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Equities News Interview: How to Protect Workers from the Heat

Protecting workers from the heat: Juley Fulcher of Public Citizen on OSHA’s new rule

LINK: https://bit.ly/4f8hTHH

Not a day goes by this summer that we don’t hear about a heat-related death, often from children left in hot cars or unprepared hikers taking walks in 100-plus degree weather. Along with these unfortunate tragedies, many outdoor employees are required to work outside during heat waves — without permission to take water or rest breaks. 

Even many inside workers get sick when an over-heated air conditioner breaks or is unable to cool an entire building. 

The Biden administration recently proposed a first-ever federal regulation to protect workers from extreme heat conditions. Although this climate-related rule, covering an estimated 35 million workers, won’t be finalized until 2026, it is designed to reduce the number of deaths, illnesses and injuries suffered by outdoor and indoor workers. 

Equities.com had the privilege of speaking to Juley Fulcher about this rule. She is a health and safety advocate for Public Citizen, a consumer and worker protection advocacy organization with over half a million members throughout the country. 

Equities.com: What is the goal of this worker-protection federal regulation? 

Juley Fulcher: The idea behind this rule is to have simple protocols and procedures put in place that can protect workers and help keep them safe from any heat illness or injury. It is designed to protect workers from heat stress, which has a dramatic impact on the body, including heat exhaustion, fainting, heat stroke, cardiac arrest and kidney disease. When heat stress isn’t kept in check, it can quickly lead to fatalities. 

EQ: Is this really the ‘first-ever’ heat protection regulation issued by the Occupational Safety and Health Administration (OSHA)? 

JF: Yes. A heat protection rule was first recommended 50 years ago by the National Institute of Occupational Safety and Health, a division of the Center for Disease Control and Prevention (CDC), but there have never been efforts to develop it until now.  

EQ: Why has the need for a heat-protection regulation been ignored for 50 years? 

JF: Unfortunately, OSHA is a very small regulatory agency. Though it was created by Congress, OSHA doesn’t have the personnel to work on developing more than one or two rules at a time. It usually takes seven or eight years from start to finish to put a rule in place. Public Citizen initially petitioned OSHA for a heat stress standard in 2011. At the time, it was turned down because they had other priorities. We, along with 100 other organizations, petitioned OSHA again in 2018. The petition was granted in 2021 and OSHA began the long process of developing the rule. 

EQ: Is there anyone against these worker protection rules? 

JF: There are industry groups that argue against any worker standard, claiming it will cost them money. In reality, that’s not the case. It will actually save money for employers. In addition to the costs of absenteeism, turnover, accident damage and increased workers compensation insurance costs, heat stress can greatly reduce worker productivity. Right now, the U.S. economy is losing nearly $100 billion a year because of the failure to put simple protections in place for workers. 

EQ: What companies have heat-related policies? 

JF: We found that many smaller businesses have protected their workers and put in policies with help from experts on the effects of heat on workers. These companies have stepped up to the plate, such as putting in fans or portable air conditioning units to help workers, giving them plenty of water and cool-down breaks, and responding quickly when workers show signs of heat illness. However, it’s been harder to get some larger corporations to put in place adequate protocols, especially farm worker and construction employers. That’s why we’re so happy with this new proposed rule. We think it will save lives. 

EQ: Is there any political pressure against protecting workers? 

JF: The main political opposition comes from a general anti-regulation mindset that often springs from conservative principles incorporating the mantra that less regulation is necessary for business growth. That mindset is about blocking all regulations with little regard for worker or consumer protection. We’ve seen that in a couple of states such as Florida and Texas. 

EQ: What do you think of Texas and Florida blocking water and rest breaks? 

JF: It’s monstrous. Florida specifically banned localities from creating standards that protect workers from heat stress. They went even further to say exactly what could not be required of employers. For example, in Miami-Dade County, employers cannot be required to provide rest breaks, or water, or any form of onsite first aid, or an emergency response plan. The Florida legislation says that even the state government is not allowed to create heat rules for the next two years. The bill passed by the Texas legislature says that only the state government can create regulations for employers, but not the local governments. The Texas legislation is broader than the Florida legislation, covering a lot more than just workplace heat protections, but it did specifically state that employers could not be required to provide rest breaks.

EQ: Besides the farming and construction industry, are there other groups against worker protection? 

JF: One of the biggest players opposing workplace rules is the Chamber of Commerce. They played a big role in lobbying the Florida legislature and governor, as well as pushing really hard against the heat rule at the federal level. 

EQ: Is this new heat-related rule going to be law? 

JF: This proposed rule is the first time we’ve seen something written on paper from OSHA. Now they have to go through a review process that includes public comment and hearings, which is an OSHA requirement. We are happy with the proposed rule as it is written. There are still a couple more years to go before it becomes a final rule. Also, remember if the administration changes, they could be antagonistic to any workplace protection standards, or even shelve or postpone this new heat rule. For now, however, we’re thrilled that something is being done. 

EQ: Is there anything that individuals can do to help?

JF: It’s important for people to be educated on these issues. It impacts people who are at work and just doing their job. It also helps to educate employers about heat stress and what it can do to the body. 

EQ: What else should people know? 

JF: We’ve seen dramatic increases in global annual temperatures, and extraordinary heat waves, which are getting longer and hotter and occurring more often. Many people don’t realize that a heat wave is measured not by how hot it gets during the day, but how hot it remains at night. If you’re working all day in the heat, at night you need a cool place to rest. Many workers don’t have adequate air conditioning at home, or don’t run the AC because of the high cost. That means they are unable to fully recover overnight in order to handle the extreme heat the next day. 

EQ: Any final thoughts? 

JF: While this new rule won’t take place until 2026 or even later, many workers will suffer, die and experience chronic kidney injuries. Many people don’t know that farm workers experience heat fatalities at 35 times the rate of any other kind of work. We’ve been working very hard to try to get Congress to pass legislation that will allow OSHA to put an interim heat standard in place until the rule is passed — the Asuncion Valdivia Heat Illness, Injury and Fatality Prevention Act. We hope that Congress will do something until the heat-stress rule is finalized.

MarketWatch: Interview with Billionaire Investor Jim Rogers

LINK TO ARTICLE: https://bit.ly/4f4pGX3

 Opinion: Global stock investor Jim Rogers: ‘I’m waiting for something to go wrong.’

‘Probably by the end of this year or next year, the bear market will have resumed in the U.S.,’ Quantum Fund co-founder says

Jim Rogers, international investor, author and financial commentator, describes the current U.S. stock market environment as showing all the signs of an aging bull, not a raging one.

Rogers has seen this before. In fact, he’s seen and invested in all types of markets over a career spanning 60 years. Rogers rose to fame in the 1970s as the co-founder with George Soros of the Quantum Fund, which gained 4,200% over the next 10 years while the S&P 500 rose about 50%. 

In a recent interview from Singapore, his base since 2007, Rogers revealed his reasons why the U.S. bull market for stocks may be nearing an end, why bear markets are actually healthy for the stock market, and what you can do now both to protect your portfolio and position it for profits.

MarketWatch: What are you doing with your money with regard to U.S. stocks right now? 

Rogers: I have a lot of cash. I’m waiting for something to go wrong, but I am not selling short at the moment. I don’t call that bearish. I am neutral.  

MarketWatch: What could go wrong? 

Rogers: If you look at the U.S. market, a lot of new investors are coming in and talking about how easy it is to make money in the stock market. You see some stocks that go up every day, but fewer and fewer stocks are going up. Some are going up a lot, but most are not. You see market breadth declining. These are the things that happen before the end of bull markets. Again, I’m not selling short yet —- but these are the signs that develop when a bull market is coming to an end. 

MarketWatch: Do you expect the U.S. stock market to crash? 

Rogers: First, I differentiate between a crash and a bear market. The world has always had bear markets and will again. But bear markets often end in a crash. I certainly anticipate a bear market. The next bear market has to be very bad because debt has skyrocketed everywhere including in the U.S. Pick a country, including countries that didn’t have debt before such as Germany and Japan. Everyone has very, very high debt. So the next bear market has to be bad, and bear markets end in a selling climax, or a crash as you put it. I hope we live long enough to see many bear markets. 

MarketWatch: Why do you want to see many bear markets? 

Rogers: They clean out the system, which nobody likes because it costs them money. But economic recessions or bear markets clean out excesses. That’s the way the system has always worked. Some people get overconfident or overextended and along comes a bear market or recession and cleans out the system. Cleaning out the excesses has always been good for the system — unless you’re the one getting cleaned out. 

MarketWatch: What is your forecast for U.S. stocks over the next few months? 

Rogers: Some people are good at market timing, but I am not one of those people. I am not a good short-term trader. But what I suspect is that probably by the end of this year or next year, the bear market will have resumed in the U.S. It’s already the longest period in American history without a bear market. We’re overdue. 

MarketWatch: How should people protect their investments? 

Rogers: The only way to protect yourself is to invest in what you know about. Everyone knows a lot about something, and that’s where you should focus. If I said you could only have 25 investments in your entire life, you would be very careful, and be a good investor. Many people might say that is boring. If you want to be a good investor, be boring. Stay with what you know. And don’t go down to the bar on Saturday night and tell everyone about the latest hot stock. 

We’ve had the longest bull market in American history. Politicians in Washington say, ‘Don’t worry, we’ve solved the problem.’ But I know that’s a lie. I know that’s wrong. I’m just saying be careful because gigantic debts are building up. If you can add or subtract, you know there is no way America can solve its debt problem. It’s a good time to be an old American, but not a good time to be a young American. I have two daughters, and the problems they will face in their lifetime will be enormous. 

MarketWatch: What do you say to your daughters about how they should invest for their future? 

Rogers: It’s hard to teach young people because they know it all (laughter). I certainly show them history. In 1924, the U.K. was the richest, most powerful country in the world. There was no No. 2. Fifty years later, the U.K. was bankrupt. They couldn’t pay their bills. This happened within 50 years — going from No. 1 to bankrupt. People say this cannot happen to America. Well, it’s happened often in world history, so be very careful, and be worried. Be aware of what has happened in the past, because it will happen again. 

Investors want advisers who will give them emotional as well as financial support

Investors want advisers who will give them emotional as well as financial support

BY MICHAEL SINCEREJULY 5, 2024•5 MIN READ

LINK: https://bit.ly/4bvYRrS

In the past, investors were usually focused solely on investment returns, i.e., trying to beat the S&P 500 or other indexes. In today’s world, however, financial advisers must not only outperform the S&P 500 but help support overwhelmed investors as they try to navigate past uncertain financial environments.

This means that advisers must keep investors calm when the stock market is volatile but also reduce investor fears — not only the fear of losing money, but also the fear of missing out on the latest hot investment (i.e., FOMO).

What behavior researchers have learned

Equities News spoke with Morningstar behavioral researchers Samantha Lamas and Danielle Labotka on how the job of financial advisors has changed — and what modern investors expect from them. Lamas and Labotka, with Ryan O. Murphy, were authors of the Morningstar research report, “Navigating the Client Lifecycle in Financial Advice,” (June, 2024).

Samantha Lamas

A key finding of their research is the huge role that emotions play in hiring, firing or blaming advisers when investments go south. “There are a lot of gaps with what investors are expecting from their advisers,” Lamas said. “Those gaps can be filled with a stronger emotional connection with investors.”

Labotka added that investors who feel they can trust their advisers to reach their financial goals were more likely to retain them. “Emotions have always been an issue with investors when it comes to financial goals, or being worried about whether they can retire. People believe advisers can do much more than just handle their finances.”

Information overload

Because of the internet, people have much more information at their disposal than in the past. Unfortunately, there is also the risk of information overload.

“We have all these trading apps, which allow you to quickly make decisions,” Lamas says. “Before, you had to make a call or go to someone’s office. Now, there are so many potential pitfalls when investing. Many people are leaning on advisers to help them sort through a lot of data and programs.”

“It’s difficult for many investors to make good decisions when there is so much noise out there. Many people rely on advisers to help structure their investments, act as a sounding board and make sense of all of that information coming at them.”

One of the problems, both researchers say, is that investors have access to so many trading tools. This causes some people to chase after returns, and trade even more. One of the roles of advisers is to help reduce the desire to trade, what some have called a “gambling instinct.” That is why many advisers must not only manage money and expectations, but also act as “behavioral coaches.”

“When the market is volatile,” Lamas says, “it’s easy for investors to get overly emotional. That is when the adviser must give behavioral guidance.”

Danielle Labotka

Labotka agreed: “We did a study on why people chase after the returns of alternative investments such as cryptocurrencies. Some people get excited when everyone is talking about a certain investment, and they don’t want to miss out on a meme stock or cryptocurrency. It’s easy to make mistakes in this emotional environment. One of the roles of financial advisers is to help investors control their emotions.”

One way that some advisers deal with overtrading is by giving these clients a small sum of money to “play” with. This allows clients to invest in trendy but risky financial products such as cryptocurrencies, but without affecting diversification formulas. “Don’t put all of your eggs in one basket,” Labotka noted, “but here’s one egg that you can play around with.”

More than stock pickers

“Our research shows that financial advisers are being asked to do more than just stock picking,” Lamas says. “Honestly, we think this is a great thing for advisers because it sets them apart from robo-advisers. A chatbot can’t give you peace of mind when the market is volatile, at least not now, but you never know what will happen in the future.”

Labotka explained that “financial advisers must know clients better than clients know themselves. They have to understand what their goals and needs are, which can take a long time if they want to get it right.”

She added that advisers must also point out potential pitfalls while also helping clients recognize behavior that may be damaging to their portfolio. “In many ways, a financial adviser also has to be a mind reader.”

It’s also important that advisers don’t overpromise potential returns. “Overpromising is a big red flag,” Labotka warns. She says the last thing an adviser wants to do is make false promises, or fail to help the client reach their financial goals.

Not only must advisers outperform the indexes, but many modern investors want more personalized guidance, and may even need some “handholding” during difficult times, which could be a volatile market environment, or a change in a client’s personal finances. It’s normal for investors to feel nervous and afraid at times, and that’s when professional advisers can help.

When markets get volatile again

It’s surprising, but they cite research that showed that when the market is underperforming such as during a bear market, or during the 2008 – 2009 Great Recession, most people didn’t fire their advisers. “We will have to see if people will still stick with their advisers when the market is less forgiving,” Labotka says.

They confirm that no one can predict how investors will react when the market struggles in the future, especially since returns have been so excellent for so long. “Many advisers have long recognized their clients are emotional beings, and imperfect, because we are human,” Labotka points out.

It’s the adviser’s job to keep clients calm during the rough times and curb their enthusiasm during the good times.

“I believe that investors can look at the research and feel empowered. They should not only receive financial expertise from their advisers but also receive emotional support,” Lamas said. “If an adviser isn’t providing that, then find someone else who will.”

Fake titanium scandal alerts investors to issues with sanctions and supply chains

Fake Titanium Scandal Affects Supply Chain

Line: https://www.equities.com/impact-investing/fake-titanium-scandal-alerts-investors-to-issues-with-sanctions-and-supply-chains/

Economic sanctions are a frequently-used tool in foreign policy designed to target certain individuals, groups and countries. The goal of these sanctions is to pressure governments into changing bad behavior, hopefully without affecting the overall population. 

The biggest problem with targeted economic sanctions, however, is that sometimes there are unintended consequences. As investors, it is important to pay attention when sanctions are implemented and to determine if any of these unintended consequences affect your investments. 

Unintended consequences

A good example of unexpected consequences occurred recently when it was discovered that counterfeit titanium was sold to Boeing and Airbus using fake documents. Commercially-pure titanium is an alloy that is used by the aerospace industry in engines, wings, the fuselage, undercarriage and landing gears. Titanium is a unique alloy that can withstand high temperatures, one of the reasons that it is highly desirable, especially in the aerospace industry. 

Previously, the most dominant player in the titanium market was Russia, which is now the third-largest producer after China and Japan. Before economic sanctions went into effect against Russia, it was the second-largest producer.  

As a result of the sanctions, many countries around the world have scrambled to find titanium to meet a growing demand for this alloy. 

Fake titanium

The fake titanium was first discovered by Spirit AeroSystems, which noticed small holes in the titanium from corrosion. After a thorough investigation, they realized that the bogus titanium was used in Boeing’s 737 Max and 787 Dreamliner jets, and the Airbus A220. Spirit AeroSystems reported their findings to Boeing and Airbus. 

Boeing BA - $184.31  1.11 (0.599%) 

and Airbus EADSY - 1.27 (3.588%) voluntarily disclosed to the FAA that one of their foreign distributors “falsified or provided incorrect records.” In response, the FAA issued a bulletin to airplane suppliers to be on the lookout for any potentially falsified records. The FAA is also conducting their own investigation. They are also looking for ways to “prevent unauthorized parts from entering the supply chain.” Jetstar via Wikimedia

Boeing claimed that the titanium was linked to a small group of suppliers. They conducted tests on the metal and in a statement said, “We are removing any affected parts on airplanes prior to delivery.” Boeing also cut ties with any supplier connected to the fake titanium documents. 

Airbus replied in a statement, “Numerous tests have been performed on parts coming from the same source of supply. They show that A220’s airworthiness remains intact.” 

Boeing and Airbus are cooperating with the FAA investigation, which includes doing internal investigations of their supply chains to find how this happened. Boeing and Airbus are also searching for other legitimate sources for titanium, all of which takes time and costs money. 

How sanctions can backfire

Although a necessary tool to control rogue nations and bad actors, the use of sanctions can sometimes backfire, as may have happened with titanium. Sanctions have adversely affected the airline industry both in Russia, Europe and the United States. 

After Russia invaded Ukraine on Feb. 24, 2022, the European Union, United States, and Canada implemented sanctions against Russia, including excluding Russian aircraft from their airspace. They also halted the supply of parts, technical support and maintenance to Russia. 

Unfortunately for Europe, their decades-long titanium arrangement with Russia was disrupted when the sanctions began. Boeing and Airbus have also been searching for non-Russian titanium suppliers. Unless the U.S., Canada, or Europe can increase domestic production of titanium (and that won’t happen quickly), the supply chain problems will continue. 

A 2023 article in the “Journal of Travel Research” found that that “the negative consequences of sanctions spill over much more into airlines than other publicly traded aviation-related companies, with differential effects on each examined region and a greater impact on larger firms than small firms.” 

As a result of the sanctions, Russia tried to minimize the effects of the sanctions by importing engines and spare parts from other countries including Singapore, Turkey and Central Asia. This was not only economically costly to Russia but is also a safety hazard. 

What investors should do

It’s important to recognize that supply chain management is a key facet of ESG investing. Alert portfolio managers will be looking at these issues and find ways to avoid getting caught on the wrong side of an economic sanction’s blowback. 

It is up to the authorities to create strong rules to prevent fake parts or metals from entering the supply chain. It is up to mutual fund managers, however, to be cautious about investing in companies that are experiencing turbulence as a result of the sanctions. 

As investors, you may want to find out if your mutual fund manager is talking about supply chain issues and what they are doing to address it. Some managers may resist buying airline stocks that have been adversely affected by supply chain issues. Others may see it as a buying opportunity. Most important, it’s an issue that needs to discussed. 

Although Boeing and Airbus are working hard to solve the fake titanium scandal, it would not be surprising to see other cracks in the supply chain. Because there is an increased need for airplanes, and an inability to get the necessary parts, bad actors may take advantage as they did with the falsified titanium documents. 

Because of the disruption in the supply chain, Boeing may be unable to produce and deliver as many Dreamliner jets as they anticipated. Obviously, this will directly affect their stock price, and not in a good way. 

Bottom line: It is essential for fund managers to understand how multinational companies manage their supply chains. If they don’t, supply chain incidents like this may keep popping up, playing havoc with not only consumer safety, but a company’s stock price. 

MarketWatch: The Market is in a Huge Bubble

The market is in a huge bubble — but you’d be wrong to bet against it

By Michael Sincere

Published: July 1, 2024 at 7:02 a.m. ET

LINK: https://www.marketwatch.com/story/the-market-is-in-a-huge-bubble-but-youd-be-wrong-to-bet-against-it-9b755bbf?mod=search_headline

One sector — technology — is carrying the market.

Jeffrey Bierman, TheoTrade’s chief market technician and an adjunct professor of finance at Loyola University Chicago, warns that the U.S. stock market is in a huge bubble — but it would be insanity to bet against it. Thanks to machine-run algorithms, he points out, technology stocks in particular are rising to unsustainable levels while market breadth is deteriorating. 

Specifically, “any technology stock with an AI story is rising too far and too fast,” Bierman says. Individual investors aren’t fueling this bubble, he adds. The algorithms are taking the market higher and ignoring fundamentals. 

MarketWatch recently spoke with Bierman to discuss his views in detail. This interview has been edited for length and clarity.

MarketWatch: How would you describe stock valuations at this point? 

Bierman: We’re in a bubble in a number of high-profile stocks. Nevertheless, it might not burst for a while. That’s because the S&P 500 Index 

SPX0.16% has become a one-sided market with little to no volatility. According to the technical indicator, RSI (Relative Strength Index), anything above 70 is in the danger zone, and we’ve gone way past that. The highest I’ve ever seen RSI on the S&P 500 daily is 88, and it could go to 90 RSI. It’s statistically overshot. 

Plus, market breadth is the worst it’s been in years. Combining an extremely overbought market with terrible market breadth is very dangerous. When the algos decide to stop buying and start selling, it could reverse polarity rather rapidly. If that happens, the algos can obliterate the market. We haven’t seen that happen since COVID-19, and then it only lasted a couple of weeks. 

MarketWatch: But the market keeps going higher despite the warning signs.

Bierman: Only one sector — technology — is carrying the market. Most traders and investors appear to be selling the other sectors and just buying technology. You know the names: NVIDIA Corp. NVDA0.34%; Apple Inc. AAPL2.65%; Microsoft Corp. MSFT1.39%; Meta Platforms Inc. META-0.23%; Netflix Inc. NFLX-0.37%, plus a spattering of peripheral mega-cap stocks like Walmart Inc. WMT-0.30% and Costco Wholesale Corp. COST-0.49%

Algorithms are a huge part of this. People are conditioned to chase the story and buy momentum with help from the algorithms. Algorithms are programmed to buy into strength and sell into weakness. The algos don’t buy weakness — people do. Right now, the algos are buying the 52-week highs and selling the 52-week lows. 

MarketWatch: There’s often a story stock or stocks the crowd follows. Which is it this time? 

Bierman: The market is completely driven by the artificial-intelligence narrative — either a company is producing AI or is offering an AI service. The AI phenomenon has emboldened people into buying mostly technology, regardless of potential risk or value. When people stop doing research, ignore fundamentals and only buy the narrative, you know you’re in a market bubble. Inside of a bubble, fundamentals don’t matter. 

The only difference this time is it’s happening at a much faster pace. A lot of this is options-driven. The momentum feeds on itself on what’s called a “positive feedback loop,” going higher and higher. The market is at all-time highs, and continually walking itself higher with little slippage. On the way down, however, it could turn into a negative feedback loop that perpetuates itself beyond investor imagination or risk tolerance. 

MarketWatch: Overbought does not mean sell. What could shift market sentiment and sour investors on stocks?

Bierman: This can last for a while, but it can’t last forever. People will likely not sell until the machines walk the market lower. On the way up, few sell. Most investors tend to sell on the way down. It’s herd mentality. In a normal market, stocks may go up for five or six days and then down for five or six days. This market has broken that mold. Nowadays the market may go up for 40 or 50 straight days because of the positive feedback loop. The market is completely detached from the news. It’s the first time in my career where most news is irrelevant. That’s because algos don’t react to news for more than a data-drop split second. 

It ends when the market unwinds all of the mega-caps, and in all likelihood, there will be a quick flush to the downside. Right now, fundamental valuations are not much of a catalyst. People also don’t seem to be focused on research.  I warn you, however: On the way down, it can become a self-perpetuating nightmare, because the machines can keep the selling pressure on. That’s when investors typically start turning to fundamentals.

MW: Should investors bet against this market?    

Bierman: Until the market starts to reverse, it is folly to short it. Anyone shorting this market has gotten decimated.  It is an unshortable market as far as I am concerned — unless you’re a masochist. The market has made up its mind it wants to go higher. It doesn’t matter what you throw at it —negative news, interest rates, macro data — it doesn’t care. It’s called “confirmation bias.” 

As for me, I am lightening up on the long side. I take gains where I see peak valuations on long positions. But what matters to money managers is that the market is going higher, and they are not paid to miss rallies. Traditional valuation metrics such as inflation, the U.S. dollar and interest rates have given way to performance-chasing. I sarcastically call this a “Seinfeld market” — not much matters except the current narrative or meme. This is the final stage of the bull market. There is no fear. The only fear is the fear of missing out (FOMO). Risk is an afterthought.

Michael Sincere (michaelsincere.com) is the author of “Understanding Options,” “Understanding Stocks,” and the forthcoming “Help Your Child Build Wealth” (Wiley, 2024).

Proxy Advisor Firms: Do they really have shareholders' best interests at heart?

Proxy advisory firms: Do they really have shareholders’ best interests at heart?

BY MICHAEL SINCEREJUNE 26, 2024•5 MIN READ

Link: https://www.equities.com/impact-investing/proxy-advisory-firms-do-they-really-have-shareholders-best-interests-at-heart/

A few weeks ago, many people learned that Tesla shareholders approved a $46 billion pay package (this is not a typo) for CEO Elon Musk, the largest compensation package ever given to a U.S. corporate executive. At the Tesla TSLA - $196.37  0.43 (0.219%) 

shareholder meeting in Austin, Texas, several audience members stood up and cheered the results. 

“Hot damn, I love you guys!” Musk said after the votes were tallied.

However, some critics strongly opposed the pay package. One of the most outspoken critics was leading proxy advisor Institutional Shareholder Services (ISS), who recommended that Tesla shareholders vote against Musk’s original $56 billion pay package. They called the package “excessive.” 

In response, Musk had a few choice words for the proxy firm, making a crude joke about ISS’ initials. 

Another top proxy advisory firm, Glass Lewis, also recommended that Tesla shareholders vote against the original $56 billion pay package. 

While the headlines all rightly focused on Musk’s big win, the underlying story is the role of proxy advisory firms and how they influence shareholders when it’s time to cast votes at annual elections.

How proxy advisory firms influence shareholders and boards

Proxy advisory firms act as independent research firms, offering institutional investors research and data, as well as recommending managers and/or proxy proposals that are voted on at a company’s annual meeting. 

The proxy firm’s goal is to help shareholders make educated voting decisions. Typically, institutional investors (i.e., pension funds, hedge funds, and mutual funds) hire proxy firms to make sure their interests are considered by the board. 

Independent trader and investor Howard Kornstein explained the process: “Proxy firms are hired to collect more proxy votes in order to help the board with executive compensation, and determine who will be elected to the board. Proxy voting is a form of power of attorney, authorizing an agent to cast a vote or votes as they see fit. It is a one-time event. Once the vote has been cast, it is finished.”

For example, institutional investors concerned about sustainability issues or company leadership might hire a proxy advisory firm to make sure these issues are represented at the annual board meeting. Proxy firms look at large amounts of research and data to help board members and shareholders gain insights into complex issues  to make sure the company and its board make informed decisions. 

Proxy advisory firms advise against Toyota chairman Toyoda

In a news story that received far less attention, in mid-June, proxy advisers ISS and Glass Lewis also recommended that shareholders vote against re-electing Toyota Motor Chairman Akio Toyoda at the Japanese automaker’s June annual meeting.  

Previously, on June 3, Toyota TM - $203.18  0.415 (0.204%) 

admitted submitting false data for some safety tests, and as a result, stopped delivery of three models. Toyota officials have repeatedly apologized for falsifying vehicle testing results. 

ISS wrote in a report that because of a series of certification test irregularities, “shareholders are advised to vote against Chairman Akio Toyoda.” ISS went on to write in their report: “Now is a good time for change in the face of incidents at its group companies.” 

Proxy advisory Glass Lewis also voted against Toyoda, citing concerns about “its strategy shareholding and return on equity” as well as the faulty tests. 

Similar to what happened with Elon Musk, on June 18, shareholders ignored the recommendations of the proxy advisory firms and reappointed Akio Toyoda as chairman of the board at its annual meeting. 

It’s not surprising shareholders ignored the proxy adviser’s advice: A large number of Toyota shares are owned by companies and institutions friendly to Toyota.  

Who pays proxy firms? 

Typically, proxy advisory firms are paid for by institutional investors. In exchange for their help, proxy advisers charge fees back to the investors. Proxy firms might make voting recommendations, keep up with issues including government regulations, and help the board understand environmental or social issues. Just as they did with the Musk pay package, proxy firms also advise the board on executive compensation.

Most companies file their proxy statements with the SEC and hold their annual meetings from April to June. Many institutional investors rely heavily on the proxy firm’s recommendations before casting their ballots. 

Complicated relationships and issues

At first glance, the proxy advisory process seems like a good deal for nearly everyone. Shareholders get independent recommendations, while boards get sound advice on complex governance issues. However, in recent years, a number of groups, including lawmakers, regulators, and corporations, have debated whether the proxy advisory firms have too much power and influence. 

Here are what critics say about proxy firms: 

  • Proxy firms are mostly unregulated with little oversight or regulation requirements. 

  • Shareholders and nonclients are unable to learn how proxy firms are compensated, or how they decided on their recommendations (i.e., there is a lack of transparency). 

  • There are no fiduciary rules that require proxy firms to act in the best interest of shareholders, even if there is a conflict of interest. 

Proxy firms are here to stay

Even with these criticisms, proxy firms offer shareholders and boards a valuable service, and offer expert insights and useful advice to boards across the United States. As mentioned earlier, they help keep boards up-to-date on emerging environmental and social issues, and help to advise and guide boards regarding executive compensation packages. 

They also help boards better understand complicated issues, and help them avoid surprises from activist shareholders. 

It is not surprising that some executives, such as Elon Musk, are annoyed by the proxy firm’s recommendations, especially if it doesn’t align with the CEO’s goals. And yet, it is a mistake to completely ignore the proxy company’s recommendations. 

Jim Woodrum, a clinical professor at the Northwestern Kellogg School of Management, says that proxy firms and corporations must learn to live with each other: “For years, corporate governance experts were in the habit of saying that the power of ISS and Glass Lewis might fade in the future. At this point, it is much more prudent to think they are here to stay — and it is time to figure out how to coexist.” 

Only time will tell whether the huge $46 billion pay package that Musk received is a brilliant reward for a job well done, or a blaring red flag. Keep an eye on Tesla’s stock price (and Toyota’s) — it sometimes takes a while, but the stock market always has the final word. 

What are the risks as Apple Intelligence comes to our iPhones

AI anxiety: What are the risks as Apple Intelligence comes to our iPhones?

BY MICHAEL SINCEREJUNE 19, 2024•5 MIN READ

Link: https://www.equities.com/impact-investing/ai-anxiety-what-are-the-risks-as-apple-intelligence-comes-to-our-iphones/

It’s been a long time coming, but Apple finally unveiled its AI strategy. In fact, Apple recently partnered with OpenAI, an artificial intelligence research laboratory, to incorporate AI into its iPhones. The question is: how can they do so as safely and as socially responsibly as possible?

During a two-hour presentation earlier this month at the company’s annual World Developers Conference in Cupertino, Calif., CEO Tim Cook and other Apple executives revealed what they are calling Apple Intelligence. 

During the presentation, Apple AAPL - $209.68  4.61 (2.151%) showed how Apple Intelligence works with a number of their products including iPhones, the Mac and iPads. Admittedly, it is an evolving technology. 

“It’s not 100 percent,” Cook explained. “I think we have done everything that we know to do, including thinking very deeply about the readiness of the technology in the areas that we’re using it in.” 

For starters, Apple Intelligence is upgrading its virtual assistant Siri, allowing her to perform many more tasks while also using a much more conversational tone. 

During the demo, Apple showed how Siri could pull up airplane flight information from an email and find details about a lunch reservation that was included in a text. Apple Intelligence can also write and proofread emails and create cartoon images of your friends. 

Highest ethical standards

Although these enhancements are useful and sometimes fun, Apple is keenly aware of its role in making sure that AI is developed with the highest ethical standards. In an interview with YouTuber Marques Brownlee right after his keynote address, Cook put an emphasis on security and privacy: 

“We are not waiting for comprehensive privacy legislation regulation to come into effect. We already view privacy as a fundamental human right. That’s the lens that we see it at. Given that we’re doing those things, personal context and privacy, we wanted to integrate it at a deep level.” 

Cook made it clear that privacy and security was Apple’s biggest concern, and they would do everything to protect both. 

AI anxiety

Many people are nervous about artificial intelligence. Some are concerned that it will take away human jobs, which has already happened in some factories and retail stores. Others are concerned that AI will develop without any ethical concerns or without adhering to ISO standards (these are a set of global rules and regulations that ethical businesses and consumers follow). In fact, several technology experts want AI participants to follow ISO standards.

Apple photo

There is reason to be concerned. Although AI is still in its infancy, some of the things it “could” do in the future are the stuff of science fiction. In fact, some experts warn that AI could do more harm than good. For example, the late Prof. Stephen Hawking, in a 2014 interview with the BBC, warned: “The development of full artificial intelligence could spell the end of the human race.” 

More recently, the Center for AI Safety (CAIS), wrote: “Ensuring that AI systems are safe is more than just a machine learning problem – it is a societal challenge that cuts across traditional disciplinary boundaries.”

When AI is misused

If unmanaged, AI could cause tremendous damage in ways few can imagine. Recently, AI has been used to create seemingly real images and videos of people, including Taylor Swift. These “deep fake” images can do lasting damage to the reputations of celebrities, as well as to innocent civilians. 

AI could also be used by criminals to imitate the voices of real people or to send realistic emails and texts to try and steal money or products. If the government doesn’t step in to provide oversight, AI could cause even more problems for society. 

Nevertheless, it’s a given that AI is going to be a bigger part of all of our lives moving forward. Now that Apple has officially entered the AI space, look for even more participants and players to join in.  

If AI can be used as a responsible tool to enhance our lives, AI will be welcomed. However, we also know that, like any tool, there are those who will abuse AI or any technology for their own selfish interests. That’s why many experts are calling for strict AI regulation. 

Government regulations

Fortunately, governments are responding. The European Union passed the AI Act, which was designed to help the government manage the risks of AI. Also, President Biden issued an executive order to not only promote AI development but also give federal agencies guidelines when designing or acquiring AI products. This includes creating a set of testing standards with a goal to minimize AI risks. 

In addition to increased regulation, others suggest that scientists should think about how to use AI in the future as a force of good. For example, AI technology is being used right now to help predict when natural disasters may occur, and to reduce response times. 

It is really up to AI scientists, technicians, and the government, to come up with a set of common-sense guidelines to enhance the positive aspects of AI while trying to control the negative. With the help of AI, it’s possible for scientists to speed up technology that will improve the environment and make the world a safer place. 

Now that Apple has joined this elite AI group, many are hoping they help AI turn into a positive tool rather than technology to be feared.

Use Commercial Real Estate to Diversify Your Portfolio and Generate Income

How to use commercial real estate to diversify your portfolio and generate income

BY MICHAEL SINCEREMAY 29, 2024•6 MIN READ

Link: https://www.equities.com/impact-investing/how-to-use-commercial-real-estate-to-diversify-your-portfolio-and-generate-income/

Equities News spoke with real estate expert Charles Clinton about the fascinating world of commercial real estate. Clinton is the co-founder and CEO of EquityMultiple, a commercial real estate investment firm that provides accredited investors access to professionally managed real estate transactions. 

If you are an individual investor thinking of adding commercial real estate to your portfolio, you have come to the right place. Equities began by asking Clinton the best way to get started as a real estate investor. 

“We start by asking investors to identify their investment goals,” Clinton says. “Then we work backwards from there. We present real estate as part of a diversified portfolio that may also include stocks and bonds. You can have a high-growth stock portfolio while also generating stable cash flow with real estate.” 

When Clinton talks about commercial real estate, he defines it as anything that provides cash flow including office, industrial, retail, multifamily, self-storage, data centers and even car washes. “Commercial real estate is a much bigger universe that what many people think from reading the headlines.” 

Educating clients

EquityMultiple, Clinton says, helps potential investors understand and the structure and risk/return profile of the diverse deals they offer, and empowers individual investors to customize a portfolio to align with their own strategy and goals. They also help with forecasting future real estate trends and curating timely opportunities on behalf of individual self-directed investors.

“That’s where we start. After that, we think about what investments to make that will fit the client’s investment goals and risk tolerance.” 

The type of investments each EquityMultiple investor chooses varies depending on the client’s goals as well as their time horizon.

Charles Clinton

“Many people don’t realize that what is happening to an office tower in Los Angeles has almost nothing to do with an industrial property in Orlando,” Clinton says. “One of our jobs is to help investors understand the particular dynamics and differences at these individual locations.” 

That is why it’s so important to have a real estate professional look at the bigger picture.

One of the firm’s goals, Clinton says, is to help educate clients to all of the nuances of investing in commercial real estate, including both the risks and rewards. 

“For some people, real estate investing may be intuitive, but we help others understand the basics. That may include explaining the unique vocabulary and language used by commercial real estate investors, as well as helping them understand specific investments, create a business plan and making forecasts.”  

In addition to speaking directly with clients, EquityMultiple provides detailed booklets and conducts webinars. “We encourage clients to ask questions so that they are not only educated but they see that everything we do is transparent.”

Debt financing

Clinton explains that real estate investment strategies vary depending on current market conditions. “Right now, we are focused on real estate debt,” he says. “Because interest rates have moved so high, and borrowing costs have increased, there is a tremendous opportunity for investors to generate income,” one of the goals when investing in debt financing.

Fortunately, EquityMultiple has found many profitable opportunities in debt financing. For example, they use private credit to help finance new building construction or even finance distressed properties. The higher that interest rates go, the higher the returns. Through EquityMultiple, individual investors can invest in unique real estate private credit opportunities.

Equity investments

Although commercial real estate valuations have slid considerably since interest rates began climbing in 2022, Clinton sees life coming back to the equity side of real estate. 

“We’re starting to see a bottom, which is what we’ve been waiting for since the middle of 2022. Now that interest rates are going to remain higher for longer than anticipated, industrial and multifamily units are valued way below what they were worth a few years ago. We are focused on this segment because we feel these have the best fundamentals. Obviously, office space has been hurt the most, which is why they may have the most value at some point. We’re not quite there yet, but we’re ready to catch a falling knife.” 

Clinton says that the goal of equity investing is an annualized return in the high teens to 20%, while with debt financing they want to aim for a 10% to 12% annualized return. In fact, he states that in many ways, EquityMultiple works like an asset manager. “We have a team of people who come from private equity backgrounds. They underwrite, structure, and control the investments to help investors find the biggest upside potential even when economic conditions are challenging.” 

Century 21 Commercial photo

When interest rates climbed so high, Clinton says, it helped to kill the commercial real estate market. “Sellers think their property is worth what it was two years ago, and buyers believe it’s worth what it is today. That’s been the story for the last two years. However, we’re hitting that inflection point when higher interest rates are hitting the seller’s cash flow. That is leading some sellers to admit they can’t hold on any longer.” 

When sellers give up, Clinton explains, they may sell their property at a discount or even at a loss. It’s similar to investors dumping stocks when the stock market bottoms. Meanwhile, there is a ton of institutional capital on the sidelines waiting for this moment. “We are also trying to make our first buys into a smaller portion of the market,” Clinton says. “We like to focus on deals that are under $40 or $50 million.” 

Interest rates and real estate

The good news, according to Clinton, is that the Fed is “determined to move rates down, probably by the end of the year. Still, the market has been consistently overly optimistic,” one of the reasons Clinton is taking a “wait-and-see” attitude regarding rates while also looking for profitable investment opportunities. 

“When interest rates are moving up, debt is a good place to be,” he explains. Meaning that investors can tap into higher rates on quality projects, secured by quality assets. “We’ve tried to be adaptive first on the debt side and now on the equity side. On the equity side, we’re like a joint venture investor. We’re the partner who does all of the work and brings capital to you.” 

In the near future, Clinton sees a number of opportunities. “When you look out into the future, there’s a lot of markets that are going to be chronically undersupplied over the next five to ten years, especially when there are high interest rates.” 

Getting started investing in commercial real estate

If you are interested in looking at investing in commercial real estate, there are minimum financial requirements that must be met based on regulations. 

“Our customer base is mostly individuals,” Clinton explains, “which may include doctors, lawyers, as well as finance, technology and media people. The first step is signing up for an account, which looks like a brokerage account on our web site. Then you can browse the types of investments that are available.” 

Clinton says you can choose your own properties as a self-directed investor or call the company to discuss various investment options. Some investors may want to meet in person. “We have a team of professionals who will answer questions, talk you through the properties and educate you on how it all works.” 

Clinton says if you are interested, go to the EquityMultiple web site or pick up the phone and call. “We’re an internet-based business but also a traditional business with real estate experts who want to speak to customers, help them screen investments, and help with asset management.” 

MarketWatch: When Your Siblings Scam You

MarketWatch Link: https://on.mktw.net/3k4CQf3

Many of us have taken steps to prevent scams such as refusing to send money to online strangers, not clicking on links from anonymous sources, and installing a VPN to hide our IP addresses. But how do you protect yourself against unethical family members whose goal is to cheat you out of money? 

I have a close friend, Alan (not his real name) who was scammed out of most of his inheritance by his greedy brother and corrupt sister-in-law. He learned the hard way that some siblings betray family members, even their own mother, just to get a bigger payout for themselves. 

Based on interviews with Alan and my own personal experience, I created a list of red flags that may help you successfully survive family financial transactions: inheritances; insurance payouts; real estate deals, loans and stock sales are fraught with opportunities for scammers, even among family members. 

1. Pressure tactics

Let’s say a sibling, with help from their lawyer, has documents for your signature. Signing documents, especially if the relative is the executor of an estate, is expected. Do not get pressured or bullied into signing documents on the spot. 

To protect your interests, take the documents with you and for your own lawyer to review. Unethical relatives can be stopped early when you refuse to sign anything without a thorough vetting. Many future financial problems could be averted if people would just read the document before signing. 

2. Psychological clues 

Be on the lookout for relatives (or anyone else) seeking a psychological advantage. Be wary if someone appears nervous when presenting you with a contract to sign, or a family member becomes secretive and vague, and unwilling to answer direct questions. An honest person will reveal everything to all family members. Dishonest people keep you in the dark and hide relevant information. If you ask for information, they may promise to “let you know,” but never do, hoping that you will forget. 

Do not ignore psychological clues. The best antidote for dishonesty is truth and full disclosure. Keep all of your family members in the loop, make sure your relative keeps promises, and push for the facts. Dishonest family members will try to distract, deceive, hide, and bully. Do not accept this behavior. Also, never make any side deals with them — you will get the “short end of the stick.”

3. Lawyering up

A common red flag is when a relative “lawyers up.” In Alan’s case, his brother claimed that other family members were stealing from the estate (this lie is a false flag), which was an excuse to “protect” the money. The brother then brought in lawyers and money managers, and directed the inheritance money to himself. Be forewarned, the larger the estate, the more cautious you need to be. 

If your sibling acts suspiciously, overspends (as an executor), or hires a lawyer, it is essential to hire your own lawyer or financial adviser for guidance. It’s likely that your sibling will discourage you from getting help, or even attack you for doing so. Do not back down. Independent counsel is needed to protect yourself and innocent family members. 

Sometimes the family member you least suspect of being unethical is the biggest scammer. In Alan’s case, his sister-in-law may have been the predator, but his greedy brother went along with the schemes, including pocketing all of the real estate profits. 

4. Unusual financial actions

Be alert to unusual or impulsive financial actions. For example, a relative may abruptly put a wealthy elderly family member into a nursing home (claiming “they will love it there”), transfer a large sum out of the estate (this may be impossible to discover before it’s too late), or initiates a rushed property sale. These are all serious red flags. 

5. Changing the will 

Extremely dishonest family members will attempt to influence the contents of the will. They often get away with this by preventing the elderly relative from communicating with others. For example, I was involved with a family whose nephew moved his sick aunt into a nursing home, cut her off from speaking to her family, and secretly had her sign documents making him the executor and sole beneficiary. After her funeral, other relatives discovered they were left with nothing. 

If an elderly family member stops communicating with you, find out what is going on before it’s too late. Be sure to keep all family members informed.

Get involved in your family’s financial affairs and don’t be left in the dark. 

6. ‘I don’t care’

Some deceitful family members will act as if they don’t care about the money, or that they don’t need it (a red herring). This lie is created to avoid suspicion. In reality, this individual may secretly be planning to take possession of as much of the family money as possible. To prevent this, get involved in your family’s financial affairs and don’t be left in the dark. This will help avoid unnecessary future surprises. 

Don’t be a victim of family fraud

When it comes to large family fortunes especially, be prepared for anything. It’s not enough to identify red flags: Have the courage to protect what is rightfully yours so you don’t become a victim. For example, do not be surprised if unethical family members fight back with bullying tactics and threats — a reason why you must hire independent legal and financial professionals. 

Money can change people. Previously honest family members may succumb to the temptation to grab the bulk of the family fortune. For the sake of your financial future and that of other family members, don’t allow these fraudsters to get away with a “crime of opportunity.” Nip it in the bud by being on guard, verifying all transactions, and most importantly, not signing anything unless reviewed by a lawyer.  

Obviously, once these schemes are uncovered, family relationships will never be the same.

MarketWatch: The Fed-Fueled Fantasy Has Popped

(January, 2023 ) Link: https://bit.ly/3XIk5fK

After the U.S. stock market made all-time highs last year, I spoke with Jeffrey Bierman, a professional stock-trader with more than three decades of experience. Bierman also lectures on TheoTrade.com and TheQuantGuy.com, and is an adjunct professor at Loyola University and DePaul University, both in Chicago. 

At the S&P 500’s high he predicted a drop to 3600 or lower in 2022, and he was right. I recently caught up with Bierman to discuss his latest projections and strategies for U.S. stocks: 

MarketWatch: What strategies do you recommend for investors in this environment? 

Bierman: First, you can’t be 100% in stocks. Second, you have to look for yield. The yield on bonds right now is competitive with stocks. If you can get 4% for a bond with half the risk of the S&P 500, then it pays to buy bonds because the yields are secure and volatility is lower. Move more towards fixed income and move away from high beta stocks with high multiples. Because in bear markets, there is little to no growth. Value dominates in a bear market, and growth dominates in a bull market. 

MarketWatch: How do you know this is still a bear market? 

Bierman: If it looks like a duck, walks like a duck, and quacks like a duck, it’s a duck! Most stocks are far below their 200-day moving averages. Also, even when good news comes out, most stocks can’t get any traction. Finally, during the last few months, money has been flowing out of stocks and into bonds. All of these clues suggest a bear market. 

MarketWatch: If you’re right, when will this bear market end? 

Bierman: When growth stocks start to underperform and value stocks outperform. Then investors throw in the towel on growth stocks. That’s when we know we are close to the end of the bear market. 

MarketWatch: Is it time then to start looking for a new bull market? 

Bierman: Not even close. The final stage of a bear market is capitulation, when investors give up. Retail investors are worried right now but the wealthy are not. If we take out 3600 on the S&P 500, the wealthy will worry. But be careful of a fakeout. The market could drop below 3600 and bounce. That’s when everyone thinks the bear market is over. Instead, you get one final flush.  

MarketWatch: How should traders approach this market? 

Bierman: You must be nimble. Trade in short ranges. This is not a market where you will get “gamma squeezes,” (when a stock soars in a short time period). Traders need to take profits quickly and often, and don’t reach for the big swings or big moves. I call this the “fits and starts” market. 

MarketWatch: How do you personally trade this market? 

Bierman: I trade in large-cap and midcap stocks, and no small-caps. I also trade small size. For example, one of my accounts has $125,000 in it. The largest position I have is $4,000 to $5,000. I trade no more than 1% to 3% of my entire portfolio on one position. You should never trade more than 5% of your portfolio in one position. Trade small.  

‘I call it a slow-motion bear market — think of it as progressive stock bloodletting.’ 

MarketWatch: What’s your prediction for U.S. stocks in the near-term? 

Bierman: I want to be conservative in my projections. Realistically, we tag 3200 to 3300 on the S&P 500. In a worst-case scenario, we could tag 3000 this year. The best-case downside projection is 3500. 

MarketWatch: So even in your best case, stock investors still will feel more pain before the conditions improve.  

Bierman: I’m not Darth Vader but yes, I expect it will get worse, but not extraordinarily worse. We are not in a 2001 or 2008 type of bubbleI call it a slow-motion bear market — think of it as progressive stock bloodletting. It will fool a lot of people. Think about a frog in a warm bath that gets hotter. By the time the water is boiling, the frog is dead. 

MarketWatch: Why are stock investors in such a tight spot now?

Bierman: This market got hooked on the Fed’s easy money. After the 2008 housing crisis, there was a handoff from Bernanke to Yellin to Powell using quantitative easing. Instead of the normal 4% to 5% interest rates, they went to nearly zero. It was like the limbo game — how low can you go? The market got comfortable, then delirious, with that low-interest rate mindset. The Fed had a chance to take away the punch bowl at 3400 [on the S&P 500] but chose not to. Then we overshot by nearly 1400 points. This is the excess that has to be worked off. 

MarketWatch: Aren’t higher stock prices a good thing?

Bierman: It’s detached from reality. It’s like an automatic brainwash where fundamentals and value don’t matter anymore. The only thing that matters is that the Fed is providing easy liquidity and to hell with anything else. That helped create an inflationary bubble and all of a sudden the market’s mindset changed. Last year was a wakeup call. For the first time in 10 years, there was a reality check. That’s when people realized the Fed can’t always stand behind the market and hold interest rates at zero. 

MarketWatch: What will it take this time for investors to get real about market conditions? 

Bierman: People are slowly realizing that something has changed. People had been living in a fantasy world by the three Fed chairs. It damaged the mindset of the average individual. Even many pros drank the Kool-Aid and believed that nothing mattered except the Fed liquidity policy. As you can see now, the market can’t get any traction. The Fed-fueled fantasy bubble has popped. 

Michael Sincere (michaelsincere.com) is the best-selling author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), is aimed at advanced short-term traders and investors. 



 

MarketWatch: Teach Your Children to Invest, not Spend

Link: https://on.mktw.net/3GZCcac

As a guest speaker at colleges and high schools, I discovered that most teenagers are clueless about investing. They get an “A” for knowing how to spend money, and many work hard for income, but few know how or why they should invest in stocks, mutual funds, or index funds. Typically, most teenagers haven’t thought about building wealth by paying themselves first.

Sometimes the biggest obstacle to making money is our perception. We believe investing is rocket science, or something that only professionals can do. By giving your children the confidence to manage and invest their own money, they can learn to be financially independent with the freedom to do what they want in life. 

Do you want your children to be spenders or investors? In reality, they can be both. Before your children get their first credit card, show them how to make money work for them by investing. 

Here are some actions you can take if you want your children to build wealth:    

1. Open a joint brokerage account: Stick with self-directed brokerage firms such as TD Ameritrade, Fidelity Investments, Charles Schwab, and eTrade Financial  (to name a few). If your children do not know what a brokerage firm is, use this analogy: a brokerage firm is like a shopping mall but instead of spending money on clothing or electronics, you’re buying different investments that can make money. 

2. Open a UGMA (Uniform Gift to Minors Act) account: A UGMA is a custodian account used to hold and protect assets for minors until they reach legal age. The account can be opened at most brokerage firms with no minimum amount. Talk to the representatives for details in opening a UGMA in your state. 

3. Consider potential tax consequences: Talk to a tax professional or the brokerage firm representatives before you open an account. When your child reaches legal age, the custodian (you) must hand over the assets to your child. 

4. Start with an index fund:  The first investment your teenager should make is in a low-cost index fund such as a S&P 500 ETF (exchange-traded fund) that tracks the S&P 500 your brokerage firm will have a list of the most popular). The S&P 500 Index contains a group of 500 large U.S. companies, so when you buy the S&P 500 Index, you are buying a small piece of every company in the index. 

5. Have a routine: The goal in opening the account is to get your child into the routine of investing a certain amount of money into the fund every month (you could also set up an automatic payment plan). If needed, use a portion of his or her allowance to invest in the fund. Here’s a hint: Match by 50% any money your child invests. (If your child invests $100, add an additional $50, etc.). Look for reasons (like a birthday) to add money to the fund. 

6. Think outside the box:  The idea is to get children to think differently about how to manage money. By opening a brokerage account, you can show your children the value of routinely paying themselves the first of each month (in contrast to making a credit card payment). 

7. Dig into the details: Show your child how to read the brokerage statement (either online or by mail), and how to follow the index fund prices (which are posted online at dozens of websites including here). Your children will see how easy it is to make (or lose) money every day without much effort, or having to be involved with the financial industry. 

Here are some other ideas to consider: 

1. Teach patience: Regular, monthly allocations can help your child learn how to be a disciplined and patient investor, attributes they will need as they get older. With the power to manage their own money, they won’t need to depend on others to invest for them. 

2. Teach the difference between investing and speculation: Some teenagers will be so fascinated by the market they may be interested in speculating in individual stocks, or in the latest investment fad. That is fine, but keep the good old reliable index fund separate from any speculative investments.  

3. Teach market realities: As the index fund appreciates, your children may experience the thrill of making money in a bull market, or the agony of losses during a correction or bear market. The odds are good that over their lifetime, the account will grow in value (although there are no guarantees). The secret is to keep adding to the account and letting it grow on its own.  

In addition, help your child become financially literate without overwhelming them with financial terms. They may have questions about how money grows in value (compound interest), why they should put a certain amount in the account every month (dollar-cost averaging), why the index fund goes up or down (profitable companies within the fund go up in price, or vice versa), or if they can invest in something else (diversification). I suggest not teaching these concepts unless they ask. 

After your child has learned how to be an index investor (it can take years), they may want to select various mutual funds, or buy individual stocks. For now, however, teach your children to follow the market rather than trying to pick winning or losing stocks. 

After the investment account gets even larger, it will be hard for most people to resist withdrawing money (unless for a good reason such as college or their first house). But if your children can make investing a lifelong habit, starting as early as possible, they can focus on accumulating wealth rather than only spending. Teaching your children how to invest is one of the most important gifts they will receive, and the time to start is right now. 

MarketWatch: 10 Rules for Cryptocurrency Traders

Link: http://bit.ly/3JB6jrf

If you’re reading this, I assume you know cryptocurrency basics — for example, that crypto is digital or electronic money not backed by a government or bank. To protect your account, you probably know to store crypto in a digital wallet, preferably offline on a computer, thumb drive, or mobile device. And you should know that crypto currencies are extremely volatile, highly risky and easy to manipulate.

If you still want to trade crypto, let’s discuss security. First, open an account with a trading platform you can trust such as Coinbase or Robinhood. Yes, there are other platforms but you have to start somewhere. These two well-known, reliable providers will do the job until you can separate the good from the bad. 

By the way, absolutely avoid fancy online brokerage firms or crypto exchanges that you’ve never heard about. Many are scam sites designed to exploit your inexperience. Please do basic research and never give your money to unknown companies. Here’s an idea: Call or email the brokerage before transferring your money and determine its level of service. Better yet, see if the company even exists. 

Second, although there are thousands of cryptocurrencies (some real, some fake), stick with the most popular and most liquid crypto in the world: bitcoin. After you gain more experience, feel free to trade other cryptos (after bitcoin, Ethereum is the second-largest). 

Now let’s talk about trading. The first question most beginners want to know is, “Can I make money trading crypto?” The answer is yes, but it takes skill, discipline, and due diligence. Crypto is still in its early stages and it could take decades for it to be accepted and backed by a government or institution (if ever). Until then, buyer beware. 

The worst part is that the crypto universe is populated with dark money, manipulators and pump-and-dump manipulators who give misleading advice on social media, lure you into buying their bogus currencies or try to convince you to join their phony crypto exchanges. Right now, crypto is pure speculation, but as long as you do your research you should be able to avoid scams. 

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Since you’re now aware of some of the risks, here are the top 10 rules that every beginner crypto trader should remember and obey: 

1. Scale into a trade rather than plunking down large sums of money: If you’re new to trading cryptos, it’s a mistake to put large sums of money into bitcoin (or other cryptos) all at once. Because crypto is so volatile, instead of buying $1,000 in bitcoin, for example, start with $200, and if it’s moving in the right direction (up), add another $200. Keep adding until your position size is fully funded. 

2. Buy and sell at extremes: Whenever you trade a volatile financial product such as crypto, you must routinely take profits. If your gains are extreme, sell half or all, but take something off the table. Resist the urge to be greedy when trading crypto (i.e. Fear of Missing Out or “FOMO”) or you risk holding until you lose most or all of your money.

3. Trade small: At first, aim for small gains. Sure, some people have made millions of dollars trading bitcoin, but like lottery winners, there are many more who have lost all or a good portion or all their money. 

4. Never buy on margin: When you go on margin, you borrow money from the brokerage to increase the amount you can buy. This is leverage, and it’s a double-edged sword. If you’re right, you can make substantial profits. If wrong, you may owe more than you invested. Wise traders manage risk, and that means not borrowing money to buy crypto. (You’ll know what I mean after you get your first margin call.) 

5. Keep mental stop-losses: It’s always wise to have stop losses, but because cryptos move so quickly, “hard” stop losses are often ineffective (one reason many platforms won’t let you use hard stops for cryptos). Instead, use “mental” stops and have the discipline to obey them. An alternative method is a “time stop,” i.e. tell yourself you will sell the position by a certain day, Friday, for example. This is an effective way of forcing yourself to lock in winners and cut losers.  

6. Don’t hold losing positions: If a trade is going against you, consider selling all or half — don’t let small losers turn into big ones. It’s true that those who sold bitcoin at $20,000 were shocked when it skyrocketed towards $60,000. Rule No. 7 shows you how to handle that.

7. Have a trading plan: It’s important to have a trading plan, especially for cryptos. Have a plan that helps you decide when to buy or sell. Follow the plan and obey your rules.  

8. Use technical analysis: Technical analysis gives you clues when to enter or exit a position. For beginners, the best two indicators are moving averages and RSI (Relative Strength Indicator). They are easy to grasp and provide good signals.  

As of June 30, 2021, bitcoin was well-below its 20-, 50-, 100-, and 200-day moving averages on the daily chart. (Bitcoin needs to rise to its 200-day MA of $43,794 to climb out of the basement.) On the weekly chart, although consolidating, bitcoin is still slightly above its 50-day moving average. 

RSI is 44.72 for bitcoin on the weekly chart. Although oversold, it’s not at extreme levels yet. At 30 or lower, it’s extremely oversold, but don’t use RSI to time when to enter. 

9. Diversify: Never put everything you own into one financial product. Buy crypto but spread your money across non-crypto investments. If that isn’t possible, make small purchases until you gain more experience and knowledge. 

10. Practice with a simulated account before buying: If it is available, practice in a simulated or paper money account before trading with real money. If you don’t have access to a test account, follow Rule No. 3. 



MarketWatch: Advice From Famed Investor Peter Lynch

Link: http://bit.ly/3JxvcUM

As a freelance writer and author, I’ve been fortunate to have interviewed many stock-market gurus over the years. One of the most memorable was with the legendary Peter Lynch, the former Fidelity Investments mutual fund manager. Years ago for an article, I spoke to him about one of his favorite subjects: Helping young people learn to invest. 

Do your research

Lynch popularized the idea to invest in what you know — meaning to own shares of the companies that you are familiar with. He wrote three bestselling books on his ideas, including actually going in person to observe what people were buying first-hand. 

Lynch was famous for visiting the companies that he wanted to buy stock in. For example, before buying shares in an automobile stock, Lynch would go to the dealer showroom, converse with the salespeople, and check out the inventory. 

His advice, while sounding simplistic, is actually brilliant. After all, most people spend more time and effort researching buying a new refrigerator than a stock. I made that mistake when I first starting investing, sinking $50,000 into shares of a Texas cell phone company that I had never even heard about. Why? Because an acquaintance who knew more than I did about the stock market said I should. “You can double your money,” he promised. Famous last words.  

Instead of doubling my money, I lost half of it within months when the company nearly went bankrupt after some questionable accounting maneuvers. It was also the first and last time I ever bought stocks on margin. 

Using margin, the broker allowed me to use my original $25,000 to buy another $25,000 worth of stock (2-1 margin). When the stock plunged, I not only lost money on my original investment, I also owed the brokerage for the money I borrowed. Mismanaging margin is one of the ways that many investors get into trouble when their stocks go against them. 

Study balance sheets and stock charts 

Had I followed Lynch’s advice and done some basic research, I would have discovered that the so-called cell phone company was a scam. It was being promoted by fake press releases and inflated posts on social media. 

In hindsight, I could have flown to Texas and visited the company. I would have discovered that it had only two employees. It would have been a lot cheaper to fly there than lose $25,000. I also could have studied the company’s balance sheet, looked at a stock chart, and studied its earnings reports. It sounds like common sense, but think of how many people buy stocks every day without doing the most basic research, what is referred to as exercising “due diligence.” Others call it “doing your homework.” 

How Lynch handled bear markets

From my interview with Lynch, I learned that he doesn’t make predictions. “I have no idea what the market will do over the next one or two years,” he told me. “What I do know is that if interest rates go up, inflation will go up and in the near term the stock market will go down. I also know that once every 18 months the market has a decline of 10%. These are called corrections. We could easily have a 10% correction. Perhaps one out of three of these corrections turns into a 20% to 25 % correction. These are called bear markets.”

Lynch took market corrections in stride, including bear markets. Although he disliked bear markets since he was a long-only manager and hated losing money when one occurred, he didn’t panic. “If you understand what companies you own and who their competitors are,” Lynch said, “you’re in good shape. You don’t panic if the market goes down and the stock goes down. If you don’t understand what you own and don’t understand what a company does and it falls by half, what should you do? If you haven’t done your research, you might as well call a psychic hotline for investment advice.” 

I learned from Lynch that although bear markets are inevitable, they cannot be predicted. That is why before one occurs, you must evaluate what stocks or funds you own. If you are confident about your investments, you won’t get shaken out.

For me, it means reducing some of my positions, especially given the U.S. market’s current technical indicators. Although the market has been on a 12-year bull run, it is still vulnerable to a steep correction, or worse, a bear market. That is why it’s more important than ever to do the basic research (i.e. study balance sheets and stock charts). 

Bottom line: If you are a long-term investor, Lynch’s methods and ideas are excellent. If there is a bear-market hiccup, use the opportunity to buy shares of stock or indexes that you have researched. 

MarketWatch: How to Use RSI (Relative Strength Index)

Link: http://bit.ly/3wT5GBY

While there are hundreds of stock market indicators and oscillators, most investors and traders only need a few. One of the most popular oscillators is RSI (Relative Strength Index). Created by a brilliant engineer, Welles Wilder, RSI tells when an index or a stock is overbought or oversold. Like most “bounded” oscillators, it has a reading from 0.0 to 100.0 on the chart.

“Overbought” is when a security makes an extended move to the upside (and is trading higher than its fair value). “Oversold,” conversely, is when a security makes an extended move to the downside (and is trading lower than its fair value). 

Jeff Bierman, chief market technician at Theo Trade and a professor of finance at Loyola University Chicago, confirms: “RSI is a time-tested oscillator that is very accurate at identifying overbought and oversold conditions. It allows you to observe ‘risk management zones.’ Then you can evaluate whether the zone might be broken to the downside or upside.” 

The purpose of RSI is to let you know if a market or stock is overbought or oversold and may reverse. It doesn’t mean that the security will reverse with 100% certainty, but it does indicate it’s in the danger zone. 

How can you identify when a market or stock is overbought? Look at RSI on a weekly (or daily) stock chart. If RSI is 70 or higher, the security is overbought. If RSI falls to 30 or below, it is oversold. It’s really that simple.

RSI is automatically displayed on almost every stock chart. Below is a screen shot of the Standard & Poor’s 500 index RSI on a weekly chart with a three-month time frame and the 14-day default (recommended). 

Here are some additional facts about RSI: 

When RSI rises to 70 and above

  • The RSI weekly chart gives a more reliable and accurate signal. 

  • RSI must be 70 or higher and remain above that level to generate an overbought signal. This is a clue that SPX (or another index or stock) is overbought. Hint: Sometimes indexes or stocks will reverse before reaching 70. 

  • As every technician knows, just because a stock or index is overbought doesn’t mean it will reverse immediately. Securities can remain overbought for long time periods before reversing. 

  • Do not use RSI to time when the market may reverse. Instead, use it as a guide. 

When RSI falls to 30 and below

When RSI on the S&P 500 (or an individual stock) falls to 30 or below, and remains under that threshold, that is an oversold signal. It doesn’t mean that SPX will reverse to the upside immediately, but the possibility increases (much depends on other factors such as market volatility). 

Bierman says that if RSI drops hard and fast (to 40 from 69, for example), even though it may not drop below 30, that hard and fast plunge is a signal that the S&P 500 or other indexes may rally (because the market is oversold). 

While some investment professionals preach that you cannot time the markets, in reality, a hard and fast plunge in RSI is an important tell, one that should not be taken lightly or ignored. Always confirm with other indicators (such as moving averages) before acting.  

Hint: Often, RSI lingers at or near 50, a neutral signal. This is not an actionable trade. However, when RSI makes an extreme move, either above 70 or close to 30 on the weekly chart, it should get your attention.  

Limitations of RSI 

Like any indicator, RSI is not perfect. Sometimes certain stocks will remain overbought (at 80 or 90) not for days or weeks, but for months. The longer the stock remains overbought without reversing, the less effective the oscillator. In addition, like many indicators, RSI is not as successful in a low-volatile market environment. 

Another weakness of RSI (and other indicators) is that it gives false negatives and false positives. Bierman explains what to do when RSI isn’t working properly: “Any indicator has a flaw. The answer is to combine RSI with other indicators. That cuts down your margin of error.”

In other words, don’t make a trade unless you confirm with other indicators (such as moving averages or MACD).  

I know that some of you are distrustful of technical indicators, and wonder if they are even effective. I speak from experience when I say that RSI usually generates reliable signals, especially on the weekly chart. Although not perfect, it is a mistake to ignore or dismiss its message.  

MarketWatch: Start by Practice Trading

Link: http://bit.ly/3YiNDAB

For reasons I don’t understand, most people enter the stock market for the first time without practicing or testing. Perhaps they read articles and books or watch videos about the market. Should anyone get a driver’s license after viewing a “how to drive” video? Of course not. New drivers practice driving in a parking lot or deserted street before getting on the highway. 

Unfortunately, as we’re seeing now with GameStop and AMC Entertainment Holdings, many new traders and investors enter the market without practicing first. It’s not surprising that most rookies lose money — sometimes a lot of money — when starting out. 

By practicing and testing before you trade or invest, two problems are solved. First, you become familiar with brokerage software. Second, the more you practice, the more skills and knowledge you gain. 

Let’s discuss some of the ways to use a simulated or paper money program, and which brokerages allow you to practice before making a real trade. 

Test before you buy

Before making a trade using real money, duplicate the trade in the paper money program. For example, if you wanted to buy 100 shares of Apple, before making that trade, buy 100 shares in the simulated trading program. 

If your timing was wrong, which is a common problem, you will lose money in the paper money program. Maybe your entry was poor. Maybe you bought right before the stock reversed. No matter the reason, the more you test, the more your timing will improve. 

Many people believe that “no one can time the market.” In reality, some traders can time the market. It’s not easy, and it takes a lot of practice, but getting the timing right is an important trading skill. Use the paper money program to develop that skill. 

Fear of missing out (FOMO)

On the other hand, let’s say you bought Apple at the right time, and made money in the paper money program. In this example, you may consider buying in the real trading program. This is a “trend following” strategy. 

If you are the type of trader or investor who hates to miss out on potential gains, then testing before buying might feel like you’re missing out. If you buy a fast-moving stock, you may believe you don’t have time to do a test trade. 

Even with these limitations, if you are a beginner, I urge you to make dozens or more test trades before betting real money. How long do you practice trade? Everyone has a different learning curve. Some may need a few days; others may take months. 

Be sure to paper trade with the same number of shares in the test program as in real life. For example, do not not pretend to buy 10,000 shares of Apple if all you can afford is 50 shares. Test trade with 50 shares. 

For those who want to skip the simulated program and start trading immediately, there is an alternative: Buy between 1 and 10 shares of a stock you believe has potential. By trading small, you learn the brokerage software while also making or losing real money. This is a reasonable alternative for anyone not wanting to test trade first. 

Experienced traders: Test strategies or take a break

Experienced traders often use simulated trading programs to test strategies. Let’s say you were interested in selling stocks short, a strategy not recommended for beginners. Before using real money, practice this risky strategy in the simulated program for as long as needed until you have gained experience and skills. 

If you’re on a losing streak, practice in the simulated program until you get your confidence back. In addition, after practice trading, re-enter the market but with much smaller share size. For example, if you normally buy 1,000 shares and lost money, trade with 100 shares until you figure out what went wrong.  

Listen to tips — but test first 

I used to advise people not to listen to tips, but I’ve changed my mind. Feel free to listen, but test first. For example, if your neighbor or some tout on TV tells you to buy shares of a stock, test it out in a paper money program. 

First, this allows you to evaluate whether the tipster is reliable. Second, you find out if the tip is valid. As long as you aren’t afflicted with FOMO, you can always buy the stock later. 

Where to find simulated or paper money programs 

These brokerage firms offer paper-money trading programs: TD Ameritrade, Interactive Brokers, TradeStation and E*TRADE . I am certain that nearly every brokerage firm will have a simulated trading program in the future. Why? Because customers will demand it. 

In addition to the brokerage firms, MarketWatch has a simulated trading game through its “virtual stock exchange,” with a 15-minute quote delay and $100,000 in play money. Investopedia also allows you to set up a trading game with $1 million in play money and a 15-minute quote delay. 

Currently the best simulated trading program is the paperMoney Virtual Stock Simulator on the thinkorswim platform from TD Ameritrade. You’re given an unlimited amount of paper money to use for 60 days free of charge (even if you don’t have an account with the firm). You can practice trade with this program at platform.thinkorswim.com. 

So the next time you are thinking of buying a stock, test before you buy. Although not everyone is a fan of this method, the benefits far outweigh the negatives. Rushing into a trade without testing is a mistake you don’t have to make.

MarketWatch: Use Puts for Protection or Speculation

Link: https://on.mktw.net/3HqZPbH

There are times when the stock market is in a big, beautiful bubble. During those times, it’s difficult to convince anyone to sell, or bet against it. 

Why sell bitcoin at $10,000, for example, when it might potentially hit $20,000? Why sell the S&P 500 at its all-time high right before Christmas? Are you crazy? 

Often, there is no hard evidence that a market is in a bubble until after it pops. That is why common sense goes out the window during bubble-euphoria as the market reaches levels that seemed impossible only a few weeks before. 

Whether the U.S. stock market is now in a bubble or not will be for the history books. Regardless, one strategy that most traders (and investors) should learn is how to buy and sell options. Those who don’t understand options believe it’s “a sucker’s bet.” It definitely is if you don’t know what you are doing. 

Although you can lose money trading options, many options strategies are designed to reduce risk and protect stock portfolios. 

If you are willing to learn, buying options is an excellent way to participate in the market’s rise or fall, and with limited risk. This does not mean no risk. Although you can lose money trading options, many options strategies are designed to reduce risk and protect stock portfolios.   

There are dozens of fancy-sounding option strategies, but all options are based on buying and selling “calls” and “puts.” If you believe a stock or index will go up in value, you would buy calls on that security. If the market is forming a bubble, typically there is a final melt-up that brings in the last of the nonbelievers. Owning call options during this stage can bring great profits if you’re able to get out before the reversal — easier said than done. 

Now, if you believe a stock or index will go down in value, you would buy puts on that security.

The risks of options trading

Options have a bad reputation because people misuse them. Typically, investors underestimate how quickly option prices fluctuate and how easy it is to lose money. 

Unlike with stocks, when buying calls or puts you have to be right about the direction and the timing of the underlying stock or index price. When you buy calls or puts, the clock is always ticking. If you’re wrong about the direction of the stock or index within a specified time period, you could lose most or all of your initial investment. That is why buying calls and puts are a speculative trading strategy, and not for everyone. 

If you want to reduce risk, there are a variety of options strategies designed to protect stock portfolios. Buying puts is the simplest of those strategies. If you own a portfolio of stocks, you will lose a lot of money when the market plunges. By owning put options, you can offset all or part of that loss. If you own enough puts, you can even earn an overall profit when stocks decline.

Buying put options

If you believe the market or a stock has reached bubble levels, you might want to learn how to buy puts. If the stock or index drops in value within a certain time period, you make a profit. If it doesn’t, you lose money, perhaps the entire cost of buying the puts. You may already know that buying put options has been a losing trade for several years while buying call options has been a winner. 

If you are convinced this market is going to plunge, I do not recommend shorting stocks. Shorting is a difficult skill for most traders to acquire, especially for beginners. Buying puts is less risky than shorting stocks. With shorting, your potential risk is unlimited. With put options, the most you can lose is the money you initially invested. 

When you get a decent profit, sell. When you’re wrong, cut your losses quickly. 

Five basic tips:

If you buy puts or calls, consider these five guidelines: 

1. Start small. The key to buying calls and puts is to use less money to make more money. This is a rule that should be followed when you are starting out. At first, trade with no more than $1,000 or $2,000, that is, buy only one or two option contracts at a time. 

2. Sell quickly. Unlike with stocks, option prices often move fast. You can’t buy a put (or call) and go on vacation, or even take the day off. When speculating with options, you need to concentrate. Options traders do not have the luxury of holding positions for long, so when you get a decent profit, sell. When you’re wrong, cut your losses quickly. 

3. Learn slowly. It might take you at least a year to learn how to trade calls and puts. Consider that initial investment as tuition money as you learn what not to do, and to start developing strategies that work for you. 

4. Focus on one stock or index at a time. At first, become an expert on the personality of only one stock or index. A good place to start is with is the S&P 500 ETF Trust (SPY). You can spend years simply trading this actively traded security. 

5. Make a trading diary. This is extremely important if you want to succeed as a trader. Keep track of your mistakes, the lessons you learned, and the trades you made. Keeping a trading diary is like having your own personal coach.

MarketWatch: 10 Rules for Beginner Day Traders

Link: http://bit.ly/3JzzElS

For those interested in day trading, consider the following: 

1. Start small: The No. 1 rule is to start small. Whether you are day trading stocks, options, or exchange-traded funds, if you are a beginner, start with no more than 100 shares of stock or one or two options contracts. This way you can make every potential mistake using as little money as possible. It can take years to learn how to be a consistent trader. Your tuition is the money you will likely lose as you learn how to manage risk. Remember, most day traders lose money at first, which is why you want to keep losses small.  

2. Trade for real, not practice: I no longer believe in using practice accounts. Practice accounts are not realistic if you want to feel the pain of loss and the thrill of making real profits. By trading small, (say $1,000), you will experience real emotions without severe financial damage when you’re wrong. 

3. Be selective: If you have less than $25,000 in your account, you are limited to making only three day trades during each five business day period in a margin account (contact your brokerage for specific rules). Once you make that fourth round-trip day trade, you will be designated as a “pattern day trader” and must put $25,000 in the account to continue trading. 

This is a good rule. Beginners will learn to make more selective trades, rather than buying and selling dozens of times a day. If you’re that good of a trader, you will eventually be able to build your account past the $25,000 threshold even if you’re starting with $5,000. 

Never trade more than what you can afford to lose.

4. Don’t be overconfident: The biggest danger to most day traders is overconfidence. Often, day traders make 5%, 10%, 20% on their money in one day. So instead of trading small, many traders bet big on the next trade, perhaps using margin (not recommended for most traders) — and instead of making the big score, they blow up their account. Never trade more than what you can afford to lose. Once you cross over from disciplined trading to gambling, you will likely lose money, perhaps all of it. 

5. Be emotionless: The best traders are often the most unemotional. When you think you are a genius (as many long-term investors thought a month ago), you could give back your profits. Here’s a hint: After I make a huge profit, I stop trading for the rest of the day, and perhaps even the next few days. If you feel giddy or too eager to make a trade, that’s a clue to stop trading.  

6. Keep a trading diary: If you want to be an educated trader, keep a trading diary. In this diary you will write all of your mistakes and what you learned. By writing it on paper,  you will eventually find strategies that work for you, indicators that will keep you on the right side of the market, and rules that will help you cut losses when wrong and increase gains when right. 

7. Concentrate: Beginner day traders underestimate the concentration needed when day trading. Although you don’t have to sit in front of the computer and trade all day, when you do have an open position, you must watch it like a hawk or you may lose money. Speaking from experience, in the past I had large open positions, went to lunch, and when I returned I had lost thousands of dollars. If you cannot watch your open positions closely, don’t trade. 

8. Trade only one or two stocks: You do not need to trade or even watch dozens of stocks every day. If you are starting out, focus on trading only one or two stocks or indexes. Popular index-tracking ETFs are good choices, such as SPDR S&P 500 ETF Trust (SPY) Dow Jones Industrial Average ETF Trust, iShares Russell 2000 ETF, or PowerShares QQQ Trust. Or you can choose one or two stocks and learn their trading personalities. The more stocks you trade, the more confusing it gets when the market turns on you. 

Aim for hitting singles, not home runs. 

9. Be content with small profits: Another huge problem for day traders is greed. Instead of being satisfied with a $100 or $200 daily gain, they fret over the money they could have made. At first, your goal is to be a disciplined and consistent trader. Aim for hitting singles, not home runs. Learn to book profits quickly, almost always before the end of the day, if not before noon. 

10. Don’t trade every day: You do not have to trade every day. On the days when intraday volatility is low, day trading strategies may not work. Eventually, after the next correction or bear market is over, volatility will get crushed once again. That’s when you may have to reduce day trading strategies and primarily use buy and hold. Meanwhile, strike while the iron is hot, because day-trading’s day in the sun won’t last forever. 



MarketWatch: 7 Common Day Trading Mistakes

Link: http://bit.ly/3XYbu9b

Stock trading is a high-stakes game, so if you’re playing at least learn how to improve your odds. Here are seven common trading mistakes and how to avoid them:   

1. Big, overconfident bets: Want to lose most or all of your money real fast? Make outsized stock-trading bets, like a roulette player betting it all on red or black. In fact, big trading bets are a form of gambling. 

Steer clear by trading in small amounts — 100 shares or less — and, it goes without saying, don’t bet more than you can afford to lose. 

2. Overtrading: Many day traders buy dozens of stocks that are moving up, hoping for a quick profit. Day trading too often and with too many stocks is a recipe for disaster. 

Trade just one or two stocks a day. Trying to manage anything more is for jugglers, not traders. Although the pattern day trading rule is annoying (you are limited to three trades in a five-day period if you have less than $25,000 in your account), it forces you to trade less but more accurately. 

3. Holding losers too long: Knowing when to sell losers takes experience. If you sell too quickly, you miss out on potential profits if the stock reverses. If you sell too late, you incur bigger losses. Most novice day traders typically hold their losers too long, hoping they will get back to even. 

Remember, you’re trading, not investing. Don’t hold losers, and rarely keep a position overnight. Once it’s clear the loser is not coming back before the market’s close, sell and live to trade another day. 

4. Selling winners too soon or too late: Managing your winning positions is as challenging as managing the losers. Many traders sell winners too early, missing out on bigger profits. Even worse, if they hold some winners too long, a profitable position can plunge to zero. 

The solution: Plan in advance for when to sell and stick to it. If you land a big winner, sell it all. If for some reason you have trouble doing that, then scale out of a winning position by selling half of it now and the rest later. 

5. Too many technical indicators: Many beginners believe the more market indicators they use, the better, as if indicators will lead you to the Holy Grail. Watching too many indicators is confusing and distracting, and prevents you from focusing on the only thing that counts: the market itself.   

The fewer indicators you use, the better. Choose one or two that work best (you have to experiment to find which works for you) and master them. Day traders I know use VWAP (Volume Weighted Average Price), or the NYSE Tick, for example. 

6. Panic buying the hottest stocks:   Momentum trading has been the rage, and many traders did well with hot stocks such as Tesla, Nvidia, Netflix, and Beyond Meat.

The easy days are over for momentum trading, yet many beginners still focus on the stocks that have had the biggest runs. What typically happens to these momentum stocks is that they stall, then fall, taking day traders’ money with them.  

Chasing hot stocks is risky and should be avoided because momentum can quickly turn against you. It’s all right to follow strong stocks whose price is trending higher — just don’t chase them. Day trading is enough of an emotional experience without you buying or selling in a panic. 

7. Not enough practice: Read a book or watch a video about day trading and you might think you’re ready to clean up. You’re not. 

Too much money and too little experience is a bad combination. Before staking a dime on a stock, practice with a simulated trading account to build your trading muscle. When you do venture in, trade with 100 shares or less until you understand how this part of the stock market works. (See tip #1.)  



MarketWatch: Clues that a Bear Market is Near

Link: http://bit.ly/3Y4wniT

Clues that a bear market is near

Although it’s tricky to predict when a bear market is near, there are clues. Here are some of trader Mark Cook's key signals:

1. Watch how the S&P 500 rallies: Cook paid attention when S&P 500 rallies were weak or failed. He said you can tell the strength of the market more by the way it rallies than the way it declines. He called them “one-day wonders,” meaning you may get a 1%or 2% rally in the S&P 500 (or more) that didn’t carry over to the next day. 

Even more alarming, if a strong early rally reverses direction by the end of the day, Cook saw it as an important warning sign. Typically, in a bull market, strong and healthy rallies continue not just for a day but for several consecutive days.

2. The buy-on-the-dip strategy fails: Buying-the-dip works brilliantly in a bull market, but it fails during a bear market. When the buy-the-dip trade is punished, Cook knew it was time to either switch strategies or risk getting mowed down.

3. Prices are always the last indicator to fall: Cook often said that the public watches stock prices for clues of a bear market, but that prices are the last domino to fall. No one knows what causes a crash or bear market. The catalyst usually comes from a source that no one has foreseen, hitting a market that is already weak. Prices plunge and everyone realizes the market is in serious trouble. According to Cook, the clues were obvious weeks or even months earlier. 

Crashes are not welcome

Cook did not like market crashes because they killed volatility. He often said that crashes are not good for anyone, especially traders. Cook thrived on volatility to make money. He preferred an occasional 10% correction to a crash. He told me he made the most money during corrections and bear markets. 

It also bothered Cook that he made money while so many investors suffered. Short-sellers such as Cook are often despised and even blamed for market crashes. Cook had to deal with being called names and not being invited to share his views on typically bullish financial news shows. 

Cook’s to-do list

Here’s a list of some of the ways Cook was able to thrive during crashes and bear markets. Keep in mind that these strategies are primarily for traders: 

  • Sell long positions and move into cash until the storm has passed. 

  • Buy puts on the S&P 500. 

  • Buy inverse ETFs. 

  • Short individual stocks. 

Cook said that the most prudent strategy for many traders is to move into cash or sell stocks to a point where they’re comfortable. Moving to cash is not designed to make a profit but to protect your portfolio and also to be ready to take advantage of future investment opportunities. 

Cook said that you must know how much pain you can accept (i.e., risk tolerance). If you can handle a 30% or 40% downturn, then stay the course. If not, move to the sidelines. 

Another key to surviving bear markets and crashes is diversification. If your portfolio is diversified, there is no reason to panic, which is what many people do when the market loses 20% or more. 

Cook left other valuable nuggets of trading wisdom: “One thing that must be stressed,” he wrote, “is that bear markets are not bad. Think of corrections and bear markets as trading opportunities. There is a pause in buying and then an all-out run for the hills when the grizzly is on their heels. When a bear market arrives, people descend into irrational thinking and actions. It always happens.”

He added: “Take the opportunity to learn about downtrending markets. You should also prepare for the next bull market that will emerge once the bear market ends. That’s when you can really do well. While trading on the short side involves good timing skills and experience, it’s easier to trade in a rising market.”  

MarketWatch: How MACD Can Give Your Trading a Boost

Link: https://on.mktw.net/3D9M7c5

For many stock traders, four letters can spell the difference between a winning and losing position. MACD (moving average convergence divergence) ranks among the key stock market indicators (along with moving averages and RSI) that traders use consistently in their analysis. 

Let’s discuss a number of creative ways to use this powerful and versatile gauge. 

MACD, introduced in the late 1970s, is a trend-following momentum indicator.  It helps to determine when a trend, and its associated momentum (i.e., directional speed and duration) has ended or begun, or might reverse direction. 

Be aware that MACD is a “lagging” or “backward-looking” indicator, which means its signals are delayed, but don’t let that deter you. When MACD yields a signal, it is often significant, especially if used on a weekly chart (versus the daily chart favored by short-term traders). In fact, the longer the MACD time frame, the more valid the results, which is one reason longer-term traders like myself prefer to use a weekly chart. 

When you view MACD on a chart, you see two lines. The black line is referred to as the “MACD line.” The gray (or red) line is referred to as the “signal line.” Remember: the MACD line is the leader line, while the signal line is the laggard line.

In addition, a horizontal line runs across the chart called the “zero line” (0 line).  The main function of the zero line is to alert you to the primary trend of the underlying price action. 

Four Simple Trading Signals

At its most basic level, MACD generates four signals: 

Buy: When the MACD line crosses above the zero line, it’s bullish. 

Buy: When the MACD line crosses above the nine-day signal line, it’s bullish.  

Sell: When the MACD line crosses below the zero line, it’s bearish.  

Sell: When the MACD line crosses below the nine-day signal line, it’s bearish. 

Note: When both the MACD line and nine-day signal line move in the same direction (uptrend or downtrend), that is a stronger, more significant signal. 

Keep in mind that just because MACD generates a buy or sell signal does not mean it is an actionable trade. Like that of any indicator, there are false signals. In addition, it’s essential that you confirm with other indicators before betting real money on a trade. Think of these MACD buy and sell signals as guidelines, not rules. 

Another limitation of MACD is that it does not work as well at stock market tops or when market volatility is low. Therefore, if you use MACD on the Dow Jones Industrial Average or the S&P 500 in this current market, the signal is not as useful. That is why you should use MACD on individual stocks until volatility returns to the major market indexes. 

What MACD says about Tesla

For example, the weekly stock chart of Tesla shows its MACD is above the zero line, and the MACD line is above the signal line. Tesla is also above its moving averages. 

Based on this information, Tesla stock currently is a short-term “strong” buy. If Tesla’s MACD line drops below its signal line while both lines are above the zero line, the shares would be a “moderate” buy.

A few years ago, I spoke with MACD’s creator, Gerald Appel. He told me that he created MACD in the late 1970s by entering numbers into a punch machine and a spreadsheet. After the personal computer was invented, he was able to automate the process. 

Appel expressed surprise that MACD became so popular. “It works because it’s adaptable to any time frame,” he said. “You can get a good reading of the major trend of the market by using MACD patterns that are based on monthly data. You can also use it on a five-minute chart.” 

MACD gives the most precise signals at market bottoms. Said Appel: “It’s more accurate at market low points than high points because of the way the market behaves. Market bottoms tend to be very sharp and pronounced, while tops tend to be broad and slow. It’s also possible for the market averages to keep drifting upwards while more and more stocks are falling.” 

Appel cautioned that you must confirm MACD signals against other indicators. “No indicator is infallible,” he said. “You might get a market rise and MACD turns down. Perhaps you think this is a sell signal. Well, it might not be.” 

Appel added that he likes to work with different MACD time frames simultaneously. For example, if the short-term MACD turns up along with the intermediate MACD, he’s more confident that the signal is valid. 

The MACD-Histogram

One of the most powerful (but often ignored) additions to the MACD is the MACD-Histogram. Developed by Thomas Aspray in 1986, this oscillator is used to gauge momentum. It is a separate program that should be available on your charting package. Traders who use this feature typically view both MACD and the histogram on a stock chart simultaneously. 

The histogram is a series of bar graphs at the bottom of the stock screen. If the bars move above the zero line, it means the underlying stock (or index) is gaining strength, i.e., momentum. If the bars move below the zero line, the stock or index is losing strength.  

Many beginning traders don’t realize that momentum always changes before price does. That is what makes MACD and the MACD-Histogram so valuable. Both indicators detect when momentum is weakening. It could also be a signal to become bullish if the histogram bars move above the zero line. 

Histogram Signals

  • If the MACD-Histogram bar changes to a lighter color, it means that momentum is diminishing. It is not a sell signal; it simply means that enthusiasm for that particular stock is waning. 

  • As mentioned earlier, if the histogram bar rises above the zero line, that is a buy signal. An uptrend may be developing. If the histogram bar drops below the zero line, that is a sell signal. A downtrend may be developing. 

Red Flags

If you see the index prices as well as stock prices move higher, but MACD turns lower, that is a red flag. In addition, if you see the MACD-Histogram changing colors and the bars getting shorter, that confirms momentum is weakening (but confirm this against RSI or stochastics). 

If you have never used MACD or MACD-Histogram, give it a try. Use these measures for any stock that has hit bottom and is on its way higher. They’ll help confirm whether the stock has legs or is a just giving traders a head fake.