Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

How Capital Waves Are Creating the Biggest Profit Opportunities in Today’s Markets

Stock-Markets / Investing 2010 Mar 18, 2010 - 08:01 AM GMT

By: Money_Morning

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleShah Gilani writes: Back when oil was trading at a record high of $145 a barrel - and was generally expected to go higher - I concluded that the forces at play were speculative, not fundamental - driven by new institutional money looking to diversify away from too many concentrated equity bets. I argued these forces were temporary, and not entrenched, meaning that oil prices were actually headed for a fall.


The "forces" I was referring to are called "capital waves." Capital waves create some of the biggest trading opportunities in the markets today. Investors who are able to spot capital waves and identify their likely impact have a huge advantage over those who don't.

With oil, for instance, pundits were calling for new highs of $200, $250, $300 and even $500 a barrel. But behind the curtain, there was a major capital wave at play: I knew that oil was being pumped out of the ground like mad, and that shipping rates were exploding because oil was being stored in offshore, idled tankers. I knew that as little as $20 billion had been "re-allocated" out of the equity markets and into this new-asset-class investment for pension fund accounts.

As a speculative frenzy seemed to be enveloping the oil market, I called for oil prices to plummet - to more than a few looks of incredulity or outright guffaws.

When the secondary capital waves took hold, the speculative advance in oil prices first stalled - and then oil prices plunged as capital exited in another wave.

Don't feel bad if you missed this opportunity. That's the important thing to remember about capital waves - they're out there if you know where to look and how to interpret them. In fact, as good as this oil play was, I see even better opportunities ahead.

Investors too often focus on specific stock selection and watch their investments get swept away when powerful undercurrents spawn market-moving capital waves.

But finding that needle-in-the-haystack stock isn't as important as picking the right haystack.

At this critical market juncture, the easy money has already been made. Whether investors are able to hang onto recent gains and take advantage of future opportunities will be determined by where - and how quickly - giant capital pools react to financial, economic and political forces.

The new religion in investing doesn't rely on faith. If you know the sea is being parted, you don't have to walk on water.

You instead must understand how to read the ripples and invest in the waves...

Ride These Five Capital Waves

The first step to successful capital-wave investing is to understand the big picture. You can pick a stock with great promise, but if its overall industry group drifts down or is tanked by an exodus of investment capital, you're sunk.

Likewise, if you pick the right industry - and even the right stock - but the overall stock market drops, that's also bad luck.

To maximize your potential for finding winning positions, start by picking the right asset class. But also make sure that you're on the correct side of the underlying trend. If you catch the big wave, you have significantly enhanced your prospect of making money when the wave pushes all boats in front of it towards profitability.

The major asset classes where huge capital waves drive quick-and-robust profits consist of:

  1. Developed-world equities.
  2. Emerging-market stocks.
  3. Fixed-income assets.
  4. Currencies.
  5. Commodities.

Profits on Our Home Shores

To really see the big picture, investors increasingly must understand political events and how they impact investment decisions and huge capital flows. Political decisions around the world affect local markets and global markets when policies impact trade relations, interest rates, currency values, taxes and regulatory matters. There are other factors, but these are the big themes to watch.

Here's what is happening around the world. And here's how to correctly position yourself in the major asset classes.

The United States is still the world's No. 1 economy and what happens here moves markets. President Barack Obama and Congress are grappling with several major political decisions. Healthcare, regulatory reform, economic stimulus and, eventually, taxation, are the major forces that will create capital waves.

The Obama administration, Congress and the U.S. Federal Reserve cannot allow interest rates to rise. They will do whatever they can to keep rates low: Otherwise, the recovery will be choked off.

Inflation is not an immediate problem. In fact, a little inflation would be an excellent tonic, and should help with asset appreciation. Also, don't get hung up on the potential ramifications of the growing U.S. deficit and escalating national debt.

The huge budgetary shortfall will hurt some investments, even as it creates huge opportunities elsewhere. But the true effects of the deficit will take more time to work their way through the U.S. economic system, meaning there are other factors that are right now more critical to consider.

With headline unemployment at almost 10% and consumers retrenching in the face of declining housing values and tight bank-lending standards, the perception of rising inflation will be offset by the need to get America going again.

Bet on low interest rates: As long as interest rates remain low, the stock market can maintain its current upward trend.

Pay careful attention to marketplace undercurrents, particularly those that are politically based. Closely follow anything that points to an end to the stimulus programs, to the market's reaction to the passage or failure of healthcare legislation, and to any real regulatory reforms that are enacted. And given the projected deficits and expected growth in U.S. debt, watch to see if any tax-law changes take place.

The trend is your friend, and right now the market trend is up. But it's a good time to be nimble, and to take profits and cut losses to give yourself the opportunity to better gauge the future direction of U.S. stocks as these major political currents play themselves out.

If you opt to remain invested in winning positions, make sure to employ protective stop-loss orders.

Ride the Tides to Global Investing Profits

The rest of the developed world is a mixed bag. Bet on Australia: As overseas economies go, it was hurt the least by the credit crisis and housing bust and has been the first to emerge. In fact, Australia is so strong that it was the first country to raise interest rates, which it never would have done if its recovery were threatened.

Canada is another strong bet. Get exposure there.

Europe is a mixed bag. The big European companies who are leaders in their respective businesses around the world are going to continue to expand and grow revenue. The governments of their home countries support and coddle the giant corporations that employ thousands and generate billions tax revenue. At this juncture, invest in the multinational leaders that are headquartered in Europe. But don't try to play any particular country.

Europe's growth prospects are inexorably tied to the euro. From a political standpoint, the European Union (EU) wants to see the euro to fall relative to the dollar and other world currencies. Why? Because, like everyone else, EU-member countries want to export their way out of recession. And a cheaper euro makes their goods and services less expensive to the rest of the world.

There's a danger, however: Europe could get too much of what it seeks.

In the face of mounting economic woes - not to mention debt that's soaring in relation to gross domestic product (GDP) - watch out for a big spike in fears that the EU could become unglued. That could cause the euro to drop too far.

This is how capital waves lead to investment opportunities. Watch the momentum of the euro: If it breaks recent support levels, it will make a great short. Put that in your currency asset-class file as a potential home-run trade.

Emerging equity markets are humming along. You should be invested internationally - in Brazil, India, Korea, and especially in China. There are political ramifications to China's stated policy to rein-in its overheated economy, just as there will be to the shifting political agendas of some of the other emerging-market countries.

The one problem with all the emerging economies is that they are all export driven. Sure, China has been investing internally. But politically speaking, Beijing knows that the domestic demand needed to fuel internal growth will need more time to reach a perpetuating critical mass. However, watch the country carefully: If domestic demand outpaces exports revenue, buy the country!

China is the engine of Asia. If China cools down, it will affect the entire region, as well as global commodities prices and, indeed, the entire world market.

There's a new nexus driving the world. The global confluence of politics and economics brokered the engagement of the United States and China. But who actually ends up wearing the pants in this marriage will determine where there are opportunities, and where there are struggles, all across the globe. Huge pools of capital will be shifted.

There are no bigger, faster or more profitable capital waves coming than these.

Low-Tide Interest Rates Yield Maximum Market Profits

The fixed-income asset class is arguably the most important asset class for investors. While there are plenty of bond and fixed-income securities and instruments to invest in, this asset class is crucial to watch because it is a window through which we can see the direction of interest rates. Nothing creates giant capital waves quite like interest-rate moves. If you want an early warning system to safeguard your investments, or if you're looking for new investment opportunities, become a master reader of the bond market and diviner of the direction of interest rates.

Since the stock market rally began last March, investors who bet that an increased risk appetite would mean an exodus from a massive build up in U.S. Treasury holdings got burned. If you understood the big picture and knew that the Fed and the Obama administration intended to keep interest rates at ultra-low levels at all costs, you would have participated in - and profited from - the rally in bonds.

Eventually, interest rates will start to rise. Getting the timing right could make you staggeringly wealthy - while those who don't have their eyes on the prize take it on the chin.

How will you know when rates are moving? Watch the political undercurrents. Watch tax-and-spend policies. Watch worldwide risk appetite. Watch bond spreads.

Movement in interest rates directly affects the biggest asset class of all - currencies.

Currencies and Commodities: The Best Waves to Ride

Investors who aren't playing the currency markets are missing out on the last great venue where one can start with a little money and, if managed properly, leverage it into double, triple or quadruple gains that just aren't attainable anywhere else.

Macro political decisions affect interest rates and currency relationships. Therefore, to catch the big movements in currencies, keep an eye on government-trade, spending, tax and regulatory policies. Watch what's happening between political factions in Europe. The biggest plays will be in the dollar, the euro and British pound. Right now the trades are: Long, short and double-short, respectively .

The last big asset class that investors can make a killing in is commodities. You don't have to watch them all. Watch the commodities that most affect your life. The ones to watch include oil, gasoline, natural gas, agricultural products and, of course, precious metals such as gold and silver.

What factors most affects commodities? Politics, for one thing. For instance, whether or not Beijing slows China's growth will determine the demand for most major commodities and basic materials. Indeed, whether all the world's economies will try to export their way to economic growth will determine commodity demand. After all, if global growth slows, commodities stockpiles will increase, and prices will plummet.

At the core of each of these scenarios will be series of macro political decisions that set the catalysts in motion.

No matter which way asset prices move, one fact is certain: If you divine the correct capital waves, and time your trades correctly, commodities provide a means of diversifying your investment portfolio and adding rocket fuel to your returns.

Rules for Safe Big-Wave Surfing

It's easy to take positions in macro trends and in different asset classes. There are plenty of great exchange-traded funds (ETFs) to trade if you currently don't wish to invest directly in bonds, currencies or commodities. At some point in your moneymaking career, your view on this point is likely to change, and you will make those investments directly.

As we've seen in the two years, markets go up and they go down - and sometimes very sharply. It's important to remember that, in general, when markets go down the velocity of the move is greater than it is on the way up. The simple reason for this reality is that the emotion of fear is much more powerful than that of greed. All the major asset classes can - and should - be played in both directions. If you're only playing the uptrends, you're missing out on the other half of the action.

And worse, if you're not inclined to see opportunity when markets reverse, there's a better-than-even chance that you will get stuck thinking that your sinking position will magically reverse course and resume its ascent. I call this investor trap "the tyranny of magical thinking." The bottom line is simple. If you take profits and cut your losses you will be out of the market at times. And, that gives you a clear view of trends.

The last 10 years are a wash. And stock-market investors must face the scary reality that buy-and-hold investing has failed. It has failed because the world has changed - but most investors haven't.

As the world has gotten larger, investing opportunities have grown in size, scope and speed. Huge capital flows move in and out of asset classes, markets, industries and stocks at the speed of a mouse click.

And precisely because these giant capital waves happen so often, smart investors tend to be big-wave surfers. They just need to be sure to pick the right waves to ride.

[Editor's Note: Money Morning Contributing Editor R. Shah Gilani has seen it all - which is why his columns and analyses have been read by millions.

A retired hedge-fund manager and gifted analyst, Gilani regularly readers behind Wall Street's "velvet rope" - and into the world he knows so well - exposing the pitfalls that can inoculate investors against ruinous losses even as he highlights profit opportunities that most other experts never even recognize.

With his new advisory service - The Capital Wave Forecast - Gilani shows investors the monster "capital waves" now forming, will demonstrate how to profit from every one, and will make sure to highlight the market pitfalls that all too often sweep investors away.

Take a moment to check out Gilani's capital-wave-investing strategy - and the profit opportunities that he's watching as a result.]

Source: http://moneymorning.com/2010/03/18/capital-waves/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules