be close. That was an education. I did graduate from WLU with distinction, having earned the Wall Street Journal Student Achievement Medal. But among my classmates, I was never graded number 1 in any test or presentation.

308

Investing defensively

Accepting that we will always incur losses but still be a winner happened to be a eureka moment in my young life. That gave me self-confidence that I applied as my primary strength in my business and finance career. Despite setbacks, I always kept trying to succeed, never quitting. Along the way, I did manage to build a big business. From 13,000 square feet of raw concrete office space on the penthouse floor of the Toronto Stock Exchange tower, I started with zero employees or accounts in place. My Vancouver-headquartered firm was, and is, Canada’s number one investment firm not owned by the Big Five Canadian banks. That took self-confidence to the extreme. Canada’s Humongous Banks & Brokers were my competition. The thought of losing was never in my mind. That was 1986-87, and I only joined the industry in 1981. As an individual, I have even stood up to HB&B in formal hearings held by securities regulators and by the Senate of Canada Banking Committee. If you have the facts on your side and the self-confidence to stand on your own two feet, then I say go for it. As Rick Rule tells his followers: “Buy the ticket.” As a private wealth manager, I often make mistakes and sometimes costly ones. Recently a client asked me if my significant loss in one stock was “personally discouraging.” Despite my expensive failures, I have never lost self-confidence. Because of my thoughtful decisionmaking practices, I aim to have more winners than losers. When I don’t, I’m disappointed but never discouraged. If you stay entirely or primarily invested during a Bear Market, you will likely have more positions with unrealized losses than gains. Unless you are a skilled day trader, you will find that some stocks can plunge by -20% or more. A loss like that amounts to a complete Bear Market in a single day. It may happen over two or three days, but you must accept it and learn to deal with such losses. Many people can’t. Earlier in this book, I referred to Peter Lynch. As manager of the Fidelity Magellan Fund for 14 years, Lynch grew the Fund from $18 million to $14 billion. What was amazing was that the Fund held about 1400 stocks in 1989. That was the best-reported success in the history of mutual funds, but Peter Lynch still failed to make gains in hundreds of his stock picks. He did not beat his S&P 500 benchmark in two of those 14 years. So, perfect never exists. The point is that you must cope psychologically with significant losses. If you can’t, then you shouldn’t be trading in securities. But you need to participate and learn along the way.

Wealth Preservation If the aim is to preserve wealth rather than build it, there is a long-term strategy that riskaverse investors might consider. Invest in low-beta dividend growth stocks of large-cap S&P 500 Dividend Aristocrat companies. On April 21, 2022, the following six financially sound companies offered an average dividend yield of 1.79%, a short ratio of 2.83, monthly volatility of 1.77%, and a beta of 0.512.

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BILL CARA / STOCK MARKET LITERACY

Fig. 71.1 Financially sound S&P 500 candidates for defensive investing Company

Ticker

Sector

Industry

Market Cap

Yield

Beta

Auto Data Proc

ADP

Industrials

Employment Services

99.65B

1.79%

0.84

76.01B

1.30%

0.64

Becton, Dickinson

BDX

Healthcare

Medical Instruments & Supplies

Hormel Foods

HRL

Consumer Defensive

Packaged Foods

29.83B

1.90%

0.09

McCormick & Co

MKC

Consumer Defensive

Packaged Foods

28.00B

1.42%

0.47

NextEra Energy

NEE

Utilities

Utilities - Regulated Electric

161.55B

1.89%

0.39

PepsiCo

PEP

Consumer Defensive

Beverages - Non-Alcoholic

244.27B

2.45%

0.64

In this illustration, click on the Name link to get a comprehensive snapshot from FinViz.com Click on the Ticker link to get a long-term (monthly data) chart from StockCharts.com These securities offer a lower risk of capital loss. Marketing sometimes labels them “crashproof,” which is entirely ridiculous. All stocks have risks. Over the long term, this list is considered helpful for investors intent on wealth preservation. Based on my experience managing people’s wealth, most people invest defensively in the late stages of a Bear phase. They tend to switch to Income stocks, which pay high dividends. That is wrong for two reasons. If the investor wanted income for the long run, that is where they should have been investing. It’s also an emotional response that changes after the market turns bullish. For the same reason, many investors who invested appropriately for Income suddenly switch to high-risk Growth investments after those securities have outperformed the broad market and are riskiest. Many people lack the patience to stick with a plan. Bottom line: Bear markets can destroy wealth regardless of how you invest. But there are investments for Risk-averse investors that can preserve wealth. Defensiveminded investors should seek investments in the Consumer Defensive, Healthcare, and Utilities sectors rather than in Technology, Consumer Discretionary, Materials, and Energy.

310

CHAPTER72

Strategies for the higher risk-taking investor Tolerating risk does not imply seeking it. The higher risk-taking investor is as conscious of risk as the risk-averse investor but, in trying to maximize returns, understands the greater need to assess risk and deal with it prudently. In seeking high returns, risk-tolerant investors will accept higher risks. Risk-averse investors try to avoid risk even if that means accepting lower returns. Higher-risk stocks can be either Growth or Value, the same as lower-risk stocks. Investors with a higher risk profile typically invest in the Technology, Consumer Discretionary, Basic Materials, and Energy sectors. They prefer not to deal with Consumer Defensive, Healthcare, and Utilities sectors. Risk-tolerant investors look for opportunities in companies that beat earnings estimates, increase dividends, have multiple positive analyst recommendations, engage in timely share repurchases, and may be expected to issue positive revenue and earnings guidance. Unlike the risk-averse investor, dividends and low beta are not crucial priorities. There are typically low or nil dividends, higher volatility, and higher beta. We should always be looking for a High-Quality company, which was the chapter 5 topic. In that chapter, I wrote that I seek certain features in high-quality companies. Fig. 72.1 Features of High-Quality • Steady price motion of the stock, which reflects sustainable investor confidence • No management scandals or major lawsuits • A balance sheet that reflects no bankruptcy concerns or inability to raise capital if needed • Sufficient free cash flow to meet obligations and provide a good investment return • Steady growth in company revenue • Up-trending free cash flow growth • Steady, even minor improvements to profit margin • Earnings with up-trending earnings growth

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BILL CARA / STOCK MARKET LITERACY

• Relatively higher return on equity than the peer group • Relatively higher return on invested capital than the peer group • Dividend growth if there are dividends; but dividends are unnecessary if capital is used wisely • Relatively low short-selling activity • A ’Buy’ consensus rating by industry analysts

I also presented an illustration in chapter 5 of what I believe are High-Quality companies. Fig. 72.2 Diversified list of High-Quality companies Company

Ticker

Industry

Country

Market Cap

First Majestic Silver Corp.

Silver

Canada

3.48B

Alamos Gold Inc.

AGI

Gold

Canada

4.26B

Applied Materials, Inc.

AMAT

Semiconductor Equip

USA

113.81B

Amazon.com, Inc.

AMZN

Internet Retail

USA

1653.17B

Apellis Pharmaceuticals, Inc.

APLS

Biotechnology

USA

5.40B

Arvinas, Inc.

ARVN

Biotechnology

USA

3.82B

Activision Blizzard, Inc.

ATVI

Electronic Gaming

USA

63.13B

Brookfield Asset Management BAM

Asset Management

Canada

92.94B

Chemed Corporation

CHE

Medical Care Facilities

USA

7.69B

salesforce.com, inc.

CRM

Software - Application

USA

213.07B

CrowdStrike Holdings, Inc.

CRWD

Software - Infrastructure

USA

52.92B

Darling Ingredients Inc.

DAR

Packaged Foods

USA

13.30B

Freeport-McMoRan Inc.

FCX

Copper

USA

73.45B

Federal Signal Corp

FSS

Pollution Controls

USA

2.05B

Mastercard Incorporated

Credit Services

USA

356.11B

Marten Transport, Ltd.

MRTN

Trucking

USA

1.41B

NVIDIA Corporation

NVDA

Semiconductors

USA

681.56B

NexGen Energy Ltd.

NXE

Uranium

Canada

3.40B

SSR Mining Inc.

SSRM

Gold

Canada

4.69B

Teck Resources Limited

TECK

Base Metals & Mining

Canada

22.73B

Teleflex Incorporated

TFX

Medical Instruments

USA

16.39B

Visa Inc.

Credit Services

USA

472.20B

Wheaton Precious Metals

WPM

Gold

Canada

22.00B

Zendesk, Inc.

ZEN

Software - Application

USA

14.96B

Click on the Name link to get a comprehensive snapshot from FinViz.com Click on the Ticker link to get a long-term (monthly data) chart from StockCharts.com 312

Strategies for the higher risk-taking investor

Of the list of companies in the following illustration (Fig. 73.3), I was looking for companies with the most attractive features to the typical risk-tolerant investor. For example, I eliminated stocks with low volatility, low beta, lowest profitability ratios, and lowest Return on Equity (ROE) and Return on Investment (ROI). A few stocks remained that would meet investment criteria for high-Quality stocks suitable for risk-tolerant investors For this select group, the average Earnings Per Share growth for the next five years is +31%. The average ROE and ROI are +39% and +20%. The average Beta is 1.28, and the Monthly Volatility is 3.3%. A portfolio of these well-diversified stocks should be traded in and out about every two or three quarters to avoid the highest risk phases. Trading systems are covered elsewhere in this book. Fig. 72.3 Diversified list of financially sound companies acceptable to risk-tolerant investors Company

Ticker

Sector

Market Cap

EPS next 5Y

ROE

ROI

Beta

Volatility M

Applied Materials

AMAT

Technology

107.4B

16%

54%

34%

1.43

3.7%

Amazon.com, Inc.

AMZN

Consumer Cyclical

1606.9B

35%

28%

10%

1.13

2.8%

Darling Ingredients DAR

Consumer Defensive

13.4B

43%

21%

15%

1.12

3.8%

FreeportMcMoRan

FCX

Basic Materials

73.0B

29%

34%

26%

2.00

3.3%

Federal Signal Corp

FSS

Industrials

2.1B

16%

13%

10%

1.05

2.0%

Mastercard Inc

Financial

354.4B

24%

130%

40%

1.08

2.3%

NVIDIA Corp

NVDA

Technology

563.2B

31%

43%

26%

1.47

4.9%

Teck Resources

TECK

Basic Materials

23.4B

71%

13%

10%

1.18

4.0%

Teleflex Inc

TFX

Healthcare

16.3B

11%

14%

10%

1.06

2.6%

Click on the Name link to get a comprehensive snapshot from FinViz.com Click on the Ticker link to get a long-term (monthly data) chart from StockCharts.com Bottom line: Securities are fungible, like money, which means interchangeable. Investors do not buy or sell other than to increase capital or income. The price at any moment is based solely on risk as assessed by someone who wants to buy and someone who wants to sell. That buyer and seller have made different assessments of risk. It’s a fact of life that some people will accept more risk than others. If that weren’t the case, there would be no market. The next chapter starts the process of how we assess risk.

313

BILL CARA / STOCK MARKET LITERACY

CHAPTER 73

Potential upside This chapter digs into analyst ratings and price targets and the risks individuals take in trying to emulate the work of a professional analyst who serves multiple constituencies and is burdened by conflicting interests. Every investor has personal issues to deal with and should not be taking on the problems of others. Securities industry analysts should and do set Price Targets (PT). Their reports may help our decision-making. However, nobody knows the future. Most opinions and forecasts are proven wrong. To avoid introducing fear-greed bias and pure guessing into their trading, no investor should set a price target or a potential hold period. All that is important is knowing why the stock was bought and understanding the reasons for a future sale. Investors use the Mean Average Price Target of Analysts to study a stock’s potential upside. The price Targets of most analysts are indeed biased. The decisions of their industry peers influence analysts. They are also affected by their firm’s investment bankers and senior management. Most analysts set their Targets too high, and these prices are seldom met in the one-year time horizon. Nonetheless, there is a big difference in upside potential between a Consensus Price Target of 45% upside versus a 5% upside. The likely reason for such differences is that the companies are in different industries. The ones with the highest upside are often in cyclical industries under market pressure at that point in the cycle. Regardless of the gap between price and price target, our confidence grows with the larger number of reporting Analysts. Investors also study the changes in price targets as a basis for confidence in the upside potential. If the Mean Average Price Target rose by +20% for a company during a month versus a drop of -20%, I would be more confident in investing in a stock with a rising Price Target.

314

Potential upside

Fig. 73.1 Analyst Price Target Potential Upside in Dow 30 stocks (April 5, 2022) Strong Buy

Buy

Hold

Sell

Consensus % Upside or Price (% DownTarget side)

Company

Ticker

Consensus Rating

salesforce.com, inc.

CRM

2.89

304.68

44.99%

Boeing Company

2.68

261.89

43.38%

Walt Disney Co

DIS

2.74

190.21

40.25%

Goldman Sachs Group

2.47

438.94

35.49%

NIKE, Inc.

NKE

2.80

171.67

29.76%

Home Depot, Inc.

2.80

394.41

29.37%

JPMorgan Chase & Co.

JPM

2.39

167.82

25.86%

Honeywell International

HON

2.50

231.46

20.62%

Visa Inc.

2.83

269.09

19.02%

Cisco Systems, Inc.

CSCO

2.43

63.83

16.23%

Walgreens Boots Alliance

WBA

1.91

50.36

16.15%

Microsoft Corp

MSFT

3.00

358.52

15.32%

3M Company

MMM

1.80

171.29

15.03%

IBM

2.30

147.90

14.75%

Intel Corporation

INTC

1.93

54.38

13.00%

Caterpillar Inc.

CAT

2.65

243.18

12.57%

McDonald’s Corporation

MCD

2.83

279.32

12.40%

Verizon Communications

2.20

59.20

12.16%

Walmart Inc.

WMT

2.74

166.95

10.22%

Merck & Co., Inc.

MRK

2.60

91.40

9.17%

Apple Inc.

AAPL

2.84

190.61

8.88%

American Express Co

AXP

2.47

199.67

7.70%

Dow Inc.

DOW

2.13

67.57

6.43%

Coca-Cola Co

2.79

65.80

5.33%

Procter & Gamble Co

2.54

161.33

4.34%

Johnson & Johnson

JNJ

2.56

182.00

2.47%

UnitedHealth Group Inc

UNH

2.95

510.52

-1.40%

Travelers Companies

TRV

2.00

175.73

-3.12%

Chevron Corp

CVX

2.70

157.52

-3.57%

Amgen Inc.

AMGN

2.17

233.88

-4.37%

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Table of Dow 30 companies, ranked by Analysts from 1 (best) to 30 (worst) for Price Potential As of July 21, 2016. Note the differences between Dow 30 stocks with the highest upside potential and those with the lowest upside potential per analysts’ forecasts. It is also apparent when one looks more closely at the data that the more Analysts that follow a company, the lower the consensus upside Price Target. Analyst bias tends to be affected by the number of colleagues reporting on a company. Stocks with considerable Price Target upsides are listed at this MarketBeat.com link. Bottom line: An analyst serves various parties, such as institutional and retail sales, underwriting, and trading. They also, like us, have biases, some of them acute and obvious. The duty of the independent investor is a personal one. So take care not to over-rely on the estimates and conclusions of a single analyst. A consensus of several will be more realistic.

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Peer groups and why we study them There are hundreds of Peer Groups that share similar characteristics or hold your interest, such as the stocks of companies that — • have a similar capital structure and business operation, e.g., mining prospectors and developers • compete for business in the same sub-industry, e.g., managed healthcare • correlate to a price driver, e.g., commodity prices and interest rates • are operating in the same country, e.g., EWG for Germany, or the same region, e.g., Europe: Germany (EWG), France (EWQ), Spain (EWP), Italy (EWI), etc • meet a specific need, e.g., high dividend yield. Just as companies in an industry are affected by the same financial and operating conditions, stocks do not trade in a vacuum. One price in the market affects other prices, none more so than in a peer group. Nothing is more important to investors than to make sense of what may appear to be random events and price actions in the capital market. Investors don’t need a salesperson to tell them what they need. They know what industries and types of companies are of interest to them. So they must block out the distracting messages of promoters and talking heads. Investors must learn the Global Industry Classification Standard (GICS) to see the capital market’s big picture. We introduced GICS in Lesson 3. The GICS system organizes all companies that issue securities to the public. It’s like a public library system for books or the department, aisles, and shelves of a food supermarket. Consider a situation where you were to enter a library or supermarket that had no aisles and shelves. You would be lost. GICS is an essential concept in capital markets. Without understanding the market structure, investors would face chaotic markets, and their investing process would be inefficient. With the help of the GICS, investors can analyze price motion effectively and efficiently via Peer Group studies. Nothing helps me more in my investing process than studying Peer Groups of companies linked in some way.

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In this book, we covered Dow Transports and Dow Utilities. These are examples of industry Peer Groups. They are indexes used for benchmarking investments in those sectors. Within the Transports sector, the Airline, Trucking, Railroad, and Delivery Service industry components are sub-industry Peer Groups. Within the Utilities Sector, the Gas, Oil, Diversified, and Alternative Energy-based Utilities are Industry Peer Groups. A large Peer Group can be in components such as Large-Cap, Mid-Cap, Small-Cap, or highprice or low-price, for example. StockCharts.com Gallery charts or MarketBeat.com group comparison lists offer Peer Group charts. They may be pre-set or organized by the investor. The prominent Auto Manufacturers or the Integrated US Banks are companies operating under similar business and economic conditions nationally and internationally. Revenues and earnings rise and Fall together. Capital flows into and out of these stocks for the same reasons. The price action of these industry Peer Groups shows concurring Trend Reversals. Note in the upcoming links how the market action is quite similar for peer group stocks. After JP Morgan Chase announces earnings first among the largest banks, investors compare those results to the JPM competitors via links like this. If Ford Motor shares (F) exhibit a Trend Reversal, investors should look at the charts of others. Toyota Motor (TM), General Motors (GM), Stellantis (STLA), and Honda Motor (HMC) would be a small Peer Group of companies, as seen in this link. Investors in the auto industry might add autos that trade in the US OTC market, like Volkswagen (VWAGY), BMW (BMWYY), Daimler (DMLRY), Mazda (MZDAY), Nissan (NSANY), Volvo (VOLVY), Renault (RNLSY), Porsche (POAHY), Peugeot (PUGOY), or Geely (GELYY), as seen in this link. For investors who only want to look at the Electric Vehicle (EV) manufacturers, the Peer Group would include Tesla (TSLA), Lucid Group (LCID), Rivian Automotive (RIVN), NIO (NIO), Li Auto (LI), and Fisker (FSR), as seen in this link. For some reason, Tesla (TSLA) became a Meme Stock with a cult-like following. People believe the company’s mission is more important than investment fundamentals, so investors might wish to separate it from the other auto manufacturers. Tesla’s market cap exceeds the combined total of all other auto stocks. In other words, there may be market factors that override the usual price drivers of a Peer Group. For Autos and big US Banks, MarketBeat.com offers a comparison tool for up to 10 stocks in a Peer Group. Investors can access 42 pre-set peer groups called comparative ideas, as follows: Airline, Artificial Intelligence, Automotive, Bank, Biotech, Bitcoin, Blockchain, Blue-Chip, Canadian, Cannabis, Casino, Chinese, Covid Therapeutics, Cryptocurrency, Cybersecurity, Electric Vehicles, FAANG, Gold, Growth, Healthcare, High Dividend, Hotel, Large Cap, Mega Cap, Meme, NFT, Oil, Outdoor Activities, Pharmaceutical, Renewable Energy, Retail, Social Media, Solar, Space, Stay-At-Home, Technology, Telecom and 5G, Utility, Vaccine, Video Game, Virtual Reality, Work-At-Home

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You may find some of the MarketBeat.com peer choices to be wanting. If so, in the selection box of Stocks to Compare, you can switch out some of the pre-set ticker symbols for ones of your choice. In the Sections selection box, you can tick off up to ten items, such as Market Rank, Analyst Ratings, Sales & Book Value, Profitability & Earnings, Dividends, and Debt, for an up-todate company and stock comparison snapshot. I rate this MarketBeat.com “Comparison Ideas” service highly. I refer to it often. Other popular market information services like FinViz.com or StockCharts.com organize Peer Group data. Investors can copy and paste a string of Peer Group stocks. I use StockCharts.com for quick studies of Peer Groups for this purpose. My charts have my choice of parameters and technical indicators. Say I am looking at a stock that enters what may be an Accumulation Zone. I always look to my Peer Group for similar characteristics. I begin to focus on decision-making only when my analytics tools issue Alerts (aka warnings) for one or more of them. Then, after a detailed study, I am ready to trade when these analytics give me a Buy or Sell Signal jointly with other stocks in the Peer Group. Finviz.com provides all the information most investors need to review any peer group. Look, for instance, at Solar companies worldwide that trade on the New York exchanges. Here is the FinViz.com valuation data screener for these Solar companies. Here is company-by-company information under the FinViz.com snapshot tab. Investors can create their peer group by entering a string of tickers with the understanding that this service does not include stocks not listed on the NYSE or Nasdaq. The simplicity of the peer studies concept is akin to anything in nature. Fig. 74.1 Photo of an Orca whale stalking a herring ball

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Not until we see ourselves as a part of nature are we fundamentally connected to capital markets. You will find this human-nature relationship concept repeated throughout this book. Academicians would do well to study it in connection to capital markets. Bottom line: The study of nature is part of my active trading playbook. It helps to understand the market structure. GICS is the market’s DNA.

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Using technical indicators when trading From this point, the content is about practice and not theory. Today, we delve into Alerts and Signals. The content previously covered the reasons to invest in securities. We learned that (1) there are only two wealth-seeking objectives, i.e., the search for capital appreciation via Growth or Value or from Income (2) changing business conditions and corporate financial results cause prices to rise and fall, so we choose Quality companies that outperform their peers, and (3) we use Technical Analysis to seize opportunities and manage risks. We use all the help we can get when making any trading decision. Technical indicator-based studies of time and space provide the necessary support. Technical Indicators have many uses, but the ones I use help me analyze price motion in the time series data. Trends and Cycles are the movements I study. Investors apply several timeframes – Monthly, Weekly, Daily, Hourly, and Minute – in a single price motion analysis. To put time into context, think of a wave. There are ripples, wavelets, waves, and tides. The longer the periodic motion, the stronger it is. In our studies, the incoming waves are less important when the tide goes out. So, monthly data is much more critical in cycle analysis than in minutes and hours. Within motion, investors discover trendlines. What we watch for are the Breakouts and Breakdowns of these trendlines. Cycle Reversals alert the investor that a Trend Reversal is likely to happen. A confirmed Trend Reversal is the best time to buy and sell. Please re-read the important statement I just made. What follows is explicit content, but I base it on logic and experience. In this chapter, we apply our previous notes on Oscillators used to study Cycles. Prices fluctuate under the influence of fear and greed emotion. All price motion has a Cycle. Every Cycle has a range of Momentum from slowing to reversing to speeding up to slowing to then reversing, which repeats. Cycle reversals are points that Signal the best time to buy and sell.

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The three Oscillators that I use the most to study cyclic price motion are: • Rate of Change (ROC) Lesson 65 • Stochastic Oscillator Lesson 66 • Relative Strength Index (RSI) Lesson 67 I present some of the following content in detail because omitting it in my Lessons From the Trader Wizard book was honest criticism. So, for this book, I am trying to meet a full spectrum of the newbie, generalist, sophisticated investor, and day trader’s needs and interests. All Cycles Oscillators track prices or indicators that fluctuate within limits above and below a Zero Line. The Zero Line is the historical average of the price or indicator. The extreme of a Cycle, the widest gap from the Zero Line, is an overbought or oversold level. Reading the following notes without simultaneously applying them to charts will be confusing. This chapter is the application of theory. Without doing the exercises, learning will be minimal. All Oscillators are helpful, but each has weaknesses because of the nature of capital markets with people acting like people, which is to say, often erratically. 1. The Rate-of-Change Oscillator, like the other oscillators, fluctuates as a percentage around the Zero Line but suffers from a significant weakness. An unusually high or low price at the start of the indicator window period is not used in the next day’s calculation, which results in distorted values. 2. The Stochastic Oscillator compares the closing price to the window period’s high minus low price range. This formula improves the ROC Indicator, which measures the relative change in only the closing price. But it, too, has a weakness. Stochastic movements can be erratic. Fig. 75.1 Stochastic Oscillator %K Formula For a 7-day period, the RSI %K = 100 [(C – L7) / (H7 – L7)] Where C = most recent closing price L7 = the lowest price traded during the past seven sessions H7 = the highest price traded during the past seven sessions

Analysts reduce Stochastic sensitivity to market movements by (1) lengthening the period or (2) taking a moving average of the result. A 3-period internally smoothed slow Stochastic Indicator (%D) is more dependable. Fig. 75.2 Stochastic Oscillator %D Formula %D = 100 [(K1 + K2 +K3) / 3]

3. (3) The Relative Strength Index (RSI) Oscillator addresses most of the weaknesses in ROC and Stochastic Oscillators. RSI is not as susceptible to distortion as it smoothly oscillates on a scale between 0 and 100. The RSI Oscillator is my most used price momentum Indicator. 322

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RSI compares upward movements in closing price to downward movements over a selected period. Welles Wilder, the inventor, initially used 14 days but also seven- and nine-day data to trade the short Cycle and 21 or 25 days for the intermediate Cycle. Rather than use a single period RSI, I use the most recent seven-month, seven-week, sevenday, and, occasionally, seven-hour price series data. I refer to these as the Monthly, Weekly, and Daily market-session timeframes. I am looking for Commonality, i.e., Cycles of different timeframes to be bottoming or topping simultaneously. RSI is smoother than the other momentum-based Oscillators and not as susceptible to distortion from unusually high or low prices at the start of the window. RSI oscillates between 0 and 100, which enables pre-set “Overbought” and “Oversold” levels. When used to determine trading Signals called Buy/Sell Alerts, these levels are typically 30 for Oversold and 70 for Overbought. Depending on market circumstances — early or late in a Bull or Bear phase, for example, or during periods of extreme or minimal volatility – I often set the oversold or overbought levels at higher than 70 or lower than 30. The discipline of using a regular period RSI set of rules as a decision-support tool is more important than fiddling with the periods. So, for most market conditions, I use the RSI-7. Trading Signals if using only the RSI Oscillator Investors use different trading Signals for (a) range-bound, i.e., sidetracking, or (b) trending, i.e., upward or downward-flowing markets. In trending markets, Buy or Sell Signals result from 1. Oversold or Overbought RSI levels, plus 2. analysis of Moving Average Converging and Diverging (MACD) patterns. a. Range-bound markets Set the overbought level at 70 and oversold at 30 for most stocks. 1. Go long when the RSI falls below the 30-level and rises back above it or on a bullish divergence where the first trough is below 30. 2. Exit when RSI rises above the 70-level and falls back below it or on a bearish divergence where the first peak is above 70. Consider the effects of Beta, i.e., the measure of a stock’s price Volatility with the rest of the market. For stocks with a high Beta, such as the smaller technology companies and companies subject to extreme media hype, set the overbought level at 80 and oversold at 20. For long-term oriented investors and extreme trading situations like the possibility of a terminating primary bull or bear phase, use a combination of RSI-7 calculations for Monthly, Weekly, and Daily price series rather than relying on a single time series.

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If there is a possibility of a terminating bull phase, all three RSI-7 period values must exceed 70. I refer to that condition as the “Distribution Zone.” My trading Signal occurs in the Distribution Zone when the Daily RSI-7 falls below 70 or on a bearish RSI-7-to-RSI-14 divergence where the first peak is above 70. b. Trending markets In a trending market, unless confirmed by a Trend Oscillator such as MACD, RSI divergences are often not strong enough Signals to trade. 1. Apply only the Signals that occur in the direction of the Trend. 2. In an up-trend, go long when the Daily RSI-7 falls below 40 and rises back above it. Take partial profits on negative divergences between RSI-7 and RSI-14. 3. Exit using a Trend Oscillator such as MACD. 4. Go short in a Downtrend when the Monthly, Weekly, and Daily RSI-7 rise above 60, and the Weekly and Daily RSI-7 then fall below it.

Trading Signals using the Stochastic Momentum Oscillator Trading Signals for the Stochastic Oscillator are the same as for RSI. a. Ranging markets Signals in order of their importance: 1. Go long on %D bullish divergence where the first Cycle trough is below the Oversold level. 2. Go long when either %K or %D falls below the Oversold level and rises back above it. 3. Go long when %K crosses above %D. Short Signals: 1. Go short on %D bearish divergence where the first Cycle peak is above the Overbought level. 2. Go short when %K or %D rises above the Overbought level and then falls below it. 3. Go short when %K crosses below %D. b. Trending markets Because of the sensitivity of the Stochastic Oscillator, I use it in combination with RSI and MACD Oscillators. The MACD Oscillator is a Trend Indicator, whereas the RSI and Stochastic Oscillators are Momentum Indicators. Apply Signals only in the direction of the trend. Never go long when the Stochastic Oscillator is overbought, nor short when oversold.

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The shape of a Stochastic bottom indicates the type of the next rally. A narrow and shallow base suggests that the market Bears (i.e., those investors who believe that prices are falling) are weak and that the next rally should be strong. A comprehensive, deep bottom pattern Signals that the Bears are strong enough to mute the next rally. The same applies to Stochastic tops. Narrow tops indicate that the market Bulls (i.e., those investors who believe that prices are rising) are weak and that the next move is likely to be severe. High, wide tops indicate that the Bulls are strong enough to soften the correction. Trading Signals using MACD Trend Oscillator The MACD Oscillator is used primarily in Trend Trading, whereas RSI and Stochastics Momentum Oscillators are used in Swing Trading. Trend Trading is not particularly effective in a range-bound market. MACD (Moving Average Convergence Divergence) should not be relied upon during those times. MACD, coined by Gerald Appel, measures the distance between two Moving Average lines. He introduced it in his 22-page 1985 book, The Moving Average Convergence Divergence Trading Method. MACD has its detractors, but the world-leading technical analyst Ian Notley taught me how to use this Trend Oscillator as an effective Technical Indicator. Notley called it the Moving Average Departure analysis. According to Gerald Appel, Signals happen when the MACD crosses its Signal line, also called the Zero Line, which is a nine-day Exponential Moving Average of MACD. First, check whether the price is trending. If the MACD is flat or stays close to the Zero Line, the market is sidetracking, and trend-based Signals are unreliable. Trending market conditions MACD is a Trend Indicator, whereas the RSI and Stochastic Oscillators are Momentum Indicators. Because of the sensitivity of MACD, I use it in combination with a Momentum Indicator. Signals are far stronger if there is either: 1. divergence on the MACD line; or 2. a giant swing above or below the Zero Line. Unless there is a divergence, do not go long if the Signal occurs above the Zero Line, nor go short if the Signal occurs below Zero. 1. Go long when the MACD line crosses the Signal line from below. 2. Go short when the MACD line crosses the Signal line from above. Note the consistent application of any time-based Indicator is more valuable than the random use of different periods of the same Indicator.

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Investors use 7, 9, 14, 21, and 28 periods for lookback periods, whether the timeframes are Daily, Weekly or Monthly. Unless you are an expert in using a particular Technical Indicator, I recommend sticking with 7 or 14. Bottom line: A Momentum Indicator is an Oscillator-based statistical study of cyclic price Motion, and a Trend Indicator is an Oscillator-based statistical study of price Trends. Both are, by definition, only indications or probabilities, not certainties. Everyone requires experience in the use of Oscillators before relying on them as Indicators for decision-making.

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Accumulation Zone, Buy Alert, and Buy Signal For the market timing task, I study Trends and Cycles using Momentum Oscillators like MACD, ROC, Stochastics, and RSI. After deciding which company stocks I wish to buy and sell, I must know when to trade them. So I use a simple trading protocol like the National Weather Service’s watch, warning, and advisory system. I base each Stock Buy on a 1-2-3 protocol, which is: (1) Accumulation Zone, (2) Buy Alert, and (3) Buy Signal. If I am selling, the protocol is (1) Distribution Zone, (2) Sell alert, and (3) Sell Signal. The Relative Strength Index (RSI) is a critical Technical Indicator for me. RSI defines my Accumulation/ Distribution Zone, Buy/Sell Alert, and Buy/Sell Signal protocol. I’m sure an artillery officer has a similar ready, aim, and fire system. Private wealth managers have a reason for every decision in selecting companies or the Buys and Sells in the company stocks. As you know, I take a holistic approach to market analysis. I have Fundamental, Quantitative, and Macroeconomics Analysis for investment research and Technical Analysis for trading. I have a proprietary rules-based Decision Support System (DSS) for the trading job. This DSS required a lot of my time and resources over several years. It is a complex subject, but we can all understand and apply the principles. As noted in an earlier Lesson, the RSI is a Momentum Oscillator that can vary between 0 and 100. In non-trending markets, the key points (you can call defaults) are 30, 50, and 70 (or 35, 50, and 65 in tranquil markets). In trending markets, the defaults are 20, 50, and 80. If RSI falls below 30 (or 20), I call that Indicator level the Accumulation Zone. That is the time I start looking to buy into weakness. It’s a time there is a greater upside possibility within the current cycle. If RSI rises above 70 (or 80), that is understood to be a higher-risk situation with less upside within the current cycle. I call that condition the Distribution Zone as I am looking to sell into strength. To me, a stock that enters an Accumulation or Distribution Zone triggers an Alert, which is the time to focus. As RSI goes deep into the zone, one must be mindful of a stock’s extraordinary strength or weakness. Depth of zone penetration is my early warning system.

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Inside an Accumulation or Distribution Zone, any reversal of RSI triggers a Buy or Sell Alert. That warning requires a heightened awareness and preparedness for possible decisions. Any reversal of RSI more than a set percentage (%) creates a Buy or Sell Signal, which is why I have to make a Buy-Sell decision. Say the RSI rises above 70 but fails to drop more than 5% even on weakness until it reaches a cycle high of 80. Then after hitting 80, RSI pulls back to 76 (5% or 4 points below the highest number reached in that Cycle). That would be a Sell Signal. The % move rule is on a slider. Selling in the 70 to 90 range is a different level than when buying in the 10 to 30 range. If RSI falls below 20, the reversal % at 5% is only 1 point, i.e., a move of RSI from a cycle low of 20 back to 21, so 10% is more likely to be a more appropriate reversal % used. I apply a different slider in volatile market conditions, some industries, and some specific stocks. Advanced computer systems are needed to manage higher levels of sophistication. The upper and lower ranges of RSI are critical, but the Zero Line (or, in the case of RSI, the 50% line) is also essential in studying Cycle failures. For example, after a Buy Signal, a Cycle Failure would occur if a rising RSI fails to cross upward through the 50-line but starts to fall. That is a Sell Signal where we look to abort the previous Buy. We use the same protocol for a falling RSI and its failure to cross the 50% line. That condition where we abort the Sell decision and possibly reacquire the stock would be a High-Risk Buy. Cycle Failure analysis of price data in mid-cycle is complex. It requires subjectivity and is applied differently under varying conditions. Hence, the research poses a more significant challenge in determining Cycle reversals than studying a terminating phase within an Accumulation-Distribution Zone. Bottom line: Going from being Watchful to Alert to Signal requires a systematic approach. But no matter how mathematical the tools we use, we must never forget that they are Indicators of probabilities, not absolutes.

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Distribution Zone, Sell Alert, and Sell Signal The concepts of Distribution Zone, Sell Alert, and Sell Signal are almost opposite to my notes in the previous chapter on Accumulation Zone, Buy Alert, and Buy Signal. That condition is a high potential risk when RSI rises above 70 (or 80). I call that the Distribution Zone, as I will be looking to sell into strength at some point. Because selling is more important than buying, there are nuances to understand. As readers know, the Relative Strength Index (RSI) is a vital Technical Indicator for me. I also use RSI to develop my Distribution Zone, Sell Alert, and Sell Signal protocol. As noted in an earlier lesson, the RSI is a momentum Oscillator that can vary between 0 and 100. In non-trending markets, the key points are 30, 50, and 70 (or 35, 50, and 65 in tranquil markets). In trending markets, the key points are 20, 50, and 80. When RSI falls below 30 (or 20), that situation is a high possible opportunity for reward. That is the Accumulation Zone where we are looking to buy into weakness. There are thousands of stocks to consider buying, but only a few we hold and sometimes need to sell. So, when RSI rises above 70 (or 80) for any holding, that condition is a high potential risk. Risk is something we want to sell. So the Distribution Zone is where we are looking to sell into strength. In these situations, the deeper the RSI moves into a zone, the greater the risk and our concern. Hence, we need to focus more. We need a warning system. Any reversal of RSI in an Accumulation or Distribution Zone is a warning. When RSI reverses greater than a set percentage (%), it is a Buy or Sell Signal. Say the RSI rises above 70 but fails to drop more than 5% even on weakness until it reaches 80. Then it pulls back to 76 (5% or 4 points below the highest number 80 in that Cycle). That would be a Sell Signal. The reversal % we apply when the RSI is above the 70% line (i.e., in the Distribution Zone) is much smaller than the one we use below the 30% line (i.e., in the Accumulation Zone). For example, an 8% reversal from 25 is just a change of 2 to get a new reading of 27. But an 8% reversal from 75 is a change of 6 to get a new reading of 69. A fall below the 70-line would cause many risk-conscious investors to sell, but even aggressive buyers will not want to buy if RSI goes from 25 to 27.

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The 50-line is a critical RSI level. A rising RSI that fails to cross upward through the 50-line but starts to fall again is called a Cycle failure. This condition is a vital Sell Signal because it shows that sellers are more confident than buyers. Cycle failure analysis of price data in mid-cycle requires subjectivity. Our RSI tool is applied differently under varying conditions. Hence, the study poses a more significant challenge in determining Cycle reversals than the other analytics we use. What may help in the study of a cycle failure at the RSI 50% line of a single stock is to look for similar conditions in that stock’s peer group or its sector. Bottom line: Other than the percentage reversal of RSI needed to give me a Signal, a Sell Signal criteria is the same as a Buy Signal. But since selling is the more important decision, the Distribution/Alert/Signal protocol requires more focus on our part.

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Analytics I use for research and to support investment decisions Independent investors and professional wealth managers are in a similar situation when it comes to investing and executing trades. They need an investment plan. Investing without a pre-established protocol would be chaotic and possibly impossible. For most readers, the takeaway from this chapter and the next is understanding that a well-structured trading plan is needed. It can be simple, but it must be logical. The hardest part is the need to think and act like a mechanic or a machine, which is not normal human behavior. It can be a simple rules-based manual or a sophisticated automated system, but it must be structured. The more capital you put at risk, the more you appreciate this advice. All investors research to find the best companies in the best industries for the times. To do so, we study economic and business cycles. Then we try to buy the stocks of those companies when the price is out of favor. To reduce our capital exposure risk, we try to sell them at a point when there appear to be insufficient buyers to push prices higher. Buying a stock requires in-depth research in choosing Quality and the most favorable entry and exit positions. We all face time constraints. Thus most individual investors should hold as few as 6 to 10 stocks in a portfolio rather than the usual 30 to 50. If a portfolio holds only a few securities, the investor can manually apply the same technical analytics as professionals use, and they can avoid the need for extensive computer support. But the more significant the portfolio holdings, the more likely the investor will need sophisticated computer data analytics to manage. As described by Wiki, an analytic is a multidisciplinary process. “There is extensive use of mathematics and statistics, descriptive techniques, and predictive models to gain valuable knowledge from data—data analysis. The insights from data are used to recommend action or to guide decision making.” If you believe that a human is not essential in the search for performance, there are RoboAdvisors.

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Robotics today is everywhere, both physical and digital. In the securities advisory business, Robo-Advisors are software systems with the same legal status as human advisors. RoboAdvisors register with the US Securities and Exchange Commission (SEC) and are subject to the same securities laws and regulations as broker-dealers. I cover this topic in chapter 16. Cybernetics (aka digital robotics) is the pioneer of our future – even in capital markets. Cybernetics is the application of data-based algorithms in time and space. Per Wiki, “The core concept of cybernetics is circular causality or feedback—where the observed outcomes of actions are taken as inputs for further action in ways that support the pursuit and maintenance of particular conditions, or their disruption.” The study of price action over time is essential to all investors. It’s the reason that all investors use charts to analyze price motion. Most of us think of the time in a calendar format of Days, Weeks, Months, and Years. Computer systems use the decimal system. Programmed algorithms and calculations use trading days, so one week is five days, one month is 30 days, one quarter is 90 days, and one year is 360 days. That differs from the calendars we use. In any case, studying price and volume over time is essential for studying past, present, and future price performance. It’s the basis of Technical Analysis. For those who want to develop a sophisticated data analytics system, I recommend eight programs for providing Alerts (aka Warnings). Another four apply to Buy and Sell Signals. As discussed in the next chapter, all 12 programs could form an automated Decision Support System (DSS). Given that the following technical discussion is beyond the grasp of most readers, I will try to publish a follow-up book that will focus exclusively on these analytics in the context of an automated Decision Support System. Please bear with me because I need all readers to understand the importance of structure in trading, just as it is essential in investing. Professional investors understand this. What follows is complicated to the average person, but conceptually, it’s a logical approach that will work in a manual system. The difference is that humans cannot operate machinelike. Fig. 78.1 Schema for Bill Cara “Decision Support System” Logic (DSS)

Please take note of the terminology: S=Signal (a Buy Signal=BS and Sell Signal=SS) and A=Alert (BA and SA).

I name my DSS Signals RTS, MAS, TXS, and RSS, where: RTS=Reversed (Price or Indicator) Trend Signal MAS=Moving Average Signal, which when it is a Crossover is aka MAX TLS=Trend Line Signal, which when it is a Crossover is aka TLX RSS=Relative Strength Signal, which is an RS Index (RSI) Extreme Level Reversal

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Analy tics I use for research and to support investment decisions

My DSS also has Alerts, which I name MFA, SOA, SRA, PDA, DRA, CSA, RDA, and MCA, where: MFA=Money Flow Alert Indicator SOA= Smoother Overlays Alert of Price Trends in Groups SRA=Support & Resistance Alert Studies IDA= Indicator Divergence Alert where Price and Indicator Trends disconnect DRA= Data Ranking Alert Changes in corporate and stock data CSA=Comparative Strength Alert of two different price series RDA=Reporting Date Alert MCA=Market Cycle Alert from the Market Cycle Model (MCM)

Signals Discussion: RTS=Reversed Trend Signal A time series-based mathematical algorithm is used to project a price trend number (TR) for 1 day, 1 week, and 1 month plus a turn number (TN) that would reverse the trend (RT) in that period. The %RT is the percentage move in price in a certain period that would change the trend. Every RT Signal is an essential Buy or Sell Signal. MAX=Moving Average Crossover We need to know whenever there is a crossover (X) of the Last Price to the 8-Day, Week, and Month EMA and between 7, 14, and 21-day EMA. An essential X is the crossover between the last price and the 8-week (i.e., 40-day) EMA. This Signal is the easiest to program but is an important one. MAX is essential if the X coincides with Peer Group stocks. TLX=Trend Line Crossover Prices tend to rise and fall in a saw-tooth pattern. A Trend Line is drawn through or near the highest points in a falling motion. When climbing, the Trend Line is through or near the lowest points. An important X would be price crossover with a long-term Trend Line, especially if that also occurs in most Peer Group stocks. That is a vital Buy or Sell Signal. Often, a Trend Line is not apparent to the eye, and we may have to computer calculate and draw it. RSS=Relative Strength Index Extreme Level Reversal The Relative Strength Index (RSI) can vary between 0 and 100. In non-trending markets, the key points are 30, 50, and 70. In trending markets, the key points are 20, 50, and 80. When RSI rises above 70 (or 80), that is a higher-risk situation.

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When RSI falls below 30 (or 20), that is a higher-reward situation. Any RSI reversal greater than a set % in these situations creates a Buy or Sell Signal. For example, the RSI rises above 70 but fails to drop more than 5% even on weakness until it reaches 80. Then it pulls back to 76 (5% or 4 points below the maximum number of 80 reached in that Cycle). That would be a Sell Signal. This % move rule will be on a slider as some markets, industries, and stocks are more volatile. If RSI falls below 30, the reversal % at 5% is only 1.5 points or 31.5, so 10% is more likely to be the appropriate reversal %. Also, a rising or falling RSI that fails to cross the 50-line is called a Cycle failure, a critical Signal. As this analytic requires subjectivity and is applied differently to varying conditions, it poses a more significant challenge than the other analytics.

Signal Notes: 1. Programmed algorithms must be continuously improved because market sophistication is always growing. 2. The more extensive the database of facts, the more influential the DBMS info and the more accurate its signals are. 3. Prices tend to rise and fall together based on economic data, interest rates, commodity prices, and currencies, which are price drivers. But the entire reason for price anomalies is usually not understood for some time as markets are not transparent. Often, at such times you will hear the mention of Animal Spirits. That term refers to people’s emotional responses, especially during geopolitical stress.

Alerts Discussion: MFA=Money Flow Indicator We do three types of volume studies: (a) MFI, (b) OBV, and (c) abnormal volume. Noteworthy changes in volume often precede price changes. 1. MFI=Money Flow Index (an accumulated plus or minus daily figure of price change times volume) 2. OBV=On Balance Volume (an accumulated plus or minus daily figure of price change times volume, which is like MFI) 3. Abnormal Volume= Last Day or Week Volume compared to Recent Average over 10 or 30 days. SOA=Price and Trend Smoother Overlays by Peer Group Smooth the Price series or Indicator like RSI, and graph only the smoothed lines overlaid with the same from other stocks in a Peer Group. This has been my favorite Alert tool for over 30 years. Once I spent 60 continuous intense hours at the office focused on this tool. Then, departing the parking lot, I drove into a post and was later pulled over by police for erratic driving (and let go with a warning). It could have been a scene from The Big Short, an excellent movie.

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Analy tics I use for research and to support investment decisions

SRA=Support & Resistance Studies We monitor technical Support and Resistance areas for every stock in the database to assess probabilities of Trend Breakouts or Trend Breakdowns. We study the support and resistance gaps among Peer Group stocks. IDA=Price and Indicator Divergences When a stock rises or falls, indicators like the RSI usually move in concert, but not always. A clear Divergence is a warning that either the price or the indicator will soon revert to being in concert. Usually, the Indicator action precedes the Price Trend change. DRA= Corporate and Stock Data Ranking Changes From an extensive database of 32,000 stocks, ETFs, mutual funds, and indices updated daily, I selected a tradeable universe of 1,000 companies for ranking Overall Quality based on Profitability, Revenue Growth, Value, and 15 other metrics, as well as 18 Technical Indicators for each stock. We continuously calculated percentile daily rankings. We focused on any company or stock exhibiting a significant change in % ranking. Suffice it to say it took a monster database to compute the DRA. CSA=Comparative Strength Comparative Strength graphs that provide relative performance information, such as 1. ETF vs. a Major Market Index like S&P500, Dow30, or Nasdaq100, 2. a stock vs. an ETF, 3. a stock vs. its closest peers, or 4. a stock vs. its primary driver, for example, Barrick Gold (ABX) vs. gold bullion. RDA=Reporting Dates We review the Price and Volume action more closely ahead of its corporate reporting date and the reporting dates of that company’s business competitors. MCA=Market Cycle Alert Model Using a Rate of Change formula, I developed a theoretical model for the market clock that defines risk and opportunity according to a proprietary analysis of Price Drivers and the resultant price motion of instruments in the market.

Notes re Alerts: • Alerts focus us on what is most important, which is a possible trading action in the days or weeks ahead, but Alerts are not Signals. Signals tell us the time for action is now. • We look for Alerts (aka Warnings) on a market-wide basis because prices do not operate in a vacuum. They tend to rise and fall together, particularly in peer groups, and price anomalies indicate areas of most significant risk or opportunity for reward.

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• It would be best if you did not act (i.e., Buy or Sell an Instrument) until assessing the bigger picture. The same logic used in sophisticated algorithms can be applied by anybody who adopts simple rules-based systems or common sense. All aspects of investing, including trading, are rooted in common sense. When natural law doesn’t work, human interventionists are involved. Take the flow of water, for example. Gravity tells us it always flows downward. When it rises beyond a tidal effect, then a machine is involved. That is human intervention. Interventionists are always involved in capital markets, but sometimes their actions are taken to extremes. For the systems developers among us, here are my company Greenfield Capital Inc’s proprietary trading system notes that could form the basis of an entire trade management system. I present it in natural language format for full-stack system developers of Artificial Intelligence (AI) systems. This discussion is too detailed for most readers, but its market logic is essential. Over many months, from a blank piece of paper, I designed the schema, the system design, and the pre-programming blueprint for the straight-through processing electronic trading system of Qtrade Investor. The two primary rating services in Canada named Qtrade the number one electric broker a total of 25 times over the Company’s first 17 years. These ratings surpassed the e-brokerage systems of every one of Canada’s Humongous Bank & Brokers, among the biggest banks in the world. We built our entire system, including computers, for under US$500,000. Despite spending tens of millions of dollars each, HB&B could not compete. Bottom line: I have always said that you don’t have to be a big player with the support of gazillions of dollars to be a winner, but you must think logically. Understanding and applying natural law, a system based on time and space, is critical.

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CHAPTER 79

Automating decision support for trading Trading systematically – like a mechanic or a machine – is not normal human behavior, but it is the key to success. This chapter takes the logic of a sophisticated trading algorithm and applies it to a simple natural law rules-based system. Buy-side and sell-side firms worldwide use sophisticated investing and trading systems. They deploy investment technology costing billions to achieve maximum portfolio performance because systematic trading overcomes the weaknesses of human emotion. The schematic design in the previous chapter shows the basis of the Bill Cara system. System developers can use the logic to program an automated decision support system. Fig.79.1 Bill Cara’s “Rules-based system”

1. Accumulation Zone Alert 1. [ ] type Alert 2. [ ] percentage of peer group has [ ] type Alert 3. [ ] percentage of peer group has Buy Signal in the past month 4. Use extreme weakness to consider buying 5. May have seen cyclic lows 6. A close above [price plus 3%] may trigger a Buy Signal 7. A close above [price plus 5%] may trigger a Buy Signal and stock break-out 8. The Coppock Curve pattern may be turning bullish 9. Consolidation pattern forming 10. Consolidation pattern continuing 11. Price/Indicator Divergence Pattern, so be alert to the next buying opportunity 12. [RSI] Indicator is extended on the downside, and we await reversal to signal a Buy 13. Peer group is strengthening 14. Macroeconomic improvement favors group 15. Macroeconomic improvement favors group, but unexpected price weakness may extend the Bear

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16. Company Quality rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 17. Company Growth rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 18. Company Value rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 19. Company Income rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 20. Company Quality ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 21. Company Growth ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 22. Company Value ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 23. Company Income ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 24. Company Quality ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 25. Company Growth ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 26. Company Value ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 27. Company Income ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low]

2. Buy Signal 1. Trader Buy Signal at [ ] on [Date] 2. Investor Buy Signal at [ ] on [Date] 3. The high-quality company, so consider stock purchases up to [price plus 3%] 4. A close below [support] would reverse the Buy and generate a high-warning Sell Signal, indicating an extended Bear 5. Set the Trader Stop Sell at [ ] and the Investor Stop Sell at [ ] 6. Bullish Long-term Trend & Short-term Cycle now in place; so buy only because of Growth, Value, or Income needs 7. Bullish Long-term Trend & Short-term Cycle are now in place; however, avoid based on unacceptable company quality or poor fundamentals 8. Buy Signal, but avoid until more of its peer group have Buy Signals 9. The industry group is showing excellent relative strength 10. Buy with an index [ ] closing below [ ] 338

Automating decision support for trading

3. Early Bull Cycle Phase 1. All buying should be complete during this phase 2. Raise the Trader Stop Sell to [ ] and the Investor Stop Sell to [ ] 3. Tighten the Stop Sell prices 4. A close below [ ] down to [ ] would facilitate additional buying 5. Bullish Long-term Trend & Short-term Cycle, but continue to avoid 6. Bullish Long-term Trend & Short-term Cycle still in place 7. All buying should be complete during this phase 8. The industry group continues to show good relative strength

4. Advancing Bull Cycle Phase 1. Bullish Long-term Trend & Short-term Cycle, but continue to avoid for Quality reasons 2. A high-quality company and strong stock in a strong stock group, so buying opportunities exist on lousy market days 3. Confirmed Short-term Cycle Bull [price up +8% from its cycle low] 4. Confirmed Long-term Cycle Bull [price up +20% from its cycle low] 5. The long-term Trend is intact, but Short-term Cycle is extended

5. Maturing Bull Cycle Phase 1. Too late for additional purchases, as any cyclic weakness could portend distribution 2. Too early to consider selling 3. Be mindful of reporting dates as the company tends [negative][positive] surprises 4. A [strong] [weak] stock in a [strong] [weak] group

6. Distribution Zone Alert 1. [ ] type Alert 2. [ ] percentage of the peer group has [ ] type Alert 3. [ ] percentage of the peer group has Sell Signal in the past month 4. Use extreme strength to consider selling 5. Although not technically a “Sell,” the stock may have seen its Trend & Cycle high price 6. A close below [price minus 3%] may trigger a Sell Signal 7. Consolidation Cycle Top pattern forming 8. Consolidation pattern Cycle Top continuing 9. Stock is toppy and vulnerable to large sellers 10. Price/Indicator Divergence Pattern, so be alert to the next selling opportunity 11. [RSI] Indicator is extended on the upside, and we await reversal to signal a Sell

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12. Peer group is weakening 13. Macroeconomic weakness threatens the group 14. Macroeconomic weakness threatens the group, but unexpected price weakness may extend the Bull 15. Company Quality rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 16. Company Growth rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 17. Company Value rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 18. Company Income rating (Universe) is [ ] percent, which is [extremely high] [high] [average] [low] [very low] 19. Company Quality ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 20. Company Growth ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 21. Company Value ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 22. Company Income ranking (Sector) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 23. Company Quality ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 24. Company Growth ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 25. Company Value ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low] 26. Company Income ranking (Industry) is [ ] of [ ], which is [extremely high] [high] [average] [low] [very low]

7. Sell Signal 1. Trader Sell Signal at [ ] on [Date] 2. Investor Sell Signal at [ ] on [Date] 3. Close all positions in this stock 4. A close above [resistance] would reverse the Sell and generate a high-risk Buy Signal, indicating an extended Bull 5. Bearish Long-term Trend & Short-term Cycle now in place; so close all positions 6. Bearish Short-term Cycle is now in place; however Long-term Trend continues, so close some or most positions

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7. Bearish Long-term Trend & Short-term Cycle now in place; so consider short selling based on undesirable company quality and poor fundamentals 8. Sell Signal, but consider dismissing this signal until more of its peer group have Sell Signals 9. The industry group is showing poor relative strength 10. Do selling on an index [ ] closing above [ ]

8. Early Bear Cycle Phase 1. All selling should be complete during this phase 2. A close above [ ] up to [ ] would facilitate additional selling 3. Raise the Trader Stop Sell to [ ] and the Investor Stop Sell to [ ] 4. Widen the Stop Buy price gap 5. A close above [ ] up to [ ] would facilitate additional selling 6. Bearish Long-term Trend, Short-term Cycle: continue to avoid; Quality is too high to sell short 7. Bearish Long-term Trend & Short-term Cycle still in place 8. Bearish Long-term Trend in place, but Short-term Cycle extended on the upside, which may lead to aggressive selling on any breakdown 9. The industry group continues to show poor relative strength

9. Advancing Bear Cycle Phase 1. Bearish Long-term Trend & Short-term Cycle, but continue to avoid for Quality reasons 2. A low-quality company and weak stock in a vulnerable stock group, so selling opportunities still exist on bullish market days 3. Confirmed Short-term Cycle Bear [price down -8% from its cycle low] 4. Confirmed Long-term Cycle Bear [price down -20% from its cycle low]

10. Maturing Bear Cycle Phase 1. Too late for additional sales as any cyclic strength could portend accumulation 2. Too early to consider buying 3. Be mindful of reporting dates as the company tends [negative][positive] surprises 4. A [strong] [weak] stock in a [strong] [weak] group Bottom line: Natural law is the logic in your brain that tells you what should happen. One of my favorite expressions: If it (natural law) doesn’t happen in the end, then it’s not the end. When you see what does happen that doesn’t make sense, the difference is the result of an intervention. You must identify an intervention and systematically deal with it. Automation manages that process unemotionally. Without automation, you must invest and trade systematically. Your systems must overcome your emotions.

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SECTION 8

Investing by Sector 80 Investing in the Energy Sector 81 Investing in the Materials Sector 82 Investing in the Commodities markets 83 The Gold & Silver markets 84 Precious Metal Royalty and Streaming Instruments 85 Investing in the Industrials and Transports Sector 86 Investing in the Consumer Discretionary Sector 87 Investing in the Consumer Staples Sector 88 Investing in the Health Care Sector 89 Investing in the Financial Sector 90 Investing in the InformationTechnology Sector 91 Investing in the Communication Services Sector 92 Investing in the Utilities Sector 93 Investing in the Real Estate Sector

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CHAPTER 80

Investing in the Energy Sector The Energy industry is oil and gas, coal, and alternative fuels. It is mostly about oil and gas stocks, the prices of which are driven by global economic growth, occasionally by hurricanes and wars, and by commodity prices. Commodity prices fluctuate due to changes in international demand and supply. Oil and Gas are called commodities for the simple reason that their products are fungible. Fungible means they are interchangeable from one producer to the next. The same applies to coal, metals, paper, forest products, and chemicals. The Energy Sector (GICS 10) encompasses companies engaged in the exploration, production, marketing, refining, or transportation of oil and gas products, plus coal and alternative energy products. This sector includes companies whose businesses construct or provide oil rigs, drilling equipment, and other energy-related services, including seismic data collection. The GICS committee is adding New Industry Groups, Industries, and SubIndustries. GICS has four-level coding of 1. Sector, 2. Industry Group, 3. Industry, and 4. Sub-Industry. Most of the largest companies in each GICS sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. GICS may soon break down the energy industry into two groups (Non-Renewable and Renewable), seven industries, and seventeen sub-industries. Fig. 80.1 GICS Sector 10 8-digit Coding (Energy) Sector 10: Energy 1010 Industry Group: Energy Non-Renewable Energy 101010 Industry: (Non-Renewable) Energy Equipment & Services 10101010 Sub-Industry: Oil & Gas Drilling Company examples*China Oilfield Services, Helmerich & Payne

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10101020 Sub-Industry: Oil & Gas Equipment & Services Company examples*Schlumberger, Halliburton 101020 Industry: Oil & Gas Production, Marketing & Transportation 10102010 Sub-Industry: Integrated Oil & Gas Company examples*Saudi Aramco, Exxon Mobil 10102020 Sub-Industry: Oil & Gas Exploration & Production Company examples*ConocoPhillips, CNOOC 10102030 Sub-Industry: Oil & Gas Refining & Marketing Company examples*Reliance Industries, Marathon Petroleum 10102040 Sub-Industry: Oil & Gas Storage & Transportation Company examples*Enbridge, Kinder Morgan 10102050 Sub-Industry: Bituminous/Thermal Coal Company examples*CONSOL Energy, Coal India 10102060 Sub-Industry: Uranium Company examples*Cameco, Kazatomprom 10102070 Sub-Industry: Coking/Metallurgical Coal Company examples*Shanxi Coking, Shanxi Meijin 101030 Industry: Non-Renewable Independent Power Producers & Energy Traders 10103010 Sub-Industry: (Non-Renewable) Ind. Power Producers & Traders Company examples*CGN Power, NTPC 1020 Industry Group: Renewable Energy 102010 Industry: Renewable Energy Equipment & Services 10201010 Sub-Industry: Renewable Energy Equipment & Services Company examples*Enphase Energy, Canadian Solar 102020 Industry: Renewable Fuels 10202010 Sub-Industry: Renewable Fuels Company examples*Renewable Energy Group, Verbio 102030 Industry: Renewable Energy Producers 10202020 Sub-Industry: Solar Energy Production Company examples*Adani Green Energy, Transalta Renewables 10202030 Sub-Industry: Wind Energy Company examples*China Three Gorges, China Longyuan Power 10202040 Sub-Industry: Hydro Energy Company examples*China Yangtze Power, Brookfield Renewable 10202050 Sub-Industry: Diversified Renewable Energy Company examples*EDP Renewables, Nextera Energy Partners 10202060 Sub-Industry: Other Renewable Energy

Company examples*Albioma, Montauk Renewables

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Coding 1020 is a new Industry Group for Renewable Energy in the Energy Sector. Renewable Energy is part of the Climate Change political agenda, so GICS committees expanded the classifications in hopes that listed companies would follow. There are a few links I could insert. When you go to the GICS link for 101020 Industry: Oil & Gas Production, Marketing & Transportation, you can click on a Sub-Industry link. For example, 10102010 Sub-Industry: Integrated Oil & Gas. The link will get a group snapshot. The most prominent industry in the Energy Sector is the integrated oil and gas group, with a market capitalization of $1.8 trillion in June 2022. Like all Energy industry stocks in the past few years, the main stock Exxon Mobil (XOM), a former Dow 30 component, has been struggling. It had a market cap of about $404 billion on 2022-06-13 versus $477 billion on 2007-08-01. That is a drop of -15% in almost 15 years. Chevron-Texaco (CVX), comparable in size to Exxon Mobil, and a current Dow 30 component, has suffered a similar fate. Labeled “blue chips” by Wall Street, some Oilers have hardly been what I call high-quality companies, although they may be considered Value stocks. The price per barrel is elevated in the $80-$90 range to start 4Q2022. Oil traded at about $100 a barrel on 07-20-2022, down from about $120 a barrel on 2022-06-13. But it was about $30 a barrel on 2016-03-29 and $77 a barrel on 2007-08-01. For long-term-oriented investors, the call is whether crude oil will trend higher or lower. Our primary job is to stay on the right side of the trend. We try to discover the answer to the never-ending question of future price levels because wealth is on the line. A key factor to watch in long-term forecasting of oil prices is the economic growth rates in the advanced countries of North America, Europe, and Japan. These rates usually lag behind the developing, so-called emerging economies of China, India, and Russia. In recent years, the Covid-19 pandemic has severely hurt the economies of all countries. That pullback had a crushing impact on energy prices. My view is that the collapse of Oil&Gas market prices in 2014-15 and again in 2020 resulted from futures markets intervention with political ties. The same intervention happened in Precious Metals markets recently as it did in the Bond, Currency, and Crypto markets. In my 50-plus years of investing, I have never seen such political and central bank intervention in capital markets. Interventionists label their skeptics conspiracy theorists, and life goes on with the same organizations controlling the narrative. As an investor, however, you must let go of those ideas and focus on facts. The result is that investors must spend more time as traders, which is unfair as Wall Street has the technology and information advantage. Market participants have traded Petroleum futures for years. These contracts were a helpful mechanism used by commercial sellers and buyers to ensure firm future prices, which they managed through hedging. Then, futures contracts became popular among speculators due to general fears of political intervention, rising prices, and occasional temporary shortages. Volatility increased. 345

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Following the Biden occupancy of the White House on January 21, 2021, the US policy on Oil & Gas took an abrupt turn. Never before in US history has a president used Executive Orders to attempt to kill an economically significant industry. US government narratives called for eliminating gasoline-powered vehicles and fossil fuel production. Renewable energy like wind and solar are said to be the replacement. The activist agenda adopted political slogans and policy platforms like Build Back Better and Climate Change. I suppose investors know a little more about energy prices than legislators. While politicians talk about developments to happen 20-40 years in the future, we trade contracts daily. In addition to putting gasoline into our cars and fueling our homes with oil, we trade the energy markets daily. We understand corporate fundamentals and the business conditions that industries need for sustainability. ROI is a specific requirement. Activists offer ESG, which can mean anything. Usually, interventionists and social activists are not obtrusive. Capitalism prevails because it is why America has grown to be the world’s economic and military power. But social change is underway today that is impacting capitalism in a threatening way. The energy futures market is too volatile for most investors, including most speculators. Oil & Gas markets represent considerable risk at the best of times. Today with politically linked ESG Interventionists getting the upper hand in Energy company boardrooms and high political office, the energy market has become a challenging game for the biggest of pro traders. For instance, in just a few months in 2006, a multi-billion-dollar energy hedge fund collapsed when its traders seriously misjudged energy prices despite all their expertise and research. Unlike central banks and their agents like JP Morgan and Goldman Sachs, which cannot fail if we are to have a capital market, there is no private investment Fund labeled ‘Too Big to Fail.’ Moreover, in 2022 the Russian invasion of Ukraine and subsequent sanctions against Russian energy and financial assets upset global Oil prices. Nevertheless, energy cost and availability are significant drivers of stock prices across the board, so portfolio managers need to understand them. When energy prices are high as they are today and maybe to rise higher, long-term investors look at the oil and gas industry of Western Canada, and its massive oil sands play. The Oil Sands, linked to Bitumen-based Heavy Oil, represent a high and rapidly rising-cost resource, which loses luster whenever world crude oil prices fall below about $70, which has often been the case in recent years. Investors know that the break-even cost level is increasing yearly with inflation, and inflation in North America in mid-2022 is running about +10% year-over-year. Netback and Free Cash Flow are the key figures in assessing Oil Producers. Netback is the Gross Margin on every barrel of Oil after deducting the direct cost from revenue attributable to that barrel of Oil.

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Free Cash Flow (FCF) remains after the company pays all direct costs, other selling and administration costs, and maintenance costs to sustain the business. Running an Oil and Gas company is different than trading Oil and Gas futures. On April 20, 2020, crude oil futures turned negative for the first time in history, likely because of canceled contracts due to economic concerns over the Covid-19 pandemic. That there was a policy war going on between Saudi Arabia, Russia, and the US was likely a related issue. When there was no price to store the excess Oil that was flooding the market, there were long purchase contracts sold at about minus-$38/barrel to those who could store it temporarily, so in effect, for a while, Oil became less than worthless. With this historical volatility in the Oil price, several Oil companies declared bankruptcy or were taken over or merged with others. Energy traders were not immune as a Danish trading company, Nordstrom Invest, declared bankruptcy in 2021. Over the years, some of the world’s biggest bankruptcies, like Enron, were energy traders. In addition to storage contracts, there are currency issues. Because most crude oil traders traded in US Dollars and OPEC countries began demanding payment in Euros and Yen, and the Chinese in Yuan, these currency issues became problematic. In the future, European oil markets (IDE Brent) may play an increasingly crucial role in international Oil pricing, and US West Texas Intermediate less. Investors should understand the differences between Brent Crude vs. West Texas Intermediate Light Sweet Crude.

Oil & Gas companies The leading energy sector companies that trade on NYSE and Nasdaq are ExxonMobil, Chevron, and ConocoPhillips from the US, Shell from the UK, PetroChina from China, TotalEnergies from France, Equinor from Norway, Enbridge from Canada, and Petroleo Brasileiro from Brazil. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for the ETFs and the most prominent stocks. Fig. 80.2 Sector 10 Industry and Sub-Industry Indexes (Energy) Sector 10–Energy Indexes

Symbol

Dow Jones US Coal Total Stock Market Index

$DWCCOA

Dow Jones US Oil & Gas Index

$DJUSEN

Dow Jones US Gas Distribution Index

$DJUSGU

Dow Jones US Oil & Gas Producers Index

$DJUSOG

Dow Jones US Oil Equipment & Services Index

$DJUSOI

Dow Jones US Integrated Oil & Gas Index

$DJUSOL

Dow Jones US Oil Equipment, Services & Distribution Index

$DJUSOQ

Dow Jones US Exploration & Production Index

$DJUSOS

Dow Jones US Oil & Gas Total Stock Market Index

$DWCOGS

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Dow Jones US Renewable Energy Equipment Total Stock Market Index

$DWCREE

Dow Jones Europe Oil & Gas Index

$E1ENE

Dow Jones Sector Titans 30 Index - Oil & Gas

$DJTENG

Dow Jones US Select Oil Equipment & Services Index

$DJSOES

Dow Jones US Select Oil Exploration & Production Index

$DJSOEP

Dow Jones World Oil & Gas Index (EOD)

$W1ENE

S&P 500 Energy Sector Index

$SPEN

S&P 500 Energy Industry Group Index

$GSPEN

S&P Energy Sector 10 Bullish Percent Index

$BPENER

S&P GSCI Energy Index - Spot Price

$GJX

Dynamic Energy & Exploration Intellidex Index

$DWE

Dynamic Oil Service Intellidex Index

$DWO

Energy Index – NYSE

$NYE

Energy Select Sector - NYSE Arca

$IXE

Energy Select Sector SPDR Advance-Decline Percent (EOD)

$XLEADP

Energy Select Sector SPDR New Highs-New Lows Percent (EOD)

$XLEHLP

Energy Select Sector SPDR Volume Advance-Decline Percent (EOD)

$XLEUDP

Natural Gas Index - NYSE Arca

$XNG

Oil Index - NYSE Arca

$XOI

Oil Services Index – Philadelphia

$OSX

Wilderhill Clean Energy Index

$ECO

To monitor the Energy sector companies, use the FinViz.com program. This link of the largest market cap companies in the sector that trade on the NYSE and Nasdaq will get you started, and from there, the Performance tab will show the performance over various periods. Fig. 80.3 List of International Integrated Oil Companies that trade in New York International Integrated Oil Companies

2022-08-02 Market Cap

XOM - Exxon Mobil Corp.

396.317 B

CVX - Chevron Corp.

312.710 B

SHEL - Shell Plc

193.113 B

TTE - TotalEnergies SE

127.036 B

EQNR - Equinor ASA

118.276 B

BP - BP Amoco PLC

92.778 B

PBR - Petroleo Brasileiro (Petrobras)

51.499 B

SU - Suncor Energy, Inc.

47.109 B

E - ENI S.P.A.

40.933 B

CVE - Cenovus Energy Inc.

36.541 B

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Investing in the Energy Sector

IMO - Imperial Oil Ltd.

29.321 B

EC - Ecopetrol SA

21.794 B

SSL - Sasol Ltd.

12.293 B

SNP - China Petroleum and Chemical Corp. (Sinopec)

11.633 B

PTR - PetroChina Co.

9.609 B

Fig. 80.4 List of North American Oil Exploration & Production Companies that trade in New York North American Oil Exploration & Production

2022-08-02 Market Cap

COP - ConocoPhillips

122.460 B

EOG - EOG Resources, Inc.

62.813 B

CNQ - Canadian Natural Resources

62.374 B

OXY - Occidental Petroleum Corp.

60.961 B

PXD - Pioneer Natural Resources Co.

55.154 B

WDS - Woodside Energy Group Ltd.

42.929 B

DVN - Devon Energy Corp.

40.016 B

HES - Hess Corp.

34.089 B

CLR - Continental Resources Inc.

24.619 B

CTRA - Coterra Energy Inc.

23.680 B

FANG - Diamondback Energy, Inc.

22.575 B

MRO - Marathon Oil

16.907 B

EQT - EQT Corp.

15.496 B

OVV - Ovintiv Inc

12.544 B

Fig. 80.5 North American Natural Gas Exploration & Production Companies that trade in New York Natural Gas Exploration & Production

2022-08-02 Market Cap

DVN - Devon Energy Corp.

37.389 B

EQT - EQT Corp.

15.644 B

CHK - Chesapeake Energy Corp.

11.684 B

AR - Antero Resources Corp.

11.404 B

RRC - Range Resources Corp.

8.085 B

SWN - Southwestern Energy Co.

7.622 B

GPOR - Gulfport Energy Corp.

1.844 B

Bottom line: The global energy industry is changing rapidly. Climate Change politics and environmental activists such as the Net Zero Asset Managers Initiative are promoting alternative energy sources like wind, solar, and uranium to the disadvantage of the Oil and Gas companies.

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Investing in the Materials Sector The Materials Sector includes the basic raw materials and capital goods needed by companies that manufacture or produce other capital and consumer goods. The Materials sector (GICS 15) companies manufacture chemicals, construction materials, glass, paper, forest products, related packaging products, and metals, minerals, and steel. Most of the largest companies in each GICS sub-industry linked in the table below trade on the NYSE or Nasdaq. If there is no link, any company of substance is trading OTC or on international markets. Fig. 81.1 GICS Sector 10 8-digit Coding (Materials) as of 1Q2022 Sector 15 Materials Industry Group 1510 Materials Industry 151010 Chemicals Sub-Industry 15101010 Commodity (Fungible) & Inorganic Chemicals Sub-Industry 15101020 Diversified Chemicals Sub-Industry 15101030 Fertilizers & Agricultural Chemicals Sub-Industry 15101040 Industrial Gases Sub-Industry 15101050 Specialty Chemicals Industry 151020 Construction Materials Sub-Industry 15102010 Construction Materials Industry 151030 Containers & Packaging Sub-Industry 15103010 Metal & Glass Containers Sub-Industry 15103020 Paper Packaging Industry 151040 Metals & Mining Sub-Industry 15104010 Aluminum Sub-Industry 15104020 Uranium Metals & Mining Sub-Industry 15104025 Copper Mining

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Investing in the Materials Sector

Sub-Industry 15104030 Gold Mining Sub-Industry 15104040 Silver Mining Sub-Industry 15104050 Steel Industry 151050 Paper & Forest Products Sub-Industry 15105010 Forestry, Lumber & Wood Sub-Industry 15105020 Paper and Paper Products

The Chemicals industry has three primary classifications: Commodity, Specialty, and Agricultural. A commodity is fungible because it is interchangeable regardless of producer. Crude Oil and Natural Gas are fungible commodities processed into commodity chemicals like plastics, rubber, dyes, pigments, synthetic fibers, paints, coatings, fertilizers, agricultural chemicals, pesticides, cosmetics, soaps, cleaning agents, and detergents. Chemical companies may produce various chemicals but are classified by GICS as Specialty Chemicals because that is the primary revenue source. Specialty chemicals are materials that are not available from many suppliers. Some specialty chemicals are further classified as Industrial Gases. Producers of a wide range of products are classified in the Diversified Chemicals subindustry group. The Materials sector is influenced by the state of the economy and by raw material commodity prices like Crude Oil. Chemicals, metals and mining, and paper and forest products stocks are most profitable when factory utilization numbers are 80% or higher. That is when the economy is in full gear, and the Commodity Research Bureau’s CRB Index is rising. During economic expansion, companies with chemicals, metals, mining, paper, and forest products have better pricing power. But they also have higher costs. Take, for example, a mining company where Oil is prohibitive. As Oil prices soar, as they are in 2022, a mining company’s profit margins are squeezed. So, it is essential to understand whether the Basic Materials company is a net seller or buyer of commodities. Economic growth requires Oil and Copper, and China has been a significant consumer of both. In recent years, the Chinese economy has grown from about 7% to 9% per year. The Covid-19 pandemic has led to much smaller growth in 2022.

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Leading Basic Materials companies The leading Basic Materials sector companies are primarily foreign-headquartered because, while America is a significant producer, commodities are a small part of the GDP. The leading companies are BHP Group from Australia (BHP), Linde PLC (LIN) and Rio Tinto Group from the UK (RIO), and Vale SA from Brazil (VALE). Nutrien from Canada (NTR) is also substantial. These trade on NYSE and Nasdaq. On the London Exchange, Glencore (GLEN.L) is a bellwether. Leading US companies in the Basic Materials sector are Sherwin Williams (SHW), Air Products and Chemicals (APD), Freeport-McMoRan (FCX), Newmont (NEM), and Dow Inc (DOW). I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks. Fig. 81.2 GICS Sector 15 Industry and Sub-Industry Indexes (Materials) Sector 15–Basic Materials Indexes

Symbol

Dow Jones US Chemicals Index

$DJUSCH

Dow Jones US Gold Mining Index

$DJUSPM

Dow Jones US Mining Index

$DJUSMG

Dow Jones US Nonferrous Metals Index

$DJUSNF

Dow Jones US Specialty Chemicals Index

$DJUSCX

Dow Jones US Steel Index

$DJUSST

Dow Jones World Basic Materials Index (EOD)

$W1BSC

S&P 500 Materials Industry Group Index

$GSPMA

S&P 500 Materials Sector Index

$SPM

S&P 500 Chemicals Index

$CEX

S&P GSCI Industrial Metals Index - Spot Price

$GYX

Dow Jones US Basic Materials Total Stock Market Index

$DWCBSM

Dow Jones US Basic Resources Total Stock Market Index

$DWCBSC

Dow Jones US Chemicals Total Stock Market Index

$DWCCHM

Dow Jones Europe Basic Materials Index

$E1BSC

Dow Jones Sector Titans 30 Index - Basic Resources

$DJTBAS

Dow Jones Sector Titans 30 Index – Chemicals

$DJTCHE

Dow Jones US Basic Materials Index

$DJUSBM

Dow Jones US Basic Resources Index

$DJUSBS

Dow Jones US Commodity Chemicals Index

$DJUSCC

Materials Select Sector - NYSE Arca

$IXB

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Investing in the Materials Sector

Materials Select Sector SPDR Advance-Decline Percent (EOD)

$XLBADP

Materials Select Sector SPDR New Highs-New Lows Percent (EOD)

$XLBHLP

Materials Select Sector SPDR Volume Advance-Decline Pct (EOD)

$XLBUDP

Natural Resource Index - NYSE Arca

$XNA

This FinViz.com link of the largest market cap companies in the sector that trade on the NYSE and Nasdaq will get you started. The Performance tab will show the performance over various periods. Bottom line: The Materials Sector is attractive to Investors during a terminating economic recession or when economic growth looks promising. The stocks are strongest when manufacturers and processors enjoy high revenues, gross margins, and free cash flow. Industry earnings are not the strongest in the business cycle then but are anticipated to be strong.

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Investing in the Commodities markets Commodity prices affect every person in the world every day. Most energy we need comes from coal, natural gas, and crude oil. Our food includes meat, vegetables, fruits, coffee, sugar, and grains. Our buildings are made with and furnished from lumber and metals products. Commodities traders set prices daily in markets such as futures, options, and ETFs categorized by metal, energy, livestock and meat, and agricultural. The Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE), and the London Metal Exchange (LME) are the major exchanges. Supply and demand constantly change, so prices often fluctuate to the extreme. Investing.com lists the major Indices in the Commodities market. This free site offers information on Price charts, Performance, and Buy/Sell Technical Indicators. Fig. 82.1 Major Indices in the Commodities market Commodity Index DJ Commodity DJ Commodity All Metals Capped Component

DJ Commodity Gold DJ Commodity Industrial Metals

DJ Commodity Lead DJ Commodity Nickel

DJ Commodity Zinc NQ Commodity Silver Index ER

NQ Commodity Palladium Index ER DJ Commodity Energy

DJ Commodity Petroleum DJ Commodity Softs

DJ Commodity Cocoa

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Investing in the Commodities markets

DJ Commodity Sugar

DJ Commodity Grains DJ Commodity Unleaded Gasoline

DJ Commodity Heating Oil BNP Paribas Global Agri TR

NQ Commodity Crude oil Index ER Risk Weighted Enhanced Commodity TR

S-Net ITG Agriculture USD SGI Commodities Optimix TR

TR/CC CRB TR/CC CRB Aluminum

TR/CC CRB Copper TR/CC CRB Nickel

TR/CC CRB ex Energy ER TR/CC CRB ex Energy TR

TR/CC CRB Unleaded Gas TR/CC CRB Heating Oil

TR/CC CRB Corn TR/CC CRB Cotton

TR/CC CRB Cocoa TR/CC CRB Coffee

TR/CC CRB Lean Hogs TR/CC CRB Orange Juice

TR/CC CRB Soybeans TR/CC CRB Sugar

TR/CC CRB Wheat

There are Commodity ETFs. ETFDB.com categorizes ETFs by Type. Clicking on the name link in Fig. 82.2 provides information on Returns, Fund Flows, Expenses, Dividends, and Technicals information like RSI and Support and Resistance levels. Fig. 82.2 Commodity-based ETFs ETFs by Commodity

Assets Under Management ($MM)

of ETFs

Broad Diversified

$23,449

Gold

$112,226

Silver

$15,467

Palladium

$437

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BILL CARA / STOCK MARKET LITERACY

Copper

$388

Nickel

$67

Lead

Aluminum

$31

Tin

$39

Crude Oil

$5,325

Broad Agriculture

$2,396

Carbon Allowances

$1,632

Platinum

$1,209

Broad Precious Metals

$1,167

Broad Industrial Metals

$772

Natural Gas

$601

Wheat

$532

Brent Oil

$275

Broad Energy

$260

Biofuels

Corn

$249

Gasoline

$100

Coffee

$81

Grains

$74

Soybeans

$65

Sugar

$58

Cotton

$39

Cocoa

$26

Broad Softs

$21

Broad Livestock

$21

If you seek equities related to various commodities, go to the ETFDB.com Industry ETF List. For example, here is the list of Goldminer ETFs. You could go to the largest ETF for Total Assets and find the GDX ETF. Then click on the Holdings tab to find the most prominent mining company constituents. The following list of Commodity Mutual Funds is from Investing.com. You will find the Profile, Historical Net Asset Value Data, Holdings, Chart, Technical Indicators, and Support and Resistance Levels of each Fund by clicking on the name link. The Morningstar Rating and Total Assets Under Management (AUM) are also listed.

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Investing in the Commodities markets

Fig. 82.3 Commodity-based Mutual Funds Commodity Mutual Fund Name

Symbol

AQR Risk-Balanced Commodities Strategy I

ARCIX

BlackRock Commodity Strategies Institutional

BICSX

Invesco Balanced-Risk Commodity Strat R5

BRCNX

Invesco Balanced-Risk Commodity Strat Y

BRCYX

Credit Suisse Trust Commodity Return St

CCRSX

VanEck CM Commodity Index Y

CMCYX

VanEck CM Commodity Index I

COMIX

Credit Suisse Commodity Return Strat A

CRSAX

Credit Suisse Commodity Return Strat I

CRSOX

DFA Commodity Strategy Institutional

DCMSX

Parametric Commodity Strategy Institutional

EIPCX

Fidelity Series Commodity Strategy

FCSSX

Goldman Sachs Commodity Strategy Institutional

GCCIX

ALPS CoreCommodity Management Complete Commodities

JCRAX

ALPS CorCommodity Mgmt CompleteCommodity Strat I

JCRIX

MFS Commodity Strategy R6

MCSRX

PIMCO CommoditiesPLUS Strategy Institutional

PCLIX

PIMCO CommoditiesPLUS Strategy P

PCLPX

PIMCO Commodity Real Ret Strat A

PCRAX

PIMCO Commodity Real Ret Strat C

PCRCX

PIMCO Commodity Real Return Strategy Institutional

PCRIX

PIMCO Commodity Real Return Strat P

PCRPX

PIMCO Commodity Real Ret Strat Admin

PCRRX

AQR Risk-Balanced Commodities Strat R6

QRCRX

Deutsche Enhanced Commodity Strat Institutional

SKIRX

Deutsche Enhanced Commodity Strat A

SKNRX

Deutsche Enhanced Commodity Strat S

SKSRX

ProFunds Short Oil & Gas Fund Investor Class

SNPIX

ProFunds Short Oil & Gas Fund Service Class

SNPSX

ProFunds Short Precious Metals Fund Investor Class

SPPIX

ProFunds Short Precious Metals Fund Service Class

SPPSX

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BILL CARA / STOCK MARKET LITERACY

By clicking on the Symbol link, you will find the up-to-date chart from StockCharts.com. The enduring feature of commodities is their cyclic nature. Speculators trade cyclic instruments. A lot of speculative trading raises the interest of politicians and regulators, particularly since high commodity prices are also increased costs to producers and consumers. The world’s highest commodity production by US Dollar value is Crude oil, Coffee, Natural gas, Gold, Wheat, Cotton, Corn, Sugar, Silver, and Copper. The countries that export the most commodities by US Dollar value are China, US, Germany, and Japan. On a relative basis, the biggest commodity-based exporters in the world are Russia, Australia, and Canada, all vast lands blessed with abundant natural resources. Russia’s major exports are all commodities: crude petroleum, refined petroleum, natural gas, coal, wheat, and iron. Australia’s major exports are also commodities: iron ore, coal, natural gas, gold, and aluminum oxide. Canada’s major exports are crude petroleum, cars and vehicle parts, gold, refined oil, and natural gas. As noted in a Bank of Canada speech:

Canada is unusual among advanced economies. It is the only G7 country that is a major commodity exporter. The production of primary products accounts for roughly 11 percent of our gross domestic product. While this is much smaller than 50 years ago, it is nearly three times the relative size of commodity production in the United States and far higher than most other industrialized countries. The Dow Jones Commodity Index (DJCI) is a weighted index of 28 Commodities. This Investing.com link is to the up-to-date chart of the index.

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Investing in the Commodities markets

Fig. 82.4 Chart of the Dow Jones Commodity Index (DJCI)

The Dow Jones Commodity Index links to many Mutual Funds, Exchange Traded Funds (ETFs), and Exchange Traded Notes ( ETNs). Bottom line: Species survive because they can acquire and process commodities. We could not build a house or drive a car. We would not have the energy and basic materials to build an economy. Commodities produced for domestic or export consumption are fungible and have an international market price. As demand and supply fluctuate a lot over time, prices are cyclical. Because of futures contracts that overcome short-term supply issues, most commodity markets are large and liquid.

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CHAPTER 83

The Gold & Silver markets The reasons to hold Gold are multi-fold. Gold is a safe-haven investment in times of geopolitical crisis because it offsets a strengthening US Dollar market. It is also a store of value when the US Dollar depreciates against other currencies. When Gold’s price increases and costs are controllable, Gold mining company fundamentals strengthen. Intrinsic value increases. Low-beta Goldminer stocks hedge a portfolio of high-beta stocks. This chapter will show the investible instruments, important terminology, and red flags. Precious Metals are commodities because they are raw materials used in manufacturing. But they are also classified as money by the Bank for International Settlements (BIS). Gold and Silver are storehouses of value against US Dollar depreciation. Most American investors interested in the long-term holding of Gold and Silver in physical form are not typical. Most American investors have faith in the US Dollar. Those who trade the commodity and the Miners understand that Precious Metals’ prices are controlled to a large extent by the largest central banks and some of the commercial banks that specialize in Precious Metal trading. Gold market prices depend on banks’ benchmark pricing in London and New York. These seriously conflicted Bullion Banks of the London Bullion Market Association are the market-makers that trade against their clients and others. The primary objective of these Bullion Banks is to seek profits for their shareholders and staff. These banks have been accused of dishonest trading in Precious Metals for years. The billions of dollars in regulator fines assessed and not contested by the Bullion Banks serve as proof. In addition to trading their funds for profit, HB&B are agents for the world’s largest central banks that are also profit-seeking. These five Bullion Banks are at the heart of the issue: JPMorgan, Scotiabank, UBS, HSBC, and ICBC Standard. Following the global financial system collapse in 2008, the other seven significant banks that deal in Gold bullion trading and price setting at the LBMA became much less influential than the big five. BNP Paribas, Citibank, Credit Suisse, Goldman Sachs, Merrill Lynch, Morgan Stanley, and TD Bank are others.

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The Gold & Silver markets

To succeed in trading against this robust competition, you will have to overcome personal greed-based emotions made worse during Gold Bull phases by slick promoters of the precious metals companies. Suppose you can endure the enormous pressure of those formidable opponents and base your decisions squarely on facts and the knowledge of Trends and Cycles. In that case, your mission will ultimately succeed, and your portfolio will grow to meet your needs and expectations. But success for most investors will not come quickly. When your impartial analysis and conclusions lead you to a trading decision, your friendly banker at JP Morgan, UBS, et al. will publish so-called “research” that will be off-putting.

The launch of the Shanghai Gold Exchange and Benchmark The Shanghai Gold Exchange (SGE) established a renminbi-denominated benchmark price in mid-April 2016. SGE said the new SGE Gold Benchmark Price reflects genuine physical gold supply and demand in China. SGE is now the world’s largest physical gold exchange, As stated in the announcement circular, “At present, China’s gold derivatives market lacks an authoritative and equitable gold benchmark price denominated in renminbi. (This exchange) will facilitate the development of China’s gold derivatives market, which will also have a big impact on the price of gold-related financial products, wealth management products, and derivatives.” Accordingly, independent Buy-side investors believe the SGE price will play a crucial global role in accurately pricing physical gold, which could help stabilize the worldwide precious metals-related equity market. Given the prospects of a fair and stable gold pricing market, investors can assess gold miner company fundamentals and stock prices in much the same manner as industrial companies. Place less emphasis on the promoters and promotion of these companies and the claims of paid-for newsletter writers. As a fundamental fiat currency Bear and a Gold Bull, I am hopeful that global securities regulators will soon facilitate an open market. That may be too much to expect, but I remain confident.

Research and Trading There is a plethora of Indices, ETFs, Mutual Funds, and Individual Stocks for Investors in Precious Metals to study. Fig. 83.1 Major Indices for Gold Miners Goldminers Indexes

Symbol

Gold & Silver Index - Philadelphia

$XAU

Gold Miners Index - NYSE Arca

$GDM

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BILL CARA / STOCK MARKET LITERACY

Gold Bugs Index - NYSE Arca

$HUI

Volatility Index - CBOE Gold

$GVZ

S&P 500 Gold Sub Industry Index

$SPGOLD

S&P GSCI Precious Metals Index – Spot Price

$GPX

Gold Miners Advance-Decline Percent (EOD)

$GDXADP

Gold Miners Bullish Percent Index

$BPGDM

Gold Miners New Highs-New Lows Percent (EOD)

$GDXHLP

Gold Miners Volume Advance-Decline Percent (EOD)

$GDXUDP

Gold Miners Advance-Decline Percent (EOD)

$GDXADP

Gold Miners Volume Advance-Decline Percent (EOD)

$GDXUDP

Fig. 83.2 Major ETFs for Gold Miners Goldminer ETF Name

Ticker

Total Assets ($MM)

Avg Volume

VanEck Senior Gold Miners ETF

GDX

$15,797.80

26,874,960

iShares MSCI Global Gold Miners ETF

RING

$615.03

171,089

Sprott Gold Miners ETF

SGDM

$306.61

41,948

Global X Gold Explorers ETF

GOEX

$49.75

6,759

US Global GO GOLD and Precious Metal Miners ETF

GOAU

$114.06

43,257

VanEck Junior Gold Miners ETF

GDXJ

$5,117.27

8,536,558

Sprott Junior Gold Miners ETF

SGDJ

$131.39

22,563

Amplify Pure Junior Gold Miners ETF

JGLD

$1.28

7,381

MicroSectors Gold Miners 3X Leveraged ETN

GDXU

$72.30

684,838

Direxion Daily Gold Miners Index Bull 2x Shares

NUGT

$769.63

3,145,214

Direxion Daily Junior Gold Miners Index Bull 2x Shares

JNUG

$481.14

1,075,943

Direxion Daily Gold Miners Index Bear 2x Shares

DUST

$88.48

3,047,327

Direxion Daily Junior Gold Miners Index Bear 2X Shares

JDST

$77.59

3,584,248

MicroSectors Gold Miners -3X Inverse Leveraged ETNs

GDXD

$7.82

111,590

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The Gold & Silver markets

Fig. 83.3 Large Gold-related US Mutual Funds Gold Mutual Fund Name

Symbol

EuroPac Gold Fund Class A

EPGFX

First Eagle Gold Fund Class A

SGGDX

First Eagle Gold Fund Class I

FEGIX

Franklin Gold & Precious Metals Fund Advisor Class

FGADX

Franklin Gold & Precious Metals Fund Class A

FKRCX

US Global Gold & Precious Metals Fund

USERX

Fig. 83.4 Largest Gold & Silver mining stocks by Market Cap that traded in New York on April 12, 2022 Precious Metals Company

Ticker

Primary Industry

Market Cap Market ($Billion) Cap Size

Country

Newmont Corporation

NEM

Gold

64.52

USA

Barrick Gold Corporation

GOLD

Gold

44.50

Canada

Franco-Nevada Corporation

FNV

Gold

39.36

Canada

Agnico Eagle Mines Limited

AEM

Gold

28.55

Canada

Wheaton Precious Metals

WPM

Gold

22.35

Canada

Gold Fields Limited

GFI

Gold

12.99

South Africa

Sibanye Stillwater Limited

SBSW

Gold

10.98

South Africa

AngloGold Ashanti Limited

Gold

9.76

South Africa

Royal Gold, Inc.

RGLD

Gold

9.37

USA

Kinross Gold Corporation

KGC

Gold

7.60

Canada

Yamana Gold Inc.

AUY

Gold

5.55

Canada

B2Gold Corp.

BTG

Gold

5.02

Canada

SSR Mining Inc.

SSRM

Gold

4.74

Canada

Alamos Gold Inc.

AGI

Gold

4.29

Canada

Hecla Mining Company

Gold

3.64

USA

NovaGold Resources Inc.

Gold

3.23

Canada

Equinox Gold Corp.

EQX

Gold

3.14

Canada

Centerra Gold Inc.

CGAU

Gold

2.95

Canada

Osisko Gold Royalties Ltd

Gold

2.83

Canada

Harmony Gold Mining Co

HMY

Gold

2.81

South Africa

Pan American Silver Corp.

PAAS

Silver

5.95

Canada

First Majestic Silver Corp.

Silver

3.51

Canada

MAG Silver Corp.

MAG

Silver

2.07

Canada

Fortuna Silver Mines Inc.

FSM

Silver

1.23

Canada

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BILL CARA / STOCK MARKET LITERACY

Most of these companies are mining companies, but the following are the most prominent financiers of mining operations by way of royalty and streaming deals: Franco-Nevada Corporation Wheaton Precious Metals Corp, Royal Gold, Inc. Osisko Gold Royalties Ltd.

Understanding the Precious Metals market Gold and Silver markets are interdependent. Sometimes investors will favor one or the other, but they will always be connected. The primary Precious Metals are Gold and Silver, Platinum, Palladium, and Rhodium. Precious metals are often, but not always, mined in the same orebody. While there may be differences in physical demand and supply for each metal, the prices will always move in similar Trends and Cycles. Miners often combine Gold and Copper, whereas they often find Silver ore with Lead. Because there is a more significant industrial metal aspect to Silver, and the price of Silver is less costly to the average buyer, the silver price is more volatile. Industry newsletter writers and stock promoters will always exploit that situation, so Silver Trend and Cycle reversals typically precede those for Gold. For the past 100 years, the average Gold/Silver price ratio has been about 50. The proportion has increased to about 65 over the past 25 years. On September 9, 2022, the 50-day MA of Gold is 1754, and Silver is 19.20. So the Gold/Silver ratio is now exceptionally high at 91. Trading the Gold/Silver ratio is vital to some investors, but not me. As with all mining company stocks, Investors make decisions based on corporate fundamentals. There are also key industry terms investors must know. I published an article on this. WHAT IS THE DIFFERENCE BETWEEN A PRELIMINARY ECONOMIC ASSESSMENT (PEA), A PRE-FEASIBILITY STUDY (PFS), AND A FINAL FEASIBILITY STUDY (FFS) Many investors new to investing in minerals exploration and mine development may be confused by the types of studies done by these companies and their importance. Endeavour Silver (EXK)(EDR.TO), which is a holding of mine, does an excellent job explaining them. These three studies (PEA, PFS, and FFS) reflect different confidence levels in evaluating a mining project. The confidence levels relate to geological knowledge about the deposit and the economic estimates, such as capital and operating costs required to exploit the deposit. After the initial discovery, a mineral deposit is usually delineated by exploration drilling to provide an understanding of its geometry, resources, tonnes, grades, and recoveries.

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The Gold & Silver markets

The first study is a conceptual PEA, also called a scoping study, to define the scope of the project, including preliminary engineering alternatives for developing the mine and processing the ore, broad estimates of capital and operating costs, and other economic parameters. A PEA tries to answer the question, “how best can this deposit be exploited to maximize its economic returns?” Unlike more advanced studies, a PEA can use inferred resources for its operational and financial modeling so long as one has a reasonable expectation the outcome will be a profitable mine. A PFS typically follows a PEA, and an FFS, if financed with debt. A PEA rarely forms the basis for a production decision because of the higher degree of unknown risks, costs, and timelines. A PFS is a more advanced study that uses only reserves plus measured and indicated resources and involves more detailed engineering to optimize the alternatives for developing the mine and processing the ore. It also uses tighter estimates of capital and operating costs and other economic parameters by comparing them to recent examples. A PFS is usually followed by a Final Feasibility Study (FFS), but financing with equity can sometimes be used as the basis for a production decision if the economics are particularly robust or the cost is at an FFS level. An FFS is the most advanced study that typically only uses reserves and involves definitive engineering and detailed costing based on actual bids instead of estimates. An FFS is essential to finance larger, more complex, capital-intensive, lower-return mining projects or financing with banks, often called a bankable feasibility study (BFS). In addition to understanding the terminology, you must recognize that most miningrelated companies are not in production, so the usual fundamental data is unavailable. These companies promote themselves as Exploration or Development companies. There are significant differences. The key metric of a Gold mining company is the All-In Sustaining Cost. AISC is like Gross Margin for industrial goods producers. If the margin is too low, the other costs of a going concern cannot be met, and the company is a loser. A mining exploration company owns mineral rights claims they believe have value based on preliminary studies. As these companies have no production or technical reports filed with securities regulators, they must raise risk capital from investors based on stories. A company that has filed a technical report making a case that can turn value into profit is called a developer. It still relies on stories to raise the capital needed to go into production. Without getting into the controversial issue of whether these stories are worthy of your investment, the facts should indicate your odds of making a successful investment. This slide, taken with permission from a presentation of Integra Resources, shows the odds of going from 3,527 pre-production projects with a PEA to just 17 projects that will likely become a Precious Metals mine with an annual production of at least 100,000 oz goldequivalent for at least ten years.

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BILL CARA / STOCK MARKET LITERACY

Fig. 83.5 Graphic illustrating the fewer Precious Metals projects based on strict criteria

Imagine how many shareholder-financed projects never get to a PEA. Mining is a challenging business, but nothing compared to the odds faced by the Explorers. For this reason, prospectors and managers who have past discoveries to their credit can raise the most capital. A mine development company has obtained sufficient exploration drilling results that show that a mineral deposit could become a commercial mine. Institutional investors will await a Preliminary Economic Assessment (PEA) filing with securities regulators. That is when most sell-side investment analysts issue their assessment reports. Investors should ignore mining promotions with billions of dollars of in-situ Gold value in their exploitation or development projects. Empirical studies show that the value of Goldequivalent ore not being mined ranges from $19/oz to $38/oz. The value range depends on the richness of the Gold, the size and type of the deposit, and perceived jurisdictional and local situation risk. Investors must also learn to ignore the daily gyrations in the prices of volatile Gold and silver stocks. I routinely make this point in my daily blog at billcara.com. One recent example is New Pacific Metals (TSX: NUAG)(NYSE-A: NEWP), a stock I hold. I respect the Company and believe it to be the builder of a major silver-gold mining company in Bolivia, South America. As some of my readers are frustrated by the price fluctuations, I blogged a reminder that the Company is a solid investment, not a day trade.

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The Gold & Silver markets

Bill Cara Author September 20, 2022, 9:59 am New Pacific ought to be a lesson to traders. It is an investment, not a trade. Traders are getting psyched out by interventionists who have taken control of the market with their words and by computer bots playing traders’ emotions. Investors stick to facts and have the patience to see it through. The Company has done enough drilling in all three New Pacific projects to show outstanding results. The breadth and depth of discovered minerals lead experts to believe there will be three mines. Experts will guestimate one billion equivalent ounces of silver within a year. They will report a Mineral Resource Estimate (MRE) for the Silver Sand (flagship) project within a month and file a Preliminary Economic Assessment (PEA)by year-end. Analysts will extensively review PEA worldwide. The Carangas silver-gold project with more potential presently has five drills working, and the assays will continue to be superb. A minor drilling program is underway at their third project, Silverstrike. The last filing (to June 30) shows no long-term debt, Current Liabilities of under $3.5 million plus under $400,000 owing to Silvercorp for shared offices and other resources. There was over $33 million in Current Assets, primarily cash, and non-current assets of $91 million. The quarterly burn was $2.34 million. What impresses me is the total expense in cash and stock to compensate management and directors for the year ended June 30 was just $1.87 million. The CEO, Rui Feng, is paid about $60,000 a year. I have not seen any comparable for an operation of this size. New Pacific is building wealth for its shareholders, not insiders, the typical beneficiaries of small prospecting and developing mining companies. The lesson here is to invest at these low share prices (US$2.34) and patiently watch the building of a major mining company. It is happening before your eyes when all you can see are computer bots trading at least half the 157,000 average daily share volume on TSX+NYSE-A. There are 157 million shares outstanding.

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Fig. 83.6 New Pacific Metals (NEWP)(NUAG.to) chart, September 20, 2022

There are always opportunities to buy prices that are low in the price cycle and below intrinsic value. Over the following several months or quarters, the price is likely to go lower. Where committed to a core holding, my philosophy is to build positions during periods of weakness. Bottom line: Any independent trader who participates in a market that the world’s most influential parties control, i.e., the central banks of the US, the UK, and Europe, must realize that who controls the money sets the rules. Gold is a special kind of money. Unlike sovereign fiat, Gold has no counter-party debt. It has been a valuable investment for thousands of years and will always be in the absence of political intervention. It is also a scarce commodity that has been a primary goal of invading armies throughout history. When investing in a developing Gold and Silver mine, the best word is patience when all is said and done. You buy on weakness and sell when the Company goes into production, and the narrative goes worldwide.

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CHAPTER 84

Precious Metal Royalty and Streaming Instruments Every mine is financed. It can be funded by debt or equity securities or by a business or financial agreement based on production. Equity is the conventional financing route, but mine financiers have recently created new opportunities. They buy royalties and streams based on future production. Once in a stable production state, a company can hedge future production by trading in the metals futures markets. Whenever a company needs capital for mine development or operations, there are benefits and risks to how they get it. This chapter focuses on the business models of mining financiers in the royalty and streaming business. Royalties and Streams in the mineral exploration and mining industries are specialized licensing agreements. They are not the traditional financing ones using stocks or bonds. These financing methods are licenses related to production. Mining companies are more likely to use this form of financing to avoid undue dilution when stock and bond prices are low.

Royalties Royalties give the Royalty Holder the right to receive a cash payment from the operator for a portion of the proceeds from selling minerals from production. The Royalty could apply to all or part of the mining property. Precious Metals Royalties may be payable on a single mineral, such as gold, or several minerals, e.g., gold, silver, and copper. It could extend to other minerals extracted from the property. The operator may sell royalties to generate early-stage revenue for the mine development. They are also used in structuring purchase-, option-, and joint venture transactions. If there is an outright sale of the mineral property, the prospector or owner may negotiate the retention of a Royalty in addition to receiving cash or shares of the acquiring corporation. Different types of Royalty Agreements apply to Oil & Gas transactions as well: a. Gross Overriding Royalty (GOR): A gross overriding Royalty is usually calculated as a percentage of the value of all ores mined and mineral products produced, without 369

BILL CARA / STOCK MARKET LITERACY

deducting production costs or costs to make the products marketable. The Gross Overriding Royalty is best applied to commodities sold with minimal processing. Gross Overriding Royalties for diamonds are calculated by multiplying the negotiated Royalty percentage by the appraised value of the diamonds at the mine site and are payable regardless of whether the mine is profitable. b. Net Smelter Returns (NSR) Royalty: A NSR is based on a percentage of the revenue from selling ore, concentrates, or other production after specified deductibles. Usually, the deductions are (1) transportation and insurance costs from the mine to a smelter, refinery, or mint, (2) smelter, refinery, or mint costs, and (3) value-added taxes. NSRs become payable when production begins and is based on the actual recovery of metal and not the metal content mined. So the NSR may be affected by the type of processing chosen (e.g., heap leach typically results in lower recovery of gold than conventional milling). Recovery of the metal may also be negatively affected if more than one mineral is extracted from ore in the milling process. c. Net Profits Interest (NPI) Royalty: The NPI is a percentage of the profits realized from operations minus operations costs after the operator recovers all exploration and development costs. Unlike the NSR, the holder of the NPI will not accrue payments at the start of commercial production since the operator is entitled to deduct all exploration and capital costs before earning a “profit.” NPI Royalties are challenging to calculate and can be subject to disputes.

Streaming Agreements A Streaming Agreement is an Offtake Agreement. As with Royalties, there is no “standard form” Streaming Agreement. But the main concepts of such agreements are standard. In a Streaming Transaction, the operator agrees to sell, and the Purchaser agrees to purchase all or a certain percentage of one or more minerals produced from a mining operation. The fixed price is below the market price and usually approximates the cost of producing and delivering the minerals purchased. Streaming Transactions are usually several decades long or a life of mine. Usually, the mineral sold under a Streaming Agreement is a by-product of the mining operation. In exchange for the right to buy the minerals, the Purchaser agrees to pay an up-front deposit or make a series of payments based on achieving certain milestones. These payments may be several million to over a billion dollars and can replace equity or debt financing. Royalty and Streaming Agreements contain so much legalize that all we should know are the key differences between a primary Streaming company and a primary Royalty company. There are often disputes with so many lawyers involved and different legal interpretations. Investors should adopt the principle that if there is smoke, there is likely fire. So with any hint of problems, avoid or sell the investment. With Streaming and Royalties, mine financiers do not have the operational risks of the miner. These are extensive and more so in some mining jurisdictions. Thus investors 370

Precious Metal Royalt y and Streaming Instruments

apply a higher PE multiple on the companies that finance mines. Franco-Nevada (FNV) and Wheaton Precious (WPM) are given a 30-multiple vs. a 20-multiple for the miners Newmont (NEM) and Barrick (GOLD). To study PM Royalty and Streams, we review the same Gold market Indices, ETFs, and companies. Fig. 84.1 Major Indexes for Gold-related investors Goldminers Indexes

Symbol

Gold & Silver Index - Philadelphia

$XAU

Gold Miners Index - NYSE Arca

$GDM

Gold Bugs Index - NYSE Arca

$HUI

Volatility Index - CBOE Gold

$GVZ

Gold Miners Advance-Decline Percent (EOD)

$GDXADP

Gold Miners Volume Advance-Decline Percent (EOD)

$GDXUDP

Fig. 84.2 Major ETFs for Precious Metals Miners Goldminer ETF Name

Ticker

Total Assets ($MM)

Avg Volume

VanEck Gold Miners ETF

GDX

15,797

26,874,960

VanEck Junior Gold Miners ETF

GDXJ

5,117

8,536,558

Fig. 84.3 Largest Precious Metals industry financiers

Precious Metals Royalty & Streaming Company

Ticker

Primary Industry

Market Cap ($Billion) Country

Franco-Nevada Corporation

FNV

Gold

39.36

Canada

Wheaton Precious Metals

WPM

Gold

22.35

Canada

Royal Gold, Inc.

RGLD

Gold

9.37

USA

Osisko Gold Royalties Ltd

Gold

2.83

Canada

I am unfamiliar with any Royalty and Streaming company that finances the production of a single mineral. Franco-Nevada’s Royalty and Streaming assets are 77% a mixture of Gold & Silver and 23% diversified in mostly Oil & Gas, Iron Ore, Platinum, and Palladium minerals. Bottom line: Most large royalty and streaming companies are well-managed financiers of commodities. These companies enable mining prospectors, developers, and operators to quickly access capital funds. The largest is Franco-Nevada and Wheaton Precious Metals, which have market caps in the $20 Billion to $40-plus Billion range. Many smaller firms compete for the business, some of which are also well-managed.

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CHAPTER 85

Investing in the Industrials and Transports Sector The Industrials Sector contains companies that manufacture and distribute capital goods or provide essential services to these companies. The Industrials Sector (GICS 20) companies manufacture and distribute capital goods. These include aerospace and defense, construction, engineering, building products, electrical equipment, and industrial machinery. Other companies provide commercial services and supplies, including printing, employment, environmental and office services, and companies that offer transportation services, including airlines, couriers, marine, road and rail, and transportation infrastructure. Most of the largest companies in each GICS sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. If there is no link, companies classified as such are trading Over the Counter or on a foreign exchange. Fig. 85.1 GICS Sector 20 8-digit Coding (Industrials and Transports) Sector 20 Industrials Industry Group 2010 Capital goods Industry 201010 Aerospace & Defense Sub-Industry 20101010 Aerospace & Defense Industry 201020 Building Products Sub-Industry 20102010 Building Products & Equipment Industry 201030 Construction & Engineering Sub-Industry 20103010 Construction & Engineering Industry 201040 Electrical Equipment Sub-Industry 20104010 Electrical Components & Equipment Sub-Industry 20104020 Heavy Electrical Equipment Sub-Industry 20104020 Light Electrical Equipment Industry 201050 Industrial Conglomerates Sub-Industry 20105010 Industrial Conglomerates 372

Investing in the Industrials and Transports Sector

Industry 201060 Machinery Sub-Industry 20106010 Construction Machinery & Heavy Trucks Sub-Industry 20106015 Agricultural & Farm Machinery Sub-Industry 20106020 Industrial Machinery Industry 201070 Trading Companies & Distributors Sub-Industry 20107010 Industrial Distributors Industry Group 2020 Commercial & Professional Services Industry 202010 Commercial Services & Supplies Sub-Industry 20201010 Commercial Printing Sub-Industry 20201050 Waste Management & Pollution Control Sub-Industry 20201060 Office Services & Supplies Sub-Industry 20201070 Diversified Support Services Sub-Industry 20201070 Rental and Leasing Services Sub-Industry 20201080 Protection Services Industry 202020 Professional Services Sub-Industry 20202010 Human Resource & Employment Services Sub-Industry 20202020 Research & Consulting Services Industry Group 2030 Transportation Industry 203010 Air Freight & Logistics Sub-Industry 20301010 Air Freight & Logistics Industry 203020 Airlines Sub-Industry 20302010 Airlines Industry 203030 Marine Sub-Industry 20303010 Marine Shipping Industry 203040 Road & Rail Sub-Industry 20304010 Railroads Sub-Industry 20304020 Trucking Industry 203050 Transportation Infrastructure Sub-Industry 20305010 Airport Services Sub-Industry 20305020 Highways & Railtracks Sub-Industry 20305030 Marine Ports & Services

For the Industrials Sector stock prices to increase, investors must have confidence in a healthy economy. A strong economy is shown in a 30-year and three-month US Treasury 373

BILL CARA / STOCK MARKET LITERACY

debt yield spread of 200 to 300 basis points (bp) in the “living” yield curve. That is not the case in September 2022. Investors who hold a portfolio over-weighted in Industrial sector stocks do not want to see a flat yield curve or inverted yield curve, which is the case presently. However, with inflation, the Producer Price Index (PPI) is high, and these manufacturers have “pricing power.” They are earning solid profits. Profits are what investors buy. This sector always does well when the US Congress gets into a ‘free-spending’ mode that also increases the defense budget. When the Fed tightens, banks reduce their loan exposure. The economy weakens, and the profits of industrial companies come under pressure. To assess the state of the US economy, investors need to study the Dow 20 Transports Average as well. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks. Fig. 85.2 GICS Sector 20 Industry and Sub-Industry Indexes (Industrials and Transports) Sector 20–Industrials & Transports Indexes

Symbol

Dow Jones US Aerospace Index

$DJUSAS

Dow Jones US Aerospace & Defense Index

$DJUSAE

Dow Jones US Airlines Index

$DJUSAR

Dow Jones US Aluminum Index

$DJUSAL

Dow Jones US Building Materials & Fixtures Index

$DJUSBD

Dow Jones US Commercial Vehicles & Trucks Index

$DJUSHR

Dow Jones US Construction & Materials Index

$DJUSCN

Dow Jones US Containers & Packaging Index

$DJUSCP

Dow Jones US Defense Index

$DJUSDN

Dow Jones US Delivery Services Index

$DJUSAF

Dow Jones US Diversified Industrials Index

$DJUSID

Dow Jones US General Industrials Index

$DJUSGI

Dow Jones US Heavy Construction Index

$DJUSHV

Dow Jones US Industrial Engineering Index

$DJUSIQ

Dow Jones US Industrial Goods & Services

$DJUSIG

Dow Jones US Industrial Machinery Index

$DJUSFE

Dow Jones US Industrial Metals Index

$DJUSIM

Dow Jones US Industrial Suppliers Index

$DJUSDS

Dow Jones US Industrial Transportation Index

$DJUSIT

Dow Jones US Industrials Index

$DJUSIN

374

Investing in the Industrials and Transports Sector

Dow Jones US Marine Transportation Index

$DJUSMT

Dow Jones US Railroad Index

$DJUSRR

Dow Jones US Select Aerospace & Defense Index

$DJSASD

Dow Jones US Transportation Services Index

$DJUSTS

Dow Jones US Trucking Index

$DJUSTK

Dow Jones US Construction & Materials Total Stock Market Index

$DWCCNS

Dow Jones US Industrial Goods & Services Total Stock Market Index

$DWCIGS

Dow Jones US Industrials Total Stock Market Index

$DWCIDU

Dow Jones Europe Industrials Index

$E1IDU

Dow Jones Sector Titans 30 Index - Construction & Materials

$DJTCNS

Dow Jones Sector Titans 30 Index - Indus. Goods & Services

$DJTIGS

Dow Jones Transportation Average

$TRAN

Dow Jones Transportation Average Total Return (EOD)

$DJTTR

Dow Jones World Industrials Index (EOD)

$W1IDU

Industrial Index – Nasdaq

$INDS

Industrial Index - NYSE Arca

$XID

Industrial Production Index

$$IPI

Industrial Select Sector - NYSE Arca

$IXI

Industrial Select Sector SPDR Advance-Decline Percent (EOD)

$XLIADP

Industrial Select Sector SPDR New Highs-New Lows Pct (EOD)

$XLIHLP

Industrial Select Sector SPDR Volume Advance-Decline Pct (EOD)

$XLIUDP

S&P Industrials Sector Bullish Percent Index

$BPINDY

S&P Industrials Sector Index

$SPI

S&P 500 Capital Goods Industry Group Index

$GSPIC

S&P 500 Transportation Industry Group Index

$GSPTRN

Airline Index - NYSE Arca

$XAL

Baltic Dry Index (EOD)

$BDI

The leading companies of the Industrial sector trade on the NYSE and Nasdaq and are US companies. These are Boeing (BA), Raytheon Technologies (RTX), Caterpillar (CAT), Honeywell (HON), Lockheed Martin (LMT), Deere (DE), 3M (MMM), and General Electric (GE). Because industrial goods are shipped from manufacturer to distributor and then to the user, the US rail and trucking companies are also stocks to watch when the economy is strong. UPS (UPS), Federal Express (FDX), Union Pacific (UNP), Canadian Pacific Rail (CP), and Canadian National (CN) are other crucial Industrial sector companies.

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BILL CARA / STOCK MARKET LITERACY

Fig. 85.3 Dow Jones Transports Average components are most of the critical US Transport companies Alaska Air Group

Airlines

ALK

American Airlines Group

Airlines

AAL

Avis Budget Group

rental & leasing service

CAR

C.H. Robinson Worldwide

Trucking

CHRW

CSX Corp

Railroads

CSX

Delta Air Lines

Airlines

DAL

Expeditors International

delivery services

EXPD

FedEx

delivery services

FDX

JB Hunt Transport

Trucking

JBHT

JetBlue Airways

Airlines

JBLU

Kansas City Southern

Railroads

KSU

Kirby

Marine transport

KEX

Landstar System

Trucking

LSTR

Matson

Marine transport

MATX

Norfolk Southern

Railroads

NSC

Ryder System

Transport services

Southwest Airlines

Airlines

LUV

Union Pacific

Railroads

UNP

United Continental Holdings

Airlines

UAL

United Parcel Service

delivery services

UPS

To track the Industrials sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Bottom line: Industrial sector companies represent the ‘Old Economy.’ These are the ones that made America the world’s leading economic and military nation. Americans built a ‘New Economy’ in the 1990s around Technology companies that offshored manufacturing to China and other countries in the Asia-Pacific region and to Mexico. Former President Donald Trump tried to onshore some of that manufacturing by changes in corporate taxes.

376

CHAPTER 86

Investing in the Consumer Discretionary Sector The Consumer Discretionary Sector is called Consumer Cyclical because its companies manufacture products that are non-essential to consumers and most desirable when personal incomes are high and extra spending money available. As we know, that is not always the case. The Consumer Discretionary Sector (GICS 25) includes industries that tend to be the most sensitive to economic Cycles. Manufacturers include automotive, household durable goods, textiles, apparel, and leisure equipment. Service companies include hotels, restaurants, leisure facilities, media production, and consumer retailing. Most of the largest companies in each GICS sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. If there is no link, companies classified as such trade Over the Counter (OTC) or on a foreign exchange. Economists say that the American consumer drives the global stock market, which is a bit of a stretch. The American consumer is becoming less of a factor. Today the growing middle-class consumers in emerging economy markets of China and India drive global economic cycles and capital markets. Consumer Discretionary is a sector that most people can relate to — it is about spending money. When consumers buy more goods than they need, inflation can occur. Inflation happens when consumers have more money available due to central bank monetary expansion policies and the commercial banks lending more. Fig. 86.1 GICS Sector 25 8-digit Coding (Consumer Discretionary) Sector 25 Consumer Discretionary Industry Group 2510 Automobiles & Components Industry 251010 Auto Components Sub-Industry 25101010 Auto Parts & Equipment Sub-Industry 25101020 Tires & Rubber Industry 252010 Automobiles Sub-Industry 25102010 Automobile Manufacturers Sub-Industry 25102020 Recreational Vehicles 377

BILL CARA / STOCK MARKET LITERACY

378

Investing in the Consumer Discretionary Sector

Industry 255040 Specialty Retail Sub-Industry 25504010 Apparel Retail Sub-Industry 25504020 Computer & Electronics Retail Sub-Industry 25504030 Home Improvement Retail Sub-Industry 25504040 Specialty Stores Sub-Industry 25504050 Auto & Truck Retail Sub-Industry 25504060 Home Furnishing Retail

The key stocks in this sector that trade on the NYSE and Nasdaq are Amazon (AMZN), Tesla (TSLA), Nike (NKE), Home Depot (HD), and McDonald’s (MCD). Disney (DIS) was once a leader in this sector, but GICS has reclassified it as a Communications sector (GICS 50) company. Because of its move into food and household consumables, Wal-Mart (WMT) can be either in the Consumer Discretionary sector or the Consumer Staples (non-discretionary spending) sector. To help you stay on top of this sector, I developed a list of Indexes as follows: Fig. 86.2 GICS Sector 25 Industry and Sub-Industry Indexes (Consumer Discretionary) Sector 25–Consumer Discretionary Indexes

Symbol

S&P Consumer Discretionary Sector Index

$SPCC

S&P Consumer Discretionary Bullish Percent Index

$BPDISC

S&P Retail Index

$RLX

S&P 500 Automobiles & Components Industry Group Index

$GSPAU

S&P 500 Consumer Durables & Apparel Industry Group Index

$GSPLP

S&P 500 Homebuilding Sub-Industry Index

$SPHB

S&P 500 Household & Personal Products Industry Group Index

$GSPHHPE

S&P 500 Retailing Industry Group Index

$GSPMS

S&P Case-Shiller National Home Price Index

$$HPI

Consumer Discretionary Select Sector SPDR Vol Advance-Decline Pct (EOD)

$XLYUDP

Consumer Discretionary Advance-Decline Percent (EOD)

$XLYADP

Consumer Discretionary New Highs-New Lows Percent (EOD)

$XLYHLP

Consumer Discretionary Select Sector - NYSE Arca

$IXY

Dow Jones Europe Consumer Goods Index

$E1NCY

Dow Jones Europe Consumer Services Index

$E1CYC

Dow Jones Sector Titans 30 Index - Automobiles & Parts

$DJTATO

Dow Jones Sector Titans 30 Index – Retail

$DJTRET

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BILL CARA / STOCK MARKET LITERACY

Dow Jones Sector Titans 30 Index - Travel & Leisure

$DJTCGS

Dow Jones US Automobiles & Parts Total Stock Market Index

$DWCAUP

Dow Jones US Consumer Goods Total Stock Market Index

$DWCCGS

Dow Jones US Consumer Services Total Stock Market Index

$DWCCSV

Dow Jones US Retail Total Stock Market Index

$DWCRTL

Dow Jones US Travel & Leisure Total Stock Market Index

$DWCTVL

Dow Jones US Apparel Retailers Index

$DJUSRA

Dow Jones US Auto Parts Index

$DJUSAT

Dow Jones US Automobiles & Parts Index

$DJUSAP

Dow Jones US Automobiles Index

$DJUSAU

Dow Jones US Broadline Retailers Index

$DJUSRB

Dow Jones US Clothing & Accessories Index

$DJUSCF

Dow Jones US Consumer Goods Index

$DJUSNC

Dow Jones US Consumer Services Index

$DJUSCY

Dow Jones US Footwear Index

$DJUSFT

Dow Jones US Furnishings Index

$DJUSFH

Dow Jones US Gambling Index

$DJUSCA

Dow Jones US General Retailers Index

$DJUSGT

Dow Jones US Home Construction Index

$DJUSHB

Dow Jones US Home Improvement Retailers Index

$DJUSHI

Dow Jones US Hotel & Lodging REITs Index

$DJUSHL

Dow Jones US Hotels Index

$DJUSLG

Dow Jones US Leisure Goods Index

$DJUSLE

Dow Jones US Personal & Household Goods Index

$DJUSNG

Dow Jones US Personal Goods Index

$DJUSPG

Dow Jones US Personal Products Index

$DJUSCM

Dow Jones US Recreational Products Index

$DJUSRP

Dow Jones US Recreational Services Index

$DJUSRQ

Dow Jones US Restaurants & Bars Index

$DJUSRU

Dow Jones US Retail Index

$DJUSRT

Dow Jones US Select Home Construction Index

$DJSHMB

Dow Jones US Specialty Retailers Index

$DJUSRS

Dow Jones US Toys Index

$DJUSTY

Dow Jones US Travel & Leisure Index

$DJUSCG

Dow Jones US Travel & Tourism Index

$DJUSTT

380

Investing in the Consumer Discretionary Sector

Dow Jones World Consumer Goods Index (EOD)

$W1NCY

Dow Jones World Consumer Services Index (EOD)

$W1CYC

Dynamic Building & Construction Intellidex Index

$DWC

Dynamic Hardware & Consumer Electronics Intellidex Index

$DZH

Dynamic Leisure & Entertainment Intellidex Index

$DZL

Dynamic Retail Intellidex Index

$DWR

Houses Sold - New One Family

$$HSNG1FAM

Housing Index – Philadelphia

$HGX

Housing Starts - New Privately Owned

$$HSNGSTARTS

Personal Consumption Expenditures

$$PCE

To track the Consumer Discretionary sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Bottom line: The consumer discretionary spending sector is cyclical. In a stable, well-balanced economy, there are good opportunities to increase personal wealth in the Consumer Cyclicals. There are brand names and interesting stock groups. When higher producer prices result in high revenues, margins, and earnings, investors buy more stocks in this sector. But inflation also puts pressure on the banks to tighten their policies, which leads to less money for consumers to spend, reversing the cycle. That is why the companies in this sector are called cyclical.

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CHAPTER 87

Investing in the Consumer Staples Sector The Consumer Staples Sector is called the Consumer Defensives because the companies manufacture products essential to everyday living. The Consumer Staples sector (GICS 30) is the defensive non-cyclical sector. These companies are less sensitive to economic cycles. They are manufacturers and distributors of food, beverages, and tobacco and produce non-durable household goods and personal products. Food and drug retailing companies, hypermarkets, and consumer super-centers are also included. Most large companies in each sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. Fig. 87.1 GICS Sector 30 8-digit Coding (Consumer Staples) as of 1Q2022 Sector 30 Consumer Staples Industry Group 3010 Food & Staples Retailing Industry 301010 Food & Staples Retailing Sub-Industry 30101010 Drug Retail Sub-Industry 30101020 Food Distributors Sub-Industry 30101030 Food Retail Sub-Industry 30101040 Hypermarkets & Supercenters Industry Group 3020 Food, Beverage & Tobacco Industry 302010 Beverages Sub-Industry 30201010 Brewers Sub-Industry 30201020 Distillers & Vintners Sub-Industry 30201030 Soft Drinks Industry 302020 Food Products Sub-Industry 30202010 Agricultural Farm Products Sub-Industry 30202030 Packaged Foods & Meats Industry 302030 Tobacco 382

Investing in the Consumer Staples Sector

Sub-Industry 30203010 Tobacco Industry Group 3030 Household & Personal Products Industry 303010 Household Products Sub-Industry 30301010 Household Products Industry 303020 Personal Products Sub-Industry 30302010 Personal Products

Dow 30 components Wal-Mart (WMT), Procter & Gamble (PG), and Coca-Cola (KO) are key stocks in this sector. Consumer Staples Sector stocks and Utilities and Financials stocks are favored early in a bull Market Cycle. That situation occurs when interest rates have fallen to deficient levels. But later in an economic Cycle, as interest rates rise, these stocks fall from favor, and Consumer Cyclicals are favored. With a flat or negative yield curve, “defensive” stocks outperform other sectors like Energy, Basic Materials, and Industrials. Cyclicals suffer in a “Stagflation” environment. Stagflation is a stagnant economy growing at 2% or less when inflation exceeds 2% year-over-year. When short-term rates rise, there is a point that high-dividend yielders no longer make sense. Short rates rise when the Fed tightens. Procter & Gamble (PG), Walmart (WMT), Coca-Cola (KO), PepsiCo (PEP), Costco (COST), Philip Morris (PM), all from the US, and Unilever (UL), Diageo (DEO), and British American Tobacco (BTI) from the UK, and Anheuser-Busch from Belgium are the key stocks. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks. Fig. 87.2 GICS Sector 30 Industry and Sub-Industry Indexes (Consumer Discretionary) Sector 30–Consumer Staples Indexes

Symbol

Consumer Staples Select Sector - NYSE Arca

$IXR

Consumer Staples Select Sector SPDR Advance-Decline Pct (EOD)

$XLPADP

Consumer Staples Select Sector SPDR New Highs-New Lows Pct (EOD)

$XLPHLP

Cons Staples Select Sector SPDR Volume Advance-Decline Pct (EOD)

$XLPUDP

Dow Jones Sector Titans 30 Index - Food & Beverages

$DJTFOB

Dow Jones Sector Titans 30 Index - Personal & Household Goods

$DJTNCG

Dow Jones US Food & Beverage Total Stock Market Index

$DWCFOB

Dow Jones US Personal & Household Goods Total Stock Market Index

$DWCPHG

Dow Jones US Beverages Index

$DJUSBV

Dow Jones US Brewers Index

$DJUSDB

Dow Jones US Distillers & Vintners Index

$DJUSVN

383

BILL CARA / STOCK MARKET LITERACY

Dow Jones US Durable Household Products Index

$DJUSHD

Dow Jones US Food & Beverage Index

$DJUSFB

Dow Jones US Food & Drug Retailers Index

$DJUSDR

Dow Jones US Food Producers Index

$DJUSFO

Dow Jones US Food Products Index

$DJUSFP

Dow Jones US Food Retailers & Wholesalers Index

$DJUSFD

Dow Jones US Nondurable Household Products Index

$DJUSHN

Dow Jones US Soft Drinks Index

$DJUSSD

Dow Jones US Tobacco Index

$DJUSTB

Dynamic Food & Beverage Intellidex Index

$DZF

S&P 500 Food & Staples Retailing Industry Group Index

$GSPFD

S&P 500 Food Beverage & Tobacco Industry Group Index

$GSPFBT

S&P Consumer Staples Sector Bullish Percent Index

$BPSTAP

S&P Consumer Staples Sector Index

$SPST

Tobacco Index - NYSE Arca

$TOB

To track Consumer Staples sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Bottom line: Consumers buy essentials first, and non-essentials with money left over if money is tight. Companies that produce essential products are likely to survive periods of economic weakness better. But during good economic times, they do not experience the higher revenues, margins, and earnings of the Consumer Cyclicals.

384

Investing in the Health Care Sector

CHAPTER 88

Investing in the Health Care Sector The companies in this sector provide health-related drugs, products, equipment, and services. As society becomes more sophisticated and older, there is a demand for a higher quality of life, which is the purpose of companies in this sector. In America, the Health Care Sector is now the largest market cap. The Healthcare Sector (GICS 35) encompasses two main industry groups: (1) healthcare equipment and supplies manufacturers and healthcare-related services providers and (2) companies involved in pharmaceutical and biotechnology research, development, production, and marketing. The first group includes distributors of healthcare products, providers of essential healthcare services, and owners and operators of healthcare facilities and organizations. Most of the largest companies in each GICS sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. Fig. 88.1 GICS Sector 35 8-digit Coding (Healthcare) as of 1Q2022 Sector 35 Health Care Industry Group 3510 Health Care Equipment & Services Industry 351010 Health Care Equipment & Supplies Sub-Industry 35101010 Health Care Equipment Sub-Industry 35101020 Health Care Supplies Industry 351020 Health Care Providers & Services Sub-Industry 35102010 Medical Distributors Sub-Industry 35102020 Health Care Facilities Sub-Industry 35102030 Managed Health Care Industry 351030 Health Care Technology Sub-Industry 35103010 Health Care Technology Industry Group 3520 Pharmaceuticals, Biotechnology & Life Sciences Industry 352010 Biotechnology

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Sub-Industry 35201010 Biotechnology Industry 352020 Pharmaceuticals Sub-Industry 35202010 Pharmaceuticals Industry 352030 Life Sciences Tools & Services Sub-Industry 35203010 Life Sciences Tools & Services

As prescription pharmaceuticals are broadly promoted to the public via television, some investors regard Healthcare as a third consumer sector. But Health Care is a corporate products and services sector with the largest lobby group in Washington, DC. As people age, their consumption of healthcare products and services grows. As people turn 55, they consume about 100% more drugs than when they turn 50. Today, the pharmaceutical industry is the largest in the world. So too, is the number of industry lobbyists in Washington. One of the reasons the pharmaceutical and biotechnology industry is so huge is that society across the world has become stressed out. People are the most drugged up in history. People today take so many pharmaceuticals; they rationalize the use or have forgotten the reason. There is a significant difference in trading stocks of Pharmaceutical versus Biotechnology companies. Biotechs are valued on intellectual property, which is intangible. Pharma valuations are based on fundamentals like Revenue, Earnings, Cash Flow, and Dividends. Biotech companies have little or no earnings or dividends. Their stock prices depend on speculation and the outcome of clinical trials of their product candidates. Two things always seem to come into play when the economy starts to look shaky: (1) government starts to ratchet up the work of regulators, and (2) civil lawsuits get popular. This is usually the “perfect storm” condition for attacking Healthcare companies, particularly pharmaceutical companies, and Consumer Staples companies like tobacco companies. Because the pharmaceutical industry lobby in the United States is the world’s most extensive, most key stocks in this sector are US-headquartered. These are Johnson & Johnson (JNJ), UnitedHealth Group (UNH), Eli Lilly (LLY), AbbVie (ABBV), Merck (MRK), Pfizer (PZE), Thermo Fisher (TMO), Abbott Laboratories (ABT). Other leaders are Novartis (NVS) from Switzerland, Novo Nordisk NVO) from Denmark, and AstraZeneca (AZN) from the UK. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks. Fig. 88.2 GICS Sector 35 Industry and Sub-Industry Indexes (Healthcare) Sector 35–Healthcare Indexes

Symbol

Healthcare Index – NYSE

$NYP

HealthCare Select Sector - NYSE Arca

$IXV

Health Care Index - NYSE Arca

$XHL

Health Care Select Sector SPDR Advance-Decline Pct (EOD)

$XLVADP

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Investing in the Health Care Sector

Health Care Select Sector SPDR New Highs-New Lows Pct (EOD)

$XLVHLP

Health Care Select Sector SPDR Volume Adv-Decline Pct (EOD)

$XLVUDP

Pharmaceutical Index - NYSE Arca

$DRG

Biotechnology Index – Nasdaq

$NBI

Biotechnology Index - NYSE Arca

$BTK

S&P US Health Care Total Stock Market Index

$HCX

S&P US Health Care Sector Bullish Percent Index

$BPHEAL

S&P 500 Healthcare Sector Index

$SPHC

S&P 500 Health Care Equip & Services Industry Grp Index

$GSPHC

S&P 500 Pharmaceutical & Biotechnology Industry Grp Index

$GSPPHB

Dow Jones Sector Titans 30 Index - Health Care

$DJTHCA

Dow Jones US Health Care Total Stock Market Index

$DWCHCR

Dow Jones US Biotechnology Index

$DJUSBT

Dow Jones US Drug Retailers Index

$DJUSRD

Dow Jones US Health Care Equipment & Services Index

$DJUSMC

Dow Jones US Health Care Index

$DJUSHC

Dow Jones US Health Care Providers Index

$DJUSHP

Dow Jones US Medical Equipment Index

$DJUSAM

Dow Jones US Medical Supplies Index

$DJUSMS

Dow Jones US Pharmaceuticals & Biotechnology Index

$DJUSPN

Dow Jones US Pharmaceuticals Index

$DJUSPR

Dow Jones US Select Medical Equipment Index

$DJSMDQ

Dow Jones US Select Pharmaceuticals Index

$DJSPHM

Dow Jones World Healthcare Index (EOD)

$W1HCR

Dow Jones Europe Health Care Index

$E1HCR

Dynamic Biotech & Genome Intellidex Index

$DZO

Dynamic Pharmaceutical Intellidex Index

$DZR

To track the Healthcare sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Pharmaceutical stocks are far less volatile than Biotech stocks. Using the FinViz.com screener on August 22, 2022, I filtered the data for the top 10 Pharma and top 10 Biotech. The Weekly and Monthly Volatility was 3.04% and 3.50% for the Biotech group and 1.53% and 1.85% for the Pharma group. Volatility makes a big difference in a Bull phase versus a Bear phase. For the same groups of ten stocks in the previous example, the 1-year performance was +7.88% for Pharma and

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-7.10% for Biotech. But for the last six months, the 10 Biotech averaged a gain of +14.38% versus a smaller +9.09% gain for the 10 Pharma. Then for the prior one-week performance, the Biotechs lost -4.07% versus an increase of +0.47%. This trading advice on Biotechs comes from my associate, an expert Biotech trader who blogs at billcara.com under the nickname baz22: “Be aware of (i) clinical stage, (ii) competition, and (iii) management. Any large move will usually retrace at least 50% from its top if it wasn’t Phase 3 results or an FDA decision. Even then, take profits. Your best profits will occur during clinical trials from the beginning of Phase 2a to 3a. The big, single momentum moves often happen around Phase 2b results.” I also learn from my associate blogger, who has traded this specialty for over 20 years. Bottom line: GICS Sector 35 provides opportunities for diverse types of investors. Investing is personal. Speculators follow the biotech industry in search of the next blockbuster drug. Entrepreneurs like discounted cash flow models of senior drug manufacturers. Conservative investors appreciate the business model of the drugstore retail chains and the drug wholesale distribution firms. It is always a matter of meeting needs and interests and of learning.

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CHAPTER 89

Investing in the Financial Sector The Financial Sector (GICS 40) includes the companies that deal in money. They create it, manage, and administrate it, trade it, and insure it from loss. These companies are agents for individuals and organizations that own assets that are money or convertible to money. Revenue from fees, interest payments, commissions, transaction charges, and trading profits amounted to $26 trillion globally in 2022. Revenue has grown at a 10% compound annual growth rate (CAGR). The global financial service market in 2026 should grow to $37.3 trillion. TheBusinessResearchCompany.com provided this data. The Financial Sector (GICS 40) contains diversified companies in commercial banks, mortgage banks, consumer finance, specialized finance, investment banks, stock brokerage, asset managers, asset custodians, corporate lenders, insurance, investment advisors, and portfolio managers. The largest companies in each sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. If there is no link, companies classified as such trade Over the Counter (OTC) or on a foreign exchange. Fig. 89.1 GICS Sector 40 8-digit Coding (Financial Services) as of 1Q2022 Sector 40 Financials Industry Group 4010 Banks Industry 401010 Banks Sub-Industry 40101010 International Banks Sub-Industry 40101015 Regional Banks Industry Group 4020 Diversified Financials Industry 401020 Thrifts & Mortgage Finance Sub-Industry 40102010 Thrifts & Mortgage Finance Industry 402010 Diversified Financial Services Sub-Industry 40201020 Other Diversified Financial Services Sub-Industry 40201030 Multi-Sector Holdings 389

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Sub-Industry 40201040 Specialized Finance Industry 402020 Consumer Finance Sub-Industry 40202010 Credit and Consumer Finance Industry 402030 Capital Markets Sub-Industry 40203010 Asset Management & Custody Banks Sub-Industry 40203020 Investment Banking & Brokerage Sub-Industry 40203030 Diversified Capital Markets Sub-Industry 40203040 Financial Exchanges & Data Industry 402040 Mortgages for Real Estate Sub-Industry 40204010 Mortgage Finance Services Sub-Industry 40204020 Mortgage REITs Industry Group 4030 Insurance Industry 403010 Insurance Sub-Industry 40301010 Insurance Brokers Sub-Industry 40301020 Life & Health Insurance Sub-Industry 40301030 Multi-line Insurance Sub-Industry 40301040 Property & Casualty Insurance Sub-Industry 40301050 Reinsurance

In 2016, the GICS moved real estate companies and funds, including REITs, from Sector 40 to Sector 60. A meaningful discussion on banking and finance involves economic growth and Money Supply. There are three types of Money Supply: M1, M2, and M3. M1 is a pretty standard definition of the money supply. M1 includes hard currency in circulation, plus checking accounts, traveler’s checks, and certain other checkable deposits. Checking accounts, aka demand deposits, are money held in a bank and out of circulation. But owners can retrieve it from the bank upon demand. M2 includes M1, plus savings deposits and CDs. Savings deposits and CDs are less liquid than checking accounts but can be converted quickly to cash. M3 includes M2 plus larger deposits and money market deposits. Some economists believe that the Quantity of Money alone creates inflation. That central banks cause and can manage inflation by increasing and reducing the money supply is a misconception. A central bank manages the size of the money supply, but commercial banks create the money. They extend loans to customers based on the Money Multiplier formula.

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Investing in the Financial Sector

A central bank cannot make a commercial bank lend or stop lending money to its customers. They only have policies that can influence those decisions. Even if Money Supply remains flat, inflation in an economy can rise or fall based on the Velocity of Money. Velocity is the rate money is spent by businesses and consumers and exchanged by investors and traders resulting from margin loans. The list of 21 banks that follows is the largest banks in the western world. I like to compare the results of the key money center bank group in the Dow 30 Industrials Average. Dow 30 components JP Morgan (JPM), Goldman Sachs (GS), Visa Inc (V), American Express (AXP), and the Travelers Companies (TRV) are the leading stocks in the Finance sector. Other vital banks are Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) in the United States; and foreign banks HSBC (HSBC), UBS (UBS), Credit Suisse (CS), Lloyds Banking (LYG), Barclays (BCS), Royal Bank of Scotland (LON: RBS), Standard Chartered (LON: STAN), and BNP Paribas (EPA: BNP). In 4Q2022, Credit Suisse (CS) appears to be financially troubled. The five largest banks in Canada are also key international banks: Toronto-Dominion (TD), Royal Bank of Canada (RY), Bank of Nova Scotia (BNS), Bank of Montreal (BMO), and the Canadian Imperial Bank of Commerce (CM). Policies that help the large-cap US banks also aid the mid-cap banks. The FinViz.com link to regional banks includes a list of US-traded foreign banks, savings and loan banks, and regional banks. The Financial sector includes the insurance industry group, including American International Group (AIG). AIG came under regulatory investigation with criminal charges laid against its senior executives in 4Q2004 but survived and is an essential player in US financial services. Sub-Industry 40204020 Real Estate Mortgage REITs did not move from GICS Sector 40 to Real Estate Sector 60 in 2016 because these are mortgage lender financial services companies. There are financial service ETFs that warrant in-depth research. The most popular is the XLF Select Sector SPDR-Financial. As an ETF contains the good and the bad, it makes sense for sophisticated investors to buy the ETF and hedge (i.e., short) the XLF’s worst component issues. Whenever economic factors converge to create a rising interest rate situation in the US, it is inappropriate to overweight or even market-weight Sector 40 stocks. The banking industry and sub-industry stocks are directly interest-sensitive. Whenever bank customers become overloaded with debt, there is a limit to the revenue growth of the banks. Moreover, as interest rates rise, so too do the bad debts of banks and the narrowing margins on their loans. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks.

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Fig. 89.2 GICS Sector 40 Industry and Sub-Industry Indexes (Financial Services) Sector 40–Financial Indexes (non-specific Bank or Insurance)

Symbol

S&P 500 Financials Sector Index

$SPF

S&P Financial Sector Bullish Percent Index

$BPFINA

S&P 500 Diversified Financials Industry Group Index

$GSPDF

Financial 100 Index – Nasdaq

$IXF

Other Finance Index – Nasdaq

$OFIN

Financial Index – NYSE

$NYK

Financial Index - NYSE Arca

$XFI

Financial Select Sector - NYSE Arca

$IXM

Financial Select Sector SPDR Advance-Decline Percent (EOD)

$XLFADP

Financial Select Sector SPDR New Highs-Lows Percent (EOD)

$XLFHLP

Financial Select Sector SPDR Volume Advance-Decline Pct (EOD)

$XLFUDP

NASDAQ Capital Market Composite Index

$RCMP

Dow Jones Sector Titans 30 Index – Banks

$DJTBAK

Dow Jones Sector Titans 30 Index - Financial Services

$DJTFVS

Dow Jones US Financial Services Total Stock Market Index

$DWCFSV

Dow Jones US Financials Total Stock Market Index

$DWCFIN

Dow Jones US Financial Administration Index

$DJUSFA

Dow Jones US Financial Services Composite Index

$DJUSFV

Dow Jones US Financial Services Index

$DJUSFI

Dow Jones US Financials Index

$DJUSFN

Dow Jones US General Financial Index

$DJUSGF

Dow Jones US Consumer Finance Index

$DJUSSF

Dow Jones US Investment Services

$DJUSSB

Dow Jones US Mortgage Finance Index

$DJUSMF

Dow Jones US Mortgage REITs Index

$DJUSMR

Dow Jones US Select Investment Services Index

$DJSINV

Dow Jones US Asset Managers Index

$DJUSAG

Dow Jones US Specialty Finance Index

$DJUSSP

Dow Jones World Financials Index (EOD)

$W1FIN

Fig. 89.3 GICS Sector 40 Industry and Sub-Industry Indexes (Banks) Sector 40–Financial Indexes (specific to Banks)

Symbol

Bank Index – Nasdaq

$BANK

Dow Jones US Banks Total Stock Market Index

$DWCBNK

Dow Jones US Banks Index

$DJUSBK

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Investing in the Financial Sector

Dow Jones US Select Regional Banks Index

$DJSRBK

KBW Bank Index

$BKX

KBW Regional Banking Index – Philadelphia

$KRX

S&P 500 Banks Industry Group Index

$GSPBK

S&P Bank Index

$BIX

Fig. 89.4 GICS Sector 40 Industry and Sub-Industry Indexes (Insurance Companies) Sector 40–Financial Indexes (specific to Insurance)

Symbol

Insurance Index – Nasdaq

$INSR

KBW Insurance Index – Philadelphia

$KIX

S&P Insurance Index

$IUX

S&P 500 Property & Casualty Insurance Sub-Industry Index

$SPINPC

Dow Jones Sector Titans 30 Index – Insurance

$DJTINN

Dow Jones US Insurance Total Stock Market Index

$DWCINS

Dow Jones US Full Line Insurance Index

$DJUSIF

Dow Jones US Insurance Brokers Index

$DJUSIB

Dow Jones US Insurance Index

$DJUSIR

Dow Jones US Life Insurance Index

$DJUSIL

Dow Jones US Nonlife Insurance Index

$DJUSIX

Dow Jones US Property & Casualty Insurance Index

$DJUSIP

Dow Jones US Reinsurance Index

$DJUSIU

Dow Jones US Select Insurance Index

$DJSINS

Dynamic Insurance Intellidex Index

$DWJ

Fig. 89.5 Money and Money Supply indexes. Sector 40–Financial Indexes (non-specific Bank or Insurance)

Symbol

London Interbank Offered Rate - 1 month (NBD)

$LIBOR

London Interbank Offered Rate - 3 month (NBD)

$LIBOR3

M1 Money Supply

$$M1

M2 Money Supply

$$M2

To track the Financial sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Central banks control Money Supply in various ways. Federal Reserve Open Market Operations, either by permanent or temporary policy actions, is an effective tool. If the Fed wants to expand the banks’ cash holdings, it buys some of the banks’ holdings of Treasury

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securities. The Fed sends cash, and the added cash held by the banks is available to create more customer loans. More loans mean more business and income for the banks. The Fed can do the same by increasing the bank’s reserve requirements which adjusts the funds a bank can lend. This process is called the Deposit Multiplier. Commercial banks use the Fractional Reserve Banking System to lend multiples of the added cash via the Money Multiplier formula. There are differences between Deposit Multiplier and Money Multiplier terms and Open Market Operations, which can get confusing. The key is to understand how the central bank creates money. A central bank’s policy affects a commercial bank’s ability to manage its loan base, which impacts its revenue and earnings.

Criticism of the Banking Industry I have long argued in formal hearings and discussions that Financial Services companies have an unfair advantage. They trade against the clients they serve as agents and fiduciaries. That is a blatant conflict of interest. No other industry in the world can do anything of the sort. Can you imagine a sporting match where the referees and linesmen are also players? They can score points or goals as well as call penalties and offsides. That is the power of the Financial Services industry lobby. No amount of regulation, self-regulation, or billions of dollars in fines has prevented massive losses from Financial Services cheating. This grievance will always be the case if banks create the money, manage the rules, intervene in markets, and participate in the transactions as principals. Egregious self-dealing behavior by bankers resulting in fraud will never stop. In any case, it is the law, and investors and traders must abide by it. If it were not for the power of the bank lobby in Washington, DC, this issue could be resolved or, at the least, more easily controlled. The 1933 Securities Act and 1934 Securities Exchange Act are 90 years old and unable to cope. Modern society uses digital technology and electronic systems. Frauds now happen in micro-seconds, but the biggest problem is banks’ unfair advantage over the customers they serve. In my opinion, the Securities Acts are antiquated. You cannot go into a store anywhere and buy something made in 1933, not called an antique. Congress needs to replace these Acts with a system that first serves the owners of capital. When it comes to money, it’s time that principals are treated more importantly than agents. Bottom line: A healthy economy needs access to money through customer dealings with commercial banks. Investors and traders rely on the integrity of banks and are, for the most part, justified in doing so. However, these Financial Services companies have an unfair advantage that often results in egregious behavior and many fraud cases.

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Investing in the Information Technology Sector The Technology Sector is a sizable sector dominated by American companies. When you looked at it 40 years ago, it was all about IBM. Today, a ‘Big Six’ dominates, and IBM is the smallest of the six. The Information Technology Sector (GICS 45) covers the following areas: 1. Technology software and services, including companies that primarily develop software in various fields (such as the Internet, enterprise systems, database management, or home entertainment), and applications, and companies that provide related information technology consulting and services, as well as data processing and outsourced services 2. Technology hardware and equipment manufacturers, including manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment, and instruments, and 3. Semiconductor and semiconductor equipment manufacturers. There are multiple industry groups and sub-groups in the Technology Sector. They are listed separately by GICS code and well covered at Finance.Yahoo.com. Most people are aware that Apple and Microsoft are the dominant players. Most of the largest companies in each GICS sub-industry listed on the NYSE or Nasdaq exchanges are linked in the table below. Fig. 90.1 GICS Sector 45 8-digit Coding (Technology) as of 1Q2022 Sector 45 Information Technology Industry Group 4510 Software & Services Industry 451020 IT Services Sub-Industry 45102010 IT Consulting & Other Services Sub-Industry 45102020 Data Processing & Outsourced Services Sub-Industry 45102030 Internet Services & Infrastructure Software Sub-Industry 451020340 Internet Content & Information Industry 451030 Software

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Sub-Industry 45103010 Application Software Sub-Industry 45103020 Systems Software Industry Group 4520 Technology Hardware & Equipment Industry 452010 Communications Equipment Sub-Industry 45201020 Communications Equipment Industry 452020 Technology Hardware, Storage & Peripherals Sub-Industry 45202030 Technology Hardware, Storage & Peripherals Industry 452030 Electronic Equipment, Instruments & Components Sub-Industry 45203010 Electronic Equipment & Instruments Sub-Industry 45203015 Electronic Components Sub-Industry 45203020 Electronic Manufacturing Services Sub-Industry 45203030 Technology Distributors Industry Group 4530 Semiconductors & Semiconductor Equipment Industry 453010 Semiconductors & Semiconductor Equipment Sub-Industry 45301010 Semiconductor Equipment & Materials Sub-Industry 45301020 Semiconductors

Today there are five Dow 30 components, of which two dominate the global Information Technology Sector. Apple ($2.2T), Microsoft ($1.9TB), Cisco ($182B), IBM ($123B), and Intel ($158B) [market caps taken in July 2022] are the Big Five in the Dow 30. These companies comprise about 50% of the mega-trillion-dollar Information Technology Sector, but massive changes have occurred. Apple and Microsoft have gained immense size in recent years, while Cisco and Intel have barely grown, and IBM has become smaller. Other American companies like NVIDIA ($416B), Broadcom ($215B), Adobe ($190B), Oracle ($176B), Salesforce ($173B), QUALCOMM ($148B), Advanced Micro Devices ($147B), and Texas Instruments ($145B) have joined the most prominent tech group. Technology is a vast sector, and there are always good stocks to hold long. But unless there is an evident strength in the global economy — in terms of real wealth created — and a softening of interest rates in the short end, investors are cautioned not to venture blindly into this sector. In a Bear phase of the broad market, “not bad” does not cut it for high-beta, high-PE stocks. Often, unless a company can report for the quarter (1) better than excellent results and (2) higher guidance, the stock is likely to suffer a setback. But after a big sell-off in a sector, investors should look for stock prices that do not fall following a poor-to-average performance report and guidance.

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Investing in the InformationTechnology Sector

Some investors believe it is best to look to the Technology Sector for Growth Stocks in the Tiny-, Small- and Mid-Cap range and Value Stock opportunities in the Mid-Cap range. They use Large-Cap stocks, Indices, and ETFs for study purposes. Other investors will hold only Apple, Microsoft, and one or two others because the most prominent tech giants have well-diversified global business operations. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks. Fig. 90.2 GICS Sector 45 Industry and Sub-Industry Indexes (Technology) Sector 45–Technology Indexes

Symbol

Dow Jones US Computer Hardware Index

$DJUSCR

Dow Jones US Computer Services Index

$DJUSDV

Dow Jones US Electronic & Electrical Equipment Index

$DJUSEE

Dow Jones US Electronic Equipment Index

$DJUSAI

Dow Jones US Internet Index

$DJUSNS

Dow Jones US Semiconductors Index

$DJUSSC

Dow Jones US Software & Computer Services Index

$DJUSSV

Dow Jones US Software Index

$DJUSSW

Dow Jones US Technology Total Stock Market Index

$DWCTEC

Dow Jones Europe Technology Index

$E1TEC

Dow Jones Internet Commerce Index

$DJECOM

Dow Jones Internet Service Index

$DJISVC

Dow Jones Sector Titans 30 Index – Technology

$DJTTHE

Dow Jones US Technology Hardware & Equipment Index

$DJUSTQ

Dow Jones US Technology Index

$DJUSTC

Dow Jones World Technology Index (EOD)

$W1TEC

S&P 500 Information Technology Sector Index

$SPT

S&P 500 Semiconductor & Equip Industry Group Index

$GSPSE

S&P 500 Tech Hardware & Equip Industry Group Index

$GSPTEHW

S&P 500 Software & Services Industry Group Index

$GSPIS

Dynamic Semiconductor Intellidex Index

$DZE

Dynamic Software Intellidex Index

$DZC

Information Technology Index - NYSE Arca

$XIT

Combined-Computer Index – Nasdaq

$IXCO

The current snapshot data from Investing.com will appear by clicking on the name link. By clicking on the ticker symbol link, the StockCharts.com chart will appear. The Technology Select Sector SPDR Fund (XLK) is the largest ETF in the Technology sector. During 1H2022, XLK suffered enormous losses. 397

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Fig. 90.3 Biggest holdings of the XLK ETF Sector 40–Technology XLK Holding

XLK % Assets

Market Cap ($Billion) PE

Ticker

Apple Inc.

Consumer 23.22% Electronics

2809

28.2

AAPL

Microsoft Corporation

Software – 22.17% Infrastructure

2259

31.6

MSFT

NVIDIA Corporation

4.14%

Semiconductors

608

60.1

NVDA

Visa Inc.

3.74%

Credit Services

453

43.1

Mastercard Incorporated

3.14%

Credit Services

342

40.2

Broadcom Inc.

2.56%

Semiconductors

246

33.4

AVGO

Cisco Systems, Inc.

2.36%

Communication Equipment

227

19.4

CSCO

Accenture plc

2.21%

Information Tech Services

226

34.2

ACN

Adobe Inc.

2.16%

Software Infrastructure

214

44.2

ADBE

salesforce.com, inc.

2.04%

Software Application

198

131.4

CRM

Intel Corporation

1.99%

Semiconductors

194

9.7

INTC

Advanced Micro Devices, Inc.

1.74%

Semiconductors

168

39.2

AMD

Texas Instruments Incorporated

1.68%

Semiconductors

164

21.1

TXN

QUALCOMM Incorporated

1.62%

Semiconductors

157

15.7

QCOM

Intuit Inc.

1.43%

Software Application

140

61.6

INTU

Avg Volume

Ticker

Industry

Fig. 90.4 Most popular Technology ETFs

Sector 45–Technology ETF Name

Industry

Total Assets ($MM)

Invesco QQQ Trust

Broad Technology

192,241

81,433,168

QQQ

Vanguard Information Technology ETF

Broad Technology

48,985

977,051

VGT

Technology Select Sector SPDR Fund

Broad Technology

46,112

14,098,417

XLK

ARK Innovation ETF

Broad Technology

11,384

25,849,696

ARKK

iShares US Technology ETF

Broad Technology

8,366

728,256

IYW

iShares Semiconductor ETF

Semiconductors

8,296

1,828,770

SOXX

VanEck Semiconductor ETF

Semiconductors

7,863

8,165,384

SMH

6,857

494,532

FDN

First Trust Dow Jones Internet Index Fund Internet

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Investing in the InformationTechnology Sector

KraneShares CSI China Internet ETF

Internet

6,488

23,155,906

KWEB

First Trust NASDAQ Cybersecurity ETF

Internet Architecture 6,359

1,424,508

CIBR

Fidelity MSCI Information Technology Index ETF

Broad Technology

6,348

390,805

FTEC

iShares Expanded Tech-Software Sector ETF

Software

5,201

1,694,287

IGV

First Trust Cloud Computing ETF

Software

5,165

623,117

SKYY

iShares Global Tech ETF

Broad Technology

4,873

561,987

IXN

iShares Expanded Tech Sector ETF

Broad Technology

4,345

88,971

IGM

iShares Exponential Technologies ETF

Broad Technology

3,661

260,697

First Trust NASDAQ-100 Tech Sector Index Fund

Broad Technology

2,401

323,017

QTEC

ARK Next Generation Internet ETF

Internet

2,285

1,509,925

ARKW

To track the Technology sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Bottom line: The global Information Technology sector is enormous and based on dominant American companies. The sector changes continuously and rapidly. The giant companies, Apple and Microsoft, will keep increasing revenue as they deliver products and services that meet global demand. The Technology Sector market prices rise and fall primarily because of market sentiment changes resulting in PE expansion and contraction. US government concerns about production and services offshoring for cheap labor and tax avoidance reasons are under review in Congress.

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Investing in the Communication Services Sector We live in a digital world where wireless communications long ago became the leading segment of the telecommunications sector. Fixed-line communications are much less significant. In recent years, GICS extended this sector from the companies that used to carry the content to include those that are the content. Telecommunications became the broader Communications. Sector services expanded from the telecom carriers into various information and social media services like Alphabet (Google) and Meta Platforms (Facebook), which are now the biggest companies in the Communications sector. Disney (DIS) is another large company that GICS recently re-classified in the Communications sector. The GICS committee initially based the Communication Services Sector (GICS 50) on companies that provided communications services primarily through a fixed line. Then cellular, wireless, high-bandwidth, or fiber-optic cable network services dominated. Then the sector expanded to include the Media and Entertainment Industry Group. The transformation has been remarkable. Most of the largest companies in each GICS sub-industry trade on NYSE or Nasdaq exchanges and are linked in the table below. Fig. 91.1 GICS Sector 50 8-digit Coding (Communications and Media) as of 1Q2022 Sector 50 Communication Services Industry Group 5010 Telecommunication Services Industry 501010 Diversified Telecommunication Services Sub-Industry 50101010 Alternative Telecom Carriers Sub-Industry 50101020 Integrated North American Telecom Services Sub-Industry 50101025 Integrated International Telecom Services Industry 501020 Wireless Telecommunication Services

400

Investing in the Communication Services Sector

Sub-Industry 50102010 Wireless Telecommunication Services Industry Group 5020 Media & Entertainment Industry 502010 Media Sub-Industry 50201010 Advertising Sub-Industry 50201020 Broadcasting Sub-Industry 50201030 Cable & Satellite Sub-Industry 50201040 Publishing Industry 502020 Entertainment Sub-Industry 50202010 Movies & Entertainment Sub-Industry 50202020 Interactive Home Entertainment Industry 502030 Interactive Media & Services Sub-Industry 50203010 Interactive Media & Services

The computer sector and the telecommunications sector were merging into one Technology sector. So, the GICS committee decided to differentiate the Technology and Communications sectors by type of products and services. While not altogether true, products and services with the moniker B2B (business to business) were kept in Sector 45 (Technology), and those in B2C (business to customer) were put into Sector 50 (Communications). The legacy key stocks in the Communication Services Sector are Dow 30 components Verizon (VZ) and AT&T (T). The Dow 30 Index dropped AT&T. Both companies have undergone radical reorganizations and restructuring in recent years. They competed with cable operators by replacing fixed-line services with wireless services. Verizon is winning that war. There are a few well-managed Telecom Services companies around the world. Many are in the fast-growing mobile phone market of emerging economies such as China and Russia. China Telecom (CHA) and China Mobile (CHL), Russia’s Mobile TeleSystems (MBT), and Vimpel-Communications (VIP) have shown steady growth. The Russian invasion of Ukraine has put a crimp on that growth. Reuters provides a Telephone and Communications Services Industry report (http:// reuters.com). As the Telecommunications sector changed over the past 15 years, company winners and losers became evident in the stock market. The 2000-2003 bear market was particularly devastating to the Sector, which had no market recovery like the other sectors. Following that Bear market, a new long-term bull phase of this sector did not start until late 2005, and the sector was hard hit again in 2008. The first half of 2022 has also been difficult. Bull markets bring higher interest rates. These companies are primarily capital-intensive, interest-sensitive (at least, the old fixed-line group is), whose stocks tend to rise and fall with interest rates. These stocks track more with the Financial Sector than the Technology sector. 401

BILL CARA / STOCK MARKET LITERACY

Bear markets do bring opportunities. The Sector is now as much about computers and Cloud Networks as it is about telephones. Today, millions of entrepreneurs in Tiny- and Small-cap companies package well-designed solutions to customer needs. Any one of them might become the next Alphabet. Google grew from its start-up in September 1998 to the world’s third-biggest company with a market capitalization exceeding $2 Trillion in 2Q2022. Today belongs to Wireless as Smart mobile phones are ubiquitous, including in every nook and cranny of the developing world. As the Wireless sub-industry group has been maturing, high-speed wireless voice and data communications ushered in the era of streaming and Internet Protocol TV. Traditional broadcast TV is losing market share. Because of Internet Protocol applications, the entire world now watches real-time films of military engagements in the Russia-Ukraine war. Who would have thought that Apple’s creator Steve Jobs was making film producers out of combat soldiers in the trenches and fields of Ukraine? The event is captured and uploaded seconds after a missile explodes in a crowded civilian railway station or shopping mall. And the world is watching. The Elon Musk company SpaceX has aided such a development. From 2019 to July 2022, SpaceX put 2,600+ small satellites in low Earth orbit (LEO) to communicate with designated ground transceivers. As of May 2022, the global Starlink service provided internet access to over 400,000 subscribers. I developed a list of Indexes to help you stay on top of this sector. Also, look at lists for ETFs and prominent stocks. Fig. 91.2 GICS Sector 50 Industry and Sub-Industry Indexes (Communications and Media) Sector 50—Telecom

Ticker

Dow Jones US Fixed Line Telecommunications Index

$DJUSFC

Dow Jones US Mobile Telecommunications Index

$DJUSWC

Dow Jones US Telecommunications Equipment Index

$DJUSCT

Dow Jones US Telecommunications Index

$DJUSTL

Dow Jones Europe Telecommunications Index

$E1TLS

Dow Jones Sector Titans 30 Index - Telecommunications

$DJTTEL

Dow Jones World Telecommunications Index (EOD)

$W1TLS

Dynamic Telecommunications & Wireless Intellidex Index

$DWY

S&P Telecom Services Sector Bullish Percent Index

$BPTELE

SPDR S&P Telecom Advance-Decline Percent (EOD)

$XTLADP

SPDR S&P Telecom New Highs-New Lows Percent (EOD)

$XTLHLP

SPDR S&P Telecom Volume Advance-Decline Percent (EOD)

$XTLUDP

Telecommunications Index – Nasdaq

$IXTC

By clicking on the name link in Fig. 90.1, the current summary data from Investing.com will appear. 402

Investing in the Communication Services Sector

By clicking on the ticker symbol link, the current StockCharts.com chart will appear. The following illustration lists ten large-cap Telecom stocks that trade in New York. The current snapshot data from FinViz.com will appear by clicking on the name. And by clicking on the NYSE ticker symbol, the current Analyst Ratings and Price Targets (PTs) from MarketBeat.com will appear. To track the Communication Services sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. This table gives an overview picture of each company. Fig. 91.3 Snapshot tab of the largest Telecom companies that trade in New York Company

Country

Market Cap ($Billion) Ticker

Verizon Communications Inc.

USA

10.07

221.21

AT&T Inc.

USA

8.73

169.50

America Movil, S.A.B. de C.V.

Mexico

20.16

70.13

AMX

BCE Inc.

Canada

24.53

52.73

BCE

The Liberty SiriusXM Group

USA

25.06

32.07

LSXMA

Orange S.A.

France

2398

31.42

ORAN

Persero PT Telekom Indonesia

Indonesia

19.37

31.32

TLK

Telefonica, S.A.

Spain

3.25

28.60

TEF

Telefonica Brasil S.A.

Brazil

14.53

19.25

VIV

Lumen Technologies, Inc.

USA

5.96

11.67

LUMN

Fig. 91.4 List of large-cap Communications sector company ETFs that trade in New York ETF Name

Total Assets ($MM)

Avg Volume

Ticker

Vanguard Communication Services ETF

$3,743.6

282,703

VOX

First Trust Indxx NextG ETF

$919.8

58,765

NXTG

Fidelity MSCI Communication Services Index ETF

$712.6

114,575

FCOM

iShares US Telecommunications ETF

$500.5

885,027

IYZ

iShares Global Comm Services ETF

$233.9

82,051

IXP

The current snapshot data ETFDB.com will appear by clicking on the name link. And by clicking on the ticker symbol link, the StockCharts.com chart will appear. Bottom Line: Digital technologies have enabled telecommunication carriers that carry customers’ traffic to expand into principal content owners. Companies like Alphabet (Google) and Meta Platforms (Facebook) are now included in this sector and are the two largest cap companies.

403

CHAPTER 92

Investing in the Utilities Sector Utilities are private, for-profit industrial companies that are part of a country’s essential public service infrastructure. Because the US has only about 4.25% of the total world population, and Utilities are regulated locally, the US Utility companies are much less prominent in the global industry but reflect the state of the US regional and national economy. Utility company stock dividends and bond interest payments are excellent sources of income. These companies use heavy debt financing, so when interest rates fluctuate in the extreme, net income often drops substantially. Dividends may be reduced or cut. So income investors are cautioned. The Utilities Sector (GICS 55) includes electric, gas, and water companies. Some are regulated, and some are independent producers and distributors of power. This sector consists of both nuclear and non-nuclear facilities. Investors treat utilities as long-term holdings with regular dividends used for Income. Utility Sector companies produce and deliver gas, electric power, or water on long-term contracts. As the economy grows, the customers demand more. As revenues increase, earnings and dividends also usually increase. The stock prices rise as a result. Politicians are now pushing for ‘clean’ energy, which includes nuclear power and the need for uranium. Fig. 92.1 GICS Sector 55 Utilities Industry Groups (Global Industry Classification Standard (GICS) 1. Electric (both nuclear and non-nuclear)(55101010), 2. Gas Producers and Distributors (55102010), 3. Diversified (55103010), 4. Water (55104010), 5. Independent Power Producers and Energy Traders (55105010), and 6. Renewable Electricity Producers (55105020).

404

Investing in the Utilities Sector

Investors like safe and reliable income from dividends. Investors can find attractive opportunities in the Dow Jones Utility Average companies. Check the 15 components of the S&P SPDRS (Amex: XLU) or the HOLDRS (Amex: UTH). Then look for the highestrated companies that pay the highest dividend yields. Most of the largest companies in each GICS sub-industry traded on the NYSE or Nasdaq exchanges are linked in the table below. Fig. 92.2 GICS Sector 55 8-digit Coding (Utilities) as of 1Q2022 Sector 55 Utilities Industry Group 5510 Utilities Industry 551010 Electric Utilities Sub-Industry 55101010 Electric Utilities Industry 551020 Gas Utilities Sub-Industry 55102010 Gas Utilities Industry 551030 Multi-Utilities Sub-Industry 55103010 Multi-Utilities Industry 551040 Water Utilities Sub-Industry 55104010 Water Utilities Industry 551050 Independent Power & Renewable Electricity Producers Sub-Industry 55105010 Independent Renewable Electricity Sub-Industry 55105020 Independent Non-Renewable Electricity

I developed a list of Indexes to help you stay on top of this sector. Fig. 92.3 GICS Sector 55 Industry and Sub-Industry Indexes (Utilities) Sector 55–Utility Sector Indexes

Symbol

Dow Jones US Utilities Index

$DJUSUT

Dow Jones US Conventional Electricity Index

$DJUSVE

Dow Jones US Electricity Index

$DJUSEU

Dow Jones US Multiutilities Index

$DJUSMU

Dow Jones US Gas, Water & Multiutilities Index

$DJUSUO

Dow Jones US Water Index

$DJUSWU

Dow Jones US Pipelines Index

$DJUSPL

Utility Index - Philadelphia

$UTY

Dow Jones Sector Titans 30 Index - Utilities

$DJTUTS

Dow Jones World Utilities Index (EOD)

$W1UTI

405

BILL CARA / STOCK MARKET LITERACY

As with all securities, there is an element of cyclicality in the Utilities Sector. It would be best if you tried to add to your positions when the market is down, which results in a higher-than-average dividend yield. To assess the quality of Utility sector companies, check Moody’s or S&P’s credit-rating changes. The Sell-side is unlikely to disclose credit issues. Sell them on S&P’s or Moody’s rating downgrades. When the economy is in recession or slowdown mode, utilities’ profits get squeezed. So, the best time to buy them is when interest rates are softening but the economy is strengthening. Investors should underweight capital-intensive, debt-burdened utility sector companies when current bond yields trend higher and bond prices fall. Fig. 92.4 The 15 Dow Utilities Average stock components Dow Jones Utilities Average Companies

Utility Type

Ticker

AES Corp

Electric

AES

American Electric Power

Electric

AEP

American Water Works

Water

AWK

CenterPoint Energy

diversified

CNP

Consolidated Edison

electric

Dominion Resources

electric

Duke Energy

electric

DUK

Edison International

electric

EIX

Exelon

diversified

EXC

FirstEnergy

electric

NextEra Energy

electric

NEE

NiSource

diversified

PG&E

electric

PCG

Public Service Enterprise

diversified

PEG

Southern Company

electric

The current snapshot data from FinViz.com will appear by clicking on the name. The current Analyst Ratings and Price Targets (PTs) will appear by clicking on the NYSE ticker.

406

Investing in the Utilities Sector

Fig. 92.5 Ten large-cap Utility ETFs that trade in New York ETF Name

Utility Type

Total Assets Average ($MM) Volume

Ticker

Utilities Select Sector SPDR Fund

Broad

$15,261.00

19,148,480

XLU

Vanguard Utilities ETF

Broad

$6,505.62

313,132

VPU

Global X US Infrastructure Development ETF

Infrastructure

$4,906.64

1,399,894

PAVE

iShares Global Infrastructure ETF

Infrastructure

$3,454.71

415,954

IGF

FlexShares STOXX Global Broad Infrastructure Fund

Infrastructure

$2,672.67

107,083

NFRA

Fidelity MSCI Utilities Index ETF

Broad

$1,421.86

302,581

FUTY

iShares US Utilities ETF

Broad

$1,025.07

97,487

IDU

iShares US Infrastructure ETF

Infrastructure

$901.36

142,489

IFRA

SPDR S&P Global Infrastructure ETF

Infrastructure

$506.05

43,422

GII

Invesco S&P 500® Equal Weight Utilities ETF

Broad

$318.69

27,951

RYU

The current snapshot data from ETFDB.com will appear by clicking on the name link. By clicking on the ticker symbol link, the StockCharts.com chart will appear. To track the Utility sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. This Snapshot tab of the largest cap Utilities that trade on the NYSE or Nasdaq gives a comprehensive financial picture of each company. Bottom line: This Investopedia review of the Utilities Sector is well written. The industry is changing to reflect people’s need for clean and renewable energy sources. The best alternatives to hydrocarbon-based utility power may be nuclear, solar, and wind-generated.

407

CHAPTER 93

Investing in the Real Estate Sector The real estate industry group was elevated to the sector level in September 2016 and became the 11th GICS sector. The newly formed sector 60 includes all equity real estate investment trusts (REITs) and real estate management and development companies. The mortgage REITs remained in the financials sector. Adding real estate as a GICS sector raised its profile as a distinct market segment. Most of the largest companies in each GICS sub-industry traded on the NYSE or Nasdaq exchanges are linked in the table below. Fig. 93.1 GICS Sector 60 8-digit Coding (Real Estate and REITs) as of 1Q2022 Sector 60 Real Estate Industry Group 6010 Real Estate Industry 601010 Equity Real Estate Investment Trusts (REITs) Sub-Industry 60101010 Diversified REITs Sub-Industry 60101020 Industrial REITs Sub-Industry 60101030 Hotel & Resort REITs Sub-Industry 60101040 Office REITs Sub-Industry 60101050 Health Care REITs Sub-Industry 60101060 Residential REITs Sub-Industry 60101070 Retail REITs Sub-Industry 60101080 Specialized REITs Industry 601020 Real Estate Management & Development Sub-Industry 60102010 Diversified Real Estate Activities Sub-Industry 60102020 Real Estate Operating Companies Sub-Industry 60102030 Real Estate Development Sub-Industry 60102040 Real Estate Services

408

Investing in the Real Estate Sector

The real estate industry accounts for nearly 20% of the US GDP. The large majority of real estate is individually owned residential and commercial structures. Real estate securities as pooled investments comprise a much smaller total capital invested in US real estate. Real-Estate investing requires an understanding of interest rates and mortgage debt. Many owners are people who are house poor. When mortgage rates rise, rollover becomes a problem for many people. As I was writing the manuscript for this book, I blogged these words: “Fed Chair Powell has set the market along the road to perdition. The impending foreclosure crisis is a major problem facing America today.” Bill Cara May 6, 2022, 12:21 pm Consumer Debt reflects serious trouble ahead for Real-Estate The Visual Capitalist tells the story. https://www.visualcapitalist.com/us-consumer-debt-16-trillion/ Long-time followers will remember my 2006 warnings before the collapse of the real estate bubble. CNBC had a crossing America roadshow touting the price increases as the reason to buy real estate. I called them fraudsters for doing that. I said, “Books will be written.” Well, books were certainly written!!! Mortgage rates have zoomed thanks to Fed Chair Powell, so as old mortgages come due, the mortgage debt will soar to levels that millions of mortgagees will be unable to pay the monthly debt. They will have to sell or go bankrupt and lose the house. A house is not a home for those who care to think about important things. Losing a house is an investment loss, but losing a home destroys a person and their family. https://en.wikipedia.org/wiki/United_States_housing_bubble https://en.wikipedia.org/wiki/2010_United_States_foreclosure_crisis So, Fed Chair Powell has set the market along the road to perdition. Mark my words: The upcoming foreclosure crisis is one of America’s biggest problems.

There are several large US companies listed on the New York Stock Exchange that invest in real estate. Most of the listings are Real Estate Investment Trusts (REITs). REITs are pooled holdings of diverse types, such as residential apartment buildings, offices, retail centers, hotels, medical facilities, warehouses, cell towers, and data centers.

Sector 60 coverage in the S&P 500 Under the GICS structure at the time of change in 2016, there were 25 REITS and one real estate developing company in the S&P 500 with a market capitalization of US$488 billion.

409

BILL CARA / STOCK MARKET LITERACY

Real Estate was the ninth-largest sector in the S&P 500, accounting for 2.89% of the total market capitalization. I developed a list of Indexes to help you stay on top of this sector. Before making a REIT investment decision, it pays to review these Indexes. Fig. 93.2 GICS Sector 60 Industry and Sub-Industry Indexes (Real Estate and REITs) Sector 60–US Real Estate and REIT Indexes

Symbol

Dow Jones US Diversified REITs Index

$DJUSDT

Dow Jones US Hotel & Lodging REITs Index

$DJUSHL

Dow Jones US Industrial & Office REITs Index

$DJUSIO

Dow Jones US Real Estate Holding & Development Index

$DJUSEH

Dow Jones US Real Estate Index

$DJUSRE

Dow Jones US Real Estate Investment & Services Index

$DJUSRH

Dow Jones US Real Estate Investment Trusts Index

$DJUSRI

Dow Jones US Real Estate Services Index

$DJUSES

Dow Jones US Residential REITs Index

$DJUSRN

Dow Jones US Retail REITs Index

$DJUSRL

Dow Jones US Specialty REITs Index

$DJUSSR

S&P 500 Real Estate Industry Group Index

$GSPREC

Dow Jones Global Telecommunications Index

$W1TLS

Dow Jones Global ex-US Select Real Estate Index

$DWXRS

DJ Global ex-US Select REIT Index

$DWXRT

DJ Global ex-US Select REIT Total Return Gross Index

$DWXRTT

DJ Global Select Real Estate Securities Index

$DWGRS

DJ Global Select Real Estate Total Return Gross Index

$DWGRST

DJ Global Select REIT Index

$DWGRT

DJ Global Select REIT Total Return Gross Index

$DWGRTT

Dow Jones Composite All REIT Index

$RCI

Dow Jones Composite REIT Total Return Index

$RCIT

Dow Jones Equity REIT Index

$REI

Dow Jones Equity REIT Total Return Index

$REIT

Dow Jones Equity REIT Index

$DJR

MSCI US REIT Index

$RMZ

410

Investing in the Real Estate Sector

Fig. 93.3 The largest NYSE-listed US Real Estate companies Sector 60– Real Estate Largest US Companies

Property Type

Market Cap ($ Billion)

Dividend Yield

NYSE Ticker

Prologis

Industrial

116.4

2.0%

PLD

American Tower

Communications

109.8

2.4%

AMT

Crown Castle

Communications

76.8

3.4%

CCI

Public Storage

Self-storage

65.9

2.1%

PSA

Equinix

Data centers

64.4

1.7%

EQIX

Simon Property Group

Malls

48.9

5.1%

SPG

Welltower

Healthcare

43.0

2.6%

WELL

Digital Realty

Data centers

40.1

3.6%

DLR

Realty Income

Commercial

40.1

4.4%

AvalonBay Communities

Residential

34.6

2.6%

AVB

The current snapshot data from FinViz.com will appear by clicking on the name. The current Analyst Ratings and Price Targets (PTs) will appear by clicking on the NYSE ticker. The average dividend yield on March 25, 2022, was +2.99%. Next is a list of the largest ETFs in the REIT sector. Note that the SPDR Dow Jones Global Real Estate ETF is much larger than the others. Fig. 93.4 The largest NYSE-listed REITs (data as of April 2022) Sector 60–Largest US Real Estate and REIT ETFs

Market Cap ($ Billion)

Avg Volume

Symbol

SPDR Dow Jones Global Real Estate ETF

1515.2

219,243

RWO

Vanguard Real Estate ETF

48.3

6,167,844

VNQ

Schwab US REIT ETF

7.2

2,802,357

SCHH

Real Estate Select Sector SPDR Fund

6.0

6,568,589

XLRE

iShares US Real Estate ETF

5.4

9,212,870

IYR

Vanguard Global ex-US Real Estate ETF

4.8

374,922

VNQI

iShares Global REIT ETF

3.5

825,117

REET

iShares Cohen & Steers REIT ETF

3.0

252,405

ICF

iShares Core US REIT ETF

2.5

323,429

USRT

SPDR Dow Jones REIT ETF

2.1

287,105

RWR

Fidelity MSCI Real Estate Index ETF

2.1

651,383

FREL

The current snapshot data from ETFDB.com will appear by clicking on the name link.

411

BILL CARA / STOCK MARKET LITERACY

By clicking on the ticker symbol link, the StockCharts.com chart will appear. This article from the Visual Capitalist is informative: https://www.visualcapitalist.com/the-worlds-largest-real-estate-investment-trusts-reits/ The article comments on trends to watch. The demand for real estate can be heavily influenced by overarching trends found around the world. One of these is population growth and urbanization, which has drastically pushed up the cost of housing in many cities around the world. There’s also the rising prevalence of ecommerce, which has triggered a boom in demand for warehouse space. Amazon’s massive growth best captures this during the COVID-19 pandemic, during which the company doubled the number of its warehouse facilities. Globally, ecommerce accounts for just 19.6% of total retail sales. Should that figure continue to rise, industrial real estate prices could be in store for robust, long-term growth. Finally, REIT investors should know important data like US Money Supply and international interest rates. Money Supply is the amount of cash and near-cash in the US economy. A substantial increase over ten years due to Quantitative Easing (QE) has caused inflation. Inflation increases real estate prices. In 1Q2022, the Federal Reserve System embarked on a Quantitative Tightening (QT) policy to reduce inflation, which puts downward pressure on real estate prices. LIBOR is the average interest rate at which global banks borrow. LIBOR is based on five currencies: the US dollar, euro, British pound, Japanese yen, and Swiss franc. It has seven maturities—overnight/spot next, one week, and one, two, three, six, and 12 months. LIBOR increases mortgage costs, putting downward pressure on real estate prices. The Eurodollar rate replaces LIBOR (June 30, 2023) as the critical rate that global banks watch. Fig. 93.5 Key data studied by Real Estate Sector investors Key Data

Symbol

London Interbank Offered Rate - 1 month (NBD)

$LIBOR

London Interbank Offered Rate - 3 month (NBD)

$LIBOR3

M1 Money Supply

$$M1

M2 Money Supply

$$M2

To track the Real Estate sector companies, use the FinViz.com program. This link to the largest market cap companies in the sector will get you started. From there, the Performance tab will show the performance over various periods. Bottom line: Real estate prices and interest rates join at the hip. Low rates mean high real estate prices (a seller’s market), and high rates mean low real estate prices (a buyer’s market).

412

SECTION 9

Investing in the US 94 The Dow Jones Industrial Average 95 The Dow Jones Transport Average 96 The Dow Jones Utilities Average (DJUA) 97 Investing in US Large-Cap Company Stocks 98 Investing in US Mid-Cap Company Stocks 99 Investing in US Small-Cap Company Stocks 100 Investing in Micro-Cap and Nano-Cap Company Stocks

413

CHAPTER 94

The Dow Jones Industrial Average This chapter examines the 30 US company components of the Dow Jones Industrials Average (DJIA), a leading benchmark. Banks and other financial services companies, but no Transports or Utility stocks, are included in the Dow 30 industrials. In 1896, Charles Dow and Edward Jones (Dow Jones & Company) created an average of the leading 30 industrial companies of that time. They wanted to focus the public on how the stocks of economically significant companies traded during the day. The Dow Jones Industrials Average (DJIA) soon became the leading benchmark index for all stocks trading on the New York Stock Exchange (NYSE). Today, the DJIA is an important market indicator. To maintain its importance as a benchmark index, the Dow 30 now contains the stocks of prominent financial and consumer service companies and industrial goods producers and services companies. Some of the stocks trade on the NASDAQ market. The Dow 30 is a price-weighted index. In 1957, the Dow Jones Company and Standard & Poor’s created a second benchmark index for US stocks. They used the market capitalizations of 500 large US company stocks, calling the index the S&P 500. Professional investors soon preferred the Capitalization-Weighted S&P 500 Index over the price-weighted DJIA. If nothing else, the popularity of the Dow 30 Index makes it essential. For that reason, I use the analysis of its 30 blue-chip components as a teaching laboratory. Investors should always seek capital appreciation or income from leading High-Quality companies. As quality is subjective, Wall Street tells investors that the Dow 30 are examples of blue-chip (‘good’) companies. But over time, some become ‘bad’ companies based on weak corporate fundamentals. Moreover, some of the ‘good’ stocks often become ‘bad’ stocks for a time. The index manager often changes the constituents of the Dow 30, so the benchmarking feature is inconsistent. In fact, since its start, there have been 57 switches in Dow 30 companies. The reasons varied. Sometimes there was a merger. Sometimes there were material changes like a company’s

414

The Dow Jones Industrial Average

business that no longer reflected the present nature of the US economy. Selections changed based on the number of constituents in a sector growing or weakening in economic importance. On August 31, 2020, Exxon, Pfizer, and Raytheon were dropped, and Amgen, Honeywell, and salesforce.com were added. Raytheon was added on April 6, 2020, replacing United Technologies, which it acquired. On April 2, 2019, Dow Inc replaced DowDuPont Inc as that name changed back to Dow following an earlier merger. Walgreen Boots Alliance replaced General Electric on June 26, 2018. On March 15, 2015, AT&T was dropped, and Apple was added. Fig. 94.1 Dow Jones Industrials Average (DJIA) Components StockCharts

Consensus Analyst Rating

Company

Sector

GICS

Industry

Market Cap ($B)

3M Company

Industrials

Specialty Machinery

MMM

American Express

Financial

Credit Services

121

AXP

Amgen Inc.

Healthcare

Drug Manufacturers

129

AMGN

Apple Inc.

Technology

Consumer Electronics

2309

AAPL

Caterpillar Inc.

Industrials

Farm/Construction Machines 119

CAT

Chevron Corporation

Energy

Oil & Gas Integrated

349

CVX

Cisco Systems, Inc.

Technology

Communication Equipment

183

CSCO

Dow Inc.

Basic Materials

Chemicals

DOW

Goldman Sachs Group

Financial

Capital Markets

104

Honeywell International

Industrials

Specialty Machinery

131

HON

IBM

Technology

Information Tech Services

124

IBM

Intel Corporation

Technology

Semiconductors

164

INTC

Johnson & Johnson

Healthcare

Drug Manufacturers

457

JNJ

JPMorgan Chase & Co.

Financial

Banks – Diversified 368

JPM

415

BILL CARA / STOCK MARKET LITERACY

McDonald’s Corporation

Consumer Cyclical

Restaurants

179

MCD

Merck & Co., Inc.

Healthcare

Drug Manufacturers

223

MRK

Microsoft Corporation

Technology

Software – Infrastructure

1980

MSFT

NIKE, Inc.

Consumer Cyclical

Footwear & Accessories

187

NKE

Procter & Gamble

Consumer Defensive

Household & Personal Prod

342

Salesforce, Inc.

Technology

Software – Application

186

CRM

The Boeing Company

Industrials

Aerospace & Defense

The Coca-Cola Company

Consumer Defensive

Beverages Non-Alcoholic

268

The Home Depot, Inc.

Consumer Cyclical

Home Improvement Retail

308

Travelers Companies

Financial

Insurance - Prop & Casualty

TRV

UnitedHealth Group Healthcare

Healthcare Plans

459

UNH

Verizon Communications

Communication

Telecom Services

214

Visa Inc.

Financial

Credit Services

429

Walgreens Boots Alliance

Healthcare

Pharmaceutical Retailers

WBA

Walmart Inc.

Consumer Defensive

Discount Stores

332

WMT

Walt Disney Company

Communication

Entertainment

188

DIS

Here is a link to the essential information you need to know about each Dow 30 company stock. Are Dow 30 companies considered Value, Growth, or Income? Many are formerly highgrowth companies but reached such large capitalizations that most investors now look elsewhere for Growth. Depending on the market cycle and investment factors described in this book, some low prices become attractive to Value investors. And many Dow 30 companies pay high dividends and are appealing to Income-seeking investors. As interest rates on Bonds dropped below dividend yields on Stocks, as happened during Quantitative Easing (QE), investors switched from Bonds to Stocks, which lifted the stock

416

The Dow Jones Industrial Average

price. But with Quantitative Tightening (QT) interest rates raised, investors switched from Stocks to Bonds, which depressed stock prices. Note that for all investors in high-yielding stocks who may sell at any time, Total Return is a more important concept than Dividend Yield. If seeking Income from the Dow 30, investors might consider the Dogs of the Dow. ‘Dogs’ is a stock-picking strategy that invests an equal amount in the ten highest dividend-yielding Dow stocks yearly. Note that due to business conditions, company operations and financial performance, and broad market sentiment, the Dividend Yield of these companies changes over the years as the share price rises or drops. The following illustration shows the 10 Dogs of the Dow from 2022 and every five years going back to 1997. Fig. 94.2 The 10 Dogs of the Dow over the years 2022 Dow stocks ranked by the yield on 12-31-2021

12-31-2021

Company

Symbol

Price

Dividend Yield

Dow

DOW

56.72

4.94%

Verizon

51.96

4.93%

IBM

133.66

4.91%

Chevron

CVX

117.35

4.57%

Walgreens

WBA

52.16

3.66%

Merck

MRK

76.64

3.60%

Amgen

AMGN

224.97

3.45%

MMM

177.63

3.33%

Coca-Cola

59.21

2.84%

2017 The Dow stocks ranked by the yield on 12-31-2016 12-31-2016

12-31-2016

Company

Symbol

Price

Dividend Yield

Verizon

53.38

4.33%

Pfizer

PFE

32.48

3.94%

Chevron

CVX

117.70

3.67%

Boeing

155.68

3.65%

Cisco Systems

CSCO

30.22

3.44%

Coca-Cola

41.46

3.38%

IBM

165.99

3.37%

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BILL CARA / STOCK MARKET LITERACY

ExxonMobil

XOM

90.26

3.32%

Caterpillar

CAT

92.74

3.32%

Merck

MRK

58.87

3.19%

2012 The Dow stocks ranked by the yield on 12-31-2011 12-31-2011

12-31-2011

Company

Symbol

Price

Dividend Yield

AT&T

30.24

5.82%

Verizon

40.12

4.99%

Merck

MRK

37.70

4.46%

General Electric

17.91

3.80%

Pfizer

PFE

21.64

3.70%

DuPont

45.78

3.58%

Johnson & Johnson

JNJ

65.58

3.48%

Intel

INTC

24.25

3.46%

Procter & Gamble

66.71

3.15%

Kraft

KFT

37.36

3.10%

2007 The Dow stocks ranked by the yield on 12-31-2006 12-31-2006

12-31-2006

Company

Symbol

Price

Dividend Yield

Pfizer

PFE

25.90

4.48%

Verizon

37.24

4.35%

Altria

85.82

4.01%

AT&T

35.75

3.97%

Citigroup

55.70

3.52%

Merck

MRK

43.60

3.49%

General Motors

30.72

3.26%

DuPont

48.71

3.04%

General Electric

37.21

3.01%

JP Morgan Chase

JPM

48.30

2.82%

2002 The Dow stocks ranked by the yield on 12-31-2001 12-31-2001

12-31-2001

Company

Symbol

Price

Dividend Yield

Eastman Kodak

29.43

6.12%

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The Dow Jones Industrial Average

Philip Morris

45.85

5.06%

General Motors

48.60

4.12%

JP Morgan Chase

JPM

36.35

3.74%

DuPont

42.51

3.29%

Caterpillar

CAT

52.25

2.68%

SBC Communications

SBC

39.17

2.61%

International Paper

40.35

2.48%

Merck

MRK

58.80

2.38%

ExxonMobil

XOM

39.30

2.34%

12-31-1996

1997 The Dow stocks ranked by the yield on 12-31-1996 Company

Symbol

Price

Dividend Yield

Philip Morris

113.00

4.19%

JP Morgan

JPM

97.63

3.53%

Texaco

98.13

3.44%

Chevron

CHV

65.00

3.25%

Exxon

XON

98.00

3.18%

AT&T

43.38

2.99%

General Motors

55.75

2.88%

International Paper

40.50

2.45%

DuPont

94.13

2.38%

MMM

83.00

2.31%

In this illustration covering 1997 through 2021, the companies paying the highest dividend continuously change. Yield changes because of price fluctuations and because of changes in dividend payout. So, while Dividend Yield is important to many investors, Total Return is the more critical investment concept. Bottom line: The Dow 30 is discussed daily by Financial Entertainment Media because there are only 30 constituents, and the public knows the names. The S&P 500 is the benchmark index used by professional investors. The Nasdaq Composite Index is the more popular technology benchmark.

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CHAPTER 95

The Dow Jones Transport Average Producers deliver goods to consumers in one way or another. Hence, the Dow Jones Transports Average (DJTA) of 20 prominent transport companies is an important benchmark to measure the performance of other transportation industry companies. The Index is also used to assess the condition of the US economy. Dow Transports consists of twenty prominent US transportation companies. Transportation is a sub-sector of the Industrials sector (Sector 20) in the Global Industry Classification Standard (GICS). The industry groups include airlines, railroads, trucking, shipping, and delivery services that may use the carriers. Fig. 95.1 Dow Jones Transport Average (DJTA) Components Dow Transport Average Constituent

Stock Chart

Analyst Ratings

Alaska Air Group, Inc.

ALK

American Airlines Group Inc.

AAL

Avis Budget Group, Inc.

CAR

C.H. Robinson Worldwide, Inc.

CHRW

CSX Corp.

CSX

Delta Air Lines, Inc.

DAL

Expeditors International of Washington, Inc.

EXPD

FedEx Corp.

FDX

J.B. Hunt Transport Services, Inc.

JBHT

JetBlue Airways Corp.

JBLU

Kansas City Southern

KSU

Kirby Corp.

KEX

Landstar System, Inc.

LSTR

Matson, Inc.

MATX

Norfolk Southern Corp.

NSC

Ryder System, Inc.

420

The Dow Jones Transport Average

Southwest Airlines Co.

LUV

Union Pacific Corporation

UNP

United Airlines Holdings, Inc.

UAL

United Parcel Service

UPS

The Dow Jones Transport Average is a price-weighted Index. Like the Dow Jones Industrials, the Dow Jones Transports play an essential role in Dow Theory. Charles Dow died in 1902, and the DJIA and DJTA components have changed in ways that Dow could never have foreseen, e.g., jet transportation and electronic file transfers. But Dow Theory is logical, and investors still consider Dow Transports a trend indicator. The transports usually lag behind the Financials, Consumers, and Industrials that populate the DJIA. So, if the DJIA sets a new high, the Dow Theory says that the DJTA must soon confirm the Bullish trend. Producers must deliver their goods to markets, which the transportation companies do. So, as a reflection of the health of the US and global economies, the transportation industry is essential to study. For that reason, the Dow Jones Transports Average is a popular index. The Dow 20 Transport stocks are listed at this link. You can see their stock valuation, financial, ownership, and performance by clicking on the tabs. Here is a link to the basic information you need to know about each Dow Transport company stock. There is a sequence to economic events. The end of a recession is foretold by the return to business by architects. The number of loan applications hitting a bank manager’s desk indicates the start or end of a real estate cycle. Products that are sold must be delivered. Companies in the transportation business are among the quickest to see a change in the economic cycle. So, the Trend and Cycle action of the twenty stocks in the Dow Transports is a leading indicator. I often watched trains on weekends at the family farm overlooking the main rail line between Toronto and Montreal. As the lengths of the trains grew longer or shorter, I knew the economy was expanding or contracting. At times, many of those rail cars were tank cars that transported Oil. When the numbers dropped a lot, I figured it was the ending of the economic cycle, even when Oil prices were high. When the Dow Transport index ($TRAN) declined from 4Q2014 to 1Q2016 and again for several months following the onset of the Covid-19 pandemic in 1Q2020, we knew the industrials component of the US economy was not in a healthy state. For about ten years, however, until the end of 1Q2022, Dow Transports were in a rising trend, which reflected the long-term economic growth of the United States. Starting in 2Q2022, the inverse-headed yield curve and the likely onset of a US recession pressured Dow Transports. Investors suffered substantial losses. The narrative switched to a

421

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severe global economic problem called the Supply Chain issue. Supply Chain Management is needed to control costs between the production of raw materials and the consumer. Transportation was a large part of these costs. Delivering products from the producer to the customer during the pandemic became a problem. The Just-In-Time inventory management system of past decades broke down. Sick drivers could not deliver goods, so unmanned vehicle technologies were developed. Self-driving cars and unmanned aircraft systems called drones are now leading an evolutionary process that will impact the transportation industry in future years. As with everything in life, change is constant. Investors must adapt. Bottom line: Transports reflect the US economy. In Dow Theory, the DJTA is a confirming signal.

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CHAPTER 96

The Dow Jones Utilities Average (DJUA) The US economy relies on power delivered from Utility company producer to consumer. The Dow Jones Utilities Average (DJUA) of 15 significant utility companies is an important benchmark for measuring the performance of other utility industry companies. DJUA is also used to assess the US economy, which was the purpose of the index. The Dow Jones Utilities Average (DJUA) is a price-weighted Index of 15 prominent US utility companies. Utilities are for-profit companies that provide essential services to the public. As such, they are heavily regulated. Because of the size and scope of the DJUA companies and the importance of the services they provide, the index gives an essential perspective of the US economy and the capital market. Here is a link to the basic information you need to know about each Dow Utility company stock. The ticker symbols and descriptions of the Dow 15 Utilities components are as follows: Fig. 96.1 Dow Jones Utilities Average (DJUA) Components Dow Utilities Average Constituent

Type

Stock Chart

Analyst Ratings

AES Corp

electric utilities

AES

American Electric Power Co.

electric utilities

AEP

American Water Works Co

Water Utilities

AWK

CenterPoint Energy, Inc.

diversified utilities

CNP

Consolidated Edison, Inc.

electric utilities

Dominion Resources, Inc.

electric utilities

Duke Energy Corp.

electric utilities

DUK

Edison International

electric utilities

EIX

Exelon Corp.

diversified utilities

EXC

FirstEnergy Corp.

electric utilities

NextEra Energy Inc.

electric utilities

NEE

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BILL CARA / STOCK MARKET LITERACY

NiSource, Inc.

diversified utilities

PG&E Corp.

electric utilities

PCG

Public Service Enterprise Group

diversified utilities

PEG

Southern Company, Inc.

electric utilities

For Fig. 96.1, click on the tickers under Chart and Ratings to access the latest charts from StockChart.com and information from MarketBeat.com. FinViz.com offers a comprehensive analysis of each company by clicking on the name. Investopedia.com also highlights investment factors: Pro • The utility sector offers stable, long-term investments with a regular and attractive dividend • Utilities function as a haven investment during times of economic downturn • Utilities offer many options for investment, including bonds, ETFs, and individual company stocks Con • Intense regulatory oversight causes difficulty in raising customer utility prices to increase revenue • Expensive utility infrastructure requires continual upgrades and maintenance • During high market interest rates, utilities become less attractive and must increase their bond yields. Here is the FinViz.com screener for all 15 Dow Jones Utilities companies. Here is the snapshot information under the FinViz.com Basic tab. This link to the data at FinViz.com provides information investors require from about 116 worldwide Utilities. To look at data only for pure Gas Utilities in the US, you can sort by Industry group and country to get this list of 10: AGR, ATO, CNP, CPK, NJR, NWN, OGS, SJI, SPH, SWX. This link will take you to all their information at FinViz.com. As of 2022-04-11, the charts are in a bullish trend. At the beginning of March, the Fed began to execute a Quantitative Tightening policy. QT lifted interest rates and sent investors looking for income in the Utility stocks. Another factor was the higher Natural Gas prices that exploded in the lead-up to the Russian-Ukraine war. Those high Gas prices have continued without trend reversal to this point (June 2022). https://tvc-invdn-com.investing.com/data/tvc_d64f67446a977e0748dddb0d9db4 0c44.png Utilities are either (a) regulated (for monopolies), (b) partially unregulated (where competition may exist), or (c) unregulated (where competition is encouraged).

424

T h e D o w J o n e s U t i l i t i e s A v e r a g e ( DJUA )

With inflation, utility companies charge more to compensate for their higher costs. But higher prices also affect demand, so companies that enjoy pricing power have been able to increase their prices the most. Commodity costs of a regulated Utility are passed to customers but within limits. So investors need to understand the regulatory aspect of the company as well as the commodity price Trend. Government regulation depends on the State and Municipal levels. One is controlled by a public service commission for local service, and the other is by the Federal government for interstate transmission. But the legislation of some States is the opposite of other States. With everything that involves government, there are critics, pro and con. And Utility investors should investigate and know where the companies stand on these matters. This FinViz.com chart on Natural Gas shows that prices lifted from under $4.00 in February 2022 to $8.00-$9.50 in just three or four months. Prices became heavily dependent on the Russia-Ukraine war and the sanctions between European demand and Russian supply. Because of the war dynamics, interested investors may find the overview from Wiki absorbing. There are times when investors can get significant capital growth by holding the stocks of some Utility companies. Utility stocks represent an essential insight into the state of the economy and the business cycle. But Utility stocks tend to have a high Price-Earnings Ratio, so they are not inexpensive. Some have too much debt, but in a low-interest rate market, e.g., during Quantitative Easing (QE), this debt probably does not present a high risk. In a period of Quantitative Tightening (QT), the reverse is true. For most of the substantial companies in this sector, the revenue and earnings are predictable, and the stocks are pretty liquid. Therefore the stocks are institutional favorites that trade at a very low beta, with many offering a high dividend yield. Oil & Gas Exploration & Production Sub-Industry companies are classified differently than Gas utility companies in the GICS system. Diversified midstream natural gas companies are classified in the Oil & Gas Storage & Transportation Sub-Industry and not as Gas Utilities. Investopedia.com discusses the debt relationship in the Utility sector. Utilities require a significant amount of expensive infrastructure and consequently carry large amounts of debt on their balance sheets. These debt loads make utilities hypersensitive to changes in the market interest rate. And because utilities are capital-intensive, they require a continuous inflow of funds to finance infrastructure upgrades and new asset purchases. The significant debt load also results in high utility debt-to-equity (D/E) ratios, which can impact companies’ credit ratings, making it difficult to borrow funds, and ultimately increasing their costs of operations. Bottom line: Income is the primary reason investors follow the Utility sector and the Dow Jones Utilities Average companies. This link at FinViz.com offers a close look at the Dividend Yield possibilities. 425

CHAPTER 97

Investing in US large-cap company stocks Market Cap is short for Market Capitalization. It calculates the number of outstanding shares multiplied by the current price. Large-Cap companies have caps of $10 billion to $200 billion, while MegaCap companies are at least $200 billion. Of the approximately 8500 companies listed on the NYSE and Nasdaq, about 9% are large caps or bigger. Some stocks are large in market cap, but company revenue, cash flow, and earnings relatively smaller. The different Market Cap categories have unique trading traits for investors to consider. For example, investors in the Mega-Cap and Large-Cap companies like financial stability and dividends, but they also face the law of large numbers. For that reason, investors look for better Growth prospects among mid, small, and tiny-cap companies. The structure of the portfolio is one of the most important concepts to me when investing and trading, so it’s a word that I use often. The Global Industry Classification System (GICS) provides investors with market structure by organizing companies by Sector, Industry, and Sub-Industry. Every company traded publicly in the world is classified this way only once. Market capitalization is another aspect of market structure. In terms of revenue, Tesla is much smaller than any of its main peers, Toyota, Volkswagen, Ford, and General Motors. But the Market Cap of TSLA is presently bigger than all of them combined. So, it’s a company differentiated by its products and services and corporate fundamentals, but the stock is about price. Price can change second by second in the market. Fundamentals change slowly. Choosing company size is a matter of choice. The categories are large-cap, mid-cap, and small-cap, but some publishers assign different sizes. Fig. 97.1 Stock Capitalization Categories • Mega-Cap companies – $200 billion and more • Large-Cap companies – $10 billion to $200 billion • Mid-Cap companies – $2 billion to $10 billion

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I n v e s t i n g i n US l a r g e - c a p c o m p a n y s t o c k s

• Small-Cap companies – $300 million to $2 billion • Micro-Cap companies – $50 million to $300 million • Nano-cap companies – under $50 million

A rule in statistics assumes that as the number of samples increases, the average of these samples will reach the mean of the entire population. Relating this concept to finance suggests that as a company grows, its chances of sustaining a sizable growth percentage diminish. As a company expands, it must develop much more to maintain a constant growth rate. Change becomes increasingly tricky. That is called the Law of Large Numbers, which affects where some investors find securities that meet their needs and interests. Mega-Cap and Large-Cap companies are better Quality/Value and Income candidates than Growth candidates. Mid-Cap and Small-Cap companies can grow faster. Mega-Cap and Large-Cap securities are much more liquid and hence easier to trade. Liquidity is the number of shares and dollar turnover each trading day. If liquidity is not a concern and you seek Growth, then go to Small-Cap and Micro-Cap companies. If you are the risk-averse type of investor, choose from the Mid-Caps.

Value Investing in the Large-Cap Universe Here are some of the highest-quality Value company stocks in my US Large-Cap universe in March 2022. Note that Market Cap refers to stock price, whereas Value refers to a discount to Enterprise Value. Neither defines Quality, importance, or usefulness, which are assessments of each individual. Take a long list of Quality companies and filter the list by Price/Earnings-to-Growth (PEG) Ratio, Return on Equity (ROE), Dividend Yield, and Forward Price-to-Earnings Ratio by Industry. You can develop a list of Large-Cap Value leaders in leading industries. As of 2022-03-14, the following is my list of twelve Value leaders. The average Market Cap is $116 Billion. The average Dividend Yield is 2.58%. The average ROE is 31.2%. And the average PEG, which is a key determinant of Value, is 0.93%. Fig. 97.2 Large-Cap US Value Companies [2022-03-19] Large-Cap US Value Company

Industry

Market Cap ($B)

ROE

PEG

Dividend

Trading Symbol

American International Group

Financial

49.72

14.50%

0.18

2.10%

AIG

Comcast Corp

Communications

212.65

14.90%

1.08

2.13%

CMCSA

Capital One Financial

Financial

57.17

21.00%

0.11

1.74%

COF

Dell Technologies

Technology

39.59

76.50%

0.86

2.55%

DELL

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BILL CARA / STOCK MARKET LITERACY

FedEx Corporation

Industrials

58.00

20.60%

0.72

1.37%

FDX

General Motors

Consumer Cyclical 65.12

18.40%

0.45

Goldman Sachs

Financial

116.71

22.50%

0.50

2.32%

JPMorgan Chase

Financial

413.69

18.30%

0.81

2.86%

JPM

Lockheed Martin

Industrials

116.06

75.60%

2.28

2.63%

LMT

Marathon Petroleum

Energy

44.27

37.10%

1.56

2.96%

MPC

Merck & Co

Healthcare

199.97

38.90%

1.72

3.49%

MRK

US Bancorp

Financial

83.95

16.10%

1.12

3.25%

USB

Click on these links to find the current data.

Charts of 12 large-cap Value companies Contrast the Value list to some of the highest-quality Growth company stocks in the US Large-Cap universe in March 2022 in the following illustration. Note that Growth refers to longer-term changes in corporate fundamentals and recent market price increases. The price of a Growth company may be trading in a Bear phase as in 1H2022. However, the Company is still defined as a Growth Company if the corporate fundamentals exceed those of the industry peer group or the growth rate of the broad economy.

Growth Investing in the Large-Cap Universe Investors seeking growth give up Dividend Yield and PEG and allow a high Price-toEarnings Ratio. The average PE is 45.4, but investors must also see it drop. Here the Forward PE is 26.4. Growth investors want to see high earnings Growth. It averaged 39.5% over the past five years and is forecast to be 24.9% over the next five years. They want to see high Margins. Here the average Gross, Operating, and Net Margins are 60.2%, 29.9%, and 24.4%. Here is a list of 12 Growth stocks. The average Market Cap is $850 Billion. The average Dividend Yield is 1.42%. The average ROE is 40.4%. And the average PEG is 2.03%. Fig. 97.3 Large-Cap US Growth Companies [2022-03-19] Large-Cap US Growth Co.

Market Cap ($B)

ROE

Forward PE

EPS past 5Y

EPS this Y

EPS next Y

EPS next 5Y

Sales past 5Y

Ticker

Adv Micro Devices

184.64

44.9%

24.6

44.6%

24.7%

15.4%

29.9%

30.9%

AMD

Amazon.com, Inc.

1641.01

28.0%

44.3

67.6%

54.9%

49.0%

34.8%

28.1%

AMZN

Broadcom Inc.

249.22

31.3%

15.9

40.0%

137.1%

9.0%

14.7%

15.7%

AVGO

EOG Resources

67.79

21.8%

10.3

43.2%

864.8%

-7.8%

60.2%

20.1%

EOG

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I n v e s t i n g i n US l a r g e - c a p c o m p a n y s t o c k s

Meta Platforms

589.27

29.7%

15.0

31.6%

36.4%

16.6%

18.5%

33.7%

Floor & Decor

10.96

23.4%

27.4

41.4%

43.6%

30.2%

27.4%

26.7%

FND

Alphabet Inc.

1803.50

31.6%

20.0

32.1%

91.4%

17.1%

21.0%

23.3%

GOOGL

Microsoft Corp

2252.28

48.4%

27.9

25.7%

39.7%

15.3%

17.4%

13.0%

MSFT

Netflix, Inc.

168.97

35.3%

26.5

90.5%

81.3%

30.6%

16.9%

27.5%

NFLX

NVIDIA Corp

661.32

35.1%

39.4

44.9%

52.5%

19.7%

30.2%

27.2%

NVDA

Paycom Software

21.62

24.1%

52.0

23.2%

36.8%

26.2%

25.4%

26.2%

PAYC

Tesla, Inc.

909.25

21.0%

71.1

48.6%

669.2%

21.5%

21.7%

50.4%

TSLA

Click on these links to find the current data. I removed Apple (AAPL) because the Company fails to meet the Revenue and Earnings growth criteria of the companies in this list.

Charts of 12 Large-Cap Growth Companies I wish there would be less promotion of companies as being value stocks. A value stock at one point becomes a momentum stock at another time. CNBC’s Kelly Evans blogged about this truth in markets.

Income Investing in the Large-Cap Universe Seeking Income is reasonably straightforward. Below are twelve high-quality Income instruments in the US Large-Cap universe in March 2022. Note that Income is the March 19 current yield, which is the recent dividend divided by the stock price. After broad market prices fell for six consecutive weeks in April-May and beyond that into the third quarter, the current dividend yields were higher. Dividends may change every quarter year, but market prices change by the minute. So, the current yield is constantly changing, either getting larger or smaller. So, if Income is your interest, a stock’s current yield may become suitable or unsuitable over time. Buying a stock at a low price with a good dividend from a company with a history of high compound dividend growth rates results in a higher current yield over time. Many companies offer automatic dividend reinvestment programs. These may be important to investors who periodically add to their holdings at cycle-low stock prices with no intention to sell.

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BILL CARA / STOCK MARKET LITERACY

Fig. 97.4 Large-Cap US Companies that pay high dividends [2022-03-19] Large-Cap US Income Co Industry

Market Cap ($B)

Current Debt/ Ratio Equity

Profit Margin

Dividend Yield

Ticker

Dow Inc.

Chemicals

45.9

1.6

0.81

11.40%

4.49%

DOW

Duke Energy Corp

Utilities -Reg.Electric

80.82

0.6

1.42

15.10%

3.75%

DUK

Enterprise Prod. Partners

Oil & Gas Midstream

52.52

1.1

1.17

11.30%

7.71%

EPD

Gilead Sciences

Drug Manufacturing

74.51

1.3

1.27

22.80%

4.78%

GILD

Kraft Heinz Co

Packaged Foods

46.04

1.0

0.44

3.90%

4.25%

KHC

Kinder Morgan

Oil & Gas Midstream

39.36

0.7

1.08

10.60%

6.22%

KMI

3M Company

Industrial Machinery

84.71

1.7

1.15

16.70%

3.99%

MMM

Southern Company

Utilities -Reg Electric

72.13

0.8

1.93

10.40%

3.88%

AT&T

Telecom Services

165.86

0.7

1.07

11.80%

8.96%

Verizon

Telecom Services

213.25

0.8

1.84

16.50%

5.04%

Walgreens Boots Alliance

Drug Retailers

40.88

0.8

0.57

4.80%

4.03%

WBA

Exxon Mobil Corp

Oil & Gas Integrated

333.06

1.0

0.28

8.30%

4.47%

XOM

Click on these links to find the current data.

Charts of 12 Large-Cap Companies for Income To keep investing simple, many investors look for Growth combined with Income. A mixture of the two in a portfolio is called a ‘blended’ portfolio. Often a company is defined as Growth because its stock is on a high momentum run. Growth should apply to a company with growing assets, earnings, cash flow, and dividends. When those companies have declining stock prices, the moniker switches from Growth to Value. That’s not helpful. Try to find a high-Quality ‘good’ company based on a solid balance sheet and operating fundamentals relative to its industry peer group when priced below the recent average price but reversing from a Bear to Bull trend, i.e., a ‘good’ stock. That’s all that matters when looking for stocks of companies to meet your needs. The rest is just a part of an ongoing discussion of people paid to entertain you or sell stocks to you. Bottom line: Mega-Cap stocks Apple (AAPL) and Microsoft (MSFT) have had Earnings Per Share increase at a 22% to 24% Compound Annual Growth Rate (CAGR). Annual Revenues have increased between 11% and 15.5% over the past five years. The Law of Large Numbers has not yet hindered these mammoth corporations. Tesla’s (TSLA) earnings and revenues have grown at 5-year CAGRs of 50.4% and 40.6%. While it is a smaller company than its peers, Tesla has a much larger Market Cap based on performance. It’s up to each investor to ignore the entertainment media discussions and stick to meaningful facts.

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Investing in US mid-cap company stocks Market Cap is short for Market Capitalization. It calculates the number of outstanding shares multiplied by the current price. Mid-Cap companies have caps of $2 billion to $10 billion. Of the approximately 8500 companies listed on the NYSE and Nasdaq, about 14% are MidCap. The different Market Cap categories have unique trading traits for investors to consider. I prefer to invest in Mid-Cap companies because they offer superior Growth, Value, and Income candidates. While not always the case, upside price moves are bigger in percentage terms than with large-cap stocks. This idea is my theory, devoid of proof, which speaks to the need to invest in whatever securities provide the most comfort. Investors aiming to find income with Mid-Cap companies pay attention to dividend stability: the smaller the company, the less consistent the dividends and dividend growth. Reasons for holding Mid-Cap stocks in a portfolio: • More analysts follow these companies than Small-Caps, which means the analyst Ratings and Price Targets are more realistic • Their managers are younger and not so interested in maintaining stability as in growing revenues and profit margins organically • The operational and financial weaknesses and threats are fewer in number than Small-Caps. What do investors look for (i.e., strengths and opportunities): • Many take-over possibilities in Mid-Cap companies do not exist in Large-Cap companies. When a larger company acquires a smaller one, the price typically comes with a +20% to 30% premium, and the stock price drops accordingly on the announcement • Quality is a company’s most attractive feature. Quality comes from – • Management, especially where the staff respects them highly • Products that have achieved high brand recognition

431

BILL CARA / STOCK MARKET LITERACY

• Solid balance sheets • Highest operating margins in the industry • High free cash flow to pay down debt and pay as dividends or buy back stock in future years.

Value Investing in the Mid-Cap Universe Use the FinViz.com screener to develop a list of mid-cap Value leaders in leading industries. From a long list of Quality companies in the Mid-Cap range, filter the list by Price/Earningsto-Growth (PEG) Ratio, Return on Equity (ROE), Dividend Yield, and Forward Price-toEarnings Ratio by Industry. The following is my list of twelve Value leaders in my high-quality US Mid-Cap universe. The current charts at StockCharts.com are linked to the Ticker. Other data is found via the FinViz.com links. As of 2022-03-14, the average Market Cap in this list is $116 Billion. The average Dividend Yield is 2.58%. The average ROE is 31.2%. And the average PEG, which is a key determinant of Value, is 0.93%. Mid-Cap stocks tend to be more volatile than large-cap stocks. As prices fluctuate more, the current dividend yields will fluctuate more. One word of warning – as market caps are lower, the dividends of these companies tend to be less secure. For this reason, investors tend to buy large-cap value and mid- or small-cap stocks for growth objectives. Fig. 98.1 Mid-Cap US Value Companies [2022-03-18] Mid-Cap US Value Company

Industry

Market Cap ($B)

ROE

PEG

Dividend Yield

Ticker

American Eagle Outfitters

Apparel Retail

3.28

22.60%

0.97

3.71%

AEO

Artisan Partners

Asset Management

3.05

131.30%

0.33

10.15%

APAM

Chemours Company

Specialty Chemicals

4.82

63.70%

0.31

3.32%

Camping World

Recreational Vehicles

2.68

181.10%

0.15

6.40%

CWH

First American Financial

Insurance - Specialty

7.50

23.00%

0.49

2.98%

FAF

Foot Locker

Footwear & Accessories

3.25

33.00%

0.11

3.71%

M.D.C. Holdings

House Construction

3.10

23.80%

0.44

4.59%

MDC

Navient Corp

Credit Services

2.66

26.70%

0.59

3.66%

NAVI

NRG Energy

Utilities - Ind. Power

9.18

74.50%

0.11

3.43%

NRG

OneMain Holdings

Credit Services

5.93

40.20%

0.23

8.16%

OMF

Old Republic International

Insurance - Diversified

7.97

23.20%

0.51

3.40%

ORI

UGI Corporation

Utilities - Regulated Gas

7.40

21.20%

1.01

3.91%

UGI

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I n v e s t i n g i n US m i d - c a p c o m p a n y s t o c k s

Growth Investing in the Mid-Cap Universe Here are some high-quality Growth company stocks in my US Mid-Cap universe. Fig. 98.2 Mid-Cap US Growth Companies [2022-03-19] Mid-Cap US Growth Company

Market Cap ($B)

ROE

Fwd PE

EPS past 5Y

EPS this Y

EPS next EPS Y next 5Y

Sales past 5Y

Ticker

Digital Turbine

4.17

11.3%

20.4

28.0%

258.00%

26.11%

50.00%

69.70%

APPS

Celsius Holdings

4.58

7.3%

76.2

28.3%

-26.30%

165.89%

62.31%

50.00%

CELH

ChampionX Corp

4.98

6.6%

16.5

39.6%

110.80%

29.95%

56.40%

32.60%

CHX

Evolent Health

2.80

-5.9%

93.9

37.0%

90.90%

272.73%

30.00%

29.00%

EVH

Exelixis

6.83

11.2%

18.4

35.4%

103.90%

37.07%

46.00%

49.60%

EXEL

GoodRx Holdings

7.16

-3.1%

31.1

-36.0%

94.20%

34.98%

28.41%

49.60%

GDRX

Canada Goose

3.58

20.9%

16.4

20.6%

-53.70%

50.85%

34.70%

25.50%

GOOS

Goosehead Ins

2.98

-67.9%

59.1

14.0%

-48.60%

73.79%

35.60%

36.90%

GSHD

Marathon Digital

2.88

-5.5%

6.9

58.7%

-183.70%

66.27%

50.00%

32.70%

MARA

PDC Energy

6.60

19.9%

5.7

24.9%

170.70%

41.41%

27.20%

37.10%

PDCE

Q2 Holdings

3.58

-18.9%

95.6

-16.9%

24.40%

82.55%

34.40%

27.10%

QTWO

WillScot Mobile

8.65

8.0%

24.4

16.7%

67.40%

27.57%

47.30%

34.70%

WSC

For this list of Mid-Cap Growth stocks: the average Market Cap is $8.50 Billion; the average Dividend Yield is 1.42%; the average ROE is 40.4%; the average PEG is 2.03%. Investors seeking growth give up Dividend Yield and PEG. But with a high Price-to-Earnings Ratio (here, it is an average of 45.4), they need to see it dropping (here, the Forward PE is 26.4). They want to see high earnings Growth (here, it was an average of 39.5% over the past five years and is forecast to be 24.9% over the next five years). Investors in Growth also want to see high Margins (here, the average Gross, Operating, and Net Margins are 60.2%, 29.9%, and 24.4%).

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BILL CARA / STOCK MARKET LITERACY

Income Investing in the Mid-Cap Universe Here are some high-quality Income company stocks in my US Mid-Cap universe. Fig. 98.3 Mid-Cap US ‘Income’ Companies as of 2022-03-19 Mid-Cap US Income Company

Industry

Market Cap ($B)

Current Ratio

Debt/ Equity

Profit Margin

Current Yield

Ticker

Chemours Co

Specialty Chemicals

4.82

1.80

3.47

9.60%

3.32%

DT Midstream

Oil & Gas Midstream

5.2

2.00

0.79

36.50%

4.47%

DTM

Energizer Holdings

Electrical Equipment

2.18

1.50

8.59

4.60%

3.93%

ENR

Leggett & Platt

Furnishings & Appliances 4.95

1.50

1.27

7.90%

4.54%

LEG

MSC Industrial

Industrial Distribution

4.48

2.30

0.64

7.40%

3.73%

MSM

NRG Energy

Utilities - Indep Power

9.18

1.40

2.21

8.10%

3.43%

NRG

Nu Skin

Household & Personal

2.37

1.60

0.41

5.50%

3.20%

NUS

ONE Gas

Utilities - Regulated Gas 4.42

2.30

1.78

11.40%

3.01%

OGS

PotlatchDeltic

REIT - Specialty

3.85

3.30

0.50

31.70%

3.16%

PCH

Reynolds Consumer

Packaging & Containers

6.24

2.30

1.20

9.10%

3.09%

REYN

Telephone & Data

Telecom Services

2.13

1.70

0.60

2.20%

3.88%

TDS

Viper Energy

Oil & Gas Midstream

4.96

4.50

0.95

11.50%

3.72%

VNOM

Investors seeking income from Mid-Cap stocks may find acceptable high current yield, but the smaller companies tend to be less stable than larger ones in their dividend policy. But, with any size company, the Investor needs to pay attention to the Total Return when seeking income. Total Return becomes negative if capital losses exceed dividends, which can happen by a large margin. Bottom line: There are unique traits in the different Market Cap stocks. But if investors are comfortable with a stock with relatively good fundamentals at a reasonable price that meets their needs, they should consider investing regardless of size. The talking heads on financial entertainment television will not mention the Mid-Cap and SmallCap stocks as much because the public interest is not as high as in the Large- and Mega-Caps.

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CHAPTER 99

Investing in US small-cap company stocks Market Cap is short for Market Capitalization. It calculates the number of outstanding shares multiplied by the current price. Small-Cap companies have caps of $300 million to $2 billion. Of the approximately 8500 companies listed on the NYSE and Nasdaq, about 65% are SmallCap. The different Market Cap categories have unique trading traits for investors to consider. They may be better Growth candidates but are unlikely to be Value or Income candidates. Most rarely measure up to the hype from management, media, and investment analysts and salespersons. Although it is not always the case, the upside price moves in Small-Cap Stocks tend to be more significant in percentage terms than those of larger company stocks. Challenges in holding Small-Cap stocks in a portfolio: • Fewer analysts follow these companies than Mid-Caps, which means the analyst Ratings and Price Targets are less realistic, and often with only a single analyst reporting, this information is unreliable • They have younger-aged managers who are less experienced in growing company revenues and profit margins organically and often try to build growth through dubious acquisitions • The operational and financial weaknesses and threats are more prevalent in number than Mid-Caps. What do investors look for (i.e., strengths and opportunities): • The key to assessing the quality of Small-Cap company opportunities is the Board of Directors and management, as many new companies have lousy business models with unrealistic budgets and plans, and an inability to execute plans even when their product is a better mousetrap • There are many take-over possibilities in smaller companies that do not exist with Large-Cap companies, and when a larger company proposes a takeover or merger, the price typically comes with a +20% to 30% premium • The most attractive features are summed up in one word, Opportunity. Opportunity comes from (1) products designed to meet consumer needs, (2) a strong marketing 435

BILL CARA / STOCK MARKET LITERACY

and sales team that executes on revenue goals, (3) sufficiently high gross margins that can cover the early-stage general, selling, and administrative costs of the company, (4) sufficient free cash flow to keep debt at a minimum and under control for the times that business conditions get more demanding.

Value Investing in the Small-Cap Universe Take a long list of Quality Small-Cap companies and filter the list by Price/Earnings-toGrowth (PEG) Ratio, Return on Equity (ROE), Dividend Yield, and Forward Price-toEarnings Ratio as we did with Mid-Cap stocks. You may be able to develop a similar list of Small-Cap Value leaders. As of 2022-03-18, the following is my list of 12 Small-Cap Value candidates: The average Market Cap is $1.32 Billion; the average Dividend Yield is 4.06%; the average ROE is 43.1%; the average ROI is 19.7%; the average Quick Ratio is 1.51; the consensus analyst rating is 2.04 (BUY); and the average PEG, which to me is a key determinant of Value, is 0.86%. This reasonably priced group with high dividend-yielding value-based securities is wellmanaged. Fig. 99.1 Small-Cap US Value Companies [2022-03-18] Small-Cap US Value Company

Industry

Market Cap ($B)

ROE

PEG

Dividend

Ticker

The Buckle

Apparel Retail

1.91

46.90%

1.00

3.65%

BKE

CURO Group

Credit Services

0.50

30.20%

0.33

3.52%

CURO

Ethan Allen

Furnishings & Appliances

0.68

22.80%

0.92

4.34%

ETD

Franchise Group

Personal Services

1.77

68.60%

0.63

5.70%

FRG

Global Industrial

Industrial Distribution

1.31

60.90%

1.04

2.08%

GIC

Hackett Group

Information Tech

0.67

28.70%

1.09

2.07%

HCKT

Holly Energy

Oil & Gas Midstream

1.73

50.20%

0.88

8.52%

HEP

PBF Logistics

Oil & Gas Midstream

0.81

70.70%

0.67

9.32%

PBFX

Ruth’s Hospitality

Restaurants

0.75

32.90%

1.29

2.14%

RUTH

Stewart Info

Insurance -Property & Casualty

1.85

27.70%

1.16

2.18%

STC

Trinseo

Specialty Chemicals

1.77

52.40%

1.14

2.68%

TSE

Virtus Investment

Asset Management

1.79

26.40%

0.27

2.52%

VRTS

436

I n v e s t i n g i n US s m a l l - c a p c o m p a n y s t o c k s

Growth Investing in the Small-Cap Universe Here are some high-quality Growth company stocks from my US Small-Cap filter. Fig. 99.2 Small-Cap US Growth Companies [2022-03-19] Small-Cap US Growth Company

Market Cap ($B)

ROE

EPS Fwd PE past 5Y

EPS EPS this Y next Y

EPS Sales next 5Y past 5Y

Ticker

BioDelivery Sciences

0.58

63.6%

8.83

21.6%

235.7%

78.5%

25.0%

60.7%

BDSI

BlueLinx

0.90

118.3%

5.79

76.0%

250.8%

-20.7%

25.0%

17.9%

BXC

Cross Country Health

0.84

60.1%

12.12

74.2%

500.0%

-42.5%

41.1%

15.0%

CCRN

3D Systems Corp

1.97

51.1%

57.66

56.5%

300.4%

163.6%

30.0%

-0.6%

DDD

Daseke

0.71

54.4%

9.50

24.2%

3500.0%

8.3%

25.0%

19.0%

DSKE

Ferro Corp

1.82

29.2%

14.97

10.4%

145.8%

14.4%

22.4%

-0.3%

FOE

H&E Equipment

1.60

39.6%

10.40

9.7%

229.2%

74.7%

39.8%

1.7%

HEES

MarineMax

1.00

28.8%

6.08

49.4%

101.0%

-3.9%

30.0%

17.0%

HZO

Regional Mgmt

0.49

31.6%

6.35

33.2%

247.4%

11.4%

24.0%

12.2%

TETRA Tech

0.43

102.2%

13.92

39.7%

-181.0%

200.0%

29.0%

-8.9%

TTI

Virtus Invest

1.78

26.4%

5.74

33.2%

159.4%

10.1%

34.2%

24.9%

VRTS

Olympic Steel

0.38

32.3%

12.94

156.7%

3825.0%

-15.8%

34.3%

17.0%

ZEUS

I noted that Virtus Investment (VRTS) was in both the Growth and Value lists. Investors seeking growth give up Dividend Yield and PEG and allow a high Price-toEarnings Ratio, although here, it is an average of 10.5. They want a high Return on Equity (ROE) and Return on Investment (ROI), with an average of 53.1% and 14.9%, respectively. Most important is Earnings Growth (here, it was an average of 48.7% over the past five years and is forecast to be 30.0% over the next five years). Growth investors also want to see high Margins. Here the average Gross, Operating, and Net Margins are 36.1%, 12.1%, and 18.8%, respectively. Annual Sales Growth in the past five years has been 14.6%.

Income Investing in the Small-Cap Universe As already noted, investors seeking income from Small-Cap stocks may be looking in the wrong place. Unless the Investor is a sophisticated and experienced trader, the Total Return may be negative as capital losses often exceed any dividends by a huge margin. Because I am not going to go looking for Income candidates in the Small-cap group, I used the same list of 12 Small-Cap Value candidates. You can see that six of the 12 had acceptably high current yields.

437

BILL CARA / STOCK MARKET LITERACY

This well-managed group had an average Market Cap of $1.32 Billion, an average Current Ratio of 1.91, an average Quick Ratio is 1.50, and an Average Debt-to-Equity ratio of 2.2 (which is only 1.28 if the credit services company CURO Group is removed), and Average Profit Margin of 20.5%, and an average Dividend Yield of 4.06%. The average Return on Equity (ROE) is 43.1%, and the average Return on Investment is 19.7%. Fig. 99.3 Small-Cap US Income Companies [2022-03-19] Small-Cap US Income Company

Industry

Market Cap ($B)

Current Ratio

Debt/ Equity

Profit Margin

Dividend Yield Ticker

The Buckle

Apparel Retail

1.93

2.5

0.0

21.8%

3.65%

BKE

CURO Group

Credit Services

0.49

12.1

8.5%

3.52%

CURO

Ethan Allen

Furnishings & Appliances

0.69

1.4

0.0

14.3%

4.34%

ETD

Franchise Group

Personal Services

1.79

1.3

2.5

7.0%

5.70%

FRG

Global Industrial

Industrial Distributor

1.23

1.6

0.0

7.9%

2.08%

GIC

Hackett Group

Information Tech

0.69

1.9

0.0

16.7%

2.07%

HCKT

Holly Energy

Oil & Gas Midstream

2.12

3.2

46.8%

8.52%

HEP

PBF Logistics

Oil & Gas Midstream

0.80

1.2

2.5

54.9%

9.32%

PBFX

Ruth’s Hospitality

Restaurants

0.77

3.6

0.5

11.6%

2.14%

RUTH

Stewart Info

Insurance -Prop. & Casualty

1.85

0.4

13.3%

2.18%

STC

Trinseo

Specialty Chemicals

1.76

2.2

2.3

9.5%

2.68%

TSE

Virtus Invest

Asset Manager

1.78

1.5

2.8

33.2%

2.52%

VRTS

In the past few years, I invested in many Small-Cap stocks with varying degrees of success. Here are links to Snapshots and Charts for a diversified list. The 1H2022 period has been tough on all stocks. That is especially so for Small-Cap stocks unless they have solid balance sheets and operations with adequate free cash flow to survive a liquidity squeeze in the market. Bottom line: The best opportunities for capital growth investments are in Small Cap stocks, but most investors fail to understand (a) the risks involved and (b) the amount of time it takes to investigate and manage the “opportunity properly.”

438

CHAPTER 100

Investing in micro-cap and nano-cap company stocks Market Cap is short for Market Capitalization. It’s the number of outstanding shares multiplied by the current price. Companies that trade with a capitalization of $50 million to $300 million are called Micro-Cap. They are called Nano Cap or Tiny Cap with less than $50 million market cap. Of the 8500 stocks that trade on the NYSE and NASDAQ, about 12% are in this category. The smaller the cap, the greater the apparent capital risk. Risk is an issue, and so is market performance, but the essence of any investment should be Quality, and investors can discover Quality in any size Market Cap. Somebody has told you Small-Cap, Micro-Cap, and Nano Cap stocks are far too risky. Right? That may be the case, but many of these stocks have more robust corporate fundamentals than many in the Dow 30. Besides, are you interested in risk only and not performance? Are the people telling you to avoid most Small-Cap stocks also showing you how bad their performance is with Large- and Mid-Cap stocks? I suspect, despite your reservations, many of you have traded shares in a Micro or Nano Cap company at one point in your life. Moreover, you were in that trade to seek higher performance. My only issue is whether those relatively tiny company stocks were of higher quality than average. While Micro-Cap companies include excellent Quality Growth candidates, they are challenging to find and require close monitoring. You can find these on your own or trade them via specialty ETFs, closed-end companies, and mutual funds. Because of the extra work involved in research and trading, Micro-Cap Funds have a higher Management Expense Ratio. With over 50 years of experience, I can tell you the best guideline to trading success in a tiny-cap company is to buy into a previously successful stock promoter. The promoter is typically the CEO or the VP of Capital Markets or Investor Relations. The cream rises to the top. The ones who have succeeded with one deal are more likely to be successful with a second and a third. Stock promoters are wholesalers of stock. They are the dream merchants who pick up lowvalue stock, acquire potentially valuable assets, create a sales pitch that overstates the value, and then try to create buying interest.

439

BILL CARA / STOCK MARKET LITERACY

The stories are attractive. The intention is to hook you. Make no mistake: all stock is sold, not bought. And when it’s being sold, the risk is usually not part of the conversation. I could recommend that you avoid getting personally involved, but why suggest the impossible? The smaller the company, the more emotions are at play. If the promoter does an adequate job, the stock price increases regardless of whether the asset performs as hoped. By ‘effective,’ I mean the promoter’s ability to find buyers. They do that by convincing broker-dealer Registered Reps who sell penny stocks, large retail accounts, and a network of market letter writers. A promoter’s network of 100 people could be connected to hundreds of thousands of potential stock buyers. Given that you are investing in the promoter, how can you tell when that person is selling? Insider trading rules require full disclosure. Securities regulators, however, do not resolve this issue in the manner the public needs. Sometimes the primary promoter is not involved in company management or the Board of Directors. This person may not even appear to the regulators as an insider in such cases. Tracking promoter distribution is complex but not impossible. But tracking volume is a necessity for heavily promoted companies. Stock prices often flatten following a period of a high-profile promotion, large trading volume, and rising share prices. That’s when I’m 95% certain the promoter is selling. Trade volume is almost impossible to hide, but that does not stop some promoters from trying. A stock promoter once called me in the Bahamas from afar to “find out” why I thought his stock was trading so much volume. Then he pointed the finger at one of my friends in Europe. That’s called scouting. The promoter was trying to determine if the word was out that he was selling personal stock. So, to survey the lay of the land, the promoter called various people close to his market. If confident that “the Street” doesn’t suspect his selling, he’ll continue to sell. In this business, when you gain enough experience with ‘emerging’ opportunities, it’s easier to pick up the cues. Sell if you think they may be selling. Little else is as critical, particularly in the case of small companies. If the promoter lacks ethics, their network is essentially a “sucker’s list.” The highest Quality companies do not hire such people. There is an expression about promoters that if their lips are moving, they’re lying. That is not to say that most of the thousands of stock promoters I have met in 50 years have done something wrong. I trust most stock promoters as much as I do Wall Streeters, bankers, accountants, lawyers, and politicians. In my long experience dealing with promoters, I know many to be highly trustworthy. It’s just that until I do my homework and prove otherwise – at least to myself – I presume they’re all overselling the facts. The bottom line is if you buy into Micro-Cap or Nano Cap stocks, you have to understand there is a good chance of misrepresentation in the corporate literature and the promoter’s claims. If you’re that interested in the story — and many of them sound appealing — then

440

Investing in micro-cap and nano-cap company stocks

you must do your due diligence. And you have to be prepared to sell at any time based on your analysis because, with heavily promoted stock, nobody will present you with a good case for selling. I have observed years of market manipulations in so-called Blue-Chip stocks as fraudulent as in Microcap company stocks. The lipstick gets painted on giant pigs too. So there is no reason to avoid investing in a small company because some people think they are risky. You could try a market advisory or newsletter if you want someone else to do your homework on Micro-Cap and Nano-Cap companies. Some have suitable credentials and a record of accomplishment. Most do not. I have never subscribed to one because I know how close the personal relationships get between the promoters and the newsletter writers. Most of them receive free stock or other tangible benefits. It would help if you differentiated between speculations, promotion, and swindling. If you are new to the game, it pays to read up on case studies. They tell a story of fortune and misfortune for the various players. As I often do, you might also read the “pro” articles on Seeking Alpha. I even write some myself. At all times, there are hundreds of high-quality tiny cap companies seeking investment and worthy of it. As with investigating larger companies, the points to consider with small companies are the same. In order of importance, look for (1) business model, (2) capable management, (3) proven demand for the product, and (4) scalability. • To a company, the business model is its plan to make a profit. To an investor, the business model encompasses the plan overview and the company’s capital structure. Too often, companies are over-leveraged in debt and do not have the cash flow to service the debt, so their going-concern status is at stake. Often there are insufficient funds to execute the business plan. • Capable management is not a matter of academic credentials or a shining resume. Past successes are quickly listed and often misleading. Respect from industry peers and investment bankers is of far greater importance. • Demand for products refers to sales and not projections. Too many promotions inform the prospective investor about the global market. We need to know if and when the company produces a product that buyers want. • Scalability is a company’s ability to grow revenue effectively and efficiently without being hampered by the business and financial structure or available resources when facing increased sales and production. Never underestimate the time and cost it takes to determine the Quality of a Micro-Cap (or smaller) company. Given your interest in an exciting story, there is a lot of homework to do. That requirement expands with the funds invested. If the company is new and an Initial Public Offering (IPO) is underway, there is an essential legal document called a prospectus to read. It’s full of legal “cover their ass” jargon that few people understand. But from skimming it, at least you know the facts filed with securities

441

BILL CARA / STOCK MARKET LITERACY

regulators and approved by the sales underwriter. Reporting Issuers file an audited Financial Statement, Management Discussion & Analysis, and news releases. Investors and analysts review them. These are the facts you need to read. An investment analyst or two has given a Buy/Sell/Hold Rating and a Price Target. However, most of those are deceiving as analysts wrote their findings to support their firm’s underwriters or sales departments. Start your investigation by reading the independent auditor’s report. Does the auditor state that management prepared these documents properly and the business is a going concern or one that will be able to continue operations only if it can raise more capital in the future? If the company is small, try to meet with the Company’s senior management in person or on a video call. Then follow their comments and news releases for accuracy or reasonableness over time—phone or email these people to question them on the company’s progress. Focus on Gross Margin, Revenue Growth, and Cash available to fund business losses until the company is self-sustaining. A benchmark comparison is one of the most valuable learning experiences for investors in Micro-Cap companies. Rather than the S&P 500, compare these possible buys to a few companies that meet your requirements, such as minimal revenue and earnings growth. We are all different in our needs and interests. The filtering system at FinViz.com is a valuable tool. Here are 12 US Micro-Cap company stocks that meet my requirements for Return on Equity (ROE), Return on Investment (ROI), Forward PE, Price-to-Earnings Ratio (PEG), Current Ratio, Debt-to-Equity ratio, and Profit Margin as well as indicate growing earnings. Fig. 100.1 Micro-Cap US Growth Companies [2022-03-19] Micro-Cap US Growth Company

Market Cap ($M) ROE

EPS Fwd past PE 5Y

EPS this Y

EPS next Y

EPS next 5Y

Sales past 5Y

Ticker

Charles & Colvard

54.8

20.9%

17.5

30.0%

297.0%

42.9%

30.0%

6.1%

CTHR

Commercial Vehicle

275.9

20.6%

6.2

12.0%

161.0%

32.7%

12.0%

8.0%

CVGI

Electromed

109.0

5.8%

35.0

15.0%

-43.8%

42.3%

15.0%

9.2%

ELMD

EMCORE Corp

141.7

19.4%

9.8

15.0%

398.2%

54.2%

15.0%

11.5%

EMKR

Lincoln Education

205.9

24.6%

7.0

15.0%

-30.0%

73.7%

15.0%

3.3%

LINC

Medallion Financial

237.6

20.7%

4.5

15.0%

252.5%

32.5%

15.0%

44.7%

MFIN

Everspin Tech

182.2

20.2%

27.2

20.0%

148.0%

41.7%

20.0%

15.3%

MRAM

442

Investing in micro-cap and nano-cap company stocks

Orion Energy

95.5

47.1%

9.5

25.0%

107.4%

31.8%

25.0%

11.6%

OESX

PFSweb

261.0

162.5% 21.4

20.0%

-146.6%

27.3%

20.0%

3.5%

PFSW

Sharps Compliance

111.6

23.6%

32.4

22.5%

448.0%

60.2%

22.5%

18.0%

SMED

Universal Technical

284.2

12.4%

6.5

15.0%

209.2%

127.4%

15.0%

-0.7%

UTI

VirTra, Inc.

61.6

19.5%

15.4

40.0%

52.6%

30.7%

40.0%

7.4%

VTSI

Unlisted securities In the United States, a market called the OTC Markets Group serves over 11,000 companies not listed on traditional exchanges. In some cases, these are foreign securities. Some large companies choose not to list on the NYSE or Nasdaq for some reason. But, for the most part, these companies fail to meet the exchange’s listing requirements. OTC-traded securities are organized into three tiers of various risks: OTCQB®, OTCQX®, and Pink® securities. The OTCQX is the highest quality tier, and the Pink, which used to be called the Pink Sheets, is the lowest. OTC trading is done via OTC Link® ATS. This electronic interdealer quotation and trade messaging system is an SEC-registered Alternative Trading System. The trading is efficient, although a tad costly, and the fills are often not as good even when the liquidity does not appear to be a factor. In January every year, the OTC Markets Group announces its “OTCQX® Best 50, a ranking of the top-performing of the highest tier OTCQX companies in the prior calendar year. These companies leverage the transparency and disclosure standards of the premium OTCQX market to increase their exposure” to potential investors. Here is the OTCQX list for 2022, These 50 companies traded “an aggregate of $594 million in average daily dollar volume in 2021, up from $123 million in 2020. The companies delivered a median total return of 81% to investors in 2021. The median market cap for the companies ranked in this list was almost $200 million, and among them were nine companies with a market cap greater than $1 billion.” Fig. 100.2 OTC Markets Group OTCQX® 2022 Best 50 Companies Rank

Company

OTCQX Ticker

Nanalysis Scientific Corp.

NSCIF

Constantine Metal Resources Ltd.

CNSNF

InPlay Oil Corp.

IPOOF

Filo Mining Corp.

FLMMF

Journey Energy Inc.

JRNGF

Opsens, Inc.

OPSSF

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BILL CARA / STOCK MARKET LITERACY

Grayscale Ethereum Trust (ETH)

ETHE

IsoEnergy Ltd.

ISENF

Corsa Coal Corp.

CRSXF

Obsidian Energy Ltd.

OBELF

Global Atomic Corp.

GLATF

Neo Lithium Corp.

NTTHF

NOVONIX LTD.

NVNXF

Petrus Resources Ltd.

PTRUF

Grayscale Ethereum Classic Trust (ETC)

ETCG

Wow Unlimited Media Inc.

WOWMF

Labrador Gold Corp.

NKOSF

Western Uranium & Vanadium Corp.

WSTRF

Eloro Resources Ltd.

ELRRF

Taal Distributed Information Technologies Inc.

TAALF

Deep Yellow Ltd.

DYLLF

Torq Resources Inc.

TRBMF

Bombardier Inc.

BDRBF

Coastal Carolina Bancshares Inc

CCNB

Fission Uranium Corp.

FCUUF

Grayscale Digital Large Cap Fund LLC

GDLC

Indiva Ltd.

NDVAF

Millennial Lithium Corp.

MLNLF

Converge Technology Solutions Corporation

CTSDF

POET Technologies Inc.

POET

4Front Ventures Corp.

FFNTF

Amerigo Resources Ltd.

ARREF

Enzon Pharmaceuticals, Inc.

ENZN

Yankuang Energy Group Co Ltd.

YZCAY

ASM International N.V.

ASMIY

NioCorp Developments Ltd.

NIOBF

Thunderbird Entertainment Group Inc.

THBRF

SVB&T Corporation

VBT

Nuvo Pharmaceuticals Inc

MRVFF

Unrivaled Brands, Inc.

UNRV

GOODNESS GROWTH HLDGS INC.

GDNSF

444

Investing in micro-cap and nano-cap company stocks

Ivanhoe Mines Ltd.

IVPAF

H2O Innovation Inc.

HEOFF

Nanoxplore Inc.

NXPF

Grayscale Bitcoin Trust (BTC)

GBTC

Corning Natural Gas Holding Corporation

CNIG

Table Trac, Inc.

TBTC

MariMed Inc.

MRMD

Adventus Mining Corp.

ADVZF

GrandSouth Bancorporation

GRRB

A large number of OTCQX companies are from Canada. Note that tickers ending in F are foreign corporations. Some items with a strikethrough are traded in Canada and may trade in the US but are not picked up by the data service. The tickers ending in Y identify the stock as an American Depositary Receipt. When investors buy or sell ADRs, they are trading in the U.S. market, and the trade will clear in U.S. dollars. Most OTCQX-listed companies are relatively new. Some have applied to the NYSE or Nasdaq for an exchange listing that gives them a higher profile than the US OTC market. So, even though an OTCQX listing is a premium listing, expect to see more remarkable change here than on traditional exchanges. In Fig. 100.2, I linked the name to the OTCQX information or elsewhere. Fig. 100.3 Bill Cara 2021-2022 holdings in three OTCQX Best 50 Companies 1

Nanalysis Scientific Corp.

NSCIF

InPlay Oil Corp.

IPOOF

Filo Mining Corp.

FLMMF

In fact, at the time of authoring this book, InPlay Oil is my only Oil & Gas holding. It’s my only holding of these three and the rest of the list. I also subsequently downgraded Nanalysis Scientific Corp. Click on the following link to view the InPlay Oil Corp. (OTCQX: IPOOF | TSX: IPO) Company Presentation at the OTCQX Best 50 Virtual Investor Conference hosted by OTC Markets Group on June 16, 2022: InPlay Oil Corp. (OTCQX: IPOOF | TSX: IPO) Company Presentation This information may be complex for most investors to grasp. The InPlay CEO is saying that his company is small but is also one of the industry leaders in per-share Revenue, Revenue growth, Free Cash Flow growth, and Gross Margin. The Company should be debt-free early in 1Q2023 if #WTI prices continue to average 85-95 for the balance of 2022. The Company has at least ten years of drilling inventory on hand.

445

BILL CARA / STOCK MARKET LITERACY

Live and virtual Small-Cap “opportunity” conferences In the months before publishing this book, I attended four nano/micro-cap conferences of the Capital Events Management Group (CEM). At every event, a colleague group of senior securities investment advisors and high-net-worth private investors meet top-flight presenting companies. That is where I met Doug Bartole, CEO of InPlay Oil. After each one-day series of eighteen one-on-one meetings with company CEOs, our group will meet privately for one hour to present our top three choices and reasons we were impressed. These selections are summarized and reported to us by CEM. This process is how I find future winning investments among small but up-and-coming companies. The video at this link captures the essence of these events. This link lists the upcoming events. At the Muskoka Ontario conference in September 2021, the Fort Lauderdale Florida conference in October 2021, and the Montreal conference in June 2022, thirty-six presenting companies. At Nassau Bahamas, in March 2022, the biggest of the year, fifty-four companies presented. CEM staff filters all companies from many applicants. There are an equal number of private investors/investment advisors and companies at each conference. Our group requires a personal invitation to attend. Most are investment advisors, and most prominent firms (Scotia, BMO, RBC, Wells Fargo, CIBC, Manulife, Raymond James, and Canaccord) have at least one representative attending. I have blogged about how blessed I am to be involved. In my 40+ year professional career, I attended at least one hundred investment conferences in person all over North America. I discovered that CEM events are, bar none, the best. I wish I had met the CEM team ten years ago when they started and when I was young enough to maximize the experience. One company that stood out most to the CEM network and me is Volatus Aerospace. In my blog, I wrote about Volatus on Oct. 4, 2021, and Feb. 1 and 16, 2022. Volatus presented in September at the CEM 2021 Muskoka Conference, where my wife and I had dinner and drinks with Glen Lynch, the Volatus Founder/CEO, and his CFO Abhi Singhvi. But the Company had not been assigned to my group of meetings, so I was fortunate to meet them socially. Volatus later went public in December. At the CEM 2022 Bahamas conference in March, Volatus was my number one pick of the 18 I met. Once again, Glen, Abhi, and I later met for drinks at the Saturday dinner. So, after my second personal meeting, I got to know the company well and made my initial investment the following week. Here is what I told my peers at the Investors Breakout Exchange in Nassau, Bahamas, to explain Volatus as my top pick: 1. The drone market is exploding worldwide. (Cash-starved) companies are phoning Glen Lynch every week to sell out to him 2. In two years, Glen acquired eleven companies in his industry, retained 100% of the staff, immediately increased their annual revenues by +50-100%, and in total has added just $600,000 in goodwill to his balance sheet, so these acquisitions are being done prudently and are accretive 446

Investing in micro-cap and nano-cap company stocks

3. Glen is building a global powerhouse in the drone industry. This Ottawa-based aerospace company will become vital to Canada, but he needs risk capital funding to finish the job. Through acquisitions, Volatus is rapidly building an international powerhouse in drone manufacturing and services. Their presentation at international investment conferences is so impressive that they scored #1 best presenter in September 2022 at the Peterson Capital Conference in La Cote d’Azur, France, and earlier at the Capital Events Management conferences across North America and the Bahamas. Of 54 companies that presented at the March 2022 Bahamas CEM AlphaNorth conference, Volatus was the investor/advisor consensus number 1 pick. As a private company at the September 2021 Muskoka conference, we picked Volatus as number 4 of 36. At his first conference in July 2021 at Whistler BC, my peers selected Volatus as number 6 of 36. So, not only are the Company’s revenues, cash flow, and earnings on a positive trend, they have trended to number 1 in reputation among my investment colleagues. Volatus Aerospace is young, has a market cap of about US$30 million in 3Q2022, and will not produce its first profit before the first quarter of 2023, but the Company is already flying high. It represents the essence of the emerging company of today that may one day become a prominent name around the world. Bottom line: If you meet these companies, follow up with zoom calls, and read the news releases, financial summaries, and Management Discussion & Analysis (MD&A) filings with regulators in the US and Canada. Doing so will make you comfortable taking the higher capital risk required to invest in nano/micro-cap stocks. Research and monitoring is a significant time demand. But with patience, you can succeed with your investment.

447

SEC TION 10

Investing in International Markets 101 Investing in Canada 102 Investing in Mexico 103 Investing in South America 104 Investing in France 105 Investing in Germany 106 Investing in Italy 107 Investing in Spain 108 Investing in the Netherlands 109 Investing in Sweden and Norway 110 Investing in Switzerland 111 Investing in the United Kingdom (UK) 112 Investing in India 113 Investing in Australia and New Zealand 114 Investing in Japan 115 Investing in Singapore 116 Investing in Hong Kong 117 Investing in China 118 Investing in the Rest of the World 119 Bellwether stocks for each country 120 Investing in a Global Stock Portfolio

448

CHAPTER 101

Investing in Canada Canada has one of the world’s most sophisticated capital markets and regulatory regimes. The largest companies are multinationals and cross-border partners with American companies, and the economies and stock markets are inseparable. The CIA World Fact Book says, “Economically and technologically, the nation has developed in parallel with the US neighbor to the south across the world’s longest international border. It is a land of vast distances and rich natural resources.” Two-thirds of the 38 million population live in 4% of the territory within 60 miles of the US border. In July 2022, 243 Canadianheadquartered companies traded on the NYSE, Nasdaq, and Toronto Exchange. A great many more trade on the US OTC market. Canadians are culturally slightly more socialist than Americans, committed to their universal health insurance, which is not unlike the health management systems of much of the world except the US. For a sense of the country for those who don’t know much, investors ought to check out the World Fact Book. I would next look at the Investing.com Canadian Market Overview. The tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-to-date prices. I was born and bred in Canada and have worked for the country’s most prominent financial services and auditing companies. I once took a 10-year lease on half the Toronto Exchange tower penthouse to start a business for the biggest broker-dealer not owned by a large Canadian bank. There are eight or nine stock exchanges in Canada. The most important are the Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange, and Neo Exchange. Note that stock exchange holidays in Canada and other countries frequently differ from those in the United States and elsewhere. Note that some company tickers in Canada differ from NYSE and Nasdaq. For example, Kinross Gold Corp, which is K in Canada, is KGC in the US.

449

BILL CARA / STOCK MARKET LITERACY

Fig. 101.1 Graphic symbolizing that the economies of Canada and the US are inseparable

Exports drive Canada’s economy, not only to the US but internationally. Canada is the largest goods trading partner of the US, with US$665.5 billion in total twoway goods trade during 2021. Goods exports to the US totaled $357.8 billion; goods imports totaled $307.8 billion. These figures will grow substantially in 2022. While China’s imports are the largest for the US in total trade in goods and services, Canada and the US are the world’s largest trading partners. Manufactured products include materials and parts that cross the border repeatedly until the end product is delivered. Energy, mining, forestry, and agriculture are the heart of the Canadian economy, so economic success or disappointment is a matter of international market prices. Note that the country prefers a weak Canadian Dollar (CAD) to increase global export sales. As natural resource industries are highly cyclical, investors should be mindful of cyclicality in the stocks. Canada’s capital market prices and the group indexes move forward in longterm trends and cycles. As commodity prices are volatile, a snapshot gives insufficient information to make trading decisions. Investors need to watch for trends and cycle reversals. My approach to investing in securities of a foreign country is first to assess the big picture through Indices and ETFs. Fig. 101.2 The key Canadian stock market indices Major Canadian Indices S&P/TSX Composite S&P/TSX 60 Large-Cap S&P/TSX Completion S&P/TSX Small-Cap S&P/TSX Venture

450

Investing in Canada

Fig. 101.3 Leading ETFs in Canada Canadian ETF Name

Toronto Ticker

BMO S&P/TSX Capped Composite

ZCN.TO

iShares S&P/TSX 60

XIU.TO

Vanguard FTSE Canada All Cap

VCN.TO

BMO Low Volatility Canadian Equity

ZLB.TO

BMO S&P/TSX Equal Weight Banks

ZEB.TO

iShares S&P/TSX Capped Energy

XEG.TO

First Asset Energy Giants Common

NXF.TO

BMO S&P/TSX Equal Weight Oil & Gas

ZEO.TO

Horizons Medical Marijuana Life Sciences

HMMJ.TO

iShares S&P/TSX Capped REIT

XRE.TO

iShares Core S&P/TSX Composite High Dividend

XEI.TO

iShares Core MSCI Canadian Quality Dividend

XDIV.TO

iShares Canadian Corporate Bond

XCB.TO

iShares Canadian Short-Term Bond

XSB.TO

RBC Canadian Bank Yield

RBNK.TO

BetaPro Canadian Gold Miners 2x Daily Bull

HGU.TO

Investors who are interested in Canadian stocks should track the trading of ETFs at this link at Investing.com. Fig. 101.4 Toronto Exchange Market Sentiment Indexes Toronto Exchange market studies

Chart Symbol

TSX - Composite Index

$TSX

TSX - Composite Bullish Percent Index

$BPTSE

TSE - Total Active Trading Symbols

$TOTOT

TSX - High-Low Index (EOD)

$TSXHILO

TSX - New Highs

$TOHGH

TSX - New Highs-New Lows

$TOHL

TSX - New Lows

$TOLOW

TSE - Advance-Decline Issues

$TOAD

TSE - Issues Advancing

$TOADV

TSE - Issues Declining

$TODEC

TSE - Issues Unchanged

$TOADU

TSE - Total Volume (EOD)

$TOTV

TSE - Volume Advancing (EOD)

$TOUPV

451

BILL CARA / STOCK MARKET LITERACY

TSE - Volume Declining (EOD)

$TODNV

TSE - Volume Unchanged (EOD)

$TOUDU

TSE - Advance-Decline Volume (EOD)

$TOUD

In illustration 101.5, I selected 12 Large-cap stocks. These companies are high-quality. They are constituents of the S&P/TSX Composite Index, the leading equities benchmark for Canada. It’s also the basis for Canada’s most highly traded futures contract. Fig. 101.5 Key stocks in the S&P/TSX 60 (With data at the date of writing)

Company

Toronto Ticker

Market Cap (Billion CAD)

Revenue (Billion CAD)

PE Ratio

Beta

Average Daily Volume (Million )

BCE Inc

BCE.TO

61.75

23.34

22.27

0.33

3.23

Bank of Montreal

BMO.TO

96.18

16.78

12.82

1.16

2.30

Bank of Nova Scotia

BNS.TO

112.67

19.30

12.11

0.85

4.20

Canadian Imperial Bank

CM.TO

73.87

11.64

11.76

1.02

1.64

Canadian Natural Resources

CNQ.TO

80.4

25.86

13.78

2.22

5.89

Canadian National Railway

CNR.TO

109.25

14.48

22.65

0.63

1.14

Enbridge

ENB.TO

67.25

44.61

19.25

0.93

10.06

Nutrien

NTR.TO

52.76

31.33

18.37

0.78

1.28

RBC

RY.TO

209.24

29.03

13.28

0.78

3.90

Suncor Energy

SU.TO

53.11

34.60

22.89

2.00

10.90

Toronto Dominion Bank

TD.TO

192.52

24.13

13.68

0.87

5.48

The Comparison tool at MarketBeat.com is effective for quickly assessing the top Canadian stocks. Go to this link, and for the top five banks only, replace the stocks to compare with this string: TSE:TD, TSE:BMO, TSE:BNS,TSE:CM, As the principal large-cap Index for Canada, the S&P/TSX 60 Index offers exposure to sixty liquid large-cap Canadian stocks. This index is market cap weighted. Weights are adjusted for available share float and balanced across ten economic sectors. But being market-cap weighted, note that Canada’s five largest banks appear to play a more prominent role in the Canadian economy than is the case. In a market-cap-weighted index, companies often have excessive weighting. For example, on Jan 16, 2009, technology company Nortel’s final trading day as a constituent of the S&P/TSX 300 composite had an index weighting of just 0.007 percent. The company had fallen into bankruptcy. But eight and a half years earlier, on August 1, 2000, Nortel represented a mammoth 33.47 percent of the Toronto Composite index. The other 299 stocks in the index totaled 66.53 percent. Seagram, the number two company, accounted for 2.85 percent. 452

Investing in Canada

The S&P/TSX 60 represents the Canadian component of the S&P Global 1200 and is also a component of the S&P/TSX 300 Composite. I would hold about 4% in Canada in a global stock portfolio. So, for a 25-stock portfolio, one would be from Canada. I recommend setting up a watchlist at Investing.com for stocks like those in illustration 101.5. My selection and trading would be based on the market timing analytics described on these pages. Under the Summary tab, there should be an up-to-date viewing of Price, Fundamentals, Technical, Performance, and Candlestick Patterns. You can compare or add symbols and apply your choice of technical indicators. You can even take a snapshot as I do when writing for my blog at billcara.com. For the customization under the Price tab, I used: Name, Symbol, Exchange, Last Price, Open, High, Low, Volume, and Next Earnings Date. For Fundamentals, you will find Market Cap. Revenue, 3-month Average Volume, PE, PE Ratio, Beta, Dividend, and Current Yield. You will find Technical assessments based on many indicators and moving average studies for the latest 15-minute and Hourly data. For Performance, you will find the gain or loss over 1-day, 1-week, 1-month, Year-To-Date, 1-Year, and 3-years. Candlestick Patterns will show Emerging Patterns and Completed Patterns based on the Investing.com automated studies of price motion over various time frames. Note the reliability of each Pattern. Under the Charts tab, you will find charts for many time series (1-, 5-, 15-, 30-, and 45-minute, and 1-, 2-, 4-, 5-hour, and 1-day, 1-week, and 1-month time frames. The Finance.Yahoo.com, Investing.com, and StockCharts.com free data services are sufficiently comprehensive to enable investors to trade effectively. Click on this link to access the new as yet untitled screener from Finance.Yahoo.com. Then select Canada in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. If you intend to track a Canadian stock across multiple markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and is categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This link is to a list of Canadian ADRs. Here is a list of Canadian stocks traded in New York on the NYSE or Nasdaq. Note the extensive information tabs.

453

BILL CARA / STOCK MARKET LITERACY

When trading international markets from abroad, particularly in large accounts, the trends and cycles of currencies play a significant role in decision-making. Fig. 101.6 The indexes and Canadian currency pairs for international Forex trading Currency Pair

Chart Symbol

FX Trading

Canadian Dollar – Philadelphia

$CDW

Canadian Dollar – Philadelphia

$XDC

Canadian Dollar to Australian Dollar (NBD)

$CADAUD

Canadian Dollar to British Pound (NBD)

$CADGBP

Canadian Dollar to Euro (NBD)

$CADEUR

Canadian Dollar to Hong Kong Dollar (NBD)

$CADHKD

Canadian Dollar to Japanese Yen (NBD)

$CADJPY

CAD/JPY

Canadian Dollar to Swiss Franc (NBD)

$CADCHF

CAD/CHF

Canadian Dollar to US Dollar (NBD)

$CADUSD

Australian Dollar to Canadian Dollar (NBD)

$AUDCAD

AUD/CAD

British Pound to Canadian Dollar (NBD)

$GBPCAD

GBP/CAD

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Hong Kong Dollar to Canadian Dollar (NBD)

$HKDCAD

Japanese Yen to Canadian Dollar (NBD)

$JPYCAD

New Zealand Dollar to Canadian Dollar (NBD)

$NZDCAD

Swiss Franc to Canadian Dollar (NBD)

$CHFCAD

US Dollar to Canadian Dollar (EOD)

$USDCAD

NZD/CAD USD/CAD

Bottom line: International investors who seek to diversify with investments in Canada will soon recognize that Canada is a politically, socially, and economically stable nation with a highly sophisticated financial system and capital market. It has similarities but is unique from the US system.

454

CHAPTER 102

Investing in Mexico Investing in Mexican stocks is entirely different than a private direct investment in Mexican companies or doing business in Mexico. Mexico’s capital market and regulatory regime are not considered vital as the stock market is used mainly for trading foreign securities. Whereas five widely held global banks dominate Canadian business, a relatively few wealthy persons control the most critical Mexican companies. US Foreign Direct Investment in Mexico exceeds $100 Billion and is likely to grow annually by about $13 Billion. Ranking 11th among global economies with a US$2.4 Trillion economy and a population of 120 million, the country has a strong manufacturing sector that enjoys a high level of import-export business with America. The biggest exports are cars, auto parts, computers, trucks, and crude oil. Mexican pesos are continually depreciating against the USD – down 49% from 13.29 in 2013 to 19.8 in 2020. Warring cartels are a source of illegal drug shipments to the US. The US-Mexican border is also problematic, as 2022 will result in about 2 million migrant encounters. For a sense of the country, investors ought to check out the World Fact Book. I would next look at the Investing.com Mexico Market Overview. The tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-to-date prices. My approach to investing in securities of a foreign country is first to assess the big picture through Indices and ETFs. Yahoo Finance has the charts. Capital market prices move forward in trends and cycles. A snapshot provides insufficient information to make trading decisions. Look for trend and cycle reversals in weekly, daily, or hourly charts. Fig. 102.1 The key Mexican stock market indices Mexican Market Indexes

Chart Symbol

Dow Jones Mexico Stock Index

$MXDOW

iShares MSCI Mexico Index

$INW

Mexico Index - NYSE Arca

$MXY

Dow Jones Latin America - Ex. Mexico Index

$A4DOW

455

BILL CARA / STOCK MARKET LITERACY

With this link, investors can investigate the EWW Mexican iShares ETF components and multi-year performance. Fig. 102.2 Mexican Funds that are US listed Mexican Market ETF or Closed-end Fund

US Ticker

Mexico iShares

EWW

Mexico Equity and Income Fund

MXE

Mexico Fund, Inc.

MXF

Fig. 102.3 Mexican market ETFs Mexican listed ETFs iShares NAFTRAC Actinver Casa de Bolsa Dlr Trac iShares $ Floating Rate Bond UCITS Acc USD ESGMEX ISHRS GENIUS21 S&P/Valmer Mexico CETETRC S&P/Valmer Mexico M10TRAC iShares Mexico Corporate Bond TRAC Vanguard FTSE BIVA Mexico Equity Actinver Casa de Bolsa Pso Trac iShares Latin America 40

To find all ETFs that trade in Mexico, go to Investing.com, which includes ETFs with their nexus elsewhere. This list of Mexican Exchange-listed companies may also trade in the US. Fig. 102.4 Noteworthy Mexican companies listed on the Mexican Exchange Important Mexican Companies that trade in Mexico and some in the US

Mexican Ticker

Alfa

ALFAA

Alsea

ALSEA

America Movil

AMXL

Arca Continental

Asur B

ASURB

Banco Del Bajio

BBAJIOO

Becle

CUERVO

BCCLF

Bimbo

BIMBOA

GRBMF

Bolsa Mexicana De Valores

BOLSAA

456

US Ticker

AMX ASR

Investing in Mexico

Cemex

CEMEXCPO

Coca-Cola Femsa

KOFUBL

KOF

Controladora Vuela

VOLARA

VLRS

Corporacion Inmobiliaria Vesta SAB

VESTA

El Puerto De Liverpool C1

LIVEPOLC1

Fomento Economico UBD

FEMSAUBD

FMX

GAP B

GAPB

PAC

Genomma Lab Int

LABB

Gruma SAB de CV

GRUMAB

Grupo Carso

GCARSOA1

Grupo Cementos Chihuahua

GCC

Grupo Elektra

ELEKTRA

Grupo Financiero Banorte

GFNORTEO

Grupo Financiero Inbursa

GFINBURO

Grupo Mexico

GMEXICOB

Grupo Televisa Unit

TLEVISACPO

Industrias Penoles

PEOLES

Kimberly - Clark A

KIMBERA

Megacable Holdings

MEGACPO

OMA B

OMAB

Orbia Advance

ORBIA

MXCHY

PINFRA

PUODY

Qualitas Controladora

Regional

Telesites SAB de CV

SITESB1

Wal Mart de Mexico

WALMEX

GRBMF

TV IPOAF

WMMVF

Eight of the S&P Latin American 40 index, a part of the S&P Global 1200 Index, are from Mexico (in January 2022). Of these, America Movil (telecom) and Cemex (building materials) are popular because they also trade on the NYSE. This Finance.Yahoo.com screener has a list of stocks on the Mexican Exchange. Click on this link to access the new, as yet untitled screener. Then select Mexico in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. Mexico’s political, economic, currency and market risks cause many investors against holding stocks that trade only in the Mexican market. So in a well-diversified global portfolio of 20 or 25 international companies, I omitted any. For exposure to Mexico, many North American companies have business operations in Mexico, and many Mexican companies list their securities in New York.

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BILL CARA / STOCK MARKET LITERACY

This FinViz.com link lists the Mexican stocks traded in New York. As of February 2022, there were sixteen in total. Fig. 102.5 Mexican companies listed on US markets Important Mexican Companies that trade in Mexico and some in the US

Mexican Ticker

Alfa

ALFAA

Alsea

ALSEA

America Movil

AMXL

Arca Continental

Asur B

ASURB

Banco Del Bajio

BBAJIOO

Becle

CUERVO

BCCLF

Bimbo

BIMBOA

GRBMF

Bolsa Mexicana De Valores

BOLSAA

Cemex

CEMEXCPO

Coca-Cola Femsa

KOFUBL

KOF

Controladora Vuela

VOLARA

VLRS

Corporacion Inmobiliaria Vesta SAB

VESTA

El Puerto De Liverpool C1

LIVEPOLC1

Fomento Economico UBD

FEMSAUBD

FMX

GAP B

GAPB

PAC

Genomma Lab Int

LABB

Gruma SAB de CV

GRUMAB

Grupo Carso

GCARSOA1

Grupo Cementos Chihuahua

GCC

Grupo Elektra

ELEKTRA

Grupo Financiero Banorte

GFNORTEO

Grupo Financiero Inbursa

GFINBURO

Grupo Mexico

GMEXICOB

Grupo Televisa Unit

TLEVISACPO

Industrias Penoles

PEOLES

Kimberly - Clark A

KIMBERA

Megacable Holdings

MEGACPO

OMA B

OMAB

Orbia Advance

ORBIA

MXCHY

PINFRA

PUODY

458

US Ticker

AMX ASR

GRBMF

TV IPOAF

Investing in Mexico

Qualitas Controladora

Regional

Telesites SAB de CV

SITESB1

Wal Mart de Mexico

WALMEX

WMMVF

If you track a Mexican stock in different markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form, and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. Here is a list of Mexican stocks that trade in the US as ADRs. Here is a list of Mexican stocks traded in New York on the NYSE or Nasdaq. Note the extensive information tabs. When trading international markets from abroad, particularly in large accounts, currency trends and cycles play a crucial role. The most important currency pairs for trading in Europe are as follows. Note that FOREX charts are End of Day (EOD) values: Fig. 102.6 The indexes and Mexican currency pairs for international Forex trading Currency Pair

Chart Symbol

Mexican Peso to British Pound Sterling (NBD)

$MXNGBP

Mexican Peso to Euro (NBD)

$MXNEUR

Mexican Peso to US Dollar (NBD)

$MXNUSD

British Pound to Mexican Peso (NBD)

$GBPMXN

Euro to Mexican Peso (NBD)

$EURMXN

US Dollar to Mexican Peso (EOD)

$USDMXN

FX Trading

USD/MXN

Bottom line: Mexico is a significant emerging economy that benefits from substantial US-based Foreign Direct Investment and a solid import-export business. But global investors will face considerable capital risks with Mexican domestic stocks.

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CHAPTER 103

Investing in South America This 2019 OECD study of Latin American equity markets covers Argentina, Brazil, Chile, Colombia, Mexico, and Peru. It delves into recent developments, key stakeholder perceptions, and needs. The investigators concluded, “The years following the 2008 global financial crisis saw a global shift in capital from US and European markets toward emerging markets in Asia. The Latin American and Caribbean (LAC) region has not benefited from this shift. Domestic markets in the region have struggled to attract new companies to go public, which means that these markets have remained highly concentrated around a low number of listed companies dominated by a few groups. Institutional framework and macroeconomic stability are crucial for equity market development. Although LAC countries made significant progress in both areas, policymakers and market participants still need to embark on further reform… The OECD Latin American Corporate Governance Roundtable and Task Force on Equity Market Development continue to review and support equity market development in the region. While taking account of the broader context, priority is given to enforcing corporate governance-related requirements and transparency.” In other words, investors beware. However, like Mexico, opportunities exist, and I am invested, although in North America-headquartered companies whose operations are 100% there. South American jurisdictions have undeveloped domestic equity markets and regulatory regimes. But there are opportunities to invest in Energy, Materials, Industrials, Consumer Discretionary and Staples, Communications, and Utility sector companies on domestic exchanges and those listed in North America. The World Fact Book offers investors a broad understanding of the South American region. Brazil, Chile, Peru, Argentina, Bolivia, Ecuador, and Colombia are the most important markets. Investing.com offers Country Market Overviews of Brazil, Chile, Peru, Argentina, and Colombia. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data provide a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts.

460

Investing in South America

The S&P Latin American 40 stocks in the S&P Global 1200 Index are represented by the ILF Latin America 40 Index iShares ETF. The ILF ETF is the best place to look for investible companies in the Latin American region. Fig. 103.1 Links to ETFs that trade in South America • Argentina - ETFs • Brazil - ETFs • Colombia - ETFs • Peru - ETFs

In February 2022, there were eight companies from Mexico and 32 others. The nonMexican companies include nineteen from Brazil, eight from Chile, three from Colombia, and two from Peru. So Brazil and Chile are the leading players. A few years ago, Argentina was represented. Fig. 103.2 South American market Indices with links to the charts at StockCharts.com Latin American Indexes

Chart Symbol

Dow Jones Latin America - Ex. Mexico Index

$A4DOW

Dow Jones Latin America Index

$A3DOW

BNY Mellon Latin America 35 ADR Index

$BKTLA

iShares MSCI Brazil Index

$WWC

Brazilian Bovespa Stock Index

$BVSP

Dow Jones Chile Stock Index

$CLDOW

Argentina MerVal Index

$MERV

Fig. 103.3 South American company ETFs US-listed South American ETF or Closed-end Fund

US Ticker

Latin America 40 Index iShares

ILF

First Trust Latin America AlphaDEX Fund

FLN

Brazil iShares

EWZ

Market Vectors Brazil Small-Cap ETF

BRF

Direxion Daily Brazil Bull 2X Shares

BRZU

ProShares UltraShort MSCI Brazil

BZQ

ProShares Ultra MSCI Brazil

UBR

iShares MSCI Brazil Small-Cap Index Fund

EWZS

First Trust Brazil AlphaDEX Fund

FBZ

iShares MSCI Chile Index Fund

ECH

Global X/InterBolsa FTSE Colombia 20 ETF

GXG

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BILL CARA / STOCK MARKET LITERACY

iShares MSCI Colombia Capped ETF

ICOL

iShares MSCI All Peru Capped Index Fund

EPU

Global X FTSE Argentina 20 ETF

ARGT

This list at Investing.com is comprehensive but also includes ETFs that have their nexus elsewhere, as we saw in Mexico Fig. 103.4 Wikipedia.com links to South American country economies and stock exchanges • The economy of Brazil - B3 • The economy of Chile - Santiago Stock Exchange • The economy of Mexico - Mexican Stock Exchange • The economy of Peru - Lima Stock Exchange • The economy of Colombia - Colombia Stock Exchange

As of February 2022, 16 Mexican and 80 other Latin American companies trade on the NYSE and Nasdaq, including 40 from Brazil, 17 from Argentina, nine from Chile, five from Colombia, five from Peru, two from Panama, and two from Uruguay. These ninety-six stocks represented a small part of the 1208 non-US NYSE and Nasdaqlisted company stocks. China and Canada had the most international listings. In a well-diversified international stock portfolio of 20 to 25 stocks, consider holding one South American stock, i.e., up to 5% of the portfolio. That may be difficult for risk-averse investors due to the considerable political, economic, currency and market risks of Colombia, Brazil, Chile, Peru, Argentina, and Bolivia. Of stock trading countries, Venezuela and Ecuador have the most significant country risk in Latin America. International investors should trade a portfolio of Latin American company stocks only if they meet strict NYSE or NASDAQ listing requirements. A list of Latin American stocks traded in New York is at this FinViz.com link. Here is a list of 30 NYSE or Nasdaq-listed stocks of South American companies that many investors consider to be high-Quality. All of them can be electronically traded in domestic markets via Interactive Brokers. Fig. 103.5 List of leading South American companies South American Companies that trade in New York, as well as many that trade domestically

Headquarter Country

Domestic Ticker

US Ticker

Banco de Chile

Chile

CHILE.SN

BCH

Banco Latinoamericano de Comerci Extr SA

Panama

Banco Macro SA

Brazil

462

BLX BMA.BA

BMA

Investing in South America

Banco Santander Brasil SA

Brazil

BSBR.BA

Banco Santander-Chile

Chile

BSAC

Bancolombia SA

Colombia

CIB

Braskem SA

Brazil

BAK

BRF SA

Brazil

Companhia Brasileira de Distribuicao

Brazil

CBD

Companhia Energetica Minas Gerais

Brazil

CIG

Companhia de Saneamento Basico-Sabesp

Brazil

SBS

Companhia Siderurgica Nacional

Brazil

CSNA3.SA

SID

Compania Cervecerias Unidas S.A.

Chile

CCU.SN

CCU

Compania de Minas Buenaventura SA

Chile

BVN

Copa Holdings, S.A.

Panama

CPA

Credicorp Ltd.

Peru

BAP

Ecopetrol SA

Colombia

Embraer SA

Brazil

ERJ.BA

ERJ

Gerdau SA

Brazil

GGBR4.SA

GGB

Grupo Aval Acciones y Valores SA

Colombia

Grupo Financiero Galicia S.A.

Argentina

GGAL.BA

GGAL

Itau Unibanco Holding SA

Brazil

ITUB4.SA

ITUB

Mercadolibre Inc

Uruguay

MELI.BA

MELI

Pampa Energia SA

Argentina

PAMP.BA

PAM

Telecom Argentina SA

Argentina

TEO

Telefonica Brasil SA

Brazil

VIV

Ultrapar Participacoes SA

Brazil

UGPA3.SA

UGP

Vale SA

Brazil

VALE3.SA

VALE

YPF SA

Argentina

YPFD.BA

YPF

BRFS3.SA

BSBR

BRFS

AVAL

Of this list, here are 30 Company snapshots at FinViz.com for the US-listed companies. Finance.Yahoo.com has a screener for stocks that trade on the South American exchanges. Click on this link to access the new, as yet untitled screener. Then select the country in the Region dropdown list and filter as desired. There are about 50 countries that investors can access for trading data. In addition to the information Investing.com provides, I added links to MarketScreener. com. This popular Big Data service was developed by founder/CEO Franck Morel, an associate from Annecy, Auvergne-Rhône-Alpes, France. The service is held in high regard in France.

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BILL CARA / STOCK MARKET LITERACY

Fig. 103.6 List of 32 leading Latin American companies with info from MarketScreener.com South American Companies with domestic market tickers, including some that trade in the US

Domestic Ticker

Alfa

March 6, 2022, Price

Market Cap (Billions USD)

MarketScreener.com Info

ALFAA

15.21

3 561

ALFA, S.A.B. DE C.V.

Alsea

ALSEA

47.04

1 881

ALSEA, S.A.B. DE C.V.

America Movil

AMXL

19.34

59 353

AMERICA MOVIL

Arca Continental

130.52

10 876

ARCA CONTINENTAL, S.A.B..

Banco Del Bajio

BBAJIOO

50.65

2 875

BANCO DEL BAJÍO, S.A., ..

Becle

CUERVO

48.09

8 237

BECLE, S.A.B. DE C.V.

Bolsa Mexicana De Valores

BOLSAA

39.93

1 119

BOLSA MEXICANA DE VALOR...

Cemex

CEMEXCPO

10.03

7 037

CEMEX, S.A.B. DE C.V.

Corporacion Inmobiliaria Vesta

VESTA

37.60

1 202

CORPORACIÓN INMOBILIARI...

El Puerto De Liverpool C1

LIVEPOLC1

100.70

6 518

EL PUERTO DE LIVERPOOL...

Fomento Economico UBD

FEMSAUBD

160.99

24 949

FOMENTO ECONÓMICO MEX

Grupo Cementos Chihuahua

GCC

133.91

2 117

GCC, S.A.B. DE C.V.

Genomma Lab Int

LABB

19.05

912.00

GENOMMA LAB INTERNACION

Gruma SAB de CV

GRUMAB

GRBMF

248.12

4 466

GRUMA, S.A.B. DE C.V.

GAP B

GAPB

PAC

278.96

6 812

GRUPO AEROPORTUARIO DEL

OMA B

OMAB

145.63

2 682

GRUPO AEROPORTUARIO DEL.

Bimbo

BIMBOA

GRBMF

57.44

12 260

GRUPO BIMBO, S.A.B. DE ..

Grupo Carso

GCARSOA1

66.11

7 108

GRUPO CARSO, S.A.B. DE ..

Grupo Elektra

ELEKTRA

1326.55

14 319

GRUPO ELEKTRA, S.A.B. D..

Grupo Financiero Banorte

GFNORTEO

133.38

18 344

GRUPO FINANCIERO BANORT..

Grupo Financiero Inbursa

GFINBURO

35.59

10 529

GRUPO FINANCIERO INBURS..

Grupo Mexico

GMEXICOB

116.98

43 437

GRUPO MÉXICO, S.A.B. DE..

Grupo Televisa Unit

TLEVISACPO TV

42.00

5 638

GRUPO TELEVISA, S.A.B.

Industrias Penoles

PEOLES

291.40

5 524

INDUSTRIAS PEÑOLES, S.A..

Kimberly Clark A

KIMBERA

29.42

4 315

KIMBERLY-CLARK DE MÉXIC..

Megacable Holdings

MEGACPO

62.94

2 574

MEGACABLE HOLDINGS, S.A

Orbia Advance

ORBIA

MXCHY

53.04

4 941

ORBIA ADVANCE CORPORATI..

PINFRA

PUODY

159.83

3 275

PROMOTORA Y OPERADORA.

US Ticker

AMX

BCCLF CX

FMX

IPOAF

464

Investing in South America

Qualitas Controladora

112.05

2 162

QUÁLITAS CONTROLADORA, ..

Telesites SAB de CV

SITESB1

24.98

3 912

TELESITES, S.A.B. DE C...

Wal Mart de Mexico

WALMEX

WMMVF

75.73

63 072

WAL-MART DE MÉXICO, S.A..

Asur B

ASURB

ASR

423.25

6 056

GRUPO AEROPORTUARIO DEL.

Currency trends and cycles play a crucial role when trading international markets, particularly in large accounts. The Brazilian Real and the Chilean Peso are the most important currency pairs in South American trading. Fig. 103.7 Currency charts for Brazil and Chile are End of Day (EOD) values Currency Pair

Chart Symbol

US Dollar to Brazilian Real (EOD)

$USDBRL

US Dollar to Chilean Peso (EOD)

$USDCLP

Bottom line: The South American economies and stock markets offer a variety of investible opportunities. The best are in Energy, Materials, Industrials, Consumer Discretionary and Staples, Communications, and Utility sector companies. Health Care, Finance, Technology, and Real Estate sectors are best avoided.

465

CHAPTER 104

Investing in France France has a sophisticated capital market, financial and regulatory system, and diversified economy. With a population of 63 million, France, as described by the CIA, is “one of the most modern countries in the world and is a leader among European nations. It plays an influential global role as a permanent member of the United Nations Security Council, NATO, the G-7, the G-20, and the EU….” The country has the world’s leading inbound tourism. Government, which swings between conservative and liberal, maintains a strong presence in the power, public transport, and defense industries. The major industries are machinery, chemicals, pharmaceuticals, automobiles, metallurgy, aircraft, electronics, textiles, food processing, and tourism. It is the world’s 5th largest exporter and 4th largest importer. Like most of Europe, France is dependent on Russian energy supplies that Russia is cutting as payback to Western sanctions related to its invasion of Ukraine in 1Q2022. The fact that only 16 French companies trade on the NYSE or Nasdaq is evidence of the strength of French capital markets, perhaps also due to the country’s independent culture. For a sense of the country, investors ought to check out the World Fact Book. I would next look at the Investing.com French Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data provide a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Capital market prices move forward in trends and cycles. A snapshot is a piece of insufficient information to make trading decisions. Look for trend and cycle reversals, as seen in weekly, daily, or hourly charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance. Fig. 104.1 French stock market Indices Index

Chart Symbol

Dow Jones France Stock Index

$FRDOW

Dow Jones France Titans 30 Total Return Index (EOD)

$FR30TR

Dow Jones France Titans Index (Euro)

$FR30

iShares MSCI France Index

$WBF 466

Investing in France

Fig. 104.2 French and neighboring country stock market ETFs ETF

Ticker

France

EWQ

Europe S&P 350

IEV

Austria

EWO

Belgium

EWK

Germany

EWG

Italy

EWI

Netherlands

EWN

Spain

EWP

Sweden

EWD

Switzerland

EWL

The EWQ French ETF from iShares contains the components and multi-year performance of the major French market ETF. This link at Investing.com lists the French-based equity ETFs that trade in France. Fig. 104.3 French market traded ETFs French ETF

French Ticker

Lyxor UCITS CAC 40 Daily Double Short

BX4

Lyxor UCITS Daily Leverage CAC 40

LVC

Lyxor UCITS Daily Short CAC 40

SHC

Lyxor UCITS CAC 40 (DR) D-EUR

CAC

Amundi ETF Short CAC 40 Daily UCITS

C4S

Amundi Index MSCI World SRI UCITS DR C

WSRI

Amundi CAC 40 UCITS

C40

Lyxor CAC 40 (DR) UCITS Acc

CACC

Lyxor PEA S&P 500 UCITS ETF Couverte en EUR Capi

PSPH

CAC 40 THEAM Easy UCITS

E40

Amundi ETF CAC 40 UCITS

C4D

GraniteShares 3x Short BNP Daily

3SBN

Lyxor UCITS CAC Mid 60 D-EUR

CACM

Lyxor PEA PME DR D

PEAP

Amundi ETF MSCI France UCITS

CF1

GraniteShares 3x Long Airbus Daily

3LAR

GraniteShares 3x Short Airbus Daily

3SAR

467

BILL CARA / STOCK MARKET LITERACY

GraniteShares 3x Long BNP Daily

3LBN

GraniteShares 3x Long Danone Daily

3LDA

GraniteShares 3x Short Danone Daily

3SDA

GraniteShares 3x Long L’Oréal Daily

3LOR

GraniteShares 3x Short L’Oréal Daily

3SOR

To access lists of ETFs of all asset classes that trade in France, including those that have their nexus outside France, go to this link at Investing.com. Note that 3x long and short leveraged ETFs track Airbus Group, Danone, and L’Oréal, and 3x long only in BNP Paribas. These stocks are liquid. But, since only BNP has no leveraged short ETF, is it illegal in France to short a French bank stock? At times, the French market regulator, the AMF, has banned net short selling on financial services industry stocks, including banks Societe Generale, BNP Paribas, Credit Agricole, and leading insurers. Similar practices have occurred in Italy, Spain, Belgium, Austria, and Greece. Fig. 104.4 List of thirty-five large-cap stocks that trade in Euro on the Paris Exchange French Company (MarketBeat.com) French Company (Investing.com)

French Ticker

US Ticker

Air Liquide

AI.PA

AIQUY

Airbus Group

AIR.PA

EADSY

Alstom

ALO.PA

ALSMY

AXA

CS.PA

AXAHY

BNP Paribas

BNP.PA

BNPQY

Bouygues

BYG.PA

BOUYY

Capgemini

CAP.PA

CGEMY

Carrefour

CA.PA

CRRFY

Credit Agricole

ACA.PA

CRARY

Danone

BN.PA

DANOY

Dassault Systemes

DSY.PA

DASTY

Engie

ENGI.PA

ENGIY

EssilorLuxottica

EL.PA

ESLOY

Hermes International

HRMS.PA

HESAY

Kering

KER.PA

PPRUY

Legrand

LR.PA

LGRDY

L’Oréal

OREP.PA

LRLCY

Louis Vuitton

LVMH.PA

LVMUY

468

Investing in France

Michelin

MCHA.PA

MGDDY

Orange

ORA.PA

ORAN

Publicis Groupe

PUB.PA

PUBGY

Renault

RNO.PA

RNLSY

Safran

SAF.PA

SAFRY

Saint Gobain

SGOB.PA

CODYY

Sanofi

SASY.PA

SNY

Schneider Electric

SU.PA

SBGSY

Societe Generale

GLE.PA

SCGLY

Stellantis NV

STLA.PA

STLA

STMicroelectronics

STM.PA

STM

Teleperformance

TEP.PA

TLPFY

Thales

HO.PA

THLLY

TotalEnergies SE

TOTB.F

TTE

Veolia Environnement

Vinci

DG.PA

VCISY

Vivendi

VIV.PA

VIVHY

VEOEY

Finance.Yahoo.com has a screener for stocks that trade in France. Click on this link to access the new, as yet untitled screener. Then select France in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. A list of the French stocks traded in New York can be found at this FinViz.com link. As of February 2022, there were few. Note the extensive information tabs. Only the top three highest market cap stocks are favored. Fig. 104.5 List of French-headquartered companies that trade in the US Company

Sector

Industry

Market Cap

US Ticker

TotalEnergies SE

Energy

Oil & Gas Integrated

156.62B

TTE

Sanofi

Healthcare

Drug Manufacturers

134.08B

SNY

Orange

Communication Svc

Telecom Services

32.97B

ORAN

Constellium SE

Basic Materials

Aluminum

2.50B

CSTM

Criteo S.A.

Communication Svc

Advertising Agencies

2.13B

CRTO

Valneva SE

Healthcare

Biotechnology

1.78B

VALN

Inventiva S.A.

Healthcare

Biotechnology

543.92M

IVA

Innate Pharma S.A.

Healthcare

Biotechnology

301.80M

IPHA

Nanobiotix S.A.

Healthcare

Biotechnology

298.65M

NBTX

469

BILL CARA / STOCK MARKET LITERACY

Cellectis S.A.

Healthcare

Biotechnology

267.52M

CLLS

EDAP TMS S.A.

Healthcare

Medical Devices

228.00M

EDAP

Genfit SA

Healthcare

Biotechnology

199.60M

GNFT

Sequans Communic S.A.

Technology

Semiconductors

172.41M

SQNS

DBV Technologies S.A.

Healthcare

Biotechnology

160.55M

DBVT

ERYTECH Pharma S.A.

Healthcare

Biotechnology

64.90M

ERYP

Biophytis SA

Healthcare

Biotechnology

56.51M

BPTS

If you intend to track a French stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. These French companies offer ADRs that trade in the US. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. To build an international stock portfolio of 20 to 25 stocks, investors might consider about 4 or 5 “Old Europe” stocks from France, Germany, Italy, Spain, Switzerland, Sweden, and Norway. The S&P Europe 350 represents the non-British European component of the S&P Global 1200. You can electronically trade these stocks on their domestic exchanges via Interactive Brokers. The European Central Bank (ECB) is the central bank of the 19 European Union countries of the 27 member states that adopted the Euro as its official currency. This group is called the Eurozone. About 350 million people live within the Eurozone region. The 19 European member states that use the Euro are France, Germany, Italy, Spain, Austria, Belgium, Cyprus, Estonia, Finland, Greece, Ireland, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, and Slovenia. The European Union (EU) includes the 19 Eurozone countries plus nine others that do not use the Euro: Bulgaria, Croatia, Czechia, Denmark, Hungary, Poland, Romania, and Sweden. The Russian invasion of Ukraine and resulting sanctions against Russia led to Russia terminating or cutting its energy exports to Europe. Most European states rely on Russia to meet their energy needs. In 2021, EU countries paid Russia US$105 Billion for energy, two-thirds of all imports from Russia. France relies on Russia for about one-sixth of its total energy needs. Some countries are much more. This Forex table uses the Euro as the base currency. Forex is a continuously trading financial market that exceeds $5 Trillion daily. The cross pairs may not always be shown where the domestic currency is the base currency. For example, in Switzerland, forex traders use EUR/ CHF rather than CHF/EUR.

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Investing in France

Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. The most important currency pairs for trading in Europe are as follows. Note that FOREX charts are End of Day (EOD) values, whereas FX trading is 7x24, the only continuous, nonstop trading market. Fig. 104.6 The indexes and French currency pairs for international Forex trading Currency Pair

Chart Symbol

FX Trading

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Australian Dollar to Euro (NBD)

$AUDEUR

British Pound to Euro (NBD)

$GBPEUR

Canadian Dollar to Euro (NBD)

$CADEUR

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Japanese Yen to Euro (NBD)

$JPYEUR

Mexican Peso to Euro (NBD)

$MXNEUR

New Zealand Dollar to Euro (NBD)

$NZDEUR

Singapore Dollar to Euro (NBD)

$SGDEUR

Swedish Krona to Euro (NBD)

$SEKEUR

Swiss Franc to Euro (NBD)

$CHFEUR

US Dollar to Euro (EOD)

$USDEUR

EUR/JPY EUR/NZD

Bottom line: The solid French economy and stock market offer many investible opportunities in all sectors.

471

CHAPTER 105

Investing in Germany Like France, Germany has a sophisticated capital market, financial and regulatory system, and diversified economy. With a population of 83 million, Germany is described by the CIA as “Europe’s largest economy and second most populous nation (after Russia), …a key member of the continent’s economic, political, and defense organizations. Europe’s power struggles immersed Germany in two devastating world wars in the first half of the 20th century. The decline of the USSR and the end of the Cold War allowed for German reunification in 1990. Since then, Germany has expended considerable funds to bring eastern productivity and wages up to western standards.” The leading industries are among the world’s largest and most technologically advanced. They produce iron, steel, coal, cement, chemicals, machinery, vehicles, machine tools, electronics, automobiles, food and beverages, shipbuilding, and textiles. It is the world’s 3rd largest importer and exporter. The fact that only 25 German companies are listed on the NYSE or Nasdaq is evidence of a robust German capital market. For a sense of the country, investors ought to check out the World Fact Book. I would next look at the Investing.com German Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Capital market prices move forward in trends and cycles. A snapshot is a piece of insufficient information to make trading decisions. Look for trend and cycle reversals, as seen in weekly, daily, or hourly charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance. Fig. 105.1 German stock market Indices Indexes

Chart Symbol

Dow Jones Germany Stock Index

$DEDOW

Dow Jones Germany Titans 30 Total Return Index (EOD)

$DE30TR

Dow Jones Germany Titans Index (Euro)

$DE30

iShares MSCI Germany Index

$WDG

472

Investing in Germany

To find German-based equity ETFs that trade in Germany, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in Germany, including those that have their nexus outside Germany, go to this link at Investing.com. Investors can use Yahoo Finance to track Germany-based US-traded ETFs. Investors who wish to diversify their portfolio across all economic sectors of Europe can do so by holding the following ETF market trackers that trade in US dollars. Fig. 105.2 German ETFs ETFs

US Ticker

Germany iShares ETF

EWG

iShares MSCI Germany Small-Cap Index Fund

EWGS

First Trust Germany AlphaDex Fund

FGM

New Germany Fund

iShares Currency Hedged MSCI Germany ETF

HEWG

Fig. 105.3 German and neighboring country stock market ETFs Country ETF

US Ticker

Germany

EWG

Europe S&P 350

IEV

Sweden

EWD

Italy

EWI

Belgium

EWK

Switzerland

EWL

Netherlands

EWN

Austria

EWO

Spain

EWP

France

EWQ

The EWG Germany ETF from iShares in this link provides investors access to the stock

components and multi-year performance. To find all ETFs that trade in Germany, go to this link at Investing.com, which includes ETFs with their nexus elsewhere. This filter excludes Bond or Commodity ETFs or ETFs with nexus outside Germany. The Filter enables users to do those searches.

Fig. 105.4 Actively traded German Bond or Commodity ETFs German ETF

German Ticker

DB x-trackers ShortDAX x2 Daily UCITS 1C

DBPD

L&G DAX Daily 2x Short UCITS

DES2

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BILL CARA / STOCK MARKET LITERACY

Lyxor UCITS Daily ShortDAX x2 C-EUR

LYXSDA.

iShares Core DAX UCITS

GDAXIEX

Xtrackers ShortDAX Daily Swap UCITS ETF 1C

XSDX

Lyxor ShortDAX Daily (-1x) Inverse UCITS

C004

Deka DAX ausschuttend UCITS

ETFGDA.

Xtrackers DAX UCITS ETF 1C

XDAX

L&G DAX Daily 2x Short UCITS

DES2

Vanguard Germany All Cap UCITS

VGER

Deka DAX UCITS

ETFGDA.

db x-trackers LevDAX Daily UCITS 1C

DBPE

iShares TecDAX UCITS

TECDAX.

iShares Core DAX UCITS (DE) EUR (Dist)

EXIC

To build an international stock portfolio of 20 to 25 stocks, investors might consider about 4 or 5 “Old Europe” stocks from France, Germany, Italy, Spain, Switzerland, Sweden, and Norway. The S&P Europe 350 represents the non-British European component of the S&P Global 1200. You can electronically trade these stocks on their domestic exchanges via Interactive Brokers. Fig. 105.5 List of thirty large-cap German stocks that trade in Euro on the Frankfurt Exchange German Companies (MarketBeat.com)

German Companies (Investing.com)

Market Cap Domestic USD Billion Ticker

US Ticker

SAP

$144.81 B

SAP.DE

SAP

Siemens

$132.78 B

SIE.DE

SIEGY

Volkswagen

$125.22 B

VOW3.DE

VWAGY

Allianz

$106.98 B

ALV.DE

ALIZY

Deutsche Telekom

$97.97 B

DTE.DE

DTEGY

Mercedes-Benz

$90.09 B

MBG.DE

MBGYY

Merck KGaA

$86.74 B

MRK.DE

MRK

BASF

$71.91 B

BAS.DE

BASFY

Deutsche Post

$71.90 B

DPW.DE

DPSGY

Siemens Healthineers

$71.57 B

SHL.DE

SEMHF

BMW

$68.23 B

BMW.DE

BMWYY

Bayer

$60.29 B

BAYN.DE

BAYRY

Adidas

$49.93 B

ADS.DE

ADDDF

Hapag-Lloyd

$49.83 B

HLAG.DE

HPGLY

Infineon

$47.88 B

IFXA.DE

IFNNY

474

Investing in Germany

Munich RE

$42.88 B

MUV2.DE

MURGY

Vonovia

$41.63 B

VNA.DE

VNNVF

BioNTech

$37.47 B

BNTX.DE

BNTX

Henkel

$35.69 B

HEN3.DE

HENKY

E.ON

$35.28 B

EOAN.DE

EONGY

Deutsche Bank

$34.44 B

DBK.DE

Deutsche Börse

$32.37 B

DB1.DE

DBOEY

Porsche SE

$29.66 B

PAH3.DE

POAHY

Sartorius

$29.57 B

SRT.DE

SARTF

Daimler Truck

$29.29 B

DTG.DE

DTRUY

RWE

$27.98 B

RWE.DE

RWEOY

Fresenius

$27.51 B

FRE.DE

FSNUY

Hannover Rück

$23.46 B

HNR1.DE

HVRRF

EnBW Energie

$23.38 B

EBK.DE

N/A

Beiersdorf

$22.48 B

BEI.DE

BDRFF

You can electronically trade them in Euro via Interactive Brokers. Finance.Yahoo.com has a screener for stocks that trade in Germany. Click on this link to access the new, as yet untitled screener. Then select Germany in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. The S&P/Europe 350 represents the non-British European component of the S&P Global 1200. A list of the German stocks that trade in New York can be found at this FinViz.com link. Note the extensive information tabs. As of July 2022, there were twenty-five in total. Only these top highest market cap stocks are popular. Fig. 105.6 List of the German stocks that trade in New York Company

Industry

Market Cap US Ticker

SAP SE

Software - Application

150.83B

SAP

BioNTech SE

Biotechnology

36.73B

BNTX

Deutsche Bank Aktiengesellschaft

Banks – Regional

33.99B

Fresenius Medical Care AG & Co. KGaA

Medical Care Facilities

19.11B

FMS

Evotec SE

Drug Manufacturers

5.39B

EVO

CureVac N.V.

Biotechnology

3.17B

CVAC

SIGNA Sports United N.V.

Specialty Retail

2.78B

SSU

MYT Netherlands Parent B.V.

Luxury Goods

1.33B

MYTE

Lilium N.V.

Aerospace & Defense

1.32B

LILM

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BILL CARA / STOCK MARKET LITERACY

MorphoSys AG

Biotechnology

1.07B

MOR

Atai Life Sciences N.V.

Biotechnology

899.27M

ATAI

trivago N.V.

Internet Content & Information 883.01M

TRVG

Jumia Technologies AG

Internet Retail

JMIA

872.54M

To track a German stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. These German companies also offer ADRs that trade in the US. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This FinViz.com link lists the German stocks that trade in New York. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. Fig. 105.7 The indexes and German currency pairs for international Forex trading Currency Pair

Chart Symbol

FX Trading

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Australian Dollar to Euro (NBD)

$AUDEUR

British Pound to Euro (NBD)

$GBPEUR

Canadian Dollar to Euro (NBD)

$CADEUR

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Japanese Yen to Euro (NBD)

$JPYEUR

Mexican Peso to Euro (NBD)

$MXNEUR

476

EUR/JPY EUR/NZD

Investing in Germany

New Zealand Dollar to Euro (NBD)

$NZDEUR

Singapore Dollar to Euro (NBD)

$SGDEUR

Swedish Krona to Euro (NBD)

$SEKEUR

Swiss Franc to Euro (NBD)

$CHFEUR

US Dollar to Euro (EOD)

$USDEUR

Note that FOREX charts are End of Day (EOD) values. Most European states are reliant on Russia to meet their energy needs, but the Russian invasion of Ukraine and resulting sanctions against Russia have led to the dire consequence of Russia’s terminating or vastly reducing its energy exports to Europe. Germany relies on about two-thirds of its total energy needs. As the winter of 2022 approaches, its economic and social wellness risks are real. Bottom line: The European-leading German economy and stock market offer many investible opportunities in all sectors. But until the Russia-Ukraine war is resolved, the risks to investors are elevated.

477

CHAPTER 106

Investing in Italy Italy has a sophisticated capital market, financial and regulatory system, and diversified economy with a population of 61 million. The CIA reported: “Mussolini’s Fascist dictatorship and alliance with Nazi Germany led to Italy’s defeat in World War II. (But) economic revival followed. Italy is a charter member of NATO and… the European Union (EU). It has been at the forefront of European economic and political unification. Persistent problems include sluggish economic growth, high youth, and female unemployment, organized crime, corruption, and economic disparities between southern Italy and the more prosperous north….” The major industries are tourism, machinery, iron and steel, chemicals, food processing, textiles, motor vehicles, clothing, footwear, and ceramics. It is the world’s 13th largest importer and 11th largest exporter. Only 7 Italian companies trade on the NYSE or Nasdaq, evidence of the limited number of multinational companies and the strength of Italian capital markets. For a sense of the country, investors ought to check out the World Fact Book. I would next look at the Investing.com Italian Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-todate prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Capital market prices move forward in trends and cycles. A snapshot is a piece of insufficient information to make trading decisions. Look for trend and cycle reversals, as evidenced in weekly, daily, or hourly charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance. Fig. 106.1 Italian stock market Indices Italian Indexes

Symbol

Dow Jones Italy Stock Index

$ITDOW

Dow Jones Italy Titans Index (Euro)

$IT30

iShares MSCI Italy Index

$INE

478

Investing in Italy

To find Italian-based equity ETFs that trade in Italy, go to this link at Investing.com. Go to Investing.com to access lists of ETFs of all asset classes that trade in Italy, plus those with their nexus outside Italy. Fig. 106.2 Italian and neighboring country stock market ETFs Country ETF

US Ticker

Italy

EWI

Germany

EWG

Europe S&P 350

IEV

Sweden

EWD

Belgium

EWK

Switzerland

EWL

Netherlands

EWN

Austria

EWO

Spain

EWP

France

EWQ

In this link, investors may wish to investigate the components and multi-year performance of the EWI Italy ETF from iShares. To find all equity ETFs that trade in Italy, go to this link at Investing.com, which includes primarily ETFs that have their nexus elsewhere. This link retrieves all ETFs of various asset classes that trade in Italy. Fig. 106.3 List of the Italian stocks that trade in New York Company

Industry

Ticker

Market Cap USD

Eni S.p.A.

Oil & Gas Integrated

53.95B

Ferrari N.V.

Auto Manufacturers

RACE

40.12B

Stevanato Group S.p.A.

Medical Instruments & Supplies

STVN

4.46B

Ermenegildo Zegna N.V.

Apparel Manufacturing

ZGN

2.23B

Kaleyra, Inc.

Telecom Services

KLR

0.346.63M

Genenta Science S.p.A.

Biotechnology

GNTA

144.03M

Natuzzi S.p.A.

Furnishings, Fixtures & Appliances

NTZ

133.85M

Fig. 106.4 List of key Italian stocks that trade on the Milan Stock Exchange Italian Companies

Domestic Ticker

US Ticker

Market Cap USD Billion

Price when book written

Intesa Sanpaolo

ISP.MI

ISNPY

$64.88

$19.43

ENI

ENI.MI

$53.21

$29.99

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Ferrari

RACE.MI

UniCredit

RACE

$41.78

$225.50

UCG.MI

$38.06

$17.39

Generali

G.MI

$33.43

$21.23

Nexi

NEXI.MI

$18.89

$14.42

Snam

SRG.MI

$17.64

$5.30

Moncler

MONC.MI

$17.11

$63.48

Poste Italiane

PST.MI

$16.16

$12.43

Terna

TRN.MI

$15.45

$7.70

Atlantia

ATL.MI

$15.29

$18.68

Campari

CPR.MI

$13.42

$11.88

FinecoBank

FBK.MI

$11.08

$18.17

Recordati

REC.MI

$10.67

$51.91

Telecom Italia

TIT.MI

$9.91

$0.47

INWIT

INW.MI

$9.72

$10.13

Prysmian Group

PRY.MI

$8.42

$31.97

UnipolSai

US.MI

$8.36

$2.96

SNMRF

Finance.Yahoo.com has a screener for stocks that trade in Italy. Click on this link to access the new, as yet untitled screener. Then select Italy in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. This FinViz.com link lists the Italian stocks that trade in New York. Note the extensive information tabs. To track an Italian stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This is a list of Italian ADRs that trade in the United States. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. Fig. 106.5 The indexes and Italian currency pairs for international Forex trading Currency Pair

Chart Symbol

FX Trading

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

480

Investing in Italy

Euro to Japanese Yen (NBD)

$EURJPY

EUR/JPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Australian Dollar to Euro (NBD)

$AUDEUR

British Pound to Euro (NBD)

$GBPEUR

Canadian Dollar to Euro (NBD)

$CADEUR

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Japanese Yen to Euro (NBD)

$JPYEUR

Mexican Peso to Euro (NBD)

$MXNEUR

New Zealand Dollar to Euro (NBD)

$NZDEUR

Singapore Dollar to Euro (NBD)

$SGDEUR

Swedish Krona to Euro (NBD)

$SEKEUR

Swiss Franc to Euro (NBD)

$CHFEUR

US Dollar to Euro (EOD)

$USDEUR

EUR/NZD

Note that FOREX charts are End of Day (EOD) values. Most European states are reliant on Russia to meet their energy needs. Italy relies on Russia for over 40% of its total energy needs. But the Russian invasion of Ukraine and resulting sanctions against Russia led to Russia’s terminating or cutting its energy exports to Europe. As the winter of 2022 approaches, the risks to Italy’s economic and social wellness are real. EU countries paid Russia US$105 Billion in 2021 for energy, two-thirds of all imports from Russia. Bottom line: The Italian stock market offers investible opportunities in all sectors. But until the Russia-Ukraine war is resolved, the risks to investors are elevated.

481

CHAPTER 107

Investing in Spain Spain has a sophisticated capital market, financial and regulatory system, and diversified economy with a population of 47 million. As described by the CIA, “Spain’s powerful world empire of the 16th and 17th centuries ultimately yielded command of the seas to England. Subsequent failure to embrace the mercantile and industrial revolutions caused the country to fall behind Britain, France, and Germany in economic and political power. A peaceful transition to democracy following the death of dictator Franco in 1975 and rapid economic modernization (joining the EU in 1986) gave Spain a dynamic and rapidly growing economy. They made it a global champion of freedom and human rights. Spain emerged from a severe economic recession that began mid-2008, posting solid years of GDP growth above the EU average. Unemployment has fallen but remains high, especially among youth. Spain is the eurozone’s fourth-largest economy.” The major industries are textiles and apparel, footwear, food and beverages, metals, chemicals, shipbuilding, automobiles, machine tools, tourism, clay and refractory products, pharmaceuticals, and medical equipment. It is the world’s 18th largest exporter and importer. The are only five Spanish companies dually listed on the NYSE or Nasdaq. For a sense of the country, investors ought to check out the World Fact Book. I would next look at the Investing.com Spanish Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Capital market prices move forward in trends and cycles. A snapshot is a piece of insufficient information to make trading decisions. Look for trend and cycle reversals, as evidenced in weekly, daily, or hourly charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance.

482

Investing in Spain

Fig. 107.1 Spanish stock market Indices Spanish Indexes

Chart Symbol

Dow Jones Spain Stock Index

$ESDOW

Dow Jones Spain Titans Index (Euro)

$ES30

iShares MSCI Spain Index

$INP

Spain (Madrid) General Index (EOD)

$SMSI

Spain Bolsa de Madrid IBEX 35 Index (EOD)

$IBEX

To find Spanish-based equity ETFs that trade in Spain, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in Spain, including those that have their nexus outside France, go to this link at Investing.com. Investors of at Yahoo Finance. Fig. 107.2 Spanish and neighboring country stock market ETFs Country ETF

US Ticker

Spain

EWP

Europe S&P 350

IEV

Italy

EWI

Germany

EWG

Sweden

EWD

Belgium

EWK

Switzerland

EWL

Netherlands

EWN

Austria

EWO

France

EWQ

In this link, investors may wish to investigate the components and multi-year performance of the EWP Spain ETF from iShares. To find all ETFs that trade in Spain, go to this link at Investing.com, which includes primarily ETFs that have their nexus elsewhere. Fig. 107.3 List of twenty large Spanish company stocks that trade in Spain and the US Spanish Companies

Domestic Ticker

US Ticker

Market Cap USD Billion

Price when book written

Cellnex Telecom

CLNX.MC

CLLNY

$30.37

$44.78

CaixaBank

CABK.MC

CAIXY

$30.12

$3.74

Naturgy

NTGY.MC

GASNY

$26.48

$27.57

Aena

AENA.MC

ANNSF

$26.12

$174.17

483

BILL CARA / STOCK MARKET LITERACY

Endesa

ELE.MC

ELEZF

$22.23

$21.00

Siemens Gamesa

SGRE.MC

GCTAY

$13.94

$20.00

International Consolidated Airlines IAG.MC

BABWF

$11.01

$2.22

Red Eléctrica

REE.MC

RDEIY

$10.30

$19.12

Grifols

GRF.MC

GRFS

$10.17

$11.11

Acciona

ANA.MC

ACXIF

$8.80

$161.19

Mapfre

MAP.MC

MPFRY

$6.79

$2.23

Inditex

IDEXY

$91.31

$14.33

Iberdrola

IBDSF

$67.06

$10.72

Santander

SAN

$66.80

$3.92

Banco Bilbao Vizcaya Argentaria

BBVA

$40.70

$6.67

Amadeus IT Group

AMADY

$30.95

$68.80

Telefónica

TEF

$29.10

$4.96

Ferrovial

FRRVY

$21.14

$28.25

Repsol

REPYF

$19.60

$13.00

EDP Renováveis

EDRVF

$19.21

$19.20

Investors can electronically trade these Spanish stocks in Euro on the Madrid Exchange or USD in the US. A list of the Spanish stocks that trade in New York can be found at this FinViz.com link. Finance.Yahoo.com has a screener for stocks that trade in Spain. Click on this link to access the new, as yet untitled screener. Then select Spain in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. Some of these stocks are constituents of the S&P/Europe 350, representing the non-British European component of the S&P Global 1200. You can electronically trade these stocks on their domestic exchanges via Interactive Brokers. You can also find many of them listed for trading on the NYSE. To build an international stock portfolio of 20-25 stocks, I would consider 4 or 5 from “Old Europe” stocks, mainly from Germany, France, Italy, Spain, and Switzerland. If you intend to track a Spanish stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This link lists Spanish ADRs that trade in the United States. Note the extensive information tabs. 484

Investing in Spain

Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. Fig. 107.4 The most important currency pairs for trading in Europe Currency Pair

Chart Symbol

FX Trading

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Australian Dollar to Euro (NBD)

$AUDEUR

British Pound to Euro (NBD)

$GBPEUR

Canadian Dollar to Euro (NBD)

$CADEUR

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Japanese Yen to Euro (NBD)

$JPYEUR

Mexican Peso to Euro (NBD)

$MXNEUR

New Zealand Dollar to Euro (NBD)

$NZDEUR

Singapore Dollar to Euro (NBD)

$SGDEUR

Swedish Krona to Euro (NBD)

$SEKEUR

Swiss Franc to Euro (NBD)

$CHFEUR

US Dollar to Euro (EOD)

$USDEUR

EUR/JPY EUR/NZD

Note that Currency charts are End of Day (EOD) values or are traded in real-time with FOREX brokers. Most European states are reliant on Russia to meet their energy needs. Spain relies on Russia for about 10% of its total energy needs. Bottom line: The domestic stock market of Spain offers investible opportunities in all sectors. But until the Russia-Ukraine war is resolved, the risks to investors are elevated.

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Investing in the Netherlands The Netherlands has a sophisticated capital market, financial and regulatory system, and diversified economy. The population is 17.4 million. CIA: “During the 17th century, the Dutch became a leading seafaring and commercial power, with settlements and colonies worldwide. After a 20-year French occupation, the Kingdom of the Netherlands was formed in 1815. In 1830, Belgium seceded and formed a separate kingdom. The Netherlands remained neutral in World War I but suffered German invasion and occupation in World War II. A modern, industrialized nation, the Netherlands is also a large exporter of agricultural products. The country was a founding member of NATO and EEC (now the EU).….” Agroindustry, metal and engineering products, electrical machinery & equipment, chemicals, petroleum, construction, microelectronics, and fishing are leading industries. The country is the world’s most vulnerable to the risk of flooding. It is the world’s 7th largest exporter and importer. The are 15 Netherlands companies listed on the NYSE or Nasdaq. For a sense of the country, investors ought to check out the World Fact Book. I would next look at the Investing.com Netherlands Market Overview. The tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and upto-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Capital market prices move forward in trends and cycles. A snapshot is a piece of insufficient information to make trading decisions. Look for trend and cycle reversals, as evidenced in weekly, daily, or hourly charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance.

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Investing in the Netherlands

Fig. 108.1 Netherlands stock market Indices at Yahoo Finance Netherlands Indices

Chart Symbol

Dow Jones Netherlands Stock Index

$NLDOW

Dow Jones Netherlands Titans 30 Index (Netherlands Guilder)

$NL30

iShares MSCI Netherlands Index

$INN

Netherlands Amsterdam Exchange Index (EOD)

$AEX

Fig. 108.2 List of Dutch Sector Indices at Yahoo Finance AEX Basic Materia. AEX Consumer Good. AEX Consumer Serv. AEX Financials AEX Health Care AEX Industrials AEX Oil & Gas AEX Technology AEX Telecommunications

To find Dutch-based equity ETFs that trade in the Netherlands, go to this link at Investing.com. To access lists of all asset classes of ETFs that trade in the Netherlands, go to this link at Investing.com. The data includes ETFs that have their nexus outside the Netherlands. In this link, investors may wish to investigate the components and multi-year performance of the EWN Netherlands ETF from iShares. Investors of Dutch stocks may wish to track the following Regional ETFs at Yahoo Finance. Fig. 108.3 Netherlands and neighboring country stock market ETFs Country ETF

US Ticker

Netherlands

EWN

Europe S&P 350

IEV

Italy

EWI

Germany

EWG

Sweden

EWD

Belgium

EWK

Switzerland

EWL

Austria

EWO

Spain

EWP

France

EWQ

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Fig. 108.4 Popular ETFs trading in Amsterdam can be monitored at Yahoo Finance Popular Netherlands ETFs

Local Ticker

iShares EURO STOXX 50 UCITS Dist

EUE

iShares MSCI Europe SRI UCITS ETF EUR

IUSK

iShares MSCI Europe UCITS Acc

IMEA

iShares AEX

IAEX

iShares AEX UCITS EUR (Acc)

IAEAU

WisdomTree Short USD Long EUR 3x Daily

USE3

Vanguard FTSE Developed Europe

VEUR

Vanguard Eurozone Government Bond

VETY

iShares EURO Dividend UCITS

IDVY

VanEck Vectors AEX UCITS

TDT

iShares Core Euro Corporate Bond UCITS

IEAC

iShares Euro Inflation Linked Government Bond UCIT

IBCI

Finance.Yahoo.com has a screener for stocks that trade in the Netherlands. Click on this link to access the new, as yet untitled screener. Then select the Netherlands in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. Fig. 108.5 List of twenty large-cap Dutch stocks that trade in Euro on the Eurex or in the US in USD Companies that trade in the Netherlands

Domestic Ticker

US Ticker

Market Cap USD Billion

Price when book written

ASML

ASML.AS

ASML

$270.54 B

$649.50

Prosus

PRX.AS

$239.94 B

$76.49

Shell

SHELL.AS

RYDAF

$200.60 B

$26.09

Adyen

ADYEN.AS

ADYYF

$69.45 B

$2,243

Heineken

HEIA.AS

$62.19 B

$108.03

ING

INGA.AS

ING

$56.34 B

$14.75

Ahold Delhaize

AD.AS

AHODF

$33.62 B

$33.26

DSM

DSM.AS

KDSKF

$32.04 B

$181.25

Philips

PHIA.AS

PHG

$29.82 B

$33.70

Wolters Kluwer

WOSB.F

$25.99 B

$99.89

AkzoNobel

AKZA.AS

$20.02 B

$106.80

Exor

EYX.F

$19.38 B

$83.75

NN Group

NN.AS

$17.51 B

$57.40

ASM International

ASM.AS

$15.55 B

$320.57

JDE Peet’s

JDE.F

$14.79 B

$29.47

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Investing in the Netherlands

These stocks can be traded via Interactive Brokers. Fig. 108.6 Netherlands Companies that trade in New York Netherlands Companies

Industry

Market Cap (USD) US Ticker

ASML Holding N.V.

Semiconductor Equipment & Materials

271.04 B

ASML

Shell plc

Oil & Gas Integrated

205.52 B

SHEL

ING Groep N.V.

Banks – Diversified

59.21 B

ING

Stellantis N.V.

Auto Manufacturers

57.64 B

STLA

NXP Semiconductors N.V.

Semiconductors

52.69 B

NXPI

Koninklijke Philips N.V.

Diagnostics & Research

29.64 B

PHG

Yandex N.V.

Internet Content & Information

18.60 B

YNDX

argenx SE

Biotechnology

15.00 B

ARGX

Aegon N.V.

Insurance – Diversified

11.74 B

AEG

QIAGEN N.V.

Diagnostics & Research

11.37 B

QGEN

Just Eat Takeaway.com N.V.

Internet Content & Information

10.14 B

GRUB

VEON Ltd.

Telecom Services

2.67 B

VEON

Core Laboratories N.V.

Oil & Gas Equipment & Services

1.20 B

CLB

Merus N.V.

Biotechnology

1.09 B

MRUS

uniQure N.V.

Biotechnology

790.11 M

QURE

Pharming Group N.V.

Biotechnology

606.88 M

PHAR

Pharvaris N.V.

Biotechnology

588.25 M

PHVS

ProQR Therapeutics N.V.

Biotechnology

360.89 M

PRQR

These stocks can be found at this FinViz.com link. Note the extensive information tabs. To track a Dutch stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. An ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. ADRs are sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This is a list of Netherlands ADRs that trade in the United States. To build an international stock portfolio of 20-25 stocks, I would consider 4 or 5 “Old Europe” stocks that include the Netherlands, but most from Germany and France, and perhaps Italy, Spain, and Switzerland. Currency trends and cycles are vital when trading international markets abroad, mainly in big accounts.

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Fig. 108.7 The most important currency pairs for trading in Europe Currency Pair

Chart Symbol

FX Trading

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Australian Dollar to Euro (NBD)

$AUDEUR

British Pound to Euro (NBD)

$GBPEUR

Canadian Dollar to Euro (NBD)

$CADEUR

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Japanese Yen to Euro (NBD)

$JPYEUR

Mexican Peso to Euro (NBD)

$MXNEUR

New Zealand Dollar to Euro (NBD)

$NZDEUR

Singapore Dollar to Euro (NBD)

$SGDEUR

Swedish Krona to Euro (NBD)

$SEKEUR

Swiss Franc to Euro (NBD)

$CHFEUR

US Dollar to Euro (EOD)

$USDEUR

EUR/JPY EUR/NZD

Note that FOREX charts are End of Day (EOD) values. Most European states rely on Russia to meet energy needs. The Netherlands relies on Russia for about 26% of its total energy needs. The economic and social wellness risks are genuine, especially as winter 2022 approaches. The Russian invasion of Ukraine and sanctions against Russia led to Russia’s terminating or cutting energy exports to Europe. In 2021, EU countries paid Russia US$105 Billion for energy, two-thirds of the Dollar value of imports from Russia. Bottom line: The Netherlands’ domestic stock market offers investible opportunities in all sectors. But until the Russia-Ukraine war is over, investor risks are elevated.

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CHAPTER 109

Investing in Sweden and Norway Sweden and Norway, the Scandinavian countries of northern Europe, have sophisticated capital markets and financial and regulatory systems. They have diversified economies. Sweden’s population is 10.4 million, and Norway’s is 5.4 million. Sweden, described by the CIA: “A military power during the 17th century, Sweden has not participated in any war for two centuries. Armed neutrality was preserved in both World Wars. Since then, Sweden has pursued a successful economic formula consisting of a capitalist system intermixed with substantial welfare elements. Sweden joined the EU in 1995, but the public rejected the introduction of the euro in a 2003 referendum. .…” About Norway, the CIA stated: “Two centuries of Viking raids into Europe tapered off following the adoption of Christianity in 994… Rising nationalism throughout the 19th century led to a 1905 referendum granting Norway independence. Although Norway remained neutral in World War I, it suffered heavy losses in its shipping. Norway proclaimed its neutrality at the outset of World War II but was still occupied by Nazi Germany (1940-45). In 1949, Norway abandoned neutrality and became a member of NATO. The discovery of oil and gas in the North Sea in the late 1960s boosted Norway’s economic fortunes.” The major industries of Sweden are iron and steel, precision equipment (bearings, radio and telephone parts, armaments), wood pulp and paper products, processed foods, and motor vehicles. The major industries of Norway are petroleum and gas, shipping, fishing, aquaculture, food processing, shipbuilding, pulp and paper products, metals, chemicals, timber, mining, and textiles. Sweden is the 27th largest exporter and importer in the world, and Norway is the 37th largest. The are 3 Swedish-headquartered companies listed on the NYSE or Nasdaq, and Norway has three. Investors ought to check out the World Fact Book. I would next look at the Investing.com Sweden Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer various information and up-to-date prices. 491

BILL CARA / STOCK MARKET LITERACY

Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance. Fig. 109.1 Swedish stock market Indices available at StockCharts.com Swedish Indices

Chart Symbol

Dow Jones Sweden Stock Index (EOD)

$SEDOW

Dow Jones Sweden Titans 30 Index (Swedish Krona)

$SE30

Capital market prices move forward in trends and cycles. A snapshot is a piece of insufficient information to make trading decisions. Look for trend and cycle reversals, as evidenced in weekly, daily, or hourly charts. Fig. 109.2 List of Swedish Sector Indices available at Investing.com Swedish Sector Indices OMX Stockholm Basic Materials OMX Stockholm Consumer Staples PI OMX Stockholm Financials OMX Stockholm Financials GI OMX Stockholm Healthcare GI OMX Stockholm Healthcare PI OMX Stockholm Healthcare Providers OMX Stockholm Industrials OMX Stockholm Info Tech OMX Stockholm Oil & Gas OMX Stockholm Pharma & Biotech OMX Stockholm Real Estate GI OMX Stockholm Tech Hardware OMX Stockholm Telecom Equipment OMX Stockholm Telecom GI OMX Stockholm Telecommunications OMX Stockholm Telephone Services OMX Stockholm Travel & Leisure GI

492

I n v e s t i n g i n Sw e d e n a n d N o r w a y

Fig. 109.3 Swedish equity ETFs that trade in Sweden Swedish ETF Overview XACT OMXS30 XACT Nordic 30 XACT Bear XACT Bear 2 XACT Svenska Smabolag XACT OMXSB XACT Bull XACT Bull 2

To find Swedish-based equity ETFs that trade in Sweden, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in the Neverlands, go to this link at Investing.com. The list includes ETFs that have their nexus outside the Netherlands, but these can be filtered out. Fig. 109.4 Swedish and neighboring country stock market ETFs Country ETF

US Ticker

Sweden

EWD

Europe S&P 350

IEV

Italy

EWI

Germany

EWG

Belgium

EWK

Netherlands

EWN

Switzerland

EWL

Austria

EWO

Spain

EWP

France

EWQ

In this link, investors may wish to investigate the components and multi-year performance of the EWD Sweden ETF from iShares. To build an international stock portfolio of 20-25 stocks, out of 4 or 5 from Europe, I might consider a single one from Sweden or Norway. Most investors would stick to Germany, France, Netherlands. I will start with Sweden, as it is a bigger market than Norway. Finance.Yahoo.com has a screener for stocks that trade in Sweden. Click on this link to access the new, as yet untitled screener. Then select Sweden in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. 493

BILL CARA / STOCK MARKET LITERACY

Here is a list of large-cap Swedish company stocks that trade in Sweden and the US. Swedish companies have among the highest standards of good corporate governance. Fig. 109.5 Companies that trade in Sweden and the US Companies that trade in Sweden and the US

Domestic Ticker

US Ticker

Market Cap USD Billion

Price when book written

Atlas Copco

ATCO-B.ST

ATKLY

$69.20

$55.20

AB Volvo Group

VOLV-B.ST

VOLVY

$57.73

$22.65

Ericsson

ERIC-B.ST

ERIC

$42.79

$12.44

EQT AB

EQT.ST

EQBBF

$37.46

$37.21

Hexagon

HEXA-B.ST

HXGBF

$35.04

$13.43

Sandvik

SAND.ST

SDVKY

$33.27

$25.70

H & M Hennes & Mauritz AB

HM-B.ST

HMRZF

$31.86

$19.60

Assa Abloy

ASSA-B.ST

ASAZF

$30.50

$27.87

Skandinaviska Enskilda Banken

SEB-A.ST

SVKEF

$28.69

$12.84

Epiroc

EPI-A.ST

EPOKY

$25.01

$20.81

Evolution Gaming

EVO.ST

EVVTY

$24.98

$115.60

Volvo Car

VOLCAR-B.ST

VLVOF

$23.81

$7.46

Svenska Handelsbanken

SHB-A.ST

SVNLY

$20.31

$10.26

Swedbank

SWED-A.ST

SWDBY

$20.18

$18.00

NIBE Industrier

NIBE-B.ST

NDRBF

$20.05

$9.61

Essity

ESSITY-B.ST

ETTYF

$19.43

$28.12

Telia Company

TELIA.ST

TLSNY

$16.45

$3.96

Alfa Laval

ALFA.ST

ALFVY

$13.57

$31.52

L E Lundbergföretagen

LUND-B.ST

LBGUF

$12.86

$51.38

Swedish Match

SWMA.ST

SWMAY

$11.94

$7.55

Boliden

BOL.ST

BDNNY

$11.73

$42.89

Getinge

GETI-B.ST

GNGBY

$11.22

$39.29

Tele2 AB

TEL2-A.ST

TLTZY

$10.97

$15.41

Skanska

SKA-B.ST

SKSBF

$10.68

$25.25

The S&P/Europe 350 represents the non-British European component of the S&P Global 1200. You can electronically trade these stocks on their domestic exchanges via Interactive Brokers. You can also find many of them listed for trading on the NYSE. A list of Swedish stocks that trade in New York on the NYSE and Nasdaq can be found at this FinViz.com link. Note the extensive information tabs.

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Fig. 109.6 Important Swedish company stocks that trade in New York Swedish Company trading in New York in USD

Industry

Trading Symbol

Market Cap

Telefonaktiebolaget LM Ericsson (publ)

Communication Equipment

ERIC

41.90B

Autoliv, Inc.

Auto Parts

ALV

8.86B

Oatly Group AB

Beverages Non-Alcoholic

OTLY

4.47B

Veoneer, Inc.

Auto Parts

VNE

3.96B

Olink Holding AB (publ)

Diagnostics & Research

OLK

2.14B

Calliditas Therapeutics AB (publ)

Biotechnology

CALT

556M

To track a Swedish stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This is a current list of Swedish ADRs traded in the United States. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. Fig. 109.7 Important currency pairs for trading in Sweden Currency Pair

Chart Symbol

Swedish Krona to Euro (NBD)

$SEKEUR

Swedish Krona to US Dollar (NBD)

$SEKUSD

Euro to Swedish Krona (NBD)

$EURSEK

US Dollar to Swedish Krona (EOD)

$USDSEK

FX Trading

USD/SEK

Bottom line: Sweden’s economy and domestic stock market offer investible opportunities in all sectors.

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BILL CARA / STOCK MARKET LITERACY

Norway For a sense of the country, investors ought to check out the World Fact Book. Next, look at the Investing.com Norway Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. The Norwegian economy heavily relies on its North Sea Oil. Oslo Børs offers the only regulated markets for securities trading in Norway today. It joined the Euronext Group in June 2019. The exchange is world-leading in the energy, shipping, and seafood sectors. To find all ETFs that trade in Norway, go to this link at Investing.com, which includes ETFs with their nexus elsewhere. In this link, investors may wish to investigate the components and multi-year performance of the ENOR Norway ETF from iShares. Finance.Yahoo.com has a screener for stocks that trade in Norway. Click on this link to access the new, as yet untitled screener. Then select Norway in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. To track a Norwegian stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. An ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. A current list of Norwegian ADRs traded in the United States. A list of the Norwegian stocks traded in New York can be found at this FinViz.com link. Note the extensive information tabs. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. The most important currency pairs for trading in Norway (Krone) are as follows: Fig. 109.8 Norwegian Krone to US Dollar Currency Pair

Chart Symbol

Norwegian Krone to US Dollar (NBD)

$NOKUSD

FX Trading

Bottom line: Norway’s domestic stock market offers investible opportunities in all sectors.

496

C H A P T E R 110

Investing in Switzerland Switzerland has a sophisticated capital market, financial and regulatory system, and diversified economy. Its population is 8.6 million. As described by the CIA: “Switzerland’s sovereignty and neutrality have long been honored by the major European powers, and the country was not involved in either of the two world wars. Europe’s political and economic integration over the past half-century and Switzerland’s role in many UN and international organizations have strengthened Switzerland’s ties with its neighbors. The country did not officially become a UN member until 2002. Switzerland remains active in many UN and international organizations but is strongly committed to neutrality.” The leading industries are machinery, chemicals, watches, textiles, precision instruments, tourism, banking, insurance, and pharmaceuticals. It is about the 16th largest exporter and importer in the world. The are 29 Swiss companies listed on the NYSE or Nasdaq. Investors ought to check out the World Fact Book to understand the country. Next, look at the Investing.com Switzerland Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance. Fig. 110.1 Swiss stock market Indices Swiss Indices and ETFs

Ticker

Dow Jones Switzerland Stock Index

$CHDOW

Dow Jones Switzerland Titans Index (Swiss Franc)

$CH30

Swiss Market Index (EOD)

$SMI

To find Swiss-based equity ETFs that trade in Switzerland, go to this link at Investing.com. To access lists of ETFs for all asset classes that trade in Switzerland, go to this link at Investing.com. The list includes ETFs that have their nexus outside Switzerland but can be filtered out.

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Fig. 110.2 Swiss and neighboring country stock market ETFs available at Yahoo Finance Country ETF

US Ticker

Switzerland

EWL

Europe S&P 350

IEV

Italy

EWI

Germany

EWG

Belgium

EWK

Netherlands

EWN

Sweden

EWD

Austria

EWO

Spain

EWP

France

EWQ

Fig. 110.3 Swiss company stocks that trade on the NYSE or Nasdaq MarketBeat.com information

US Ticker

FinViz.com information

GICS

Sector

Industry

Market Cap

Amcor

AMCR

Amcor plc

Consumer Cyclical

Packaging & Containers

17.17B

Garrett Motion Inc.

GTX

Garrett Motion Inc.

Consumer Cyclical

Auto Parts

392.00M

On Holding AG

On Holding ONON AG

Consumer Cyclical

Apparel Retail

5.54B

Transocean Ltd

RIG

Transocean Ltd.

Energy

Oil & Gas Drilling 2.57B

Chubb

Chubb Limited

Financial

Insurance Property & Casualty

84.78B

Credit Suisse

Credit Suisse Group AG

Financial

Banks Diversified

12.77B

UBS

UBS Group AG

Financial

Banks Diversified

53.60B

ADCT

ADC Therapeutics SA

Healthcare

Biotechnology

349.66M

28.54B

4.26B

ADC Therapeutics

Alcon CRISPR Therapeutics

ALC

Alcon Inc.

Healthcare

Medical Instruments & Supplies

CRSP

CRISPR Therapeutics AG

Healthcare

Biotechnology

498

I n v e s t i n g i n Sw i t z e r l a n d

Molecular Partners

Novartis

SOPHiA GENETICS

MOLN

Molecular Partners AG

NVS

Novartis AG

SOPH

SOPHiA GENETICS SA

ABB

ABB Ltd

Garmin

GRMN Garmin Ltd.

Healthcare

Biotechnology

238.61M

Healthcare

Drug Manufacturers General

185.78B

Healthcare

Health Information Services

140.28M

Industrials

Specialty Industrial Machinery

55.16B

Technology

Scientific & Tech Instruments

16.16B

768.60M

Technology

Information Technology Services

Global Blue Group

Logitech

LOGI

Logitech International

Technology

Computer Hardware

7.78B

Sportradar Group

SRAD

Sportradar Group AG

Technology

Software Application

2.58B

STMicroelectronics

STM

STMicroelectronics N.V.

Technology

Semiconductors

31.29B

TE Connectivity

TEL

TE Connectivity Ltd.

Technology

Electronic Components

38.09B

For the Switzerland-headquartered stocks that trade on the NYSE or Nasdaq, this FinViz. com link provides essential information. To build an international portfolio of 20-25 stocks, I would select one from my list of “Old Europe” stocks, including Switzerland. Finance.Yahoo.com has a screener for stocks that trade in Switzerland. Click on this link to access the new, as yet untitled screener. Then select Switzerland in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. The S&P/Europe 350 represents the non-British European component of the S&P Global 1200. You can electronically trade S&P/Europe 350 stocks on their domestic exchanges via Interactive Brokers. The following list includes 24 key stocks that trade on the Swiss Exchange. Investors can electronically trade all of these stocks in Swiss Francs in Switzerland via Interactive Brokers or many of them in the US in USD.

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BILL CARA / STOCK MARKET LITERACY

Fig. 110.4 Swiss company stocks that trade OTC in the US with access via the Swiss Exchange ticker MarketBeat.com information

Swiss Ticker

US Ticker

Barry Callebaut

BARN.SW

BYCBF

Compagnie Financière Richemont

CFR.SW

CFRUY

Geberit

GEBN.SW

GBERY

Givaudan

GIVN.SW

GVDNY

Glencore (trades on London Exchange)

GLEN.L

GLCNY

Holcim

HOLN.SW

HCMLY

Julius Bär

BAER.SW

JBAXY

Kühne + Nagel

KNIN.SW

KHNGY

Lindt

LISN.SW

LDSVF

Lonza

LONN.SW

LZAGY

Nestlé

NESN.SW

NSRGY

Partners Group

PGHN.SW

PGPHF

Roche

ROG.SW

RHHBY

Schindler Group

SCHN.SW

SHLRF

SGS

SGSN.SW

SGSOY

Sika

SIKA.SW

SXYAY

Sonova

SOON.SW

SONVY

Straumann

STMN.SW

SAUHF

Swatch

UHR.SW

SWGAY

Swiss Life

SLHN.SW

SZLMY

Swiss Re

SREN.SW

SSREY

Swisscom

SCMN.SW

SCMWY

Vifor Pharma

VIFN.SW

GNHAY

Zurich Insurance Group

ZURN.SW

ZFSVF

Investors may wish to investigate the components and multi-year performance of the EWL Switzerland ETF from iShares. To track a Swiss stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form, and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This link lists Swiss ADRs that trade in the United States. This FinViz.com link lists the Swiss stocks traded in New York. Note the extensive information tabs.

500

I n v e s t i n g i n Sw i t z e r l a n d

Switzerland is a significant currency-trading country. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. Trading Forex is a 24-hour, 7-days-a-week financial market that exceeds $5 Trillion daily. Forex tables use the Euro as the base currency, but in Switzerland, the forex traders use EUR/CHF rather than CHF/EUR. In this table, I use both as an easier way to see how much local currency is used to buy instruments in a different currency. Fig. 110.5 The most important currency pairs for trading in Switzerland Currency Pair

Chart Symbol

FX Trading

Swiss Franc – Philadelphia

$XDS

Swiss Franc – Philadelphia

$XSF

Swiss Franc to Australian Dollar (NBD)

$CHFAUD

Swiss Franc to British Pound (NBD)

$CHFGBP

Swiss Franc to Canadian Dollar (NBD)

$CHFCAD

Swiss Franc to Euro (NBD)

$CHFEUR

Swiss Franc to Hong Kong Dollar (NBD)

$CHFHKD

Swiss Franc to Japanese Yen (NBD)

$CHFJPY

Swiss Franc to Singapore Dollar (NBD)

$CHFSGD

Swiss Franc to US Dollar (NBD)

$CHFUSD

Australian Dollar to Swiss Franc (NBD)

$AUDCHF

AUD/CHF

British Pound to Swiss Franc (NBD)

$GBPCHF

GBP/CHF

Canadian Dollar to Swiss Franc (NBD)

$CADCHF

CAD/CHF

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Hong Kong Dollar to Swiss Franc (NBD)

$HKDCHF

New Zealand Dollar to Swiss Franc (NBD)

$NZDJPY

Singapore Dollar to Swiss Franc (NBD)

$SGDCHF

US Dollar to Swiss Franc (EOD)

$USDCHF

CHF/JPY

NZD/CHF USD/CHF

Note that FOREX charts are End of Day (EOD) values. Switzerland is not a member of the European Union. In Switzerland, the Euro is considered a foreign currency. The Euro can be used, but the change is in Francs. Until 2015, the Franc was pegged at a set rate to the Euro, but the Swiss National Bank removed the peg, saying it was no longer sustainable. Bottom line: The domestic stock market of Switzerland offers investible opportunities in most sectors.

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C H A P T E R 111

Investing in the United Kingdom (UK) The UK has one of the world’s most sophisticated capital markets, financial and regulatory systems, and diversified economies. Its population is 67 million. The CIA says: “The United Kingdom has historically played a leading role in developing parliamentary democracy and advancing literature and science. At its zenith in the 19th century, the British Empire stretched over one-fourth of the earth’s surface. The first half of the 20th century saw two World Wars seriously deplete the UK’s strength, and the Irish Republic withdrew from the union. The second half witnessed the dismantling of the Empire and the UK rebuilding itself into a modern and prosperous European nation. As one of five permanent members of the UN Security Council and a founding member of NATO and the Commonwealth of Nations, the UK pursues a global approach to foreign policy.….” Major industries are machine tools, electric power equipment, automation equipment, railroad equipment, shipbuilding, aircraft, motor vehicles and parts, electronics and communications equipment, metals, chemicals, coal, petroleum, paper and paper products, food processing, textiles, clothing, and other consumer goods. It is about the world’s 6th largest exporter and importer. The are 99 UK companies listed on the NYSE or Nasdaq. Investors ought to check out the World Fact Book to understand the country. I would next look at Investing.com UK’s Market Overview. The tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance.

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I n v e s t i n g i n t h e U n i t e d K i n g d o m ( UK )

Fig. 111.1 The key UK indices Important UK Indices

Symbol

Dow Jones UK Titans 50 Index (British Pound)

$UK50

Dow Jones UK Titans 50 Total Return Index (EOD)

$UK50TR

Dow Jones UK Stock Index

$GBDOW

Dow Jones Europe -Ex UK Stock Index

$E2DOW

LSE - Issues Advancing (EOD)

$LOADV

LSE - Issues Declining (EOD)

$LODEC

LSE - Issues Unchanged (EOD)

$LOADU

LSE - Total Active Trading Symbols (EOD)

$LOTOT

10-Year UK Treasury Yield (EOD)

$UKT10Y

London Interbank Offered Rate - 1 month (NBD)

$LIBOR

London Interbank Offered Rate - 3 month (NBD)

$LIBOR3

To find all ETFs that trade in the UK, go to this link at Investing.com, which includes primarily ETFs that have their nexus elsewhere. To access lists of ETFs of all asset classes that trade in the UK, including those with their nexus outside the UK, go to this link at Investing.com. Fig. 111.2 UK and neighboring country stock market ETFs available at Yahoo Finance Country ETF

US Ticker

United Kingdom

EWU

Europe S&P 350

IEV

Italy

EWI

Germany

EWG

Belgium

EWK

Netherlands

EWN

Sweden

EWD

Switzerland

EWL

Austria

EWO

Spain

EWP

France

EWQ

Investors who wish to diversify their portfolio across all economic sectors of Europe can do so by holding these AMEX ETF market trackers that trade in US dollars.

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Fig. 111.3 The major UK companies that trade in New York UK Company listed in New York

Industry

Ticker

AstraZeneca PLC

Drug Manufacturers - General

AZN

Linde PLC

Specialty Chemicals

LIN

HSBC Holdings PLC

Banks – Diversified

HSBC

Rio Tinto Group

Other Industrial Metals & Mining

RIO

Unilever PLC

Household & Personal Products

Diageo PLC

Beverages - Wineries & Distilleries

DEO

GlaxoSmithKline PLC

Drug Manufacturers - General

GSK

BP PLC

Oil & Gas Integrated

British American Tobacco PLC

Tobacco

BTI

RELX PLC

Publishing

RELX

National Grid PLC

Utilities – Diversified

NGG

Lloyds Banking Group PLC

Banks – Regional

LYG

Vodafone Group Public Limited Co.

Telecom Services

VOD

Prudential PLC

Insurance – Life

PUK

Barclays PLC

Banks - Diversified

BCS

NatWest Group PLC

Banks - Diversified

NWG

Ferguson PLC

Industrial Distribution

FERG

Willis Towers Watson Public Ltd Co.

Insurance Brokers

WTW

Coca-Cola Europacific Partners PLC

Beverages - Non-Alcoholic

CCEP

CNH Industrial N.V.

Farm & Heavy Construction Machinery

CNHI

WPP PLC

Advertising Agencies

WPP

Liberty Global PLC

Entertainment

LBTYA

A list of the British stocks traded in New York on the NYSE and Nasdaq can be found at FinViz.com. Note the extensive information tabs that enable comprehensive studies. Finance.Yahoo.com has a screener for stocks that trade in the UK. Click on this link to access the new, as yet untitled screener. Then select the United Kingdom in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. If tracking a British stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This link lists ADRs from the United Kingdom that trade in the United States.

504

I n v e s t i n g i n t h e U n i t e d K i n g d o m ( UK )

Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. The British Pound sterling is one of the world’s major currencies. Note that FOREX charts from StockCharts.com are End of Day (EOD) values. Fig. 111.4 The most important currency pairs for trading in the UK Currency Pair

Chart Symbol

FX Trading

British Pound – Philadelphia

$XBP

British Pound – Philadelphia

$XDB

British Pound to Australian Dollar (NBD)

$GBPAUD

GBP/AUD

British Pound to Canadian Dollar (NBD)

$GBPCAD

GBP/CAD

British Pound to Euro (NBD)

$GBPEUR

British Pound to Hong Kong Dollar (NBD)

$GBPHKD

British Pound to Japanese Yen (NBD)

$GBPJPY

British Pound to Mexican Peso (NBD)

$GBPMXN

British Pound to New Zealand Dollar (NBD)

$GBPNZD

British Pound to Singapore Dollar (NBD)

$GBPSGD

British Pound to Swiss Franc (NBD)

$GBPCHF

GBP/CHF

British Pound to US Dollar (NBD)

$GBPUSD

GBP/USD

Australian Dollar to British Pound Sterling (NBD)

$AUDGBP

Canadian Dollar to British Pound (NBD)

$CADGBP

Euro to British Pound (NBD)

$EURGBP

Hong Kong Dollar to British Pound (NBD)

$HKDGBP

Japanese Yen to British Pound Sterling (NBD)

$JPYGBP

Mexican Peso to British Pound Sterling (NBD)

$MXNGBP

New Zealand Dollar to British Pound (NBD)

$NZDGBP

Singapore Dollar to British Pound Sterling (NBD)

$SGDGBP

Swiss Franc to British Pound (NBD)

$CHFGBP

US Dollar to British Pound Sterling (EOD)

$USDGBP

GBP/JPY GBP/NZD

EUR/GBP

Bottom line: The London stock market of the United Kingdom offers investible opportunities in all sectors.

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C H A P T E R 112

Investing in India India, with a population of 1.57 Billion, is the most populous country in the world, surpassing China’s 1.45 Billion (August 2022). India has two sophisticated capital markets, the National Stock Exchange (NSE) and the much older Bombay Stock Exchange (BSE). There are robust financial and regulatory systems and a diversified economy. The CIA says: “By the 19th century, Great Britain had become the dominant political power on the subcontinent, and India, one of the world’s oldest civilizations, was seen as the “Jewel in the Crown” of the British Empire. Years of nonviolent resistance to British rule, led by Gandhi and Nehru, eventually resulted in Indian independence in 1947. Largescale communal violence occurred before and after the partition of the subcontinent into two separate states - India and Pakistan…” India’s major industries are textiles, chemicals, pharmaceuticals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, and software. It is the 13th largest exporter and 11th largest importer globally. The are 12 India-headquartered companies listed on the NYSE or Nasdaq. To understand the country, investors ought to check out the World Fact Book. Next, look at the Investing.com Indian Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. Investing in a foreign country or region’s securities requires assessing the big picture through Indices and ETFs. Yahoo Finance has the charts. Investors may wish to track the following Indices and ETFs at Yahoo Finance. Fig. 112.1 India’s NIFTY stock market Indices India Indices

Symbol

Nifty Bank Index – India

$BANKNIFTY

Nifty 100 Index – India

$CNX100

Nifty 200 Index – India

$CNX200

Nifty 500 Index – India

$CNX500

Nifty Auto Index – India

$CNXAUTO

Nifty Commodities Index – India

$CNXCMDT

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Investing in India

Nifty India Consumption Index - India

$CNXCONSUM

Nifty Dividend Opportunities 50 Index - India

$CNXDIVOP

Nifty Energy Index – India

$CNXENERGY

Nifty Financial Services Index - India

$CNXFIN

Nifty FMCG Index – India

$CNXFMCG

Nifty Infrastructure Index – India

$CNXINFRA

Nifty IT Index – India

$CNXIT

Nifty Media Index – India

$CNXMEDIA

Nifty Metal Index – India

$CNXMETAL

Nifty Midcap 100 Index – India

$CNXMID

Nifty MNC Index – India

$CNXMNC

Nifty Pharma Index – India

$CNXPHARMA

Nifty PSE Index – India

$CNXPSE

Nifty PSU Bank Index – India

$CNXPSUBANK

Nifty Realty Index – India

$CNXREALTY

Nifty Services Sector Index – India

$CNXSERVICE

Nifty Smallcap 100 Index – India

$CNXSML

Nifty CPSE Index – India

$CPSE

India Vix Index – India

$INDIAVIX

Nifty 100 Liquid 15 Index – India

$LIX15

Nifty Growth Sectors 15 Index - India

$NI15

Nifty 50 Index – India

$NIFTY

Nifty Next 50 Index – India

$NIFTYJR

Nifty Midcap 50 Index – India

$NIFTYMID50

Nifty50 PR 1X Inverse Index – India

$NIFTYPR1XINV

Nifty50 PR 2X Leveraged Index - India

$NIFTYPR2XLEV

Nifty50 TR 1X Inverse Index – India

$NIFTYTR1XINV

Nifty50 TR 2X Leveraged Index – India

$NIFTYTR2XLEV

To find India-based equity ETFs that trade in India, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in India, including those that have their nexus outside India, go to this link at Investing.com. Investors of Indian stocks can track India-based ETFs at FinViz.com.

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Fig. 112.2 US-listed India-based ETFs available at FinViz.com India ETF

Ticker

iShares MSCI India Index Fund

INDA

WisdomTree India Earnings Fund

EPI

India Fund, Inc.

IFN

iShares S&P India Nifty 50 Index Fund

INDY

PowerShares India Portfolio

Morgan Stanley India Investment Fund

IIF

Direxion Daily India Bull 3x Shares

INDL

EG Shares India Consumer ETF

INCO

iShares MSCI India Small-Cap Index Fund

SMIN

Fig. 112.3 India and region ETFs that trade in New York Regional ETF

US Ticker

India

INDA

Malaysia

EWM

Singapore

EWS

Thailand

THD

Indonesia

EIDO

Vietnam

VNM

Pakistan

PAK

Australia

EWA

New Zealand

ENZL

This FinViz.com link contains tabs for charts and information for these markets. Finance.Yahoo.com has a screener for stocks that trade in India. Click on this link to access the new, as yet untitled screener. Then select India in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. Investors who may wish to invest in stocks of India on the NYSE and Nasdaq can review the following India-based stocks at FinViz.com. Here is a FinViz.com snapshot of the five largest-cap and most popular Indian stocks traded in New York.

Consideration for an India-based Portfolio Consider holding one from India to build an international portfolio of 20-25 stocks. Here is my select list of thirty-six large-cap stocks traded in Rupee in India and their ticker symbols in India. Some also trade in USD in New York. The list is from largest to smallest by Market Cap at the date of writing. 508

Investing in India

Fig. 112.4 List of thirty-six large-cap stocks traded in Rupee in India Company

India Ticker

Reliance Industries

RELIANCE.NS

Tata Consultancy Services

TCS.NS

HDFC Bank

HDFCBANK.NS

HDB INFY

Infosys

INFY.NS

Hindustan Unilever

HINDUNILVR.NS

ICICI Bank

ICICIBANK.NS

State Bank of India

SBIN.NS

Housing Development Finance Cp

HDFC.NS

Bajaj Finance

BAJFINANCE.NS

Bharti Airtel

BHARTIARTL.NS

Kotak Mahindra Bank

KOTAKBANK.NS

HCL Technologies

HCLTECH.NS

Asian Paints

ASIANPAINT.NS

Wipro

WIPRO.NS

Adani Green Energy

ADANIGREEN.NS

ITC

ITC.NS

DMart

DMART.NS

Larsen & Toubro

LT.NS

Maruti Suzuki India

MARUTI.NS

Bajaj Finserv

BAJAJFINSV.NS

Axis Bank

AXISBANK.BO

Titan Company

TITAN.NS

Adani Transmission

ADANITRANS.NS

Oil & Natural Gas

ONGC.NS

Sun Pharmaceutical

SUNPHARMA.NS

UltraTech Cement

ULTRACEMCO.NS

Adani Enterprises

ADANIENT.NS

Tata Motors

TATAMOTORS.NS

Nestlé India

NESTLEIND.NS

JSW Steel

JSWSTEEL.NS

Adani Ports & SEZ

ADANIPORTS.NS

Tata Steel

TATASTEEL.NS

Tech Mahindra

TECHM.NS

Powergrid Corporation of India

POWERGRID.NS

Vedanta

VEDL.NS

Hindustan Zinc

HINDZINC.NS

509

US Ticker

IBN

WIT

TTM

BILL CARA / STOCK MARKET LITERACY

For a detailed look into individual stocks and US-listed ADRs from India, I recommend you look at JP Morgan’s ADR website. Investing.com has a current list of ADRs from India that trade in the United States. To track an Indian stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. I suspect most investors are unaware that India now has the largest population in the world. China’s population growth will peak by 2027, whereas India’s population will peak many years later. Fig. 112.5 Projected Populations of India and China (source: VisualCapitalist.com)

The population of India has surpassed that of China. India is growing at a much faster rate. Economic growth in India in 2016-2050, as reported by VisualCapitalist.com, may grow annually at +8% to 15 percent of the global GDP. China will increase to 20 percent of global GDP, but at a +2% rate. Economic growth indicates that India has the best investment opportunities in emerging economies. Most investors are also surprised to learn that over a dozen people of Indian origin and Indian-born executives are CEOs of US-headquartered global companies. Fig. 112.6 List of Top Indian Origin CEOs in American Companies (3Q2022) • Satya Nadella - CEO, Microsoft • Sundar Pichai - CEO, Google LLC & Alphabet Inc • Arvind Krishna - CEO, IBM Group

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Investing in India

• Shantanu Narayen - CEO, Adobe Inc • Ajay Banga - CEO, Mastercard • Parag Agrawal - CEO, Twitter • Raj Subramaniam - CEO, FedEx • Rangarajan Raghuram - CEO, VMware

These eight corporations represent over 4 Trillion in Market Cap. Read more at: https://www.oneindia.com/india/indian-ceos-list-2021-top-5-indian-originceos-in-american-companies-3341831.html In my 2007 book, I wrote the following about India: “There is an excellent case for a rapidly growing economy in India for years ahead, but perhaps less for stocks. I took a wait-and-see approach for several years before adding Indian stocks to my global portfolio. I now believe (1) that in maybe five years — say about 2012 — India will be the next great country of stock traders, and (2) about 2% of one’s global portfolio should be positioned in the Indian banks to take advantage of the remarkable growth and stability of the Indian economy. I hope to be early in picking winners. I selected ICICI Bank (IBN) and HDFC Bank (HDB) as two of the Cara Global Best 100 companies based on their financial strength and operating performance. Today, I look at the broad market in India as something of a Wild West, with rampant speculation. In a bear market, I expect significant capital to be lost, and the capital markets are set on their heels for the five-year window I suggested. India has never been without its celebrity supporters. In a Fortune magazine article on the “Economy and the World” (January 12, 2004), Peter Drucker is highly complementary of India (and not so for China). Here are some quotes from the eminent Mr. Drucker from this Fortune article: “The dominance of the US [over the world economy] is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union [and] ASEAN. There is no one center in this world economy. India is fast becoming a powerhouse. The medical school in New Delhi is perhaps the best in the world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge center.... In contrast, the greatest weakness of China is its tiny proportion of educated people.... the likelihood of the absorption of rural workers into the cities without upheaval seems dubious. India does not have that problem because they have already absorbed excess rural population into the cities.” The Indian economy and its stock market have rapidly developed since 2007. I no longer doubt the efficacy of investing and trading in India. In the 2H2022, the Indian equity market is the best performer of the 45 markets I monitor. Foreign Direct Investment (FDI) has flowed into India for many years. Securities laws have also improved to enable foreign trading on domestic exchanges. The exchanges are NSE (National) and BSE (formerly Bombay). 511

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Currency trends and cycles play a crucial role when trading international markets abroad. The most important currency pair for trading in India is the US Dollar. Fig. 112.7 The most important currency pairs for trading in India Currency Pair

Chart Symbol

FX Trading

US Dollar to Indian Rupee (EOD)

$USDINR

USD/INR

Indian Rupee Index (EOD)

$RUP

X-rates.com publishes “free foreign exchange rates and tools including a currency conversion calculator, historical rates and graphs, and a monthly exchange rate average.” Their currency rate data for India is extensive. Only the Top-10 pairs are quoted here as of the date of writing, but the up-to-date rate is published by clicking where appropriate. Fig. 112.8 India Rupee currency trading at X-rates.com Indian Rupee

1.00 INR

inv. 1.00 INR

US Dollar

0.01291

77.461821

Euro

0.012192

82.02026

British Pound

0.01032

96.901205

Australian Dollar

0.018291

54.672905

Canadian Dollar

0.016528

60.502819

Singapore Dollar

0.017802

56.172695

Swiss Franc

0.012559

79.626032

Malaysian Ringgit

0.056865

17.585424

Japanese Yen

1.647317

0.607048

Chinese Yuan Renminbi

0.086659

11.539454

Bottom line: The domestic stock market of India offers investible opportunities in most sectors.

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C H A P T E R 113

Investing in Australia and New Zealand Australia and New Zealand in South Pacific Oceania have sophisticated capital markets and financial and regulatory systems. Their economies are diversified economy although Australia’s is the most prominent. Australia’s population is 27.1 million, and New Zealand’s is 5.1 million. As described by the CIA: “Australia severed most UK constitutional links in 1942. In 2021, the UK, the US, and Australia announced the AUKUS enhanced a security partnership to develop military capabilities and critical technologies. Australia’s postWW2 economy boomed. By the 1970s, racial policies that prevented most racialized people from immigrating to Australia were removed, greatly increasing Asian immigration. In recent decades, Australia has become an internationally competitive, advanced market economy due largely to economic reforms adopted in the 1980s and its proximity to East and Southeast Asia.” About New Zealand, the CIA stated: “The UK declared New Zealand a separate colony in 1841 and limited self-government in 1852. The country changed its status to an independent dominion in 1907 and reaffirmed its independence in 1947. In recent years, New Zealand explored reducing ties to the UK. There is an active, minority movement about making New Zealand a republic.” The leading industries of Australia are mining, industrial and transportation equipment, food processing, chemicals, and steel. The major industries of New Zealand are agriculture, forestry, fishing, logs and wood articles, manufacturing, construction, financial services, real estate services, mining, and tourism. Australia is the world’s 23rd largest exporter-importer, and New Zealand around the 60th largest. There are 19 Australia-headquartered companies listed on the NYSE or Nasdaq, but New Zealand has none. Investors can check out the World Fact Book overviews at these links to understand these two Oceanian countries, Australia and New Zealand. Australia, in the southwestern South Pacific Ocean, is the sixth largest island country in the world and is called a continent. Its 27 million population relies on international trade with 513

BILL CARA / STOCK MARKET LITERACY

(in order) China, Japan, the US, the Republic of Korea, Singapore, New Zealand, the UK, India, Malaysia, and Thailand. Investors should check out the Australian Market Overview and the New Zealand Market Overview from Investing.com. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. The Economic data shows that Australia has a strong economy. Fig. 113.1 Australian economic data (May 2022) • Interest Rate 0.35% • Unemployment Rate 3.9% • GDP YoY 4.2% • CPI YoY 5.1% • Trade Balance 9.314B

Economic data reflects the rear view, and investors are always looking forward by 6 to 9 months. The Australian Stock Exchange (ASX) in Sydney is the premier market for listed equities and ETFs. My approach to investing in securities of a foreign country is first to consider the big picture through Market Indices and ETFs. Fig. 113.2 Australian stock market Indices Australia Indices

Chart Symbol

Australia ASX All Ords Composite (EOD)

$AORD

Dow Jones Australian Index (EOD)

$DJAU

Dow Jones Australian Large-Cap Index (EOD)

$DJAUL

Dow Jones Australian Mid-Cap Index (EOD)

$DJAUM

Dow Jones Australian Small-Cap Index (EOD)

$DJAUS

iShares MSCI Australia Index

$WBJ

To find Australian-based equity ETFs that trade in Australia, go to this link at Investing.com. Go to Investing.com to access lists of ETFs of all asset classes that trade in Australia, including those with their nexus outside Australia. Fig. 113.3 Australian ETFs listed on the Sydney market Australia ETFs listed on the Sydney market

Domestic Ticker

SPDR S&P/ASX 200 Fund

STW.AX

Ishares Core S&P/ASX 200

IOZ.AX

Vanguard Australian Shares

VAS.AX

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Investing in Australia and New Zealand

BetaShares Australian Equities Strong Bear Hedge

BBOZ.AX

Betashares Active Australian Hybrids

HBRD.AX

BetaShares Geared Australian Equity Hedge

GEAR.AX

VanEck Vectors Australian Equal Weight

MVW.AX

Perth Mint Gold

PMGOLD.AX

VanEck Vectors Australian Resources

MVR.AX

Beta Shares S&P/ASX 200 Resources Sector

QRE.AX

BetaShares Australian Sustainability Leaders

FAIR.AX

Vanguard Australian Shares High Yield

VHY.AX

Australian High-Interest Cash

AAA.AX

Vanguard Australian Government Bond

VGB.AX

VanEck Vectors Australian Corporate Bond Plus

PLUS.AX

Betashares Australian Major Bank Hybrids Index

BHYB.AX

Vanguard Australian Fixed Interest

VAF.AX

Australian ETFs that trade in New York with the Ticker linked to the chart at StockCharts.com. Fig. 113.4 Australian ETFs that trade in New York Australia ETF

Ticker

iShares MSCI Australia ETF

EWA

Invesco Currency Shares Australian Dollar Trust

FXA

Aberdeen Australia Equity Fund, Inc.

IAF

Investors can investigate the components and multi-year performance of the EWA Australia ETF from iShares. To find all ETFs that trade in Australia, go to this link at Investing.com. The list includes ETFs that have their nexus elsewhere but can be filtered. Investors can trade ETFs and stocks on the Sydney exchange in Australian Dollars or through New York or USOTC in US Dollars. Finance.Yahoo.com has a screener for stocks that trade in Australia. Click on this link to access the new, as yet untitled screener. Then select Australia in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 such countries that investors can access for trading data. The S&P/Australia 20 stocks of the S&P 1200 contain some high-quality companies. Here is a select list of twenty large-cap Australian companies and their tickers linked to the Australia Stock Exchange.

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Fig. 113.5 List of twenty large-cap Australian companies Australian Company

Market Cap (A$ Billion)

Domestic Ticker

US Ticker

BHP Group

$238.79

BHP.AX

BHP

Commonwealth Bank

$177.12

CBA.AX

CBAUF

CSL

$131.98

CSL.AX

CSLLY

National Australia Bank

$99.05

NAB.AX

NABZY

ANZ Bank

$70.63

ANZ.AX

ANZBY

Macquarie

$68.15

MQG.AX

MQBKY

Fortescue

$62.00

FMG.AX

FSUMF

Wesfarmers

$53.02

WES.AX

WFAFF

Telstra

$45.59

TLS.AX

TLSYY

Transurban

$43.98

TCL.AX

TRAUF

Woolworths Group

$42.73

WOW.AX

WOLWF

Goodman Group

$36.19

GMG.AX

GMGSF

Woodside Petroleum

$28.36

WPL.AX

WDS

Amcor

$27.43

AMC.AX

AMCR

Santos

$27.17

STO.AX

STOSF

Coles Group

$23.90

COL.AX

CLEGF

Aristocrat

$23.61

ALL.AX

ARLUF

Qbe Insurance Group

$23.61

QBE.AX

QBIEY

Newcrest Mining

$22.78

NCM.AX

NCMGY

South32

$21.83

S32.AX

SOUHY

A list of the Australian stocks traded in New York can be found at this FinViz.com link. Note the extensive information tabs. Here are the ten largest Australian-headquartered companies that trade in USD in New York. FinViz.com links to the Company name and Market Cap will produce the most recent information. Links to the Ticker will show the latest charts from StockCharts.com. Fig. 113.6 The ten largest Australian-headquartered companies that trade in USD in New York Company

Sector

Industry

Market Cap (USD) Ticker

BHP Group Limited

Basic Materials

Industrial Metals & Mining

167.24B

BHP

Atlassian Corporation Plc

Technology

Software - Application

40.17B

TEAM

Tritium DCFC Limited

Industrials

Electrical Equipment & Parts 1.17B

DCFC

Mesoblast Limited

Healthcare

Biotechnology

435.20M

MESO

Drug Manufacturers

372.71M

IXHL

Incannex Healthcare Limited Healthcare

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Investing in Australia and New Zealand

Opthea Limited

Healthcare

Biotechnology

325.56M

OPT

Iris Energy Limited

Financial

Capital Markets

294.44M

IREN

Immutep Limited

Healthcare

Biotechnology

208.73M

IMMP

Mawson Infrastructure Group, Inc.

Technology

Info Technology Services

160.97M

MIGI

Aberdeen Australia Equity Fund, Inc.

Financial

Asset Management

132.75M

IAF

To track an Australian stock across international markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form, and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. An ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. Here is the list and trading details of Australian ADRs. Note the tabs for Performance, Technical, and Fundamental data, which are up to date. I would not likely have one from Australia to build an international portfolio of twenty stocks. However, I would consider 2% (1 in 50) from Australia. Many investors trade a portfolio entirely comprised of Australian stocks from abroad. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. As the Australian Dollar is a primary world currency, investors can track the currency pairs shown in Fig. 113.7. Fig. 113.7 The most important currency pairs for trading in Australia Currency Pair

Chart Symbol

Australian Dollar – Philadelphia

$XAD

Australian Dollar – Philadelphia

$XDA

Australian Dollar to British Pound Sterling (NBD)

$AUDGBP

Australian Dollar to Canadian Dollar (NBD)

$AUDCAD

Australian Dollar to Euro (NBD)

$AUDEUR

Australian Dollar to Hong Kong Dollar (NBD)

$AUDHKD

Australian Dollar to Japanese Yen (NBD)

$AUDJPY

AUD/JPY

Australian Dollar to New Zealand Dollar (NBD)

$AUDNZD

AUD/NZD

Australian Dollar to Singapore Dollar (NBD)

$AUDSGD

Australian Dollar to Swiss Franc (NBD)

$AUDCHF

AUD/CHF

Australian Dollar to US Dollar (NBD)

$AUDUSD

AUD/USD

British Pound to Australian Dollar (NBD)

$GBPAUD

GBP/AUD

Canadian Dollar to Australian Dollar (NBD)

$CADAUD

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AUD/CAD

BILL CARA / STOCK MARKET LITERACY

Euro to Australian Dollar (NBD)

$EURAUD

Hong Kong Dollar to Australian Dollar (NBD)

$HKDAUD

Japanese Yen to Australian Dollar (NBD)

$JPYAUD

New Zealand Dollar to Australian Dollar (NBD)

$NZDAUD

Singapore Dollar to Australian Dollar (NBD)

$SGDAUD

Swiss Franc to Australian Dollar (NBD)

$CHFAUD

US Dollar to Australian Dollar (EOD)

$USDAUD

EUR/AUD

Note that Currency charts are End of Day (EOD) values. FOREX trading is real-time. Bottom line: Australia’s economy and domestic stock market offer investible opportunities in all sectors. Commodities are favored.

New Zealand New Zealand is an island country in the remote southwestern South Pacific Ocean, 1445 miles east of Australia. The 5.1 million population (2022) relies on international trade with China, Australia, the US, Japan, South Korea, and Germany. The NZX Equity Market (NZSX) is the premier market for listed equities and ETFs in New Zealand. Fig. 113.8 New Zealand’s stock market Indices New Zealand Indices

GICS

Dow Jones New Zealand S&P/NZX Energy

S&P/NZX Basic Materials

S&P/NZX Industrials

S&P/NZX Consumer Discretionary

S&P/NZX Consumer Staples

S&P/NZX Health Care

S&P/NZX Financial Services

S&P/NZX Technology

S&P/NZX Telecommunication Services

S&P/NZX Utilities

S&P/NZX Real Estate

From the links in Fig. 113.8, note the extensive information from Investing.com.

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Investing in Australia and New Zealand

Fig. 113.9 List of New Zealand-based ETFs that trade on the NZSX market New Zealand ETFs listed on the NZXS market

Domestic Ticker

Smartshares NZ Top 10

TNZ

Smartshares NZ Top 50

FNZ

Smartshares NZ Mid Cap

MDZ

Smartshares NZ Property

NPF

Smartshares NZ Dividend

DIV

Smartshares NZ Bond

NZB

Smartshares NZ Cash

NZC

To find all ETFs that trade in New Zealand, go to this link at Investing.com, which includes primarily ETFs that have their nexus elsewhere. Finance.Yahoo.com has a screener for stocks that trade in New Zealand. Click on this link to access the new, as yet untitled screener. Then select New Zealand in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. Fig. 113.10 List of larger New Zealand-based Companies that trade on the NZSX market Companies listed on the NZSX market

Market Cap

Domestic Ticker

Westpac Banking Corporation

$90,959,297,490

WBC.NZ

Australia and New Zealand Banking Group Limited

$78,654,032,498

ANZ.NZ

Fisher & Paykel Healthcare Corporation Limited

$12,036,509,010

FPH.NZ

Meridian Energy Limited (NS)

$11,599,041,533

MEL.NZ

Australian Foundation Investment Company Limited

$10,970,764,250

AFI.NZ

Auckland International Airport Limited

$10,861,058,122

AIA.NZ

Ampol Limited

$9,217,525,189

ALD.NZ

Spark New Zealand Limited

$8,946,188,131

SPK.NZ

F&C Investment Trust PLC

$8,601,762,203

FCT.NZ

Mercury NZ Limited (NS)

$7,959,423,249

MCY.NZ

Mainfreight Limited

$7,562,460,955

MFT.NZ

Ebos Group Limited

$7,547,541,120

EBO.NZ

Contact Energy Limited

$5,995,302,167

CEN.NZ

Infratil Limited

$5,900,466,193

IFT.NZ

Ryman Healthcare Limited

$4,925,000,000

RYM.NZ

Here is the list and trading details of New Zealand ADRs. Note the tabs for Performance, Technical, and Fundamental data, which are up to date.

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The New Zealand Dollar is not a significant world currency but trades in many FX currency pairs. Fig. 113.11 The New Zealand Dollar pairs Currency Pair

Chart Symbol

FX Trading

New Zealand Dollar (EOD)

$NZD

New Zealand Dollar to Australia Dollar (NBD)

$NZDAUD

New Zealand Dollar to British Pound (NBD)

$NZDGBP

New Zealand Dollar to Canadian Dollar (NBD)

$NZDCAD

New Zealand Dollar to Euro (NBD)

$NZDEUR

New Zealand Dollar to Japanese Yen (NBD)

$NZDJPY

NZD/JPY

New Zealand Dollar to Swiss Franc (NBD)

$NZDJPY

NZD/CHF

New Zealand Dollar to US Dollar (EOD)

$NZDUSD

NZD/USD

Australian Dollar to New Zealand Dollar (NBD)

$AUDNZD

AUD/NZD

British Pound to New Zealand Dollar (NBD)

$GBPNZD

GBP/NZD

Euro to New Zealand Dollar (NBD)

$EURNZD

EUR/NZD

US Dollar to New Zealand Dollar (EOD)

$USDNZD

NZD/CAD

Bottom line: The domestic stock market of New Zealand offers investible opportunities in most sectors.

520

C H A P T E R 114

Investing in Japan Japan has one of the world’s most sophisticated capital markets, financial and regulatory systems, and diversified economies. Its population is 125 million. The CIA says: “During the late 19th and early 20th centuries, Japan became a regional power that could defeat the forces of both China and Russia. It occupied Korea, Formosa (Taiwan), and southern Sakhalin Island. In 1931-32 Japan occupied Manchuria, and in 1937 launched a full-scale invasion of China. Japan attacked US forces in 1941 - triggering America’s entry into World War II - and soon occupied much of East and Southeast Asia. After its defeat in World War II, Japan recovered to become an economic power and an ally of the US. While the emperor retains his throne as a symbol of national unity, elected politicians hold decision-making power. Following three decades of unprecedented growth, Japan’s economy experienced a major slowdown starting in the 1990s, but the country remains an economic power.” Major industries rank among the world’s largest. Some are the most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods. It is the 4th largest exporter and 5th largest importer in the world. The are 13 Japanese companies listed on the NYSE or Nasdaq. The Japanese stock market is significant among global capital markets. Japan is an island country in the northwestern Pacific Ocean, about 1700 miles northeast of Hong Kong. Its people rely heavily on international trade with the United States, China, South Korea, Hong Kong, and Saudi Arabia. Investors ought to check out the World Fact Book to understand the country. Next, look at the Investing.com Japan Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-to-date prices. Yahoo Finance offers almost 1600 indices (and fewer than 250 stocks) for Japanese markets. Yahoo Finance provides less than 900 indices, even for the United States market.

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Fig. 114.1 Japanese stock market Indices Index Nikkei 225 JASDAQ 20 JPX-Nikkei 400 Nikkei 300 Nikkei 500 Nikkei JQ Average Nikkei Volatility TOPIX TOPIX 100 TOPIX 1000 TOPIX 500

Yahoo Finance offers Japan Indices that can be accessed at this link. The Tokyo Stock Exchange (TSE) is Japan’s premier market for listed equities and ETFs. Fig. 114.2 Japanese ETFs listed on the Tokyo market Japanese market ETF

Ticker

NEXT FUNDS Nikkei 225 Double Inverse Index

1357.T

NEXT FUNDS Nikkei 225 Leveraged Index

1570.T

Nikkei225 Bear -2x

1360.T

Rakuten Nikkei 225 Double Inverse

1459.T

NEXT FUNDS Nikkei 225 Inverse Index

1571.T

TSE Mothers

2516.T

Nomura TOPIX Listed

1306.T

Nikkei225 Bull 2x

1579.T

NEXT FUNDS REIT Index

1343.T

Rakuten Nikkei 225 Leveraged

1458.T

Daiwa ETF Japan Nikkei 225 Double Inverse

1366.T

MAXIS J-REIT

1597.T

Nomura TSE Bank Listed

1615.T

Nomura Nikkei 225 Listed

1321.T

TOPIX Bear -2x

1356.T

Listed Index Fund J-REIT

1345.T

Daiwa ETF TOPIX Listed

1305.T

iShares Core TOPIX

1475.T

MAXIS TOPIX

1348.T

522

Investing in Japan

To find Japanese-based equity ETFs that trade in Japan, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in Japan, Yahoo Finance offers almost 400 Japan ETFs that can be accessed at this link. ETFs that have their nexus outside Japan can be filtered out. Fig. 114.3 The most popular (in order) Japanese ETFs that trade in the US in US Dollars Japanese ETFs that trade in New York

Ticker

iShares MSCI Japan ETF

EWJ

WisdomTree Japan Hedged Equity Fund

DXJ

iShares MSCI Pacific ex Japan ETF

EPP

Franklin Templeton ETF Trust - Franklin FTSE Japan ETF

FLJP

Invesco Currency Shares Japanese Yen Trust

FXY

Xtrackers MSCI Japan Hedged Equity ETF

DBJP

Fig. 114.4 Japan and region ETFs that trade in New York are available at Yahoo Finance Regional ETF

Ticker

iShares MSCI Japan ETF

EWJ

iShares MSCI China ETF

FXI

iShares MSCI Hong Kong ETF

EWH

iShares MSCI Australia ETF

EWA

iShares MSCI New Zealand ETF

ENZL

iShares MSCI South Korea ETF

EWY

iShares MSCI Taiwan ETF

EWT

Investors may wish to investigate the EWJ Japanese ETF from iShares in this link. Finance.Yahoo.com has a screener for stocks that trade in Japan. Click on this link to access the new, as yet untitled screener. Then select Japan in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. Here are thirty-six large-cap Japanese companies with tickers for the Tokyo exchange, where the stocks trade in Yen. In the US, these stocks trade in US Dollars. Fig. 114.5 List of leading Japanese stocks that trade in Tokyo Large Japan-headquartered companies

Market Cap USD Billion

Japan Ticker

US Ticker

Toyota

$262.62

7203.T

Sony

$132.18

6758.T

SONY

Keyence

$120.74

6861.T

KYCCF

Nippon Telegraph & Telephone

$102.51

9432.T

NTTYY

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BILL CARA / STOCK MARKET LITERACY

Mitsubishi UFJ Financial

$82.88

8306.T

MUFG

Tokyo Electron

$78.27

8035.T

TOELY

SoftBank

$75.92

9984.T

SFTBF

Recruit

$73.03

6098.T

RCRRF

KDDI

$71.63

9433.T

KDDIF

Shin-Etsu Chemical

$67.70

4063.T

SHECF

Oriental Land

$64.09

4661.T

OLCLY

Nintendo

$59.59

7974.T

NTDOY

Denso

$57.12

6902.T

DNZOF

Chugai Pharmaceutical

$57.07

4519.T

CHGCY

Fast Retailing

$57.02

9983.T

FRCOF

Daikin

$55.54

6367.T

DKILY

Honda

$55.06

7267.T

HMC

Nidec

$52.91

6954.T

NJDCY

Sumitomo Mitsui Financial

$52.06

8316.T

SMFG

Hoya

$49.83

7741.T

HOCPY

ITOCHU Corporation

$49.76

8001.T

ITOCF

Hitachi

$49.62

6501.T

HTHIF

Takeda Pharmaceutical

$48.00

4502.T

TAK

Murata Manufacturing

$45.70

6981.T

MRAAY

Mitsui Bussan

$42.16

8031.T

MITSY

Tokio Marine

$41.44

8766.T

TKOMY

SMC

$39.36

6273.T

SMECF

Fanuc

$38.17

6954.T

FANUF

Daiichi Sankyo Company

$37.69

4568.T

DSNKY

Z Holdings

$36.73

4689.T

YAHOY

Note that the ticker symbols in Japan are numbers, as they are in China, Hong Kong, and South Korea. Investors can trade them in Tokyo via Interactive Brokers. Rather than trading Japanese stocks through the Tokyo exchange (TSE), you can directly trade some of them on the NYSE or NASDAQ. A list of Japanese stocks traded on the NYSE can be found on the NYSE website. A list of Japanese stocks traded in New York on the NYSE or Nasdaq can be found at this FinViz.com link. Note the extensive information tabs.

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Investing in Japan

Fig. 114.6 List of leading Japanese stocks listed on the NYSE Large Japanese companies listed in New York

Industry

New York Ticker

Market Cap USD

Toyota

Auto Manufacturers

312.95B

Sony

Consumer Electronics

SONY

141.24B

Mitsubishi UFJ Financial

Banks – Diversified

MUFG

86.20B

Honda

Auto Manufacturers

HMC

59.01B

Sumitomo Mitsui Financial Group

Banks – Diversified

SMFG

52.06B

Takeda Pharmaceutical

Drug Manufacturers

TAK

48.90B

Mizuho Financial Group, Inc.

Banks – Regional

MFG

36.37B

Canon Inc.

Computer Hardware

CAJ

33.53B

ORIX Corporation

Credit Services

26.64B

Nomura Holdings, Inc.

Capital Markets

NMR

15.57B

To build an international portfolio of 20-25 stocks, consider two from Japan. Many highquality Japanese companies trade on NYSE and NASDAQ. To manage an entire portfolio of Japanese stocks in Yen, consider doing so on the Tokyo Exchange via a broker like Interactive Brokers. In the US, many major Japanese companies have listings of shares or securities in the American Depositary Receipt (ADR) form. An ADR is a certificate issued by a US depositary bank that represents foreign shares held by the bank, usually by a branch or correspondent in the country of issue. I also recommend you go to this JP Morgan website for ADRs. To track Japanese stocks across international markets, possibly for arbitrage purposes, understand that the ADR may trade in multiples of regular shares and categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. This link lists ADRs from Japan that trade in the United States.

Characteristics of Japanese stock trading Trading interests and style differs in every market in the world. I knew a young trader with a major international bank in Canada who was personally responsible for about $60 million in annual profits. The bank sent him to a foreign country with a small team to run their trading operations there. He became so frustrated that the culture was different that he soon quit. Japanese stocks are known to move in well-defined themes, which can change quickly. Japanese investors, especially individuals, love Technical Analysis and charts. You must know technical support, resistance, trendlines, and Japanese candlestick patterns. Even if you are a pure fundamentalist, you must still be aware of key price points and trends of the stocks.

525

BILL CARA / STOCK MARKET LITERACY

In the 1970s and 1980s, Japan suffered an inflationary disaster that resulted in a major stock market crash. Significant technological developments, deregulation, and restructuring have led Japan to an ultra-long-term economic recovery. Its government is committed to improving the conditions. The remarkable Japanese stock market’s boom and bust history had global economic and political repercussions. Japan is a lesson for the world. The primary stock market index, the Nikkei 225, soared from 86 in 1950 to almost 39000 40 years later, with a 600% bubble growth in the last seven years. How crazy was that! At its peak in December 1989, Japan accounted for 45% of the world market cap. It was much larger than the total US market capitalization. That defied all common sense, but right at the top — months before the bubble burst — many of the world-leading Sell-side financial services firms were touting the Japanese market. The collapse and recovery from extreme bubbles take extraordinary patience. It may be decades before Japan’s debt and asset levels return to balanced conditions. In all the booms, bubbles, bursts, and busts in stock-market history, the Cycle peak is always characterized by widespread maniacal greed, followed by absolute sheer panic. While the US media likes to refer to 1987 as the “year of the crash,” the Japanese crash that began in 1990 was far more significant. The Nikkei 225 Index of the Tokyo Exchange lost 80% of its peak valuation. It dropped from 38916 to 14980 in August 1992 and then, in step with the US market collapse, down to 7699 in April 2003. From 2Q2003, Japan was on the road to recovery, supported by Chinese demand for Japanese export products attractively priced due to a lower Yen and stronger Yuan. But even today, its economy has been continually disrupted by massive currency fluctuations. The subtle intricacies of Japanese economic analysis and stock picking seem strange to Americans and Europeans. Japan stocks move in well-defined themes, and these can change quickly. Scarcity value magnifies demand and price movement. More so than in most countries, you must be mindful of the Japanese economic environment in a regional context — particularly in China, Taiwan, and South Korea, which are also major exporting countries. International interest rates and foreign-exchange movements play a role. Currency movement (the yen versus the dollar) is a significant factor in trading Japanese equities. If you buy Japanese stocks or ETFs with US dollars, you can hedge your currency position by buying the Japanese yen in the currency market. Without the time to study individual Japanese stocks but want a non-ETF exposure to the Japanese stock market, try the closed-end Japan Equity Fund (JEQ).

526

Investing in Japan

Mutual Funds in Japan are a huge market Here is the link to the 818 Japanese Mutual Funds. Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. The Japanese Yen is a major world currency of interest to many international investors. The economy is one of the world’s most significant and is driven by its exports, so the country prefers a weak yen to increase global sales. Fig. 114.7 The most important currency pairs for trading in Japan Currency Pair

Chart Symbol

FX Trading

Japanese Yen – Philadelphia

$XDN

Japanese Yen – Philadelphia

$XJY

Japanese Yen to Australian Dollar (NBD)

$JPYAUD

Japanese Yen to British Pound Sterling (NBD)

$JPYGBP

Japanese Yen to Canadian Dollar (NBD)

$JPYCAD

Japanese Yen to Euro (NBD)

$JPYEUR

Japanese Yen to US Dollar (NBD)

$JPYUSD

Australian Dollar to Japanese Yen (NBD)

$AUDJPY

AUD/JPY

British Pound to Japanese Yen (NBD)

$GBPJPY

GBP/JPY

Canadian Dollar to Japanese Yen (NBD)

$CADJPY

CAD/JPY

Euro to Japanese Yen (NBD)

$EURJPY

EUR/JPY

New Zealand Dollar to Japanese Yen (NBD)

$NZDJPY

NZD/JPY

Swiss Franc to Japanese Yen (NBD)

$CHFJPY

CHF/JPY

US Dollar to Japanese Yen (EOD)

$USDJPY

USD/JPY

Bottom line: Japan’s economy and domestic stock market offer investible opportunities in all sectors.

527

C H A P T E R 115

Investing in Singapore Singapore has one of the world’s best-planned, most sophisticated capital markets, financial and regulatory systems. It has a population of 6 million. Its economy is one of the world’s most business-friendly and competitive. Due to strong international finance, electronics and machinery manufacturing, tourism, and shipping, there is high government revenue, a consistently positive surplus, and no foreign debt. Other industries are chemicals, oil drilling equipment, petroleum refining, ship repair, offshore platform construction, biomedical products, processed food and beverages, and trading in international goods. The CIA says: “A Malay trading port known as Temasek existed on the island of Singapore by the 14th century but was burned in the 17th century and fell into obscurity. The British founded modern Singapore as a trading colony in 1819. In 1963, it joined the Malaysian Federation but was ousted two years later and became independent. Singapore then became one of the world’s most prosperous countries, with strong international trading links. Its port is one of the world’s busiest. The per capita GDP is equal to the leading nations of Western Europe….” Singapore is the 10th largest exporter and the 12th largest importer in the world. The are 26 Singapore-headquartered companies listed on the NYSE or Nasdaq. For such a small population (5.7 million), the Singapore Exchange (SGX) is important among global capital markets. The SGX Group promotes itself as follows: We are Asia’s leading and trusted securities and derivatives market infrastructure, operating equity, fixed income, currency, and commodity markets to the highest regulatory standards. We also use a multi-asset sustainability platform, SGX FIRST or Future in Reshaping Sustainability Together (sgx.com/first). As Asia’s most international, multi-asset exchange, we provide listing, trading, clearing, settlement, depository, and data services, with about 40% of listed companies and over 80% of listed bonds originating outside Singapore. We are the world’s most liquid international market for China, India, Japan, and ASEAN benchmark equity indices. We are Asia’s leading marketplace in foreign exchange and the most comprehensive service provider for global FX OTC and futures participants.

528

Investing in Singapore

Headquartered in AAA-rated Singapore, we are globally recognized for our risk management and clearing capabilities. The Straits Times Index (STI) is a market capitalization-weighted index that tracks the performance of the top 30 companies listed on SGX. Singapore’s financial system’s core of domestic and international banks and the stock exchange is advanced and well-regulated. It is one of the world’s largest financial centers. It has a world-leading pro-business and cost-competitive environment, excellent infrastructure, and a highly skilled and cosmopolitan labor force. The Monetary Authority of Singapore (MAS) is Singapore’s central bank. To get a sense of this small but vitally important city-state, investors should check out the World Fact Book. Next, look at Investing.com Singapore’s Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. Fig. 115.1 Singapore’s stock market Indices and ETFs Singapore Indices and ETF

Symbol

Singapore Straits Times Index (EOD)

$STI

Dow Jones Singapore Stock Index (EOD)

$SGDOW

iShares MSCI Singapore ETF

EWS

To find Singapore-based equity ETFs that trade in Singapore, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in Singapore, including those that have their nexus outside Singapore, go to this link at Investing.com In this link, investors of Singapore stocks may wish to investigate the components and multi-year performance of the EWS Singapore ETF from iShares. Finance.Yahoo.com has a screener for stocks that trade in Singapore. Click on this link to access the new, as yet untitled screener. Then select Singapore in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. This link lists ADRs from Singapore that trade in the United States. Investors can trade on the Singapore Exchange in Singapore Dollars (SGD) via Interactive Brokers.

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Fig. 115.2 List of Singapore-exchange listed companies Large Singapore headquartered companies

Market Cap USD Billion

Singapore Ticker

US Ticker

DBS

$70.29 B

D05.SI

DBSDF

Jardine Matheson Holdings

$44.52 B

J36.SI

JMHLY

Overseas-Chinese Banking Corp

$44.36 B

O39.SI

OVCHY

Union Overseas Bank

$40.64 B

U11.SI

UOVEY

Singtel

$30.37 B

Z74.SI

SGAPY

Wilmar

$23.12 B

F34.SI

WLMIF

Singapore Airlines

$11.94 B

C6L.SI

SINGY

CapitaLand Integrated

$10.52 B

C38U.SI

CPAMF

Singapore Technologies Engineering

$8.95 B

S63.SI

SJX.F

Ascendas REIT

$8.84 B

A17U.SI

ACDSF

Keppel REIT

$8.19 B

BN4.SI

KREVF

Singapore Exchange

$7.71 B

S68.SI

SPXCF

Genting Singapore

$7.09 B

G13.SI

GIGNF

Mapletree Logistics Trust

$6.25 B

M44U.SI

MAPGF

Mapletree Industrial Trust

$5.06 B

ME8U.SI

MAPIF

City Developments

$4.95 B

C09.SI

CDEVY

UOL Group

$4.58 B

U14.SI

UOLGF

A list of Singapore stocks that trade in New York on the NYSE or Nasdaq can be found at FinViz.com. Note the extensive information tabs. Fig. 115.3 Singapore companies listed on the NYSE or Nasdaq Large Singapore companies listed in New York Industry

Singapore Ticker

New York Market Ticker Cap USD

Sea Limited

Electronic Gaming & Multimedia

25.76B

Grab Holdings Limited

Asset Management

GRAB

8.83B

Flex Ltd.

Electronic Components

FLEX

8.18B

JOYY Inc.

Internet Content & Information

2.00B

Kulicke & Soffa Industry

Semiconductor Equipment

KLIC

2.34B

Kenon Holdings Ltd.

Utilities - Regulated Electric

KEN

2.00B

TDCX Inc.

Specialty Business Services

TDCX

1.67B

Karooooo Ltd.

Software – Application

KARO

0.50B

530

Investing in Singapore

Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. The Singapore Dollar is a vital world currency. Fig. 115.4 The most important currency pairs for trading in Singapore Currency Pair

Chart Symbol

Singapore Dollar to Australian Dollar (NBD)

$SGDAUD

Singapore Dollar to British Pound Sterling (NBD)

$SGDGBP

Singapore Dollar to Euro (NBD)

$SGDEUR

Singapore Dollar to Swiss Franc (NBD)

$SGDCHF

Singapore Dollar to US Dollar (NBD)

$SGDUSD

Australian Dollar to Singapore Dollar (NBD)

$AUDSGD

British Pound to Singapore Dollar (NBD)

$GBPSGD

Euro to Singapore Dollar (NBD)

$EURSGD

Swiss Franc to Singapore Dollar (NBD)

$CHFSGD

US Dollar to Singaporean Dollar (EOD)

$USDSGD

FX Trading

USD/SGD

Note that Currency charts are End of Day (EOD) values. FOREX is traded in real-time. Bottom line: The domestic stock market of Singapore offers a limited number of investible opportunities.

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C H A P T E R 116

Investing in Hong Kong Hong Kong, like Singapore, has one of the world’s best-planned, most sophisticated capital markets, financial and regulatory systems. Its population is 7.8 million. Its economy has been considered one of the world’s most business-friendly and competitive for years, but that picture is changing. The CIA says: “According to the 1984 agreement signed by China and the UK, Hong Kong became the Hong Kong Special Administrative Region (HKSAR) of the People’s Republic of China on 1 July 1997. Under a “one country, two systems” formula, China agreed that China’s socialist economic and strict political system would not be imposed on Hong Kong and that Hong Kong would enjoy a “high degree of autonomy” in all matters except foreign and defense affairs for 50 years. After the turnover, Hong Kong enjoyed success as an international financial center. However, dissatisfaction with the Hong Kong Government and growing Chinese political influence has been a central issue and led to considerable civil unrest, including large-scale pro-democracy demonstrations in 2019 after the HKSAR tried to revise a local ordinance to allow extraditions to mainland China. In response, the HKSAR and China governments took several actions that reduced the city’s autonomy and placed new restrictions on the rights of Hong Kong residents….” Wealthy Chinese families and skilled ex-pats departed after the loss of freedom. The leading industries are trading and logistics, financial services, professional services, tourism, cultural and creative, clothing and textiles, shipping, electronics, toys, clocks, and watches. HK is the world’s 8th largest exporter and importer. The are 44 Hong Kong companies listed on the NYSE or Nasdaq. Check out the World Fact Book to understand this vital jurisdiction. Next, investigate the Investing.com Hong Kong Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-to-date prices. The Hong Kong Stock Exchange (HKEX) is important among global capital markets despite its small population. There are many China-headquartered Large-Cap company listings. As per the exchange’s website: “HKEX is one of the world’s major exchange groups, and operates a range of equity, commodity, fixed income, and currency markets. HKEX is the world’s leading IPO market. As Hong Kong’s only securities and derivatives exchange and

532

Investing in Hong Kong

sole operator of its clearing houses, it is uniquely placed to offer regional and international investors access to Asia’s most vibrant market.” I did business in Hong Kong around the time of the Sino-British Joint Declaration that turned control of Hong Kong from the UK to China. As noted in the chapter introduction, that agreement stipulated that Hong Kong would keep its high degree of autonomy, rights, and freedoms for 50 years after the 1997 handover. But the Hong Kong of today under the increasing control of China is not the Hong Kong of 1987, a year I visited twice. Hong Kong then was a bastion of Free Market Capitalism, like Singapore then and now. Since then, many of the residents have protested China’s non-compliance. In turn, China has complained of political interference by the UK and the US in “Hong Kong affairs, which are China’s internal affairs.” As the 50-year period nears completion, pro-democracy activism in Hong Kong has become a problem. China has responded with increasing pressure to ensure sovereignty. As Hong Kong depends on being a center of finance and trade between China and the US, the world’s leading economic and military powers, its capital market has suffered. Bloomberg has reported: From the stock exchange to brokerages, construction projects to the retail sector, Chinese state-controlled firms are increasingly dominating, taking market share away from the local tycoons and British trading houses that thrived under the final decades of UK rule. Those behind the growing Chinese influence view Hong Kong’s economy as stagnant and slow to embrace the technology-driven, new economy industries that have been catalysts for growth on the mainland. Chinese enterprises have been handed more political power in the city, including a recent revamp of the electoral system that reduced the influence of local businesspeople and added greater representation for state-backed companies. Still, Hong Kong is remarkable. It remains one of the world’s largest financial centers and houses some of its most spectacular real estate development. The financial system’s core of domestic and international banks and the stock exchange is advanced and well-regulated. Investors ought to check out the Hong Kong Stock Market Overview from Investing.com. The tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and key Economic data offer a plethora of information and up-to-date prices. There are many factors to consider when trading in the Hong Kong market. Check the following Indices to determine their stability. Fig. 116.1 Hong Kong stock market Indices Hong Kong Indices

Symbol

Dow Jones Hong Kong Stock Index (EOD)

$HKDOW

Hong Kong 30 Stock Index

$HKX

Hong Kong Hang Seng (EOD)

$HSI

Hong Kong Option Index

$HKO 533

BILL CARA / STOCK MARKET LITERACY

To access lists of ETFs of all asset classes that trade in Hong Kong, go to this link at Investing. com. The list includes ETFs that have their nexus outside Hong Kong. Investors may wish to investigate the components and multi-year performance of the EWH Hong Kong ETF from iShares in this link. Here is a list of the regional ETFs for Far East/East Asia: EWA, FXI, EWH, EWJ, EWY, EWT, and ENZL, along with links to Performance Technical Analysis Snapshot. Here is the ETF list for Southeast Asia: EWM, EWS, VNM, IDX, THD, and EPHE, along with links to Performance Technical Snapshot Finance.Yahoo.com has a screener for stocks that trade in Hong Kong. Click on this link to access the new, as yet untitled screener. Then select Hong Kong in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. For 2020 and 2021, equity prices in Hong Kong far underperformed those of Shanghai, China’s primary financial city. Hong Kong is suffering from the exodus of Western capital and ex-pat workers. In transition, Hong Kong’s capital markets are expected to weaken further. Here is a list of 30 large-cap Hong Kong-headquartered companies whose stocks trade in Hong Kong Dollars on the Hong Kong exchange. Their ticker symbols are numbers like for stocks on Shanghai and Tokyo exchanges. Fig. 116.2 List of large-cap Hong Kong-headquartered companies that trade in Hong Kong Large Hong-Kong headquartered companies

Market Cap USD Billion

Hong Kong Ticker

US Ticker

Bank of China (Hong Kong)

$42.75 B

2388.HK

BACHY

Hang Seng Bank

$40.82 B

0011.HK

HSNGY

Budweiser APAC

$39.29 B

1876.HK

BDWBF

Sun Hung Kai Properties

$36.84 B

0016.HK

SUHJY

China Overseas Land & Investment

$34.02 B

0688.HK

CAOVY

MTR Corporation

$33.97 B

0066.HK

MTCPY

CK Hutchison Holdings

$29.56 B

0001.HK

CKHUY

Hong Kong and China Gas

$29.08 B

0003.HK

HOKCY

Galaxy Entertainment

$27.01 B

0027.HK

GXYEY

China Resources Beer

$26.44 B

0291.HK

CRHKY

CLP Group

$25.90 B

0002.HK

CLPHY

CK Asset Holdings

$24.77 B

1113.HK

CHKGF

Henderson Land Development

$21.22 B

0012.HK

HLDCY

Chow Tai Fook

$20.61 B

1929.HK

CJEWY

Link REIT

$17.75 B

0823.HK

LKREF

Orient Overseas Container Line

$16.99 B

0316.HK

OROVF

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Investing in Hong Kong

CK Infrastructure

$16.42 B

1038.HK

CKISY

Swire Properties

$16.08 B

1972.HK

SWPFF

ESR

$14.81 B

1821.HK

ESRCF

Wharf REIC

$14.14 B

1997.HK

WRFRF

Power Assets

$13.71 B

0006.HK

HGKGY

Lenovo

$13.42 B

0992.HK

LNVGY

Wharf Holdings

$10.87 B

0004.HK

WARFY

New World Development Co.

$10.58 B

0017.HK

NDVLY

Sino Land

$10.17 B

0083.HK

SNLAY

Hang Lung Properties

$9.48 B

0101.HK

HLPPY

WH Group

$9.39 B

0288.HK

WHGLY

HK Electric Investments

$8.95 B

2638.HK

HKCVF

Swire Pacific

$8.61 B

0019.HK

SWRAY

Here is a list of the ten largest Hong Kong-headquartered company stocks that trade in New York. Fig. 116.3 The largest cap Hong-Kong-headquartered companies that trade in New York

Industry

Hong Kong Ticker

New York Ticker

Market Cap USD

Futu Holdings Limited

Capital Markets

FUTU

4.5B

Melco Resorts & Entertainment Ltd

Resorts & Casinos

0200.HK

MLCO

2.4B

Silicon Motion Technology Corp

Semiconductors

SIMO

1.8B

HUTCHMED (China) Limited

Drug Manufacturers

0013.HK

HCM

1.4B

Bridgetown Holdings Limited

Shell Companies

BTWN

731M

AMTD International Inc.

Capital Markets

HKIB

253M

MSC

244M

Software - Application no

TROO

166M

Hong Kong domestic companies listed in New York

Studio City International Holdings Ltd Resorts & Casinos TROOPS, Inc.

Investors may wish to investigate the components of the EWH Hong Kong ETF from iShares in this link. To track a Hong Kong stock across multiple markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form, and some in the same security. The ADR may trade in multiples of regular shares and be categorized by levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. Here is a list of Hong Kong ADRs that trade in the US.

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Currency trends and cycles play a crucial role when trading international markets abroad, particularly in large accounts. As the Hong Kong Dollar is a vital world currency, investors of Hong Kong stocks may wish to track the following currency pairs. Note that FOREX charts are End of Day (EOD) values. Fig. 116.4 The most important currency pairs for trading in Hong Kong Currency Pair

Chart Symbol

Hong Kong Dollar to Australian Dollar (NBD)

$HKDAUD

Hong Kong Dollar to British Pound (NBD)

$HKDGBP

Hong Kong Dollar to Canadian Dollar (NBD)

$HKDCAD

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Hong Kong Dollar to Swiss Franc (NBD)

$HKDCHF

Hong Kong Dollar to US Dollar (NBD)

$HKDUSD

Australian Dollar to Hong Kong Dollar (NBD)

$AUDHKD

British Pound to Hong Kong Dollar (NBD)

$GBPHKD

Canadian Dollar to Hong Kong Dollar (NBD)

$CADHKD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Swiss Franc to Hong Kong Dollar (NBD)

$CHFHKD

US Dollar to Hong Kong Dollar (EOD)

$USDHKD

FX Trading

USD/HKD

Bottom line: In 3Q2022, mounting evidence shows China encountering severe economic challenges. As the Hong Kong authority becomes fully integrated with the mainland under Chinese Communist Party control, there has been an exodus of wealthy capitalist families and skilled ex-pats. This process will continue for many years. By 2054, Hong Kong will likely survive and thrive under China’s leadership, as has Shanghai and Beijing. Hong Kong’s economy relies on its being a gateway to and from mainland China. Hong Kong’s advanced economy and stock market still offer investible opportunities in all sectors.

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C H A P T E R 117

Investing in China China is now the second most populous country (next to India) with a population of 1.41 billion. It has the second-biggest economy and second-strongest military power (next to the United States). China has sophisticated capital markets in Shanghai and Shenzhen, robust financial and regulatory systems, and a diversified economy. The CIA says: “In the late 1920s, a civil war erupted between the ruling Nationalist-controlled government led by CHIANG Kai-shek and the Chinese Communist Party (CCP). Japan occupied northeastern China in the early 1930s and launched a full-scale invasion in 1937. The resulting eight years of warfare cost up to 20 million Chinese lives by the time of Japan’s defeat in 1945. The Nationalist-Communist civil war continued and ended with a CCP victory in 1949 under leadership of MAO Zedong. MAO established an autocratic socialist system that, while ensuring the PRC’s sovereignty, imposed strict controls over everyday life and launched agricultural, economic, political, and social policies. From 1978, subsequent leaders DENG Xiaoping, JIANG Zemin, and HU Jintao focused on market-oriented economic development and opening up China to foreign trade while maintaining the rule of the CCP. Since then, China has been among the world’s fastest-growing economies, with real gross domestic product averaging over 9% growth annually through 2021, lifting an estimated 800 million people out of poverty, improving living standards….” The major industries are mining and ore processing, iron, steel, aluminum, and other metals, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizer; consumer products (including footwear, toys, and electronics); food processing; transportation equipment, including automobiles, railcars, and locomotives, ships, aircraft; telecommunications equipment, commercial space launch vehicles, satellites. China is the #1 exporter and #2 importer in the world. The are 225 Chinese-headquartered companies listed on the NYSE or Nasdaq. But given disagreements over audit standards, the US securities regulator requires compliance or delisting. A compromise is likely. China is an economic and military powerhouse, a true rival of the United States. The China capital market is also robust.

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For a sense of the country, investors should check out the World Fact Book. Next, look at the Investing.com China Market Overview. Tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic data offer a plethora of information and up-to-date prices. This Yahoo Finance link offers China Indices. For China’s markets, Yahoo Finance had 1565 indices and 1300 stocks at the time I did the research for this book. Even for the United States market, Yahoo Finance offered only 889 indices. To find China-based equity ETFs that trade in China, go to this link at Investing.com. To access lists of ETFs of all asset classes that trade in China, including those that have their nexus outside China, go to this link at Investing.com. Consider holding about two from China to build an international portfolio of 20-25 stocks. Independently audited financial statements using Generally Accepted Accounting Principles required for US listings is a problem for China-headquartered companies. China’s government is reluctant to comply. For years, the SEC has overlooked this deficiency. As a consequence of recent SEC policy enforcement, many China companies are dropping or planning to drop their US listing. A solution is possible. Here is a list of 38 large-cap China-headquartered companies whose stocks trade in China, Hong Kong, and the US. Fig. 117.1 List of large-cap China-headquartered companies whose stocks trade in many markets Large China-headquartered companies

China listing

Hong Kong Listing

US Listing

Agricultural Bank of China

601288.SS

1288.HK

ACGBY

Alibaba

9988.HK

BABA

Baidu

9888.HK

BIDU

Bank of China

3988.HK

BACHY

Bank of Communications

601328.SS

3328.HK

BKMXY

BYD

002594.SZ

1211.HK

BYDDF

China Construction Bank

601939.SS

0939.HK

CICHY

China Life Insurance

601628.SS

2628.HK

LFCHY

3968.HK

CIHKY

China Merchants Bank China Mobile

600941.SS

0941.HK

China Petroleum & Chemical Sinopec

600028.SS

0386.HK

SNPTY

China Shenhua Energy

601088.SS

1088.HK

CSUAY

China Telecom

601728.SS

0728.HK

China Tourism Group Duty-Free

601888.SS

China Yangtze Power

600900.SS

CITIC Securities

600030.SS

6030.HK

CNOOC

600968.SS

0883.HK

538

Investing in China

Contemporary Amperex Technologies

300750.SZ

Foshan Haitian Flavouring & Food

603288.SS

Hikvision

002415.SZ

Industrial & Commercial Bank Industrial and Commercial Bank

1398.HK 601166.SS

IDCBY IDCBY

JD.com

9618.HK

Kuaishou Technology

1024.HK

KUASF

3690.HK

MPNGF

9999.HK

NTES

9633.HK

NNFSF

0857.HK

PTRCY

Kweichow Moutai

600519.SS

LONGi Green Energy Technology

601012.SS

Meituan Midea Group

000333.SZ

Mindray

300760.SZ

NetEase Nongfu Spring PetroChina

601857.SS

Pinduoduo

PDD

Ping An Insurance

601318.SS

2318.HK

PNGAY

Postal Savings Bank of China

601658.SS

1658.HK

PSTVY

0700.HK

TCEHY

Tencent Wuliangye Yibin

000858.SZ

Stocks trade with ticker numbers in China (Shanghai and Shenzhen markets), Hong Kong, Taiwan (Republic of China), South Korea, and Japan. Here is a list of 24 US-listed China ETFs to consider. A single-day volume reflects popularity. Fig. 117.2 List of 24 US-listed China ETFs FinViz.com screener China ETFs that trade in the USA

StockCharts Ticker FinViz Ticker

Volume

iShares Trust - iShares China Large-Cap ETF

FXI

59,823,599

KraneShares CSI China Internet ETF

KWEB

56,260,241

Direxion Daily FTSE China Bear 3X Shares ETF

YANG

11,650,188

iShares MSCI China ETF

MCHI

10,643,692

Direxion Daily FTSE China Bull 3X Shares ETF

YINN

7,080,346

Xtrackers Harvest CSI 300 China A-Shares ETF

ASHR

3,572,370

Invesco ETF Trust - Invesco Golden Dragon China ETF

PGJ

505,845

ProShares Short FTSE China 50 ETF

YXI

283,692

ProShares UltraShort FTSE China 50 ETF

FXP

194,385

539

BILL CARA / STOCK MARKET LITERACY

WisdomTree China ex-State-Owned Enterprises Fund ETF

CXSE

127,173

SPDR S&P China ETF

GXC

121,644

Global X MSCI China Consumer Disc ETF

CHIQ

121,307

Direxion Daily CSI 300 China A Share Bull 2X Shares ETF

CHAU

114,259

KraneShares Bosera MSCI China A ETF

KBA

97,036

The China Fund, Inc. [Closed-End Fund]

CHN

66,235

Direxion Daily CSI 300 China A Share Bear 1X Shares ETF

CHAD

65,248

Global X MSCI China Financials ETF

CHIX

24,146

VanEck Vectors ChinaAMC China Bond ETF

CBON

18,752

ProShares Ultra FTSE China 50 ETF

XPP

18,393

VanEck Vectors ChinaAMC SME-ChiNext ETF

CNXT

13,362

Xtrackers Harvest CSI 500 China-A Shares Small Cap ETF

ASHS

12,810

iShares MSCI China Small-Cap ETF

ECNS

11,484

First Trust China AlphaDEX Fund ETF

FCA

9,663

KraneShares CICC China Leaders 100 Index ETF

KFYP

1,481

To find all ETFs that trade in China, go to this link at Investing.com, which includes primarily ETFs that have their nexus elsewhere. Yahoo Finance offers over 950 China Mutual Funds at this link, over 1250 China Indices at this link, and over 450 China ETFs at this link. Investors could investigate components of the FXI China Large-Cap ETF from iShares in this link Finance.Yahoo.com has a screener for stocks that trade in China. Click on this link to access the new, as yet untitled screener. Then select China in the dropdown list called the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data. To track a Chinese stock across multiple markets, possibly for arbitrage purposes, understand that some trade in American Depositary Receipt (ADR) form. The ADR may trade in multiples of regular shares and be categorized by levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. Exports drive China’s economy, so the country prefers a weak YUAN to increase international sales. This link lists ADRs from China that trade in the United States, where some trade on the USOTC market

540

Investing in China

This link lists well over 200 China-headquartered stocks that trade in New York. Note that over 20 have Market Caps greater than US$10 billion (May 20, 2022). Note the extensive information from the tabs on this site. Arguably, the United States is the world’s leading economic and military power due to the strength of its capital market. Although China is in rapid catch-up, the American capital market system is, by a considerable measure, the most sophisticated in the world. One of the tenets of American capitalism is open and free and accessible capital markets. Capital moves freely into and out of the United States. American companies that seek foreign listings must meet the regulatory conditions of those countries. US regulators require the same of foreign companies that list securities in America. China disagrees with the mutuality of this financial regulatory policy. Because the economy of China now almost equals that of the United States, there are growing domestic political pressures on the SEC to enforce compliance. US investment bankers broke SEC rules with the help of lobbying by major US financial services companies. Making a profit is evidently more important than conflict of interest issues. To their credit, the SEC will no longer have its rules ignored, no matter how big and powerful the US players are. Investors in US-listed Chinese stocks and ADRs need to review the latest information from the SEC and articles like this article, and this one. China’s economy is driven by its ability to raise external capital and generate export sales where a weak YUAN helps. Currency trends and cycles play a crucial role when trading international markets abroad. As the Chinese Yuan is an increasingly important world currency, investors of China-listed stocks may wish to track the following currency pairs. Fig. 117.3 US Dollar to Chinese Yuan currency trading Currency Pair

Chart Symbol

FX Trading

US Dollar to Chinese Yuan (EOD)

$USDCNY

USD/CNY

Big Data firms in the US seem reluctant to post other currency pairs to the Chinese Yuan. Note that Currency charts are End of Day (EOD) values. FOREX FX trading is in real-time continuous 7x24 markets around the world. Bottom line: The Chinese Communist Party has permitted a degree of integration of socialism and capitalistic business practices. The dual system enabled the country’s rapid economic growth. But the fact is that the CCP is in total control. Geopolitical tensions, particularly concerning differing policies regarding Taiwan, have increased between China and the US. There are growing risks for global investors. The third term for President Xi may prove problematic for investors. In 4Q2022, there are indications that China is encountering severe economic problems.

541

C H A P T E R 118

Investing in the rest of the world There are many second and third-tier stock markets in the world. Each has regulatory authority and a financial system of varying strength. I could have added chapters to accommodate a few. South Korea and Taiwan are two I considered writing up separately. In any case, the material covered in this chapter may spur interest to dig deeper. Wikipedia.com provides lists of countries by economic indicators, the same as we covered in these chapters. Before considering an investment, investors should try to understand the country’s economics. Country-based Indices and ETFs are available at Investing.com. Fig. 118.1 Country-based Indices of securities that trade in many countries not listed in earlier chapters Indices Austria Belgium Bosnia Bulgaria Croatia Cyprus Czechia Denmark Finland Greece Hungary Iceland Malta Montenegro Poland Portugal Romania

542

Investing in the rest of the world

Russia Serbia Slovakia Slovenia Turkey Ukraine

Fig. 118.2 Country-based ETFs are available at Investing.com for countries not listed in earlier chapters Austria - ETFs Belgium - ETFs Bulgaria - ETFs Croatia - ETFs Denmark - ETFs Egypt - ETFs Emirates - ETFs Euro Zone - ETFs Finland - ETFs Greece - ETFs Hungary - ETFs Iceland - ETFs Indonesia - ETFs Ireland - ETFs Israel - ETFs Kazakhstan - ETFs Malaysia - ETFs Mauritius - ETFs Nigeria - ETFs Pakistan - ETFs Poland - ETFs Portugal - ETFs Qatar - ETFs Romania - ETFs Russia - ETFs Saudi Arabia - ETFs South Africa - ETFs South Korea - ETFs

543

BILL CARA / STOCK MARKET LITERACY

Taiwan - ETFs Thailand - ETFs Turkey - ETFs Vietnam - ETFs

Most of these countries have a country ETF that trades in the US. Illustration 118.3 shows the trading volumes the day I created this table, which reflects popularity. Fig. 118.3 Other country ETFs that trade in New York

Country ETF

Info Domestic Ticker

Info USA Ticker

Chart for Ticker

Volume

Country

iShares MSCI Austria ETF

EWO

31,646

Austria

iShares MSCI Belgium ETF

EWK

4,101

Belgium

iShares MSCI Denmark ETF

EDEN

7,942

Denmark

iShares MSCI Finland ETF

EFNL

1,367

Finland

Global X MSCI Greece ETF

GREK

80,222

Greece

iShares MSCI Indonesia ETF

EIDO

1,010,093

Indonesia

VanEck Vectors Indonesia Index ETF

IDX

61,761

Indonesia

iShares MSCI Ireland ETF

EIRL

22,164

Ireland

iShares MSCI Israel ETF

EIS

25,853

Israel

VanEck Vectors Israel ETF

ISRA

1,689

Israel

iShares MSCI Malaysia ETF

EWM

389,461

Malaysia

iShares MSCI New Zealand ETF

ENZL

4,944

New Zealand

iShares MSCI Philippines ETF

EPHE

181,753

Philippines

iShares MSCI Poland ETF

EPOL

508,186

Poland

Global X MSCI Portugal ETF

PGAL

2,595

Portugal

iShares MSCI Russia ETF

ERUS

1,499,487

Russia

VanEck Vectors Russia ETF

RSX

27,541,324

Russia

iShares MSCI South Africa ETF

EZA

395,054

South Africa

iShares MSCI South Korea ETF

EWY

3,355,166

South Korea

The Korea Fund (Closed-End Fund)

3,478

South Korea

Direxion Daily South Korea Bull 3X Shares

KORU

133,158

South Korea

iShares MSCI Taiwan ETF

EWT

3,312,165

Taiwan

The Taiwan Fund (Closed-End Fund)

TWN

3,619

Taiwan

iShares MSCI Thailand ETF

THD

174,571

Thailand

iShares MSCI Turkey ETF

TUR

154,349

Turkey

544

Investing in the rest of the world

Fig. 118.4 Regional Grouping of Country ETFs Investors of stocks in these countries may wish to track the country ETFs in ten regions via these Investing.com links. Each of these countries’ ETFs trades in the US. I provided links to (1) Performance, (2) Technical Analysis, and (3) Snapshot that includes related news and articles. Western Europe: EWU, EWG, EWQ, EWI, EWP, EWL, EWN, EWK, PGAL, EIRL, Performance

Technical Analysis

Snapshot

Northern Europe: EWD, NORW, EDEN, EFNL, Performance

Technical Analysis

Snapshot

Eastern Europe: TUR, GREK, EWO, EPOL, RSX, Performance

Technical Analysis

Snapshot

Technical Analysis

Snapshot

South Asia: INDA, PAK, Performance

Southeast Asia: EWM, EWS, VNM, IDX, THD, EPHE, Performance

Technical Analysis

Snapshot

Far East/East Asia: EWA, FXI, EWH, EWJ, EWY, EWT, ENZL, Performance

Technical Analysis

Snapshot

Middle East/Near East: EIS, EGPT, KWT, QAT, UAE, Performance

Technical Analysis

Snapshot

Technical Analysis

Snapshot

Southern Africa: EZA, NGE, Performance

South America: GXG, EWZ, ECH, EPU, ARGT, Performance

Technical Analysis

Snapshot

Technical Analysis

Snapshot

North America: EUSA, EWC, EWW, Performance

There are overlaps in these regions that were compiled for illustrative purposes only. Perhaps you identify the regions differently? Investors may wish to study the ETFs in adjacent countries. For example, Malaysia and Singapore were once the same country and are inter-connected in business in many ways. The EWS Singapore and EWM Malaysia ETFs from iShares cover these countries. Investors can study the components and multi-year performance of the stock holdings.

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Fig. 118.5 ADRs from tier-two countries that trade in the US are available at Investing.com. ADRs Austria Belgium Cyprus Denmark Emirates Finland Greece Hungary Indonesia Ireland Israel Luxembourg Malaysia Philippines Poland Portugal Russia South Africa South Korea Taiwan Thailand Turkey

There will be US-traded ETFs and ADRs for more second-tier countries in the future. There will always be companies in countries in Africa and Eastern Europe that need access to American investment capital where ADRs will help. Take Ukraine as an example. I also expect to see more foreign trading of stocks on this second and third tier of stock exchanges. Some good companies trade there. The financial and market regulatory systems are improving. Investors ought to be careful, as corruption is endemic in some countries. Geopolitics is a factor. Taiwan and Ukraine are problems for American investors in 2022. Companies from China and Russia that trade in the US are losing US sponsorship or Chinese interest at headquarters to continue trading in the US. Capital markets will always face geopolitical issues.

546

Investing in the rest of the world

The new and untitled Finance.Yahoo.com screener lists stocks that trade in Denmark, Finland, Greece, Hungary, Indonesia, Israel, Poland, Portugal, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, and Turkey. Click on the link above to access the screener. Then select the Region (i.e., country) and filter as desired. In Fig. 118.6, I listed some of the more prominent company stocks that trade in various countries I did not write about in a separate chapter. I called this list the Best of the Rest. Fig. 118.6 Some leading company stocks that trade in various countries were not written up earlier Denmark

Novo Nordisk A/S

NOVO-B.CO

Denmark

A.P. Møller - Mærsk A/S

MAERSK-B.CO

Denmark

Ørsted A/S

ORSTED.CO

Denmark

A.P. Møller - Mærsk A/S

MAERSK-A.CO

Denmark

DSV A/S

DSV.CO

Denmark

Nordea Bank Abp

NDA-DK.CO

Denmark

Vestas Wind Systems A/S

VWS.CO

Denmark

Coloplast A/S

COLO-B.CO

Denmark

Genmab A/S

GMAB.CO

Denmark

Carlsberg A/S

CARL-A.CO

Denmark

NTG Nordic Transport Group A/S

NTG.CO

Denmark

Carlsberg A/S

CARL-B.CO

Denmark

Novozymes A/S

NZYM-B.CO

Denmark

Tryg A/S

TRYG.CO

Denmark

Danske Bank A/S

DANSKE.CO

Finland

Neste Oyj

NESTE.HE

Finland

Nordea Bank Abp

NDA-FI.HE

Finland

Nokia Oyj

NOKIA.HE

Finland

Telefonaktiebolaget LM Ericsson (publ)

ERIBR.HE

Finland

KONE Oyj

KNEBV.HE

Finland

Sampo Oyj

SAMPO.HE

Finland

UPM-Kymmene Oyj

UPM.HE

Finland

Telia Company AB (publ)

TELIA1.HE

Finland

Stora Enso Oyj

STEAV.HE

Finland

Stora Enso Oyj

STERV.HE

547

BILL CARA / STOCK MARKET LITERACY

Greece

Coca-Cola HBC AG

EEE.AT

Greece

Hellenic Telecommunications Organization S.A.

HTO.AT

Greece

Organization of Football Prognostics S.A.

OPAP.AT

Greece

National Bank of Greece S.A.

ETE.AT

Greece

Prodea Real Estate Investment Co. SA

PRODEA.AT

Greece

Public Power Corporation SA

PPC.AT

Greece

Jumbo SA

BELA.AT

Greece

Mytilineos SA

MYTIL.AT

Greece

Terna Energy SA Commercial Technical Co

TENERGY.AT

Greece

Eurobank Ergasias Services and Holdings SA

EUROB.AT

Greece

Hellenic Petroleum Holdings SA

ELPE.AT

Greece

Motor Oil (Hellas) Corinth Refineries SA

MOH.AT

Greece

Piraeus Financial Holdings SA

TPEIR.AT

Greece

Alpha Services and Holdings SA

ALPHA.AT

Hungary

MOL Hungarian Oil and Gas

MOL.BD

Hungary

OTP Bank Nyrt.

OTP.BD

Hungary

OPUS GLOBAL Nyrt.

OPUS.BD

Hungary

4iG Nyrt.

4IG.BD

Hungary

Budapest Real Estate Utilization and Development

BIF.BD

Hungary

ALTEO Energy Services Public Limited Company

ALTEO.BD

Indonesia

PT Bank Central Asia Tbk

BBCA.JK

Indonesia

PT Bank Rakyat Indonesia (Persero) Tbk

BBRI.JK

Indonesia

PT Telekomunikasi Indonesia Tbk

TLKM.JK

Indonesia

PT Bank Mandiri (Persero) Tbk

BMRI.JK

Indonesia

PT GoTo Gojek Tokopedia Tbk

GOTO.JK

Indonesia

PT Astra International Tbk

ASII.JK

Indonesia

PT Bayan Resources Tbk

BYAN.JK

Indonesia

PT Mandala Multifinance Tbk

MFIN.JK

Indonesia

PT. Chandra Asri Petrochemical Tbk

TPIA.JK

Israel

Bank Leumi Le-Israel B.M.

LUMI.TA

Israel

NICE Ltd.

NICE.TA

Israel

Bank Hapoalim B.M.

POLI.TA

548

Investing in the rest of the world

Israel

ICL Group Ltd

ICL.TA

Israel

Teva Pharmaceutical Industries Limited

TEVA.TA

Israel

Elbit Systems Ltd.

ESLT.TA

Israel

Azrieli Group Ltd

AZRG.TA

Israel

Mizrahi Tefahot Bank Ltd.

MZTF.TA

Israel

Israel Discount Bank Limited

DSCT.TA

Israel

Tower Semiconductor Ltd.

TSEM.TA

Israel

Ormat Technologies, Inc.

ORA.TA

Israel

Bezeq The Israel Telecommunication Corp. Ltd

BEZQ.TA

Israel

First International Bank of Israel Ltd

FIBI.TA

Israel

Melisron Ltd.

MLSR.TA

Israel

Israel Corporation Ltd

ILCO.TA

Israel

NewMed Energy - Limited Partnership

NWMD.TA

Israel

Amot Investment Ltd

AMOT.TA

Israel

Shapir Engineering and Industry Ltd

SPEN.TA

Israel

Strauss Group Ltd.

STRS.TA

Israel

Nova Ltd.

NVMI.TA

Poland

CEZ, a. s.

CEZ.WA

Poland

Polskie Górnictwo Naftowe i Gazownictwo S.A.

PGN.WA

Poland

Dino Polska S.A.

DNP.WA

Poland

Powszechna Kasa Oszczednosci Bank

PKO.WA

Poland

Polski Koncern Naftowy ORLEN Spólka Akcyjna

PKN.WA

Poland

Allegro.eu SA

ALE.WA

Poland

Santander Bank Polska S.A.

SPL.WA

Poland

KGHM Polska Miedz S.A.

KGH.WA

Poland

ING Bank Slaski S.A.

ING.WA

Poland

Pepco Group N.V.

PCO.WA

Poland

PGE Polska Grupa Energetyczna S.A.

PGE.WA

Poland

Bank Polska Kasa Opieki S.A.

PEO.WA

Portugal

EDP Renováveis, S.A.

EDPR.LS

Portugal

EDP - Energias de Portugal, S.A.

EDP.LS

Portugal

Jerónimo Martins, SGPS, S.A.

JMT.LS

Portugal

Galp Energia, SGPS, S.A.

GALP.LS

Portugal

MERLIN Properties SOCIMI, S.A.

MRL.LS

549

BILL CARA / STOCK MARKET LITERACY

Portugal

The Navigator Company, S.A.

NVG.LS

Portugal

Banco Comercial Português, S.A.

BCP.LS

Portugal

Sonae, SGPS, S.A.

SON.LS

Saudi Arabia

Saudi Arabian Oil Company

2222.SR

Saudi Arabia

Al Rajhi Banking and Investment Corp

1120.SR

Saudi Arabia

The Saudi National Bank

1180.SR

Saudi Arabia

Saudi Basic Industries Corporation

2010.SR

Saudi Arabia

Saudi Telecom Company

7010.SR

Saudi Arabia

Saudi Arabian Mining Company (Ma’aden)

1211.SR

Saudi Arabia

ACWA POWER Company

2082.SR

Saudi Arabia

Riyad Bank

1010.SR

Saudi Arabia

Saudi Electricity Company

5110.SR

Saudi Arabia

The Saudi British Bank

1060.SR

Saudi Arabia

Alinma Bank

1150.SR

Saudi Arabia

Dr. Sulaiman Al Habib Medical Services Group

4013.SR

Saudi Arabia

SABIC Agri-Nutrients Company

2020.SR

Saudi Arabia

Banque Saudi Fransi

1050.SR

Saudi Arabia

Almarai Company

2280.SR

Saudi Arabia

Bank Albilad

1140.SR

Saudi Arabia

Arab National Bank

1080.SR

South Africa

Anglo American plc

AGL.JO

South Africa

Naspers Limited

NPN.JO

South Africa

FirstRand Limited

FSR.JO

South Africa

Anglo American Platinum Limited

AMS.JO

South Africa

Standard Bank Group Limited

SBK.JO

South Africa

MTN Group Limited

MTN.JO

South Africa

Vodacom Group Limited

VOD.JO

South Africa

Capitec Bank Holdings Limited

CPI.JO

South Africa

Sasol Limited

SOL.JO

South Africa

Kumba Iron Ore Limited

KIO.JO

South Africa

Impala Platinum Holdings Limited

IMP.JO

South Korea

Samsung Electronics Co., Ltd.

005930.KS

South Korea

Samsung Heavy Industries Co., Ltd.

010140.KS

South Korea

LG Energy Solution, Ltd.

373220.KS

South Korea

SK Hynix Inc.

000660.KS

550

Investing in the rest of the world

South Korea

Samsung Biologics Co., Ltd.

207940.KS

South Korea

LG Chem, Ltd.

051910.KS

South Korea

Hyundai Motor Company

005380.KS

South Korea

NAVER Corporation

035420.KS

South Korea

Samsung SDI Co., Ltd.

006400.KS

South Korea

Kakao Corp.

035720.KS

South Korea

Kia Corporation

000270.KS

South Korea

Celltrion, Inc.

068270.KS

South Korea

Hyundai Mobis Co.,Ltd

012330.KS

Taiwan

Taiwan Semiconductor Manufacturing

2330.TW

Taiwan

Hon Hai Precision Industry Co., Ltd.

2317.TW

Taiwan

MediaTek Inc.

2454.TW

Taiwan

Chunghwa Telecom Co., Ltd.

2412.TW

Taiwan

Formosa Petrochemical Corporation

6505.TW

Taiwan

Delta Electronics, Inc.

2308.TW

Taiwan

Cathay Financial Holding Co., Ltd.

2882.TW

Taiwan

Formosa Plastics Corporation

1301.TW

Taiwan

Fubon Financial Holding Co., Ltd.

2881.TW

Taiwan

Nan Ya Plastics Corporation

1303.TW

Taiwan

Evergreen Marine Corporation (Taiwan) Ltd.

2603.TW

Taiwan

United Microelectronics Corporation

2303.TW

Taiwan

Mega Financial Holding Co., Ltd.

2886.TW

Taiwan

CTBC Financial Holding Co., Ltd.

2891.TW

Taiwan

China Steel Corporation

2002.TW

Thailand

Airports of Thailand Public Company Ltd

AOT.BK

Thailand

PTT Public Company Limited

PTT.BK

Thailand

Charoen Pokphand Foods Public Company Ltd

CPF-R.BK

Thailand

Intouch Holdings Public Company Limited

INTUCH-R.BK

Thailand

Delta Electronics (Thailand) Public Company Ltd

DELTA-R.BK

Thailand

SCB X Public Company Limited

SCB-R.BK

Thailand

PTT Exploration and Production Public Co Ltd

PTTEP.BK

Thailand

Advanced Info Service Public Company Limited

ADVANC.BK

Thailand

Delta Electronics (Thailand) Public Company Ltd

DELTA.BK

551

BILL CARA / STOCK MARKET LITERACY

Turkey

QNB Finansbank A.S.

QNBFB.IS

Turkey

Enka Insaat ve Sanayi A.S.

ENKAI.IS

Turkey

Ford Otomotiv Sanayi A.S.

FROTO.IS

Turkey

Sasa Polyester Sanayi A.S.

SASA.IS

Turkey

Eregli Demir ve Çelik Fabrikalari T.A.S.

EREGL.IS

Turkey

Koç Holding A.S.

KCHOL.IS

Turkey

Türk Hava Yollari Anonim Ortakligi

THYAO.IS

Turkey

Türkiye Petrol Rafinerileri A.S.

TUPRS.IS

Turkey

Iskenderun Demir ve Çelik A.S.

ISDMR.IS

Turkey

Türkiye Sise Ve Cam Fabrikalari A.S.

SISE.IS

Soon after the Russian invasion of Ukraine began in February 2022, Russian company listings were dropped, and other countries seized assets. So, geopolitics often determines where companies can or want to list their shares. Some multinational companies headquartered in these countries trade in multiple markets, perhaps only in other countries. Investors can trade these stocks with a broker in each country or from Interactive Brokers, which offers global trading from a single account. The cost of international trading may be problematic for small accounts. By clicking on any company link at Yahoo Finance, investors can observe high-quality stocks where up-to-date information is available as follows: Summary

Profile

Holders

Chart

Financials

Sustainability

Statistics

Analysis

Historical Data

Options

Sustainability Here is a list of 37 primarily mid- to large-cap company stocks of various international companies from this lesson that also trade in New York. Fig. 118.7 Larger company stocks that trade in New York but are not written up in a separate chapter Instrument

USA Ticker Industry

Country

Nokia Corporation

NOK

Communication Equipment

Finland

Telecom Indonesia Tbk

TLK

Telecom Services

Indonesia

Check Point Software Tech

CHKP

Software - Application

Israel

CyberArk Software Ltd.

CYBR

Software - Infrastructure

Israel

Elbit Systems Ltd.

ESLT

Aerospace & Defense

Israel

Global-e Online Ltd.

GLBE

Internet Retail

Israel

ICL Group Ltd

ICL

Agricultural Inputs

Israel

552

Investing in the rest of the world

ironSource Ltd.

Software - Application

Israel

monday.com Ltd.

MNDY

Software - Application

Israel

NICE Ltd.

NICE

Software - Application

Israel

Playtika Holding Corp.

PLTK

Electronic Gaming & Multimedia

Israel

SolarEdge Technologies, Inc.

SEDG

Solar

Israel

Teva Pharmaceutical

TEVA

Drugs - Specialty & Generic

Israel

Tower Semiconductor Ltd.

TSEM

Semiconductors

Israel

ZIM Integrated Shipping

ZIM

Marine Shipping

Israel

AngloGold Ashanti Limited

Gold

South Africa

Gold Fields Limited

GFI

Gold

South Africa

Harmony Gold Mining Co

HMY

Gold

South Africa

Sibanye Stillwater Limited

SBSW

Gold

South Africa

Sasol Limited

SSL

Oil & Gas Integrated

South Africa

Coupang, Inc.

CPNG

Internet Retail

South Korea

KB Financial Group Inc.

Banks – Regional

South Korea

Korea Electric Power Corp

KEP

Utilities - Regulated Electric

South Korea

KT Corporation

Telecom Services

South Korea

LG Display Co., Ltd.

LPL

Consumer Electronics

South Korea

POSCO

PKX

Steel

South Korea

Shinhan Financial Group Co

SHG

Banks – Regional

South Korea

SK Telecom Co

SKM

Telecom Services

South Korea

Woori Financial Group Inc.

Banks – Regional

South Korea

ASE Technology Holding Co.

ASX

Semiconductors

Taiwan

Chunghwa Telecom Co., Ltd.

CHT

Telecom Services

Taiwan

Himax Technologies, Inc.

HIMX

Semiconductors

Taiwan

ChipMOS Technologies, Inc.

IMOS

Semiconductors

Taiwan

Taiwan Semiconductor

TSM

Semiconductors

Taiwan

United Microelectronics

UMC

Semiconductors

Taiwan

Turkcell Iletisim Hizmetleri

TKC

Telecom Services

Turkey

553

BILL CARA / STOCK MARKET LITERACY

Fig. 118.8 Company ADR Stocks from these countries that trade in the US Austria - ADRs

Indonesia - ADRs

Russia - ADRs

Belgium - ADRs

Ireland - ADRs

South Africa - ADRs

Cyprus - ADRs

Israel - ADRs

South Korea - ADRs

Denmark - ADRs

Luxembourg - ADRs

Taiwan - ADRs

Emirates - ADRs

Malaysia - ADRs

Thailand - ADRs

Finland - ADRs

Philippines - ADRs

Turkey - ADRs

Greece - ADRs

Poland - ADRs

Hungary - ADRs

Portugal - ADRs

To track a stock from any international issuer across multiple markets, possibly for arbitrage purposes, understand that some foreign issuers have stock that trades in American Depositary Receipt (ADR) form and some in the same security. The ADR may trade in multiples of regular shares and be categorized by Levels of access to US markets. The ADR may be sponsored or unsponsored. Unsponsored ADRs trade OTC in the US. Investing.com maintains a current list of World ADRs that trade in the United States. Just as we covered important countries in separate chapters with links to their ADRs, investors can get the list for any country with ADRs by going to the World List and clicking on the country names, like Argentina, Israel, or United Arab Emirates. Currency trends and cycles play a crucial role when trading international markets abroad.

Mutual Funds Fig. 118.9 Country-based Mutual Funds sold in many countries not listed in earlier chapters are available at Investing.com. Funds Andorra

Emirates

Latvia

Pakistan

South Africa

Austria

Estonia

Liechtenstein

Philippines

South Korea

Bahrain

Finland

Lithuania

Poland

Taiwan

Belgium

Gibraltar

Luxembourg

Portugal

Thailand

Bermuda

Greece

Malaysia

Qatar

Turkey

Cayman Islands

Hungary

Malta

Russia

Vietnam

Czechia

Iceland

Mauritius

Saudi Arabia

Denmark

Indonesia

Monaco

Slovenia

Ireland

Namibia

Israel

Oman

554

Investing in the rest of the world

The most important currency pairs for trading in the world are as follows. Fig. 118.10 All country Currency Pairs are available at Investing.com with EOD charts at StockCharts.com Currency Pair

Chart Symbol

Australian Dollar – Philadelphia

$XAD

Australian Dollar – Philadelphia

$XDA

Australian Dollar to British Pound Sterling (NBD)

$AUDGBP

Australian Dollar to Canadian Dollar (NBD)

$AUDCAD

Australian Dollar to Euro (NBD)

$AUDEUR

Australian Dollar to Hong Kong Dollar (NBD)

$AUDHKD

Australian Dollar to Japanese Yen (NBD)

$AUDJPY

AUD/JPY

Australian Dollar to New Zealand Dollar (NBD)

$AUDNZD

AUD/NZD

Australian Dollar to Singapore Dollar (NBD)

$AUDSGD

Australian Dollar to Swiss Franc (NBD)

$AUDCHF

AUD/CHF

Australian Dollar to US Dollar (NBD)

$AUDUSD

AUD/USD

British Pound – Philadelphia

$XBP

British Pound – Philadelphia

$XDB

British Pound to Australian Dollar (NBD)

$GBPAUD

GBP/AUD

British Pound to Canadian Dollar (NBD)

$GBPCAD

GBP/CAD

British Pound to Euro (NBD)

$GBPEUR

British Pound to Hong Kong Dollar (NBD)

$GBPHKD

British Pound to Japanese Yen (NBD)

$GBPJPY

British Pound to Mexican Peso (NBD)

$GBPMXN

British Pound to New Zealand Dollar (NBD)

$GBPNZD

British Pound to Singapore Dollar (NBD)

$GBPSGD

British Pound to Swiss Franc (NBD)

$GBPCHF

GBP/CHF

British Pound to US Dollar (NBD)

$GBPUSD

GBP/USD

Canadian Dollar – Philadelphia

$CDW

Canadian Dollar – Philadelphia

$XDC

Canadian Dollar to Australian Dollar (NBD)

$CADAUD

Canadian Dollar to British Pound (NBD)

$CADGBP

Canadian Dollar to Euro (NBD)

$CADEUR

Canadian Dollar to Hong Kong Dollar (NBD)

$CADHKD

Canadian Dollar to Japanese Yen (NBD)

$CADJPY

CAD/JPY

Canadian Dollar to Swiss Franc (NBD)

$CADCHF

CAD/CHF

555

FX Trading

AUD/CAD

GBP/JPY GBP/NZD

BILL CARA / STOCK MARKET LITERACY

Canadian Dollar to US Dollar (NBD)

$CADUSD

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Hong Kong Dollar to Australian Dollar (NBD)

$HKDAUD

Hong Kong Dollar to British Pound (NBD)

$HKDGBP

Hong Kong Dollar to Canadian Dollar (NBD)

$HKDCAD

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Hong Kong Dollar to Swiss Franc (NBD)

$HKDCHF

Hong Kong Dollar to US Dollar (NBD)

$HKDUSD

Japanese Yen – Philadelphia

$XDN

Japanese Yen – Philadelphia

$XJY

Japanese Yen to Australian Dollar (NBD)

$JPYAUD

Japanese Yen to British Pound Sterling (NBD)

$JPYGBP

Japanese Yen to Canadian Dollar (NBD)

$JPYCAD

Japanese Yen to Euro (NBD)

$JPYEUR

Japanese Yen to US Dollar (NBD)

$JPYUSD

Mexican Peso to British Pound Sterling (NBD)

$MXNGBP

Mexican Peso to Euro (NBD)

$MXNEUR

Mexican Peso to US Dollar (NBD)

$MXNUSD

New Zealand Dollar (EOD)

$NZD

New Zealand Dollar to Australian Dollar (NBD)

$NZDAUD

New Zealand Dollar to British Pound (NBD)

$NZDGBP

New Zealand Dollar to Canadian Dollar (NBD)

$NZDCAD

New Zealand Dollar to Euro (NBD)

$NZDEUR

556

EUR/JPY EUR/NZD

NZD/CAD

Investing in the rest of the world

New Zealand Dollar to Japanese Yen (NBD)

$NZDJPY

NZD/JPY

New Zealand Dollar to Swiss Franc (NBD)

$NZDJPY

NZD/CHF

New Zealand Dollar to US Dollar (EOD)

$NZDUSD

NZD/USD

Norwegian Krone to US Dollar (NBD)

$NOKUSD

Singapore Dollar to Australian Dollar (NBD)

$SGDAUD

Singapore Dollar to British Pound Sterling (NBD)

$SGDGBP

Singapore Dollar to Euro (NBD)

$SGDEUR

Singapore Dollar to Swiss Franc (NBD)

$SGDCHF

Singapore Dollar to US Dollar (NBD)

$SGDUSD

South African Rand (EOD)

$ZAR

Swedish Krona to Euro (NBD)

$SEKEUR

Swedish Krona to US Dollar (NBD)

$SEKUSD

Swiss Franc – Philadelphia

$XDS

Swiss Franc – Philadelphia

$XSF

Swiss Franc to Australian Dollar (NBD)

$CHFAUD

Swiss Franc to British Pound (NBD)

$CHFGBP

Swiss Franc to Canadian Dollar (NBD)

$CHFCAD

Swiss Franc to Euro (NBD)

$CHFEUR

Swiss Franc to Hong Kong Dollar (NBD)

$CHFHKD

Swiss Franc to Japanese Yen (NBD)

$CHFJPY

Swiss Franc to Singapore Dollar (NBD)

$CHFSGD

Swiss Franc to US Dollar (NBD)

$CHFUSD

US Dollar to Australian Dollar (EOD)

$USDAUD

US Dollar to Brazilian Real (EOD)

$USDBRL

US Dollar to British Pound Sterling (EOD)

$USDGBP

US Dollar to Canadian Dollar (EOD)

$USDCAD

US Dollar to Chilean Peso (EOD)

$USDCLP

US Dollar to Chinese Yuan (EOD)

$USDCNY

USD/CNY

US Dollar to Danish Krone (EOD)

$USDDKK

USD/DKK

US Dollar to Euro (EOD)

$USDEUR

US Dollar to Hong Kong Dollar (EOD)

$USDHKD

USD/HKD

US Dollar to Indian Rupee (EOD)

$USDINR

USD/INR

US Dollar to Japanese Yen (EOD)

$USDJPY

USD/JPY

US Dollar to Mexican Peso (EOD)

$USDMXN

USD/MXN

US Dollar to New Zealand Dollar (EOD)

$USDNZD

557

CHF/JPY

USD/CAD

BILL CARA / STOCK MARKET LITERACY

US Dollar to Polish Zloty (EOD)

$USDPLN

US Dollar to Russian Ruble (EOD)

$USDRUB

USD/RUB

US Dollar to Singaporean Dollar (EOD)

$USDSGD

USD/SGD

US Dollar to South African Rand (EOD)

$USDZAR

USD/ZAR

US Dollar to Swedish Krona (EOD)

$USDSEK

USD/SEK

US Dollar to Swiss Franc (EOD)

$USDCHF

USD/CHF

US Dollar to Turkish Lira (EOD)

$USDTRY

USD/TRY

European states listed here are reliant on Russia to meet domestic energy needs. The Russian invasion of Ukraine and resulting sanctions against Russia have led to Russia’s terminating or cutting its energy exports to Europe. EU countries like Hungary (95%), Finland (67%), Poland (54%), and Portugal (9%) have varying degrees of reliance on Russia for energy. Note that Currency charts are End of Day (EOD) values. FOREX FX trading is around the world, around the clock, in the only continuously trading market. Real-time information is not provided for free 7x24x365. Bottom line: The economies and domestic stock markets of many countries listed in this chapter are strong. Until the Russia-Ukraine war is resolved, these countries’ economic and social wellness risks are elevated as the winter of 2022 approaches. However, despite much higher risk in many jurisdictions, investors can still find investible companies in all sectors with proper due diligence.

558

C H A P T E R 119

Bellwether stocks for each country Merriam-Webster defines a Bellwether as “someone or something that leads others or shows what will happen in the future.” That ought to be of interest to investors. I always stress the importance of grasping the big picture of what is happening in capital markets before deciding on specific actions in a portfolio. Without such a vision, it is near impossible to have success in managing for success and avoiding pitfalls. I also stress the importance of trying to be early, turning from bearish to bullish. Bellwether companies help us make decisions. The Bellwether company There is at least one Bellwether in every country, every sector, and every industry. Today’s global market leaders would be Apple (AAPL and JP Morgan (JPM). Over the years, as economies and capital markets change, Bellwethers also change. In the 1980s, we followed the Generals – General Motors (leadership in consumer goods) and General Electric (leader in industrial goods). Times change, and these companies are no longer considered leaders. To assess the flow of capital funds into and out of the global market, we break down the eleven equity market sectors by region (i.e., US, Canada, Latin America, UK & Europe, and Asia) and examine the Bellwether stocks and major ETFs in each. Fig. 119.1 To recap, the eleven stock market sectors with links to the giant companies traded in New York Oil & Gas Sector

GICS 10

Basic Materials Sector

GICS 15

Industrials and Transports Sector

GICS 20

Consumer Discretionary Sector

GICS 25

Consumer Staples Sector

GICS 30

Healthcare Sector

GICS 35

Financial Sector

GICS 40

Technology Sector

GICS 45

559

BILL CARA / STOCK MARKET LITERACY

Communications Sector

GICS 50

Utilities Sector

GICS 55

Real Estate Sector

GICS 60

Fig. 119.2 Table of international bellwether stocks in each sector (and sub-sectors) 10- Oil & Gas Sector

Local Ticker

Sub-sector

Country

Petrobras

PETR4.SA

Oil & Gas Integrated

Brazil

Enbridge

ENB.TO

Pipeline

Canada

PetroChina

PTR

Oil & Gas Integrated

China

TotalEnergies

TTE.PA

Oil & Gas Integrated

France

Shell

SHEL.L

Oil & Gas Integrated

Netherlands

Equinor

EQNR.OL

Oil & Gas Integrated

Norway

Aramco

2222.SR

Oil & Gas Integrated

Saudi Arabia

Oil & Gas Integrated

Chevron

CVX

Oil & Gas Integrated

USA

BHP Group

BHP.AX

Industrial Metals & Mining

Australia

Vale SA

VALE3.SA

Industrial Metals & Mining

Brazil

Air Liquide

AI.PA

Specialty Chemicals

France

BASF SE

AS.DE

Chemicals

Germany

Shin-ETSU Chemical

4063.T

Chemicals

Japan

Saudi Basic Industries (SABIC)

2010.SR

Agri-Nutrient Chemicals

Saudi Arabia

Rio Tinto Group

RIO.L

Industrial Metals & Mining

Sherwin-Williams

SHW

Specialty Chemicals

USA

Volkswagen

VOW3.DE

Automotive

Germany

Toyota

7203.T

Automotive

Japan

Airbus

EADSY

Aerospace & Defense

Netherlands

Samsung Electronics

005930.KS

Electronics, various

South Korea

Hon Hai Precision Industry

2317.TW

Electronic Components

Taiwan

Apple

AAPL

Consumer Electronics

United States

Ford

Automotive

USA

Intel

INTC

Semiconductors

USA

General Motors

Automotive

USA

Raytheon Technologies

RTX

Aerospace & Defense

USA

15- Basic Materials Sector

20- Industrials and Transports Sector

560

Bellwether stocks for each country

25- Consumer Discretionary Sector Alibaba Group

9988.HK

Internet Retail

China

LVMH

MC.PA

Luxury Goods

France

Amazon.com

AMZN

Internet Retail

USA

Home Depot

Home Improvement Retail

USA

Disney

DIS

Entertainment

USA

Nike

NKE

Footwear & Accessories

USA

Starbucks Corp

SBUX

Restaurants

USA

Walmart

WMT

Discount Stores

USA

Procter & Gamble

House & Personal Products

USA

Coca-Cola

Beverages—Non-Alcoholic USA

Costco

COST

Discount Stores

USA

Philip Morris International

Tobacco

USA

Mondelez

MDLZ

Confectioners

USA

Unilever

ULVR.L

House & Personal Products

Diageo

DGE.L

Beverages—Alcoholic

Novo Nordisk A/S

NOVO-B.CO

Drug Manufacturers

Denmark

Novartis AG

NOVN.SW

Drug Manufacturers

Switzerland

AstraZeneca PLC

AZN.L

Drug Manufacturers

UnitedHealth Group

UNH

Healthcare Plans

USA

Abbott Laboratories

ABT

Medical Devices

USA

Thermo Fisher Scientific

TMO

Diagnostics & Research

USA

Eli Lilly and Company

LLY

Drug Manufacturers

USA

ICBC

1398.HK

Banking

China

China Life Insurance

2628.HK

Insurance

China

AXA

CS.PA

Insurance

France

Allianz

ALV.DE

Insurance

Germany

Generali Group

G.MI

Insurance

Italy

HSBC

HSBA.L

Banking

JP Morgan Chase

JPM

Banking

USA

0700.HK

Internet Content & Info

China

30- Consumer Staples Sector

35- Consumer Healthcare Sector

40- Financial Sector

45- Technology Sector Tencent

561

BILL CARA / STOCK MARKET LITERACY

SAP

SAP.DE

Software—Infrastructure

Germany

Lenovo

0992.HK

Computer Hardware

Hong Kong

Accenture plc

ACN

IT Services

Ireland

Dell Technologies

DELL

Computer Hardware

USA

Alphabet

GOOGL

Internet Content & Info

USA

IBM

IT Services

USA

Intel

INTC

Semiconductors

USA

Microsoft

MSFT

Software—Infrastructure

USA

BCE Inc

BCE.TO

Telecom Services

Canada

Deutsche Telekom AG

DTE.DE

Telecom Services

Germany

America Movil SAB de CV

AMXL.MX

Telecom Services

Mexico

Vodafone Group PLC

VOD.L

Telecom Services

Verizon Communications Inc

Telecom Services

USA

Engie

ENGI.PA

Utilities—Diversified

France

E.ON SE

EOAN.DE

Utilities—Diversified

Germany

Enel SpA

ENEL.MI

Utilities—Diversified

Italy

Korea Electric Power Corp

015760.KS

Utilities—Regulated Electric

South Korea

National Grid PLC

NG.L

Utilities—Regulated Electric

American Electric Power

AEP

Utilities—Regulated Electric

USA

China Evergrande Group

3333.HK

Real Estate—Development China

KE Holdings Inc.

BEKE

Real Estate Services

China

Vonovia SE

VNA.DE

Real Estate Services

Germany

Sun Hung Kai Properties

0016.HK

Real Estate—Diversified

Hong Kong

Mitsubishi Estate Co

8802.T

Real Estate—Diversified

Japan

CoStar Group, Inc.

CSGP

Real Estate Services

USA

Prologis, Inc

PLD

REIT -Industrial

USA

American Tower Corp

AMT

REIT -Communication Towers

USA

50- Telecommunications Sector

55- Utilities Sector

60- Real Estate Sector

In the US Consumer Discretionary sector, Amazon (AMZN) leads the XLY Sector ETF higher and lower.

562

Bellwether stocks for each country

Fig. 119.3 In the US Consumer Discretionary sector, Amazon (AMZN) is the bellwether

https://tvc-invdn-com.investing.com/data/tvc_143e3c711c61e14e25f4cf3b0fcf469a.png Because of enhanced market sophistication in the United States, there may be more than one bellwether in a sector. In the Oil & Gas Integrated sub-sector, for example, some investors consider Chevron (CVX) the bellwether, and others would say Exxon Mobile (XOM). Let’s say both are equal. MarketBeat.com offers a comparison service. This MarketBeat.com comparison is of CVX and XOM. I selected CVX because it is a Dow 30 index component. The following table identifies vital ETFs for most countries. Investing.com will list the key ETFs that trade in the country by clicking on the country link. Some will be global and some domestic. Fig. 119.4 Bellwether stocks are typically the top holdings of domestic market ETFs Argentina - ETFs

Iceland - ETFs

Qatar - ETFs

Australia - ETFs

India - ETFs

Romania - ETFs

Austria - ETFs

Indonesia - ETFs

Russia - ETFs

Belgium - ETFs

Ireland - ETFs

Saudi Arabia - ETFs

Brazil - ETFs

Israel - ETFs

Singapore - ETFs

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BILL CARA / STOCK MARKET LITERACY

Bulgaria - ETFs

Italy - ETFs

South Africa - ETFs

Canada - ETFs

Japan - ETFs

South Korea - ETFs

China - ETFs

Kazakhstan - ETFs

Spain - ETFs

Colombia - ETFs

Malaysia - ETFs

Sweden - ETFs

Croatia - ETFs

Mauritius - ETFs

Switzerland - ETFs

Denmark - ETFs

Mexico - ETFs

Taiwan - ETFs

Egypt - ETFs

Netherlands - ETFs

Thailand - ETFs

Euro Zone - ETFs

New Zealand - ETFs

Turkey - ETFs

Finland - ETFs

Nigeria - ETFs

UAE - ETFs

France - ETFs

Norway - ETFs

UK - ETFs

Germany - ETFs

Pakistan - ETFs

US - ETFs

Greece - ETFs

Peru - ETFs

Vietnam - ETFs

Hong Kong - ETFs

Poland - ETFs

Hungary - ETFs

Portugal - ETFs

Bottom line: Business conditions matter. It’s hard for any industry, its many subindustry components, or any local or regional stock market to reverse the Trend from Bear to Bull or Bull to Bear without the stock of its most crucial company impacting the change and perhaps leading it.

564

C H A P T E R 120

Investing in a global stock portfolio This lesson introduces the concept of managing a portfolio of stocks from many countries. The interest would be for greater diversification, access to more opportunities to meet your needs and interests and reduced single-country risk. Most US-headquartered Large-Cap companies indeed have multi-national business operations, but investors have to be mindful that international sales exposure and international stock exposure are different. A company is not a stock. As explained throughout these chapters, stock prices are a function of more than corporate fundamentals. Other factors drive stock prices, like national macroeconomic data, cultural differences in savings and investment risk acceptance, and approaches to technical analysis. Market sentiment also places a role in pricing stocks, and these opinions vary from country to country. Recapping the book to this point By this point in the book, you understand your needs as an investor: to find Growth, Value, and/or Income and to look for those needs only in the stocks of High-Quality companies. You also understand that capital market data is structured by an Industry Classification System, which makes finding relevant content via sectors, sub-sectors, and industries an efficient process. You can find this information by region of the world or by country. Finally, you understand that stocks do not trade in a vacuum. You know there is a time and space aspect to price motion, which interconnects all the tradeable instruments. Before getting into tools and trading, the opening eleven chapters discussed the mindset of the individual who wants to become a student of the market. We then looked at the big picture of the market in chapters 12 to 25. Chapters 26 to 33 covered aspects of trading in funds, bonds, currencies, and crypto. I say trading because the intrinsic value of these securities or assets is unknown. Investors are traders, but they must first understand the inherent value underlying the market prices they buy and sell. In Chapters 34 through 42, we switch topics to focus on the collective actions of investors. We cover seven different overall market studies.

565

BILL CARA / STOCK MARKET LITERACY

Aspects of company fundamental analysis were the subject of chapters 43 to 56. In Chapters 57 to 70, we covered market timing analysis tools. In chapters 71 to 79, we applied technical analytics to trading stocks. Then, Chapters 80 through 93 drilled down into the various sectors and industries. Our objective with Chapters 94 through 100 was to provide a framework to apply the tools you have acquired in Chapters 1 through 93 that I believe will help you succeed in trading a successful US-centric portfolio. Chapters 101 to 120 covered market insights and portfolio studies of the major country markets outside the United States. It might be said that investing in the most prominent American companies is investing in the world. But the truth is that global investing opens up a unique realm of opportunities. It also entails more complex socio-political-economic risks than investing domestically. The leading corporations in the world fail at times to meet our expectations. So do capital markets of all countries. Diversification into a global portfolio and timely trades could meet the challenges involved. One of the biggest problems international investors face is making decisions without understanding the cultural fabric of each country. It differs from their own. For sure, each country is unique. Political, legal, and financial systems, race, and religion affect how people invest and trade capital markets. While it’s fair to say that people have the same priorities for essential needs like security, food, and shelter and a common desire to live a better life, there are distinct differences in how people live around the world. That includes their saving and risk-taking. People’s emotions, attitudes, opinions, ideas, and so forth are called sentiments. As you have seen, market sentiment plays a significant role in pricing capital market instruments. That is the subjective aspect of decision-making versus relying on facts, which is the objective. If you can successfully trade a popular single stock in your own country, you can also trade a portfolio of 20-25 carefully selected international company stocks. In doing so, you can achieve proper diversification. Far too much is made of Pooled Fund diversification. I attribute this development to the Sell-side’s marketing their services as all-knowing and best capable of managing money. They advise customers to buy their funds, and the customer does. In that way, stock is sold, not bought. Individuals with basic skills and who know how to think for themselves could achieve better results. It is your investment capital, and you know what’s best for you. Anybody who learns to invest prudently in shares of individual companies that meets specific needs is as “knowing” as a professional. The Financial Services Sector from Wall Street are agents. They are no different from the real estate agents you use when buying a house. Before investing in a global stock portfolio, investors need to investigate and build an overview understanding of the world’s major capital markets. While doing so takes time,

566

Investing in a global stock portfolio

the information is available on free websites. So much up-to-date information is there to support your research. At the Investing.com site, you will find well-organized summaries of each country along with easy-to-navigate tabs for Indices, Stocks, ADRs, ETFs, Forex, Bonds, and Economic Data. Country overviews can supplement this information in the World Fact Book published by the US CIA. You have gained an understanding of many essential investment topics. Now it’s time for readers to get into the details of creating a global portfolio. Fig. 120.1 Information on broad market indices, sectors, and leading stocks for tier-one countries Canada

Sweden

Japan

Mexico

Norway

Singapore

France

Switzerland

Philippines

Germany

United Kingdom

Hong Kong

Italy

India

China

Spain

Australia

Taiwan

Netherlands

New Zealand

South Korea

Because of the importance of regional economies and market sentiment, investors of stocks in these countries may wish to monitor the vital country ETFs in ten regional groups via the following Investing.com links. Fig. 120.2 Links to (1) Performance, (2) Technical Analysis, and (3) Snapshot for each of the tierone Country ETFs, which includes related news and articles

567

BILL CARA / STOCK MARKET LITERACY

Western Europe: EWU, EWG, EWQ, EWI, EWP, EWL, EWN, EWK, PGAL, EIRL, Performance

Technical Analysis

Snapshot

Northern Europe: EWD, NORW, EDEN, EFNL, Performance

Technical Analysis

Snapshot

Eastern Europe: TUR, GREK, EWO, EPOL, RSX, Performance

Technical Analysis

Snapshot

Technical Analysis

Snapshot

South Asia: INDA, PAK, Performance

Southeast Asia: EWM, EWS, VNM, IDX, THD, EPHE, Performance

Technical Analysis

Snapshot

Far East/East Asia: EWA, FXI, EWH, EWJ, EWY, EWT, ENZL, Performance

Technical Analysis

Snapshot

Middle East/Near East: EIS, EGPT, KWT, QAT, UAE, Performance

Technical Analysis

Snapshot

Technical Analysis

Snapshot

Southern Africa: EZA, NGE, Performance

South America: GXG, EWZ, ECH, EPU, ARGT, Performance

Technical Analysis

Snapshot

Technical Analysis

Snapshot

North America: EUSA, EWC, EWW, Performance

The Global S&P 1200 Index is a vital benchmark for investors with global interests. The widely followed Global S&P 1200 was launched on September 30, 1999, as a free-float weighted stock market index that provides efficient exposure to the global equity markets of thirty-one countries and captures about 70% of global market capitalization. This index is a composite of seven headline indices, which includes the US S&P 500, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All-Australian 50, S&P Asia 50, S&P Latin America 40, and S&P Europe 350. The S&P Europe 350 includes 125 companies from the UK and 225 from Europe. On December 31, 2021, the US S&P 500 comprised 41.7% in number and close to 50% by capitalization weighting of the Global S&P 1200.

568

Investing in a global stock portfolio

Fig. 120.3 S&P 1200 Country stocks composition Countries in the S&P 1200 index

Stocks at 2021-12-31

% Number 2021-12-31 Stocks at 2021-12-31

USA

500

41.67%

500

Australia

4.17%

Canada

5.00%

Japan

150

12.50%

150

Asia 50

Hong Kong/China

2.08%

South Korea

0.92%

Singapore

0.33%

Taiwan

0.83%

Latin America 40

Brazil

1.58%

Mexico

0.67%

Chile

0.67%

Peru

0.17%

Colombia

0.25%

Europe 350

350

125

10.42%

125

Austria

0.17%

Belgium

0.83%

Denmark

0.33%

Finland

0.42%

France

3.83%

Germany

2.67%

Greece

0.25%

Ireland

0.50%

Italy

2.17%

Luxembourg

0.08%

Netherlands

1.50%

Norway

0.50%

Portugal

0.50%

Spain

1.50%

Sweden

1.67%

Switzerland

1.83%

Total

1200

100%

1200

569

BILL CARA / STOCK MARKET LITERACY

S&P Asia 50 In the S&P/Asia 50, there are 16 stocks headquartered in China, 12 in South Korea, 11 in Taiwan, 8 in Hong Kong, and 3 in Singapore. On May 12, 2022, the notional value – using Australian Dollars – was about $661 billion, split between China (39.1%), Hong Kong (11.4%), Singapore (4.6%), South Korea (21.6%), and Taiwan (23.3%). The current S&P/Asia 50 data can be downloaded at this link. Fig. 120.4 S&P Asia 50 Constituents as of May 12, 2022

Location

Market Value ($000)

Price

Notional Value ($ Australia)

Ticker

Name

Weight (%)

9988

ALIBABA GROUP HOLDING

6.40

Cons Discr

China

43,237,310

2,917,497

14.82

43,237,310

2020

ANTA SPORTS PRODUCTS

0.53

Cons Discr

China

3,560,850

224,801

15.84

3,560,850

9888

BAIDU CLASS A INC

1.29

Communicat China

8,690,074

448,867

19.36

8,690,074

3988

BANK OF CHINA LTD H

1.24

Financials

China

8,402,032

15,276,421

0.55

8,402,032

1211

BYD LTD H

0.98

Cons Discr

China

6,635,307

158,626

41.83

6,635,307

939

CHINA CONSTRUCTION BNK

3.03

Financials

China

20,455,349

3968

CHINA MERCHANTS BANK

0.85

Financials

China

5,740,539

744,558

7.71

5,740,539

1398

INDUS & COMMERCIAL BNK

1.60

Financials

China

10,806,054

13,019,342

0.83

10,806,054

9618

JD.COM CLASS A INC

2.18

Cons Discr

China

14,729,454

413,981

35.58

14,729,454

2331

LI NING LTD

0.71

Cons Discr

China

4,800,486

460,258

10.43

4,800,486

3690

MEITUAN

3.44

Cons Discr

China

23,242,978

799,002

29.09

23,242,978

9999

NETEASE INC

1.49

Communicat China

10,062,529

396,475

25.38

10,062,529

2318

PING AN INSURANCE

1.50

Financials

China

10,110,176

1,178,342

8.58

10,110,176

700

TENCENT HOLDINGS LTD

11.31

Communicat China

76,325,975

1,196,707

63.78

76,325,975

2269

WUXI BIOLOGICS CAYMAN

0.90

Health Care

China

6,081,021

642,135

9.47

6,081,021

1810

XIAOMI CORP

0.76

Info Tech

China

5,100,879

2,656,708

1.92

5,100,879

1299

AIA GROUP LTD

4.76

Financials

32,141,998

2,395,082

13.42

32,141,998

CK HUTCHISON HOLDINGS

0.78

Industrials

5,286,271

532,890

9.92

5,286,271

CLP HOLDINGS LTD

0.69

Utilities

4,647,354

331,008

14.04

4,647,354

Sector

570

Investing in a global stock portfolio

HONG KONG & CHINA GAS

0.49

Utilities

3,326,258

2,159,908

1.54

3,326,258

388

HONG KONG EXCHANGE

2.06

Financials

13,885,033

233,480

59.47

13,885,033

823

LINK REIT

0.76

Real Estate

5,159,527

418,453

12.33

5,159,527

SUN HUNG KAI PROPERTIES

0.76

Real Estate

5,113,702

304,932

16.77

5,113,702

669

TECHTRONIC INDUSTRIES

0.89

Industrials

6,027,704

342,289

17.61

6,027,704

68270

CELLTRION INC

0.52

Health Care

S Korea

3,538,309

20,290

174.39 3,538,309

5380

HYUNDAI MOTOR

0.85

Cons Discr

S Korea

5,768,952

28,318

203.72 5,768,952

35720

KAKAO CORP

0.83

Communicat S Korea

5,624,391

61,745

91.09

5,624,391

KB FINANCIAL GROUP 1E+05 INC

0.75

Financials

S Korea

5,038,385

77,359

65.13

5,038,385 5,154,735

270

KIA CORPORATION CORP

0.76

Cons Discr

S Korea

5,154,735

52,923

97.4

51910

LG CHEM LTD

0.76

Materials

S Korea

5,126,728

9,356

547.99 5,126,728

35420

NAVER CORP

1.32

Communicat S Korea

8,899,965

29,204

304.75 8,899,965

5490

POSCO

0.68

Materials

S Korea

4,616,309

14,981

308.14 4,616,309

5930

SAMSUNG ELECTRONICS

11.02

Info Tech

S Korea

74,388,233

1,015,539

73.25

6400

SAMSUNG SDI

1.03

Info Tech

S Korea

6,928,951

10,885

636.58 6,928,951

55550

SHINHAN FINANCIAL GP

0.70

Financials

S Korea

4,723,481

102,063

46.28

660

SK HYNIX INC

1.94

Info Tech

S Korea

13,109,721

106,557

123.03 13,109,721

D05

DBS GROUP HOLDINGS

1.71

Financials

Singapr

11,526,093

355,853

32.39

11,526,093

O39

OVERSEA-CHINESE BANK

1.43

Financials

Singapr

9,647,067

790,743

12.2

9,647,067

UOB

UNITED OVERSEAS BANK

1.32

Financials

Singapr

8,908,604

304,256

29.28

8,908,604

2882

CATHAY FINANCIAL HLDG

0.66

Financials

Taiwan

4,472,490

1,700,567

2.63

4,472,490

2412

CHUNGHWA TELECOM

0.67

Communicat Taiwan

4,554,152

752,752

6.05

4,554,152

2891

CTBC FINANCIAL HOLDING

0.73

Financials

Taiwan

4,895,780

3,854,945

1.27

4,895,780

2308

DELTA ELECTRONICS INC

0.60

Info Tech

Taiwan

4,058,041

380,679

10.66

4,058,041

1301

FORMOSA PLASTICS CORP

0.62

Materials

Taiwan

4,201,860

857,522

4.9

4,201,860

2881

FUBON FINANCIAL

0.69

Financials

Taiwan

4,689,467

1,522,554

3.08

4,689,467

571

74,388,233

4,723,481

BILL CARA / STOCK MARKET LITERACY

2317

HON HAI PRECISION IND

1.82

Info Tech

Taiwan

12,281,362

2,471,099

4.97

12,281,362

2454

MEDIATEK INC

1.87

Info Tech

Taiwan

12,654,913

316,373

12,654,913

1303

NAN YA PLASTICS CORP

0.66

Materials

Taiwan

4,454,470

1,113,618

4,454,470

2330

TAIWAN SEMICONDUCTOR

13.66

Info Tech

Taiwan

92,227,307

3,742,991

24.64

92,227,307

2303

UNITED MICRO ELECTRONIC

0.79

Info Tech

Taiwan

5,349,508

2,295,926

2.33

5,349,508

Note that the stocks of the 16 China-headquartered companies in the S&P/Asia 50 Index are listed and traded on the Hong Kong Stock Exchange with the tickers shown in the table in Fig. 102.2.

Portfolio of eight NYSE-listed stocks from the S&P Asia 50 Many S&P Asia 50 stocks trade over the counter in the US. Most are high-quality companies, but some present a higher risk than the ones listed on the NYSE. I excluded those from the following list of eight quality stocks. The FinViz.com screener tabs are helpful, particularly the snapshot view. https://finviz.com/screener.ashx?v=111&t=PKX,BABA,KB,SHG,TSM,BIDU,CHT,NTES Fig. 120.5 Portfolio of eight NYSE-listed stocks from the S&P Asia 50 US Ticker

Name

GICS

Sector

Country

PKX

POSCO

Materials

S Korea

BABA

ALIBABA GROUP HOLDING

Cons Discretionary

China

KB FINANCIAL GROUP INC

Financials

S Korea

SHG

SHINHAN FINANCIAL GP

Financials

S Korea

TSM

TAIWAN SEMICONDUCTOR

Info Tech

Taiwan

BIDU

BAIDU CLASS A INC

Communications

China

CHT

CHUNGHWA TELECOM

Communications

Taiwan

NTES

NETEASE INC

Communications

China

S&P/Latin 40 Although the companies in Central and South America are much smaller and less international than those in the Asia 50 Index, the Latin American equity market is also attractive. In the S&P/Latin 40, after excluding preferred shares of Petrobras (Brazil), there are nineteen stocks from Brazil, eight from Chile, three from Colombia, eight from Mexico, and two from Peru.

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Investing in a global stock portfolio

Fig. 120.6 S&P Latin 40 Constituents as of January 20, 2022 Ticker

Company

GICS

Industry

Country

B3: B3SA3

B3 Brasil, Bolsa, Balcao

Stock exchange

Brazil

B3: ITSA4

Itaúsa Investimentos Itau

Banking

Brazil

NYSE: PAGS

PagSeguro

Mobile payment

Brazil

NYSE: ABV

AmBev

Beverages

Brazil

NYSE: BBDO

Banco Bradesco

Banking

Brazil

B3: BBAS3

Banco do Brasil

Banking

Brazil

NYSE: BRFS

BRF S.A.

Food processing

Brazil

B3: CCRO3

CCR S.A.

Transportation

Brazil

NYSE: GGB

Gerdau

Steel

Brazil

NYSE: ITUB

Itaú Unibanco

Banking

Brazil

B3: RENT3

Localiza Rent A Car

Car rental

Brazil

B3: LREN3

Lojas Renner

Retail

Brazil

B3: MGLU3

Magazine Luiza

Retail

Brazil

NYSE: NTCO

Natura & Co

Cosmetics

Brazil

NYSE: PBR

Petrobras

Oil

Brazil

B3: RDOR3

Rede D’Or São Luiz

Health care

Brazil

NYSE: STNE

StoneCo [pt]

Mobile payment

Brazil

NYSE: VALE

Vale

Mining

Brazil

B3: WEGE3

WEG Industries

Industrial engineering

Brazil

NYSE: BSAC

Banco Santander Chile

Banking

Chile

NYSE: BCH

Banco de Chile

Banking

Chile

BCS: CENCOSUD

Cencosud

Retail

Chile

BCS: CMPC

Empresas CMPC

Pulp and paper

Chile

BCS: COPEC

Empresas Copec

Energy

Chile

NYSE: ENIA

Enel Américas

Utilities

Chile

BCS: FALABELLA

S.A.C.I. Falabella

Retail

Chile

NYSE: SQM

Sociedad Química y Minera de Chile 15

Agricultural Chemicals Chile

NYSE: CIB

Bancolombia

Banking

Colombia

NYSE: EC

Ecopetrol

Oil

Colombia

BVC: ISA

Interconexión Eléctrica [es]

Utilities

Colombia

NYSE: AMOV

América Móvil

Telecom

Mexico

NYSE: CX

Cemex

Cement

Mexico

573

BILL CARA / STOCK MARKET LITERACY

NYSE: FMX

Fomento Económico Mexicano

Beverages

Mexico

BMV: FUNO 11

Fibra Uno

REIT

Mexico

BMV: GFNORTE O

Grupo Financiero Banorte

Banking

Mexico

BMV: GMEXICO B

Grupo México

Mining

Mexico

NYSE: TV

Grupo Televisa

Media

Mexico

BMV: WALMEX*

Wal-Mart de México

Retail

Mexico

NYSE: SCCO

Southern Copper Corp.

Mining

Peru

NYSE: BAP

Credicorp

Banking

Peru

Investors might be attracted to a portfolio of quality Latin American companies listed on the NYSE. Fig. 120.7 Twenty quality Mexican and South American Companies listed on NYSE NYSE Ticker Company

GICS

Industry

Country

Ecopetrol

Oil

Colombia

PBR

Petrobras

Oil

Brazil

SQM

Sociedad Química y Minera de Chile

Agricultural Chemicals

Chile

Cemex

Cement

Mexico

SCCO

Southern Copper Corp.

Mining

Peru

VALE

Vale

Mining

Brazil

GGB

Gerdau

Steel

Brazil

Grupo Televisa

Media

Mexico

FMX

Fomento Económico Mexicano

Beverages

Mexico

NTCO

Natura & Co

Cosmetics

Brazil

BRFS

BRF S.A.

Food processing

Brazil

BAP

Credicorp

Banking

Peru

BBD

Banco Bradesco

Banking

Brazil

BCH

Banco de Chile

Banking

Chile

BSAC

Banco Santander Chile

Banking

Chile

CIB

Bancolombia

Banking

Colombia

ITUB

Itaú Unibanco

Banking

Brazil

PAGS

PagSeguro

Mobile payment

Brazil

ENIC

Enel Américas

Utilities

Chile

574

Investing in a global stock portfolio

The FinViz.com snapshot provides helpful information. https://finviz.com/screener.ashx?v=111&t=ABEV,BAP,BBD,BCH,BRFS,BSAC,CIB,CX,EC,ENIC,FMX,GGB,ITUB,NTCO,PAGS,PBR,SCCO,SQM,TV,VALE For investors who trade these international markets and need access to data and information, there is a plethora of free information from Investing.com, MarketBeat.com, Finance. Yahoo.com, StockCharts.com, and, for US-listed stocks on NYSE and Nasdaq, FinViz.com. My favorite international financial markets platform is Investing.com which is available in forty-four language editions and provides real-time data, quotes, charts, financial tools, news, and analysis across 94 countries and 250 exchanges worldwide. In addition to the Equity Markets of these countries, Investing.com also covers Bonds & Interest Rates, Mutual Funds, Commodities, Cryptocurrencies, Blockchain, and Futures and Options. With over 300,000 financial instruments covered, Investing.com offers unlimited access to investor tools such as real-time market alerts, customized portfolios, personal alerts, calendars, and calculators. However, you will note that many stocks infrequently trade in many countries. With more than twenty-one million monthly users, and 160 million monthly sessions (Dec 2021), with apps available on iOS and Android, Investing.com is one of the top global financial websites. They claim their service is “a one-stop-shop for traders and investors and has been the highest-rated financial markets app on Google Play since 2016.” I also use Finance.Yahoo.com, StockCharts.com, and FinViz.com, which are extensive free services for research purposes.

Studies of the stocks in each country Investing.com has an impressive ninety-four country coverage with links to each country’s Stocks as per Illustration 120.8. By clicking on the links, investors will see the previous day’s active trading stocks with tabs for EOD Price, Performance (multiple periods), Technical Assessment (various periods), and some Fundamental data. The Investing.com US Sector Summary is set up to review all aspects of US markets efficiently. This Investing.com link lists the World ADRs of foreign issuers trading securities in US markets. Click on this link to access the new untitled screener from Finance.Yahoo.com. Then select the Region (i.e., country) and filter as desired. There are about 50 countries that investors can access for trading data.

575

BILL CARA / STOCK MARKET LITERACY

Fig. 120.8 Plethora of data on stocks in 94 countries from Investing.com United States

Greece

Asia-Pacific (19)

Jordan

Canada

Hungary

Australia

Kuwait

Americas (9)

Iceland

Bangladesh

Lebanon

Argentina

Ireland

China

Oman

Brazil

Italy

Hong Kong

Palestinian Territory

Chile

Latvia

India

Qatar

Colombia

Lithuania

Indonesia

Saudi Arabia

Costa Rica

Luxembourg

Japan

UAE

Jamaica

Malta

Kazakhstan

Africa (15)

Mexico

Montenegro

Malaysia

Botswana

Peru

Netherlands

Mongolia

Cote D’Ivoire

Venezuela

Norway

New Zealand

Kenya

Europe (37)

Poland

Pakistan

Malawi

Austria

Portugal

Philippines

Mauritius

Belgium

Romania

Singapore

Morocco

Bosnia-Herzegovina

Russia

South Korea

Namibia

Bulgaria

Serbia

Sri Lanka

Nigeria

Croatia

Slovakia

Taiwan

Rwanda

Cyprus

Slovenia

Thailand

South Africa

Czech Republic

Spain

Vietnam

Tanzania

Denmark

Sweden

Middle East (12)

Tunisia

Estonia

Switzerland

Bahrain

Uganda

Finland

Turkey

Egypt

Zambia

France

Ukraine

Iraq

Zimbabwe

Germany

United Kingdom

Israel

576

Investing in a global stock portfolio

Investing in a well-balanced global stock portfolio Fig. 120.9 Allocating stocks from various countries for a balanced global portfolio A globally balanced portfolio

20 Stocks

United States

Canada and Americas

The UK and Western Europe

Hong Kong and China

South Korea and Japan

Australia, India, South Asia

100

Fig. 120.10 Selection of twenty High-Quality companies for a balanced global portfolio Company

US Ticker GICS Industry

Market Fwd Country Cap $B P/E P/E Yield % ROE %

Aon plc

AON

Insurance Brokers

AstraZeneca PLC

AZN

Pharmaceutical UK

BHP Group Ltd BHP

Industrial Metals

Australia 121.8

6.3 -

12.93% 63.10% 38.10% 49.01 69.3

Berkshire Hathaway

BRK-B 40

Insurance Diversified

USA

623.9

Canadian Natural Res

CNQ

Oil & Gas E&P

Canada

63.0

8.4 5.7

3.87%

30.20% 14.50% 58.63 69.8

Gerdau S.A.

GGB

Steel

Brazil

8.2

2.8 1.4

12.69% 37.70% 29.70% 5.08 6.8

Alphabet Inc.

GOOGL 50

Internet Content

USA

1307.5 19

28.60% 24.00% 102.5 140.5

Ireland

ROI %

Price Target USD Price

57.7

0.80%

115.90% 15.30% 284.5 303.1

167.8

3.46%

-3.30% 2.00%

55.18 71.9

287.5 351.0

Infosys Limited INFY

Infotech

India

75.8

2.20%

30.70% 24.80% 18.44 20.6

Johnson & Johnson

JNJ

Pharmaceutical USA

434.1

2.68%

26.90% 19.40% 171

Coca-Cola Co

Beverages Non-Alcohol

USA

238.2

3.15%

41.20% 12.60% 57.57 66.5

Linde plc

LIN

Specialty Chemicals

140.7

1.62%

8.30%

Eli Lilly and Co LLY

Pharmaceutical USA

312.7

1.15%

65.80% 20.80% 347.9 349.2

Microsoft

Software Infrastructure

1761.2 25

1.12%

45.40% 31.30% 247.3 323.2

MSFT

USA

577

6.40%

183.8

278.1 347.7

BILL CARA / STOCK MARKET LITERACY

NetEase, Inc.

NTES

Internet Content

42.5

1.8

2.49%

19.70% 10.60% 56.28 119.5

Novo Nordisk A/S

NVO

Pharmaceutical Denmark 182.3

3.6

1.54%

72.80% 48.60% 106.5 128.2

Procter & Gamble

Household Products

300.9

2.84%

32.20% 18.90% 129.4 146.8

Silicon Motion SIMO

Semiconductors HK

1.9

8.9 7.4

3.56%

33.80% 30.20% 52.11 104.4

Sony Group

SONY

Consumer Electronics

Japan

81.8

0.82%

12.50% 9.30%

65.14 136.9

Toyota Motor

Auto Manufacturers Japan

218.1

1.88%

10.40% 3.60%

134.7 157.2

Visa Inc.

Credit Services USA

387.3

0.79%

42.80% 21.70% 190.7 251.1

326.4

22.9 15.8 3.31%

37.62% 20.09% 134.9 167.4

China

USA

At the time of writing (Oct. 25, 2022), these primarily large-cap stocks (average market cap is $326B) all trade in New York. As a 20-stock Global portfolio, they have an excellent Analysis Consensus Rating of 2.0 out of 5.0 (where 1.0 is best) and Return on Equity (ROE) and Return On Investment (ROI) of 37.6% and 20.1%. The average dividend yield is 3.31%, and the PE and Forward PE is 22,9 and 15.8. The average Beta is 0.8. As this book is a general publication, none of these stocks, or any others in tables in this book, represent my personal recommendations to buy them. Choices have been made for information and educational purposes only. Up-to-date details of each stock in illustration 102.10 can be found at this FinViz.com link. Investors are now trading securities around the world, around the clock. They need information, and in addition to Investing.com, one of the best sources is Yahoo Finance. This free service lets you get stock quotes, up-to-date news, investment management resources, and international market data from 65 securities exchanges outside the United States. This information covers the full range of Indices, ETFs, Companies, Commodities, Cryptocurrencies, and Mutual Funds worldwide. As the world becomes smaller and investors are exposed to deeper data from various countries, investment brokers like Interactive Brokers (IBKR) offer global trading. Other brokers like Fidelity, Schwab, and TD Ameritrade are at least as popular in the US but may not provide international market services. At IBKR, ranked number 1 by Barron’s for highly active and global trading, I can electronically trade most international markets using international currencies from a single account.

Sourcing information There are hundreds of websites for independent investors and traders to choose. I have my favorites. Depending on your needs and interests, you may select some that I don’t use. See Addendum 1.

578

Investing in a global stock portfolio

The importance of FOREX When trading international markets from abroad, particularly in large accounts, currency trends and cycles play a crucial role. This link to Investing.com shows the latest Real-time Currency Pairs trades. Note that FX Trading is the only non-stop continuous trading market worldwide. See Addendum 5. Bottom Line: Even if a global portfolio seems too large a task for the small investor, the data could be instrumental in researching a domestic portfolio, particularly of USheadquartered companies with significant operations worldwide.

579

In closing Most people will agree that their lives do not revolve around stock markets. They say it is up to others to decide how their investments are best made. Some will say that the capital market system is more corrupt than a casino, and they have no interest. Many people today even prefer to gamble, an activity they think is under their control for some reason. Society does not have to evolve in this direction. Lawmakers and securities regulators must re-engineer the capital market system to benefit the owners of capital ahead of the financial services companies. The rest is up to the people. All markets, whether capital markets or markets where we buy and sell goods and services, need to be free, honest, and transparent. Then capitalism and democracy can survive. That is not the case today, but it’s the only way to protect our interests and to do that, we must first learn how to invest our money. We need to know how to invest in securities as much as we already do in real estate or buy goods and services for our homes and businesses. For trading in securities, people need to learn from a proper teaching curriculum, not a sales course or system the promoters claim can be a game-changer in a few hours or days. That, in a nutshell, is why I authored this book. I included all these links from free information and education sources so that anybody with a computer and internet access can learn a life skill.

The implications of Russia-Ukraine As I was drafting this book, Russia, a totalitarian state, had amassed some 150,000 or more military forces on the Ukraine border and was hours away from invading that sovereign democratic and capitalist nation. Russia was about to start the worst war in free Europe in over 75 years. Hundreds of millions of people in Europe are threatened by a dictator. I thought at the time that more than Ukraine or Europe, potentially global freedom was under siege. Capitalism and capital markets are our only defense. Knowing how to invest and trade in securities can free us to live a life that people under a dictator’s control could only dream about. Our success will make those people seek to join us, not harm us. But it’s up to us to gain confidence in our system and abilities.

580

In closing

Knowing that war has implications for investors, I wrote the following blog on February 22, 2022, at billcara.com: Bill Cara(@bill-cara-2-2) Author February 22, 2022, 7:19 am Russia stocks are imploding We continue to hear how the American President, VP, and Secretary of State warned Putin that the invasion of Ukraine would have dire consequences. Well, suppose Putin believes that US and European sanctions will not deliver a devastating blow to the Russian economy. In that case, all he has to do is to watch equity prices on the Moscow Exchange collapse before the Russian investors’ eyes. Here is my Russian watch list (Click on the Ticker links and look at the 5-day trading) Gazprom GAZP.ME, Sberbank SBER.ME, Rosneft ROSN.ME, Novatek NVTK.ME, Lukoil LKOH.ME, United Heavy Machinery OMZZP.ME, Norilsk Nickel GMKN.ME, Polyus PLZL.ME. Here are the Russian trading instruments (two stocks and two ETFs) I follow in New York trading. Mobile TeleSystems MBT, Mechel MTL, iShares MSCI Russia ETF ERUS, VanEck Russia ETF RSX. The Russian Ruble is also not doing so well against the US Dollar either. As the Ruble collapses, inflation in Russia will be soaring. https://tvc-invdn-com.investing.com/data/tvc_6789cc0057862aa756c724ca16e8da0a. png Eight days later, I followed up on my blog at billcara.com. The Moscow Exchange had been shuttered for three days. Bill Cara(@bill-cara-2-2) Author March 2, 2022, 11:18 am Putin’s destruction of one of the world’s leading banks Before 14 days ago, Sberbank (SBER) ranked 31st in the Banker’s Top 1000 World Banks and number 1 in Europe, with over 17,000 branches across Russia, employing about 293,000 people serving more than 135 million individual customers and 1 million corporate clients in 22 countries and holding over one-third of Russia’s assets.

581

BILL CARA / STOCK MARKET LITERACY

Two weeks ago, Sberbank traded on the London Exchange at around US$15.00. Today SBER.L is trading between 1 and 5 cents. The bank was founded in Moscow almost 200 years ago and has always been a joint publicly owned and government-owned institution. The Central Bank of Russia owns 50% of SBER plus one share, and public investors the rest. Putin destroyed this bank in less than a month. https://tvc-invdn-com.investing.com/data/tvc_3e3c7bef4f5bd26dbffd4d3545d1ef76.png Subsequently, the powers-that-be that manage the financial and capital market system of the US and allied countries sanctioned Russia in many ways, including stopping trading of all Russian securities. Russia took countermeasures to try to safeguard its own financial and capital market. In March 2022, which followed the onset two years earlier of the Covid-19 pandemic, one of the deadliest in history, traditional relationships in finance and capital markets became unhinged. Implied volatility, which looks forward, became detached from historical volatility. The traditional market framework for investors has become challenged, unlike anything in the previous 100 years. The S&P 500 posted a first-half loss worse than any in 100+ years. Still, my message in this book is clear: Intervention is fleeting; natural law is forever. Capital markets are a function of time and space. The opportunities are endless. It’s your money. It’s your life. Take control. Never leave it in a financial services company’s hands, especially those that trade against you.

582

Table 1 List of investor websites to help you get started Category

BILL’S CHOICE of Website

General Investing

Investing.com

Charts, Screeners, and Analytics

StockCharts

Communities

SeekingAlpha

Online Brokers

Interactive Brokers

Crypto

CoinMarketCap

Educational

Investopedia

Research

Sedar

Names for General investing

URL

Investing (BILL’s CHOICE)

https://www.investing.com/

Yahoo Finance

https://finance.yahoo.com/

Google Finance

https://www.google.com/finance/

Motley Fool

https://www.fool.com/

MarketScreener

https://www.marketscreener.com/

CNBC

https://www.cnbc.com/

CNN Business

https://edition.cnn.com/business

Bloomberg

https://www.bloomberg.com/

Wall Street Journal

https://www.wsj.com/

Barron’s

https://www.barrons.com/

Benzinga

https://www.benzinga.com/

MarketWatch

https://www.marketwatch.com/

Financial Times

https://www.ft.com/

Investors

https://www.investors.com/

Morningstar

https://www.morningstar.com/

Kiplinger

https://www.kiplinger.com/

Zacks

https://www.zacks.com/

583

BILL CARA / STOCK MARKET LITERACY

Names for Charts, Screeners, and Analytics

URL

StockCharts (BILL’S CHOICE)

https://stockcharts.com/

FinViz

https://finviz.com/

Koyfin

https://www.koyfin.com/

UncleStock

https://unclestock.com/

Marketscreener

marketscreener.com

MarketBeat

https://www.marketbeat.com/

TipRanks

https://www.tipranks.com/

StocksCafe

https://www.stocks.cafe

*unranked *TradingView

https://www.tradingview.com/

*YCharts

https://ycharts.com/

*MetaStock

https://www.metastock.com/

*Simply Wall St

https://simplywall.st/

*WeBull

https://app.webull.com/watch

*WallMine

https://wallmine.com/

*FinBox

https://finbox.com/

*Trade Ideas

https://www.trade-ideas.com/

*Docoh

https://docoh.com/

*WallStreetZen

https://www.wallstreetzen.com/

*StockRover

https://www.stockrover.com/

*SwingTradeBot

https://swingtradebot.com/

*ChartMill

https://www.chartmill.com/home

*Atom Finance

https://atom.finance/

*StackTarget Advisor

https://www.stocktargetadvisor.com/

*HypeEquity

https://app.hypeequity.com/monitor

*MarketGear

https://www.marketgear.com/

Names for Communities

URL

CaraCommunity (BILL’S OWN)

https://www.billcara.com/community/

Seeking Alpha (BILL’s CHOICE)

https://seekingalpha.com/

StockTwits

https://stocktwits.com/

Reddit – Wall Street Bets

https://www.reddit.com/r/wallstreetbets/

Reddit – Stocks

https://www.reddit.com/r/stocks/

Reddit – Investing

https://www.reddit.com/r/investing/

584

Table 1

Reddit – Stock Market

https://www.reddit.com/r/StockMarket/

Reddit – Stock News

https://www.reddit.com/r/StockNews/

Reddit – Security Analysis

https://www.reddit.com/r/SecurityAnalysis/

Reddit – Investment Club

https://www.reddit.com/r/InvestmentClub/

Reddit – Behavioral Economics

https://www.reddit.com/r/BehavioralEconomics/

Reddit – Bitcoin

https://www.reddit.com/r/Bitcoin/

Reddit – Money

https://www.reddit.com/r/Money/

Reddit – Finance

https://www.reddit.com/r/finance/

Reddit – Personal Finance

https://www.reddit.com/r/personalfinance/

Reddit – Financial Independence

https://www.reddit.com/r/financialindependence/

Names for Online Brokers

URL

Interactive Brokers (Bill’s CHOICE)

https://www.interactivebrokers.com/

TD Ameritrade

https://www.tdameritrade.com/

Charles Schwab

https://www.schwab.com/

E*Trade

https://us.etrade.com/home

Qtrade Investor (CANADA)

https://www.qtrade.ca/

Questrade (CANADA)

https://www.questrade.com/home

*unranked *Fidelity

https://www.fidelity.com/

*eToro

https://www.etoro.com/

*RobinHood

https://robinhood.com/us/en/

*WeBull

https://www.webull.com/

*Capital.com

https://capital.com/

*DeGiro

https://www.degiro.com/

Names for Crypto Marketplace

URL

CoinMarketcap (BILL’S CHOICE)

https://coinmarketcap.com/

Reddit – Bitcoin

https://www.reddit.com/r/Bitcoin/

Reddit – CryptoCurrency

https://www.reddit.com/r/CryptoCurrency/

Binance

https://www.binance.com/en

*unranked *CoinDesk

https://www.coindesk.com/

*Blocktrade

https://blocktrade.com

*Cointelegraph

https://cointelegraph.com/

585

BILL CARA / STOCK MARKET LITERACY

Names for Education

URL

Investopedia (BILL’s CHOICE)

https://www.investopedia.com/

Bankrate

https://www.bankrate.com/

Finimize

https://www.finimize.com/

Robinhood Learning

https://learn.robinhood.com/

Names for Research

URL

SEDAR Canada Corporate Filings (BILL’s CHOICE)

https://www.sedar.com/homepage_en.htm

SEC United States Corporate Filings

https://www.sec.gov/edgar/search-and-access

ETF Database

https://etfdb.com/

FRED Economic Data

https://fred.stlouisfed.org/

586

Table 2 The world’s most essential stock exchanges 1. New York Stock Exchange 2. NASDAQ 3. Tokyo Stock Exchange 4. Shanghai Stock Exchange 5. Hong Kong Stock Exchange 6. London Stock Exchange 7. Euronext 8. Shenzhen Stock Exchange 9. Toronto Stock Exchange 10. Deutsche Boerse

This list of 16 stock exchanges ranks the exchanges by listed company capitalization in May 2022, accounting for 87% of the world’s total market capitalization. This link is to Countries that have no stock exchange. They are the world’s smallest or its poorest.

587

Table 3 List of the leading indices of the world stock exchanges with Wiki descriptions Country

Main Stock Market Index

Description

Investing.com link

Argentina

S&P Merval

Description

Investing.com link

Australia

S&P/ASX 200

Description

Investing.com link

Austria

ATX

Description

Investing.com link

Bahrain

Bahrain All Share

Description

Investing.com link

Bangladesh

Dhaka DSE 30

Description

Investing.com link

Belgium

BEL 20

Description

Investing.com link

Bosnia-Herzegovina

BIRS 12

Description

Investing.com link

Botswana

BSE Domestic Company

Description

Investing.com link

Brazil

Bovespa

Description

Investing.com link

Bulgaria

BSE SOFIX

Description

Investing.com link

Canada

S&P/TSX Composite

Description

Investing.com link

Chile

S&P CLX IGPA

Description

Investing.com link

China

Shanghai SSE Composite

Description

Investing.com link

China

SZSE Component

Description

Investing.com link

Colombia

COLCAP

Description

Investing.com link

Costa Rica

Costa Rica Indice Accionario

Description

Investing.com link

Cote D’Ivoire

BRVM Composite

Description

Investing.com link

Croatia

CROBEX

Description

Investing.com link

Cyprus

CSE All-Share Main Market

Description

Investing.com link

Czech Republic

Description

Investing.com link

Denmark

OMXC25

Description

Investing.com link

Egypt

EGX 30

Description

Investing.com link

Finland

OMX Helsinki 25

Description

Investing.com link

France

CAC 40

Description

Investing.com link

Germany

DAX

Description

Investing.com link

Greece

Athens General Composite

Description

Investing.com link

Hong Kong

Hang Seng

Description

Investing.com link

Hungary

Budapest SE

Description

Investing.com link

588

Table 3

Iceland

ICEX Main

Description

Investing.com link

India

BSE Sensex

Description

Investing.com link

India

NSE Nifty 50

Description

Investing.com link

Indonesia

IDX Composite

Description

Investing.com link

Iraq

ISX Main 60

Description

Investing.com link

Ireland

ISEQ 20

Description

Investing.com link

Israel

TA 125

Description

Investing.com link

Italy

FTSE MIB Italy 40

Description

Investing.com link

Jamaica

JSE Market

Description

Investing.com link

Japan

Nikkei 225

Description

Investing.com link

Jordan

Amman SE General

Description

Investing.com link

Kazakhstan

KASE

Description

Investing.com link

Kenya

Nairobi NSE 20

Description

Investing.com link

Kuwait

BK Main Market 50

Description

Investing.com link

Lebanon

BLOM Stock

Description

Investing.com link

Malaysia

KLCI

Description

Investing.com link

Malta

MSE

Description

Investing.com link

Mauritius

Semdex

Description

Investing.com link

Mexico

S&P/BMV IPC

Description

Investing.com link

Mongolia

MNE Top 20

Description

Investing.com link

Montenegro

MONEX

Description

Investing.com link

Morocco

Moroccan MASI All Shares

Description

Investing.com link

Namibia

NSX Overall

Description

Investing.com link

Netherlands

AEX

Description

Investing.com link

New Zealand

NZX 50

Description

Investing.com link

Nigeria

NSE All Share

Description

Investing.com link

Norway

Oslo All Share

Description

Investing.com link

Oman

MSM 30

Description

Investing.com link

Pakistan

Karachi 100

Description

Investing.com link

Palestinian Territory

Al-Quds

Description

Investing.com link

Peru

S&P Lima General IGBVL

Description

Investing.com link

Philippines

PSEi Composite

Description

Investing.com link

Poland

WIG

Description

Investing.com link

Portugal

PSI 20

Description

Investing.com link

Qatar

QE General

Description

Investing.com link

589

BILL CARA / STOCK MARKET LITERACY

Romania

BET 10

Description

Investing.com link

Russia

MOEX

Description

Investing.com link

Rwanda

Rwanda All Share

Description

Investing.com link

Saudi Arabia

Tadawul All Share TASI

Description

Investing.com link

Serbia

BELEX15

Description

Investing.com link

Singapore

Straits Times Index STI

Description

Investing.com link

Slovakia

SAX

Description

Investing.com link

Slovenia

Blue-Chip SBITOP

Description

Investing.com link

South Africa

FTSE/JSE Africa All Shares

Description

Investing.com link

South Korea

KOSPI

Description

Investing.com link

Spain

IBEX 35

Description

Investing.com link

Sri Lanka

CSE All-Share

Description

Investing.com link

Sweden

OMXS30

Description

Investing.com link

Switzerland

SMI

Description

Investing.com link

Taiwan

Taiwan TAIEX Weighted

Description

Investing.com link

Thailand

Bangkok SET 50

Description

Investing.com link

Tunisia

Tunindex

Description

Investing.com link

Türkiye

BIST XU 100

Description

Investing.com link

Uganda

Uganda All Share ALSI

Description

Investing.com link

Ukraine

PFTS

Description

Investing.com link

United Arab Emirates

FTSE ADX General

Description

Investing.com link

United Kingdom

FTSE 100

Description

Investing.com link

United States

Nasdaq Composite

Description

Investing.com link

United States

S&P 500

Description

Investing.com link

Venezuela

Bursatil

Description

Investing.com link

Vietnam

MSCI VN 30

Description

Investing.com link

Zambia

LSE All Share LASI

Description

Investing.com link

Zimbabwe

ZSE All Share

Description

Investing.com link

Many smaller exchanges do not have a wiki link to describe the index, so the stock exchange link is provided.

590

Table 4 List of the international markets covered by Yahoo Finance Country

Market, or Index

Suffix

Argentina

Buenos Aires Stock Exchange (BYMA)

.BA

Austria

Vienna Stock Exchange

.VI

Australia

Australian Stock Exchange (ASX)

.AX

Belgium

Euronext Brussels

.BR

Brazil

Sao Paolo Stock Exchange (BOVESPA)

.SA

Canada

Canadian Securities Exchange

.CN

Canada

NEO Exchange

.NE

Canada

Toronto Stock Exchange (TSX)

.TO

Canada

TSX Venture Exchange (TSXV)

Chile

Santiago Stock Exchange

.SN

China

Shanghai Stock Exchange

.SS

China

Shenzhen Stock Exchange

.SZ

Czechia

Prague Stock Exchange Index

.PR

Denmark

Nasdaq OMX Copenhagen

.CO

Egypt

Egyptian Exchange Index (EGID)

.CA

Estonia

Nasdaq OMX Tallinn

.TL

Europe

Euronext

.NX

Finland

Nasdaq OMX Helsinki

.HE

France

Euronext Paris

.PA

Germany

Berlin Stock Exchange

.BE

Germany

Bremen Stock Exchange

.BM

Germany

Dusseldorf Stock Exchange

.DU

Germany

Frankfurt Stock Exchange

Germany

Hamburg Stock Exchange

.HM

Germany

Hanover Stock Exchange

.HA

Germany

Munich Stock Exchange

.MU

Germany

Stuttgart Stock Exchange

.SG

Germany

Deutsche Boerse XETRA

.DE

Greece

Athens Stock Exchange (ATHEX)

.AT

591

BILL CARA / STOCK MARKET LITERACY

Hong Kong

Hong Kong Stock Exchange (HKEX)

.HK

Hungary

Budapest Stock Exchange

.BD

Iceland

Nasdaq OMX Iceland

.IC

India

Bombay Stock Exchange

.BO

India

National Stock Exchange of India

.NS

Indonesia

Indonesia Stock Exchange (IDX)

.JK

Ireland

Euronext Dublin

.IR

Israel

Tel Aviv Stock Exchange

.TA

Italy

EuroTLX

.TI

Italy

Italian Stock Exchange

.MI

Japan

Tokyo Stock Exchange

Latvia

Nasdaq OMX Riga

.RG

Lithuania

Nasdaq OMX Vilnius

.VS

Malaysia

Malaysian Stock Exchange

.KL

Mexico

Mexico Stock Exchange (BMV)

.MX

Netherlands

Euronext Amsterdam

.AS

New Zealand

New Zealand Stock Exchange (NZX)

.NZ

Norway

Oslo Stock Exchange

.OL

Portugal

Euronext Lisbon

.LS

Qatar

Qatar Stock Exchange

.QA

Russia

Moscow Exchange (MOEX)

.ME

Singapore

Singapore Stock Exchange (SGX)

.SI

South Africa

Johannesburg Stock Exchange

.JO

South Korea

Korea Stock Exchange

.KS

South Korea

KOSDAQ

.KQ

Spain

Madrid SE C.A.T.S.

.MC

Saudi Arabia

Saudi Stock Exchange (Tadawul)

.SAU

Sweden

Nasdaq OMX Stockholm

.ST

Switzerland

Swiss Exchange (SIX)

.SW

Taiwan

Taiwan OTC Exchange

.TWO

Taiwan

Taiwan Stock Exchange (TWSE)

.TW

Thailand

Stock Exchange of Thailand (SET)

.BK

Turkey

Borsa İstanbul

.IS

United Kingdom

London Stock Exchange

United Kingdom

London Stock Exchange

.IL

592

Table 5 The world’s Forex currency pairs Currency Pair

Chart Symbol

Australian Dollar – Philadelphia

$XAD

Australian Dollar – Philadelphia

$XDA

Australian Dollar to British Pound Sterling (NBD)

$AUDGBP

Australian Dollar to Canadian Dollar (NBD)

$AUDCAD

Australian Dollar to Euro (NBD)

$AUDEUR

Australian Dollar to Hong Kong Dollar (NBD)

$AUDHKD

Australian Dollar to Japanese Yen (NBD)

$AUDJPY

AUD/JPY

Australian Dollar to New Zealand Dollar (NBD)

$AUDNZD

AUD/NZD

Australian Dollar to Singapore Dollar (NBD)

$AUDSGD

Australian Dollar to Swiss Franc (NBD)

$AUDCHF

AUD/CHF

Australian Dollar to US Dollar (NBD)

$AUDUSD

AUD/USD

British Pound – Philadelphia

$XBP

British Pound – Philadelphia

$XDB

British Pound to Australian Dollar (NBD)

$GBPAUD

GBP/AUD

British Pound to Canadian Dollar (NBD)

$GBPCAD

GBP/CAD

British Pound to Euro (NBD)

$GBPEUR

British Pound to Hong Kong Dollar (NBD)

$GBPHKD

British Pound to Japanese Yen (NBD)

$GBPJPY

British Pound to Mexican Peso (NBD)

$GBPMXN

British Pound to New Zealand Dollar (NBD)

$GBPNZD

British Pound to Singapore Dollar (NBD)

$GBPSGD

British Pound to Swiss Franc (NBD)

$GBPCHF

GBP/CHF

British Pound to US Dollar (NBD)

$GBPUSD

GBP/USD

Canadian Dollar – Philadelphia

$CDW

Canadian Dollar – Philadelphia

$XDC

Canadian Dollar to Australian Dollar (NBD)

$CADAUD

Canadian Dollar to British Pound (NBD)

$CADGBP

Canadian Dollar to Euro (NBD)

$CADEUR

Canadian Dollar to Hong Kong Dollar (NBD)

$CADHKD

593

FX Trading

AUD/CAD

GBP/JPY GBP/NZD

BILL CARA / STOCK MARKET LITERACY

Canadian Dollar to Japanese Yen (NBD)

$CADJPY

CAD/JPY

Canadian Dollar to Swiss Franc (NBD)

$CADCHF

CAD/CHF

Canadian Dollar to US Dollar (NBD)

$CADUSD

Euro to Australian Dollar (NBD)

$EURAUD

EUR/AUD

Euro to British Pound (NBD)

$EURGBP

EUR/GBP

Euro to Canadian Dollar (NBD)

$EURCAD

EUR/CAD

Euro to Hong Kong Dollar (NBD)

$EURHKD

Euro to Japanese Yen (NBD)

$EURJPY

Euro to Mexican Peso (NBD)

$EURMXN

Euro to New Zealand Dollar (NBD)

$EURNZD

Euro to Singapore Dollar (NBD)

$EURSGD

Euro to South African Rand (NBD)

$EURZAR

Euro to Swedish Krona (NBD)

$EURSEK

Euro to Swiss Franc (NBD)

$EURCHF

EUR/CHF

Euro to US Dollar (NBD)

$EURUSD

EUR/USD

Eurodollar Index (EOD)

$XED

Hong Kong Dollar to Australian Dollar (NBD)

$HKDAUD

Hong Kong Dollar to British Pound (NBD)

$HKDGBP

Hong Kong Dollar to Canadian Dollar (NBD)

$HKDCAD

Hong Kong Dollar to Euro (NBD)

$HKDEUR

Hong Kong Dollar to Swiss Franc (NBD)

$HKDCHF

Hong Kong Dollar to US Dollar (NBD)

$HKDUSD

Japanese Yen – Philadelphia

$XDN

Japanese Yen – Philadelphia

$XJY

Japanese Yen to Australian Dollar (NBD)

$JPYAUD

Japanese Yen to British Pound Sterling (NBD)

$JPYGBP

Japanese Yen to Canadian Dollar (NBD)

$JPYCAD

Japanese Yen to Euro (NBD)

$JPYEUR

Japanese Yen to US Dollar (NBD)

$JPYUSD

Mexican Peso to British Pound Sterling (NBD)

$MXNGBP

Mexican Peso to Euro (NBD)

$MXNEUR

Mexican Peso to US Dollar (NBD)

$MXNUSD

New Zealand Dollar (EOD)

$NZD

New Zealand Dollar to Australian Dollar (NBD)

$NZDAUD

New Zealand Dollar to British Pound (NBD)

$NZDGBP

594

EUR/JPY EUR/NZD

Table 5

New Zealand Dollar to Canadian Dollar (NBD)

$NZDCAD

New Zealand Dollar to Euro (NBD)

$NZDEUR

New Zealand Dollar to Japanese Yen (NBD)

$NZDJPY

NZD/JPY

New Zealand Dollar to Swiss Franc (NBD)

$NZDJPY

NZD/CHF

New Zealand Dollar to US Dollar (EOD)

$NZDUSD

NZD/USD

Norwegian Krone to US Dollar (NBD)

$NOKUSD

Singapore Dollar to Australian Dollar (NBD)

$SGDAUD

Singapore Dollar to British Pound Sterling (NBD)

$SGDGBP

Singapore Dollar to Euro (NBD)

$SGDEUR

Singapore Dollar to Swiss Franc (NBD)

$SGDCHF

Singapore Dollar to US Dollar (NBD)

$SGDUSD

South African Rand (EOD)

$ZAR

Swedish Krona to Euro (NBD)

$SEKEUR

Swedish Krona to US Dollar (NBD)

$SEKUSD

Swiss Franc – Philadelphia

$XDS

Swiss Franc – Philadelphia

$XSF

Swiss Franc to Australian Dollar (NBD)

$CHFAUD

Swiss Franc to British Pound (NBD)

$CHFGBP

Swiss Franc to Canadian Dollar (NBD)

$CHFCAD

Swiss Franc to Euro (NBD)

$CHFEUR

Swiss Franc to Hong Kong Dollar (NBD)

$CHFHKD

Swiss Franc to Japanese Yen (NBD)

$CHFJPY

Swiss Franc to Singapore Dollar (NBD)

$CHFSGD

Swiss Franc to US Dollar (NBD)

$CHFUSD

US Dollar to Australian Dollar (EOD)

$USDAUD

US Dollar to Brazilian Real (EOD)

$USDBRL

US Dollar to British Pound Sterling (EOD)

$USDGBP

US Dollar to Canadian Dollar (EOD)

$USDCAD

US Dollar to Chilean Peso (EOD)

$USDCLP

US Dollar to Chinese Yuan (EOD)

$USDCNY

USD/CNY

US Dollar to Danish Krone (EOD)

$USDDKK

USD/DKK

US Dollar to Euro (EOD)

$USDEUR

US Dollar to Hong Kong Dollar (EOD)

$USDHKD

USD/HKD

US Dollar to Indian Rupee (EOD)

$USDINR

USD/INR

US Dollar to Japanese Yen (EOD)

$USDJPY

USD/JPY

595

NZD/CAD

CHF/JPY

USD/CAD

BILL CARA / STOCK MARKET LITERACY

US Dollar to Mexican Peso (EOD)

$USDMXN

US Dollar to New Zealand Dollar (EOD)

$USDNZD

US Dollar to Polish Zloty (EOD)

$USDPLN

US Dollar to Russian Ruble (EOD)

$USDRUB

USD/RUB

US Dollar to Singaporean Dollar (EOD)

$USDSGD

USD/SGD

US Dollar to South African Rand (EOD)

$USDZAR

USD/ZAR

US Dollar to Swedish Krona (EOD)

$USDSEK

USD/SEK

US Dollar to Swiss Franc (EOD)

$USDCHF

USD/CHF

US Dollar to Turkish Lira (EOD)

$USDTRY

USD/TRY

596

USD/MXN

Table 6 Choices of market data Service Name

Service Currency

ASX Total (NP, L2)

AUD

ASX24 Commodities and Futures (NP, L2)

AUD

Alternative European Equities (L1)

EUR

BME (MEFF) (NP, L1)

EUR

BME (MEFF) (NP, L2)

EUR

BOVESPA (NP, L1)

USD

Baltic Equity (NP, L1)

EUR

Baltic Equity (NP, L2)

EUR

Bolsa de Madrid (NP, L1)

EUR

Bolsa de Madrid (NP, L2)

EUR

Borsa Italiana (BVME stock/SEDEX/IDEM deriv) (NP, L1)

EUR

Borsa Italiana (BVME stock/SEDEX/IDEM deriv) (NP, L2)

EUR

Budapest Stock Exchange (NP, L2)

EUR

CBOT Real-Time (NP, L1)

USD

CBOT Real-Time (NP, L2)

USD

CME Real-Time (NP, L1)

USD

CME Real-Time (NP, L2)

USD

COMEX Real-Time (NP, L1)

USD

COMEX Real-Time (NP, L2)

USD

Canadian Exchange Group (TSX/TSXV) (NP, L1)

USD

Canadian Securities Exchange (CSE) (NP, L1)

USD

Cboe One (NP, L1)

USD

Chi-X Australia (NP, L1)

USD

Deutsche Boerse Volatility Index (NP)

EUR

Eurex Core (NP, L1)

EUR

Eurex Core (NP, L2)

EUR

Eurex Retail Europe (NP, L1)

EUR

Euronext Bundle (NP, L1)

EUR

Euronext Total Bundle (NP, L2)

EUR

597

BILL CARA / STOCK MARKET LITERACY

Service Name

Service Currency

Europe Equity and Derivative Display Value Bundle (NP)

EUR

European (BATS/Chi-X) Equities (NP, L2)

EUR

German ETFs and Indices (NP, L1)

EUR

Japan (Chi-X) Equities (NP, L1)

JPY

Japan (OSE) Derivatives (NP, L1)

JPY

Japan (OSE) Derivatives (NP, L2)

JPY

Japan (TSE) Equities (NP, L1)

JPY

Japan (TSE) Equities (NP, L2)

JPY

Johannesburg Stock Exchange (NP, L1)

USD

Korea Stock Exchange (NP, L2)

USD

Mexican Derivatives (NP, L1)

USD

Mexican Stock Exchange(NP, L1)

USD

Montreal Derivatives (NP, L1)

USD

Montreal Derivatives (NP, L2)

USD

Moscow Exchange (NP, L1)

USD

NEO Exchange (NP, L1)

USD

NYMEX Real-Time (NP, L1)

USD

NYMEX Real-Time (NP, L2)

USD

NYSE Global Index Feed (NP)

USD

Nordic Derivatives (NP, L1)

EUR

Nordic Derivatives (NP, L2)

EUR

Nordic Equity (NP, L1)

EUR

Nordic Equity (NP, L2)

EUR

OTC Global Equities (NP, L2)

USD

OTC Markets (NP, L1)

USD

OTC Markets (NP, L2)

USD

Prague Stock Exchange Cash Market (NP, L2)

EUR

Prague Stock Exchange Cash Market(NP, L1)

EUR

RussellTick Indices Real-Time (NP)

USD

SIX Structured Advanced Access (NP, L2)

CHF

SIX Structured Basic Access (NP, L1) SIX Swiss Exchange (NP, L2) STOXX Index Real-Time Data (NP)

EUR

Shanghai Stock Exchange (NP, L1)

USD

598

Table 6

Service Name

Service Currency

Shanghai Stock Exchange (NP, L2)

USD

Shanghai Stock Exchange Alternative Display (NP, L1)

USD

Shenzhen Stock Exchange (Outside Mainland China) (NP, L1)

USD

Shenzhen Stock Exchange Alternative Display (NP, L1)

USD

Spot Market Germany (Frankfurt/Xetra) (NP, L2)

EUR

Spot Market Germany (Frankfurt/Xetra)(NP, L1)

EUR

Stuttgart Boerse incl. Euwax (SWB) (NP, L1)

EUR

TSX Venture Market by Price (NP, L2)

USD

Tel Aviv Stock Exchange (NP, L1)

USD

Toronto Market by Price (NP, L2)

USD

Turquoise Derivatives (Nordic) (NP, L1)

NOK

Turquoise ECNs and Gettex (NP, L1)

GBP

Turquoise ECNs and Gettex (NP, L2)

GBP

UK LSE (IOB) Equities (NP, L1)

GBP

UK LSE (IOB) Equities (NP, L2)

GBP

UK LSE Equities (NP, L1)

GBP

UK LSE Equities (NP, L2)

GBP

Vienna Stock Exchange Cash Market and Indices (NP, L1)

EUR

Vienna Stock Exchange Cash Market and Indices (NP, L2)

EUR

Warsaw Stock Exchange (NP, L1)

PLN

Warsaw Stock Exchange (NP, L2)

PLN

599

Table 7 Top 500 Keywords selected from many thousands Keyword

Chapter Links

10-K (Annual)

43, 44

10-Q (Quarterly)

43, 44

68–95–99.7 rule

Absolute Value

Accumulation

Actively Managed

Algorithmic Trading

All-In Sustaining Cost

Alternative Trading System

100

American Depositary Receipt (ADR) form

101

Analyst “Buy,”“Hold,” or “Sell” Ratings

Arbitrage

101

Asset Allocation

34, 70

Asset Custodian

Asset Managers

Asset/Liability Management

Assets

43, 44

Assets Under Administration (AUA)

At-Best Fill

Auction Price

Audited Financial Statement

100

Average Volume

7, 23

Average Volume of Daily Trades (AVDT)

Backtesting

Balance Sheet

43, 44

Bank Act

Bank CDs

Bank for International Settlements (BIS)

42, 83

Bank of England

600

Table 7

Bank of Japan

Bank Ratings

Basic Materials

Bear

Bear Market

24, 26, 60, 61

Bellwether

119

Benchmark

Beta

49, 72

Bias

Bid Price

Bid-and-Ask

1, 23, 70

Bitumen-based Heavy Oil

Bituminous/Thermal Coal

BlackRock

Blockchain

120

Blue Chip

4, 57, 94

Board of Directors

Bond

1, 22, 31

Bond Market

Bonds & Interest Rates

120

Bottom-Up Studies

Breakouts

BREXIT

Brokerage Commission

Broker-Dealers

Bull

Bull Market

7, 60

Bullion Banks

Bullish Percent Indexes

Bureau of Economic Analysis (BEA)

34, 35

Bureau of Labor Statistics (BLS)

34, 35, 37

Burton Malkiel

Business Model

5, 100

Buy and Hold

Buy Weakness

601

BILL CARA / STOCK MARKET LITERACY

Buy/Sell/Hold Rating

100

Buy-and-Hold

Buy-Side

4, 10, 26

Calculating Gains and Losses

Canadian Securities Administrators

17, 44, 54

Capital

Capital and Operating Expenditures

Capital Asset Pricing Model

Capital Events Management (CEM)

7, 100

Capital Exposure Risk

Capital Gain

1, 8, 9

Capital Growth

Capital Growth vs. Income

Capital Loss

Capital Market

1, 3

Capital Risk

Capital Structure

5, 100

Capitalism

Capitalization-Weighted S&P 500 Index

Capital-Raise Phase

Cathie Wood

Causal Forces

Causality

Central Banks

8, 16, 34

CFTC Copper Speculative Net Positions

38, 40

Charlie Munger

Chicago Board of Options Exchange (CBOE)

49, 58

Chicago Mercantile Exchange

Chief Executive Officer (CEO)

Cleantech

Climate Change Theory Investing

13, 80

Closed-End Fund

26, 28

Cognitive Biases

Coking/Metallurgical Coal

Command Economy

13, 15, 36

602

Table 7

Commercial Banks

16, 34, 89

Commodity

Commodity Futures Contracts

12, 35

Commodity Market

120

Computer Algorithms

58, 62

Conflict of Interest

Conglomerate

Consensus Estimate

46, 56

Consumer and Business Spending Aggregates

Consumer Defensive

Consumer Discretionary

Consumer Metrics Institute

Consumer Price Index (CPI)

Consumer Spending

Contrarian Thinking

Corporate Fundamentals

6, 7, 43, 57

Correlation

Cost Basis

1, 22

Cost of Goods Sold (COGS)

Cost of Living

34, 39

Cost of Living Adjustment

Countermovement

Coupon Rate

Credit Markets

Credit Ratings

Crossover

Cryptocurrencies

33, 120

C-Suite

1, 5

Cup and Handle pattern

Currency

Currency Futures and Options Trading

Current Account Deficit vs. Trade Deficit

Current Assets to Current Liabilities

Current Yield

Custodian

603

BILL CARA / STOCK MARKET LITERACY

Cybernetics

Cycle

2, 34, 57, 58, 59, 62

Cyclical Industries

Data Analytics

Data Pyramid

Data Smoother

Day Traders

57, 58

Death Spiral Debt

Debt Loads

Debt Ratio

Debtor Nation

Debt-to-Equity ratio

6, 70

Decentralized Finance (Defi)

Deposit Multiplier vs. Money Multiplier

89, 105

Depth of Market

Discount to the Net Asset Value

Discount Window

Disinflation

Distribution

Divergence

19, 60, 68, 69

Dividend

8, 22, 72

Dividend Growth Rate

43, 71

Dividend Yield

6, 31, 43, 97, 98, 99

Dogs of the Dow

22, 94

Dow 30 Industrial Average Components

4, 51, 89

Dow 30 is a Price-Weighted Index

Dow Jones & Company

Dow Jones Commodity Index

Dow Jones Industrials Average (DJIA)

89, 94

Dow Jones Transport Average (DJTA)

Dow Jones Utilities Average (DJUA)

Dow Theory

Downtrend

57, 60

Due Diligence (DD)

100

Durables

604

Table 7

Earnings Growth

7, 70

Earnings Multiplier

Earnings Per Share (EPS)

8, 46, 51

Earnings Quality

Earnings Reports Calendar

Earnings Surprise

46, 47

Earnings Yield

Ecclesiastes 3

Economic Calendar

23, 34

Economic Sector

3, 19

Economics

Economists

EDGAR Securities & Exchange Commission

17, 54

Efficient Market Hypothesis (EMH)

Employment Report

34, 35, 37

Energy

Energy-Efficient Net-Zero Home

Enterprise Value (EV)

Environmental, Social, and Governance (ESG)

Equity

Equity Markets

120

Equity, Diversity, and Inclusion

ESG

ETFs

Eugene Fama

Euro

Eurodollar

European Central Bank (ECB)

31, 42, 104

European Union (EU)

104

Eurozone

104

EV Relative to Sales

EV to Profitability

Expense Ratio (ER), Management Expense Ratio (MER)

Expenses

Exponential Moving Average (EMA)

20, 63

605

BILL CARA / STOCK MARKET LITERACY

Face Value

Fair Value

Fast Market

62, 64

Fear and Greed

Fed Discount Rate

Fed Funds Rate

Federal Open Market Committee (FOMC)

34, 42

Federal Reserve Bank of New York

Federal Reserve Board (FRB)

32, 34

Federal Reserve System (FRS)

35, 51

Fibonacci

Fiduciary

15, 29

Financial Engineering

Financial Instrument

Financial Market

Financial Performance

Financial Plans

Financial Ratios

Financial Services Industry

4, 26

Financial Services Sector

89, 120

Financial Statement Manipulation

Financial Statements

47, 62

Financial Structure

Fintech

Flat Yield Curve

Foreign Exchange Rates

Forex

12, 32

Forward Price-to-Earnings

7, 51, 97, 98

Fractional Reserve Banking System

Free Cash Flow (FCF)

Free Market Economy

Free-Float Weighted Stock Market Index

120

Fully Diluted Shares

Fundamental Analysis

26, 36, 57, 59, 62, 70

606

Table 7

Fundamentally Sound

Fundamentals

Fungible

Futures

1, 120

G-20 nations

G-7 nations

GAAP vs. Non-GAAP

46, 47

Gambler’s Fallacy

Generally Accepted Accounting Principles (GAAP)

GICS

3, 5, 19, 74, 92, 95

Global Industry Classification Standard (GICS)

3, 5, 19, 74, 92, 95

Global S&P 1200

120

Going Concern

100

Gross Domestic Product (GDP)

Gross Profit Margin

Groupthink

Growth Company

Growth Stock

21, 57, 70

Halloween Indicator

Hedging Practices

High Yield Bonds

Holdings

House Price Index

Ian Notley

IBKR Account

IDE Brent

Illiquidity

Implied Volatility

120

Income

1, 4, 57, 70, 97

Income Statement

43, 44

Index-Related Funds

Indicator

Individual Retirement Account (IRA)

Industrial Classification Benchmark (ICB)

Inflationary

607

BILL CARA / STOCK MARKET LITERACY

Infrastructure

In-Situ

Instrument

Interactive Brokers (IBKR)

Interest

Interest Income

Interest Rate Derivative Contracts

Interest Rates

7, 12, 96

Intraday

Intrinsic Value

6, 21, 53, 70

Inventories

Inverse ETF

Inverted Yield Curve

Investing

Investment Advisers Act of 1940

Investment Advisors

15, 26, 89

Investment Analyst

36, 100

Investment Bank

1, 16, 89

Investment Holding Company

26, 28, 29

Investor

Jay Powell

Jeffery Hirsch and Yale Hirsch

Journal of Financial Planning

Junk Bonds

Just-In-Time inventory management

Kudlow-Laffer/Supply-Siders

Labor Productivity

Large-Cap

Law of Large Numbers

Laws of Nature

Leading Indicator

Lessons from the Trader Wizard in 2007

5, 13, 14, 17, 73

Liabilities

LIBOR

Limit Orders

608

Table 7

Linear Regression

Lipstick to a Pig

liquidator

liquidity

Liquidity Crisis

London Bullion Market Association

London Metal Exchange

Long Positions

59, 60

Macroeconomic Activity

3, 12, 23, 34, 36, 59, 62, 70

Management Discussion & Analysis (MD&A)

17, 54, 100

Margin

41, 89

Market Capitalization

Market Cycles

2, 57

Market Dynamics

Market Economy

Market Orders

28, 70

Market Price

1, 34

Market Risk

Market Sentiment

2, 7, 14, 19, 23, 49, 59, 120

Market Value

Market-Makers

Mark-to-Market

Maturity

Meme Stock

6, 74

MFI vs. RSI

Microcap

Microeconomic Data

23, 34

Momentum

2, 20, 63

Momentum Indicator

20, 66, 68

Momentum Investing

Monetary Policy

Money

Money Flow Index (MFI)

23, 62, 68

Money Multiplier

89, 105

609

BILL CARA / STOCK MARKET LITERACY

Money Supply

34, 89, 93

Moody’s

Mortgage-Backed Securities (MBS)

Moving Average (MA)

20, 62, 63

Moving Average Convergence Divergence (MACD)

20, 62, 63

Moving Average Crossovers

Multiple Time Frames

Mutual Funds

28, 29, 58, 120

Natural Law

18, 58, 120

Negative Yields

Net Asset Value (NAV)

Net Book Value

Net Profits Interest (NPI)

Net Smelter Returns (NSR)

Net Zero Asset Managers Initiative

Netback

Non-Fungible Tokens (NFT)

Normal Course Issuer Bid (NCIB)

Offtake Agreement

Oil Sands

On Balance Volume (OBV)

62, 68

Open Market Operations

42, 89

Open-End Funds

28, 29

Operating Cash Flow Margin

Operations Management

Options

1, 120

Oscillator

20, 62, 64

OTC Markets Group

100

Over The Counter

Payment For Order Flow (PFOF)

6,7

Peer Groups

12, 74

Personal Finance

14, 34

Peter Lynch

Pivot Point indicators

610

Table 7

Point and Figure (P&F)

Pooled Fund

120

Portfolio Management

43, 89

Position

Pound Sterling

Precious Metals

Price Momentum

Price Targets

6, 56, 73, 120

Price Trend

Price Trendlines

Price/Earnings-to-Growth (PEG) Ratio

97, 98, 99

Price-to-Earnings (PE) Ratio

Producer Price Index (PPI)

Profit

Profitability Ratio

43, 45

Prospectus

100

Qualitative

2, 36

Quality of Earnings

Quality of Financials

Quantitative

2, 36, 57, 59, 62, 70

Quantitative (Statistical) Analysis

Quantitative Easing (QE

8, 34, 51, 94, 96

Quantitative Tightening (QT)

8, 31, 34, 94, 96

Quantity of Money

Random Walk Theory

Rate of Change (ROC) Oscillator

62, 65

Real Rate of Return

Realized Profit or Loss

Realized Yield

Recession

Relative Strength Index (RSI)

59, 60, 62, 66, 68

Relative Value

Relative Volume (RVOL)

Reporting Issuer

100

Reserve Currency

611

BILL CARA / STOCK MARKET LITERACY

Resistance

Retail Investor

Return on Capital (ROC)

Return on Equity (ROE)

6, 7, 70, 97, 98, 99

Return on Investment (ROI)

Revenues

Reversion to the Mean

Risk Management

9, 23, 27

Risk Tolerance

70, 72

Risk-Aversion

Robo-Advisory

16, 78

Royalties

Seasonal Investing

Seasoned Securities

Securities Act of 1933

Securities and Exchange Commission (SEC)

Security

SEDAR Canadian Securities Administrators

Sedar.com

44, 54

Self-Regulatory Organizations (SRO)

35, 55

Sell into Strength

Seller’s Market

Sell-Side

10, 26

Sentiment Indicator

Shanghai Gold Exchange (SGE)

Short Interest Ratio

6, 7

Short Position

9, 59, 60

Simple Moving Average (SMA)

20, 63

Social Networking

Socialism

Socially Responsible Investing (SRI)

Soft Costs

Spurious Correlation

Stagflation

Standard Deviation

612

Table 7

Stochastic Oscillator

62, 64, 65

Stock Market

Stock Trader’s Almanac

Stockbrokerage

Stocks

Store of Value

Story Stocks

6, 74

Supply Chain

Support Level

Swing Trading

57, 58, 75

Tactical Trading

Technical Analysis

7, 20, 26, 45, 57, 58, 59, 70

Technical Indicator

27, 57, 62, 69

Technical Resistance

20, 57, 60

Technical Support

20, 57, 60

The System

Thinly Traded

Ticker

Top-Down Investing

Total Return

8, 22, 31, 94

Trader

Trading Gain

Trading Halt

Trading Strategy

34, 36

Treasury Role and Mission

Trend

2, 19, 20, 34, 36, 59, 60, 62, 68

Trend Analysis

Trend Breakdown

57, 59

Trend Breakout

Trend Line

Trend Reversal

60, 62

Trend Trading

Trending Market

Trendline

57, 58

613

BILL CARA / STOCK MARKET LITERACY

Unemployment Rate

Unrealized Profit or Loss

Uptrend

57, 60

Valuation

1, 21, 43

Value

7, 57, 70, 72

Value Investing

6, 7, 21

Value Stocks

21, 57, 72

Velocity of Money

Volatility

23, 43, 49, 72

Volatility Index (VIX)

Volume

Wall of Worry

Wall Street

34, 120

Warren Buffett

3, 70

Whipsaws

20, 63

Yield

8, 22, 31

Yield Curve

Yield to Maturity

Yield vs. Total Return

614

Postscript My mission is to empower individual investors to make better investment and trading decisions by providing the protocols and access to the market information I use as a professional wealth manager. From the beginning and throughout these pages I stressed the need for independent thinking, summed up by this immortal quote from F. Scott Fitzgerald, “Either you think – or else others have to think for you and take power from you, pervert and discipline your natural tastes, civilize and sterilize you.” I authored this book to share with investors worldwide how I prepare for the opportunities that I know will arise everywhere. “Preparation is what turns opportunity into success” are words that encapsulate my advice and the reason for studying the material I present here. Any individual who accepts my challenge and takes responsibility for their own decisions and actions in life can, in time, succeed as an investor and trader in a free capital market. With an understanding of time and space and the observance of natural law, you can gain the strength to stand up against the financial service industry’s extraordinary powers. Opinions and the information shared in this book follow the ten thousand or more unsponsored, freely available articles and blogs I have written at billcara.com starting in April 2004. To conclude, as I wrote in my introduction, saying good luck to my readers and genuine students of the market is inappropriate, so, in closing, I wish you all ‘good fortune.’

615

Bill Cara, Toronto, December 6, 2022, home at Christmas

See also Bill’s Lessons from the Trader Wizard (2007) and his billcara.com website (2004-present)