Back to Main

Market Wrap-Up for Apr.28 (NSC, AVB, CRR, FLS, CME, POT, more)

Posted: 4/28/2011 4:24:00 PM
Referenced Stocks: AET;ALL;AVB;CME;CRR

The indices picked up steam as the day went along, with the main averages all closing with gains.

Dividend stocks that traded higher on this morning's earnings collection included Norfolk Southern ( NSC ), Aetna ( AET ), Allstate ( ALL ), AvalonBay Communities ( AVB ), and Carbo Ceramics ( CRR ). On the flipside, companies like Flowserve ( FLS ), CME Group ( CME ) and Potash ( POT ) all saw selling following their earnings results.

On another note, be sure to check out our weekly "Top 50 Watchlist Names" post that is out today, only for Premium members.

Today I'd like to touch upon an interesting subject that many on Wall Street refuse to acknowledge: the huge recent spike in commodity prices. The volatility we're seeing in commodities (gold/silver, grains, oil, etc.) clearly has a profound effect on the everyday economy. The price of oil and gas, for example, continue to rise, when by all accounts, there isn't a lack of supply nor a spike in demand. Traditionally, supply and demand issues were to blame for price movements in commodities, but today that is no longer the case.

Computer code/algorithmic trading is now responsible for most of the activity on Wall Street, with some estimating computer-aided high-frequency trading now accounts for about 70 percent of total trade volume, according to a recent article. The wild swings we are seeing in the markets are great for the firms that are able to write the programs to take advantage of these fluctuations, but for the individual that is trying to make a living trading, the frustrations continue to pile up. I recently spoke with a friend of mine who is considering quitting the daily grind of trading because his discipline is causing him leave money on the table every day. He has been trying to take advantage of the run in commodities, but again, he takes a small profit, only to watch prices continue much higher. As the trader put it to me, you wait for a correction, but rather than lasting a normal 4-5 days, maybe two weeks, the correction barely lasts one or two full trading sessions. Pull up a chart of any homebuilder (PHM for example) and compare it to the recent parabolic spike in metal prices. You will see a very similar run-up in the homebuilders during the housing craze of early-mid 2000′s, only to see just as steep of a decline as the housing market crashed. I've said it before and I'll say it again: this commodity boom will end ugly and as usual, everyday people will be the ones to pay the price.

Tom (our Editor/Web Director) and I have seen this correlate in the high-beta stocks that we follow. When you see stocks trading at 80 times earnings and no analysts bat an eye, you first think hey maybe it's the late 90′s again (and it could be), but the fact that machines are making a ton of money off of the daily trading moves, you see that firms are almost held hostage to the run. If analysts say "sell" and prices move higher, they lose clients. Now of course, there will be a reversion to the means at some point, at which point the machines will alter the current algorithms to push prices lower. As you can see, this is what is making trading a tougher business than ever for the retail person. Whenever you point to your good discipline costing you money day-in and day-out, that can only lead to reckless market action, and eventually someone's account blowing up. In contrast, long-term investing in quality dividend plays acts as protection from market volatility. Companies with a long history of paying (and increasing) solid dividends have large shareholder bases and aren't subject to wild swings like high-beta names are.

That's why we're very cautious when it comes to recommending high-beta dividend names. Previously, we were more aggressive when it came to recommending low-yield, high-growth stocks, but our stance has clearly changed now. We've also heard from several subscribers who believe our focus should be on yield alone, and we're on board with that line of thinking. I also like to remind investors to avoid trying to time the markets, because that is the first step that eventually will morph their strategy from a long-term investor to a market-timer/swing trader.

Just about every type of market has seen some wild swings in recent years. If you don't believe me, check out this data published by Census Bureau yesterday: In the first quarter of 2011, 66.5% of Americans owned their homes (as opposed to renting), down from 67.2% a year earlier. The big news is that this is the lowest level of home ownership since 1998. Could you point to Wall Street and the various sub-prime loan bundles and real estate derivatives they created as to killing the housing market? Good old fashioned Wall Street green certainly wasn't the only factor, but the blame could start there. Let's just hope the rise in gas prices and other commodity prices (no thanks to the algorithmic trading) are not the next nail to hit the retail investor.

The best thing we can do as individual investors is look for opportunities where we receive great income (dividends) from the companies who can best weather the economic storms ahead. You can count on to be your guide in that arena. As always, you can find all of our current recommendations on our industry-leading Best Dividend Stocks List .

Thanks for reading, and I'll see you tomorrow! P.S. Please pass this e-mail on to someone you think can use some financial motivation as well as being kept in the financial news loop that could affect them. Thanks again!

Be sure to visit our complete recommended list of the Best Dividend Stocks , as well as a detailed explanation of our ratings system here .