Tag Archives: management

Larry Williams’ Principals And Insight Into Becoming A Better Trader

Larry Williams is a well-known trader and newsletter writer in the stock trading space. He has over 40 years of experience in the market and has written numerous books including Trade Stocks and Commodities with the Insiders: Secrets of the COT Report and How I Made One Million Dollars … Last Year … Trading Commodities . There is something to be learned from someone who has been in the markets for 40 years and been extremely successful. We were extremely lucky to be privy to a recent interview Larry Williams was a part of. Below are some notes we’ve gathered from the conversation: 1) Fundamental and technical analysis both work, however they will only work under the right market conditions whether it be a bull or bear market. For example, in the latter stages of a bullish market, as a buyer, you might find companies with low P/E ratio to be few and far between. Therefore, if you stick with fundamental analysis, you will most probably miss out on buying opportunities you’d otherwise find through technical analysis. In technical analysis, your focus is more on supply and demand in what is most likely a shorter time frame versus how well a company is fundamentally performing over the long haul. 2) For commodities, retail traders like to buy strength, but commercials like to buy weakness because the cost is less. Our interpretation of this is that most successful traders buy strength because of human behavior. People see an underlying asset like a derivative of oil go up, they jump on it for fear of missing out even if the prices jump and then more people jump on it. Until of course the prices become too ridiculously high and then people try and sell to lock in their profits. Commercial companies that use commodities like to buy at low prices because it keep their cost of goods sold lower. If revenues are constant and you reduce costs then you’d have better margins. 3) Most indicators are redundant, RSI (Relative Strength Index) and STO (Stochastic Oscillator) are essentially the same. There are a lot of things to look at, but when using an indicator understand the purpose of the indicator you are using. There are a lot indicators out there that essentially do the same thing. Both the RSI and STO both help to determine overbought and oversold conditions. While there are evidently cases when regardless of whether or not a stock or index is overbought, prices continue to print higher. The key is not to have too many, keep it simple, and don’t use the same overlapping indicators. 4) Trade your personality, find the system that fits you and lifestyle. Can you trade during work or at home? Do a personality check. One thing I’ve learned through trading in the stock markets for about 10 years now is that you have to trade your personality. Take someone else’s trading plan and trying to trade against that typically doesn’t work out unless the both of you have the same personality. Each of us have different risk tolerance and financial needs. You should only trade with what you are willing to lose and not only that but you have to be comfortable with actually losing that amount. Market Related Information When interest rates go up, stocks have historically been hit hard in the short term, but you’ll want to buy that weakness. The logic behind this is that when rates begin to go up, more people will feel goosed into borrowing and that leveraged money will go into consumption and production. Market tops are typically well formed and structured thereby also taking a long time to develop. On the other hand, market bottoms are based on crashes and plummet on panic. How many positions should you hold? Any more than 4 positions is a lot of multi-tasking. For Larry Williams, 3-4 positions is plenty. Any more than that require too much multi-tasking. In addition, he typically puts on a 2%-4% risk of total trading capital on each trade . Losing four consecutive trades at 4% risk would be a 16% drawdown. What is the biggest lesson Larry has learned from trading? He learned to be humble when you are winning and learning from other people. All highly successful traders are a little unsure of themselves, so they never bet big. None of these successful individuals have had high levels of emotional response to things and therefore don’t get emotionally rattled. What are the four steps to making a trade? Find condition, find the entry, set your target, create trailing stops. What are some other interesting tips and tidbits? 1) Conditional traders look at conditions, seasonality and overlay technicals. 2) Trading should be like combo lock where you need to get a number of factors going your way.

Why Exelon Remains A Buy

Summary EXC has increased its presence in the regulated segment, with a focus on acquisitions. The EPA’s decision works in favor of Exelon. The company has a low valuation and good performance with a regular dividend payout. I have long been bullish on Exelon Corp. (NYSE: EXC ) given its clean energy portfolio, major presence in the U.S. utility market, low valuation, and dividend growth. The company has a market capitalization value of $27 billion and delivered revenues of approximately $27.4 billion in 2014. The company is engaged in the production, sales, and transmission of energy. The stock declined in line with other large U.S. utilities like Southern Company (NYSE: SO ), Dominion Resources (NYSE: D ), and Duke Energy (NYSE: DUK ). However, what gives EXC an edge when compared to the other utilities is its large fleet of green assets. Exelon Nuclear operates the largest nuclear fleet in the nation and the third largest fleet in the world. With the utility industry coming under increasing EPA pressure to reduce carbon emissions, EXC is set to outperform as its nuclear plants emit zero greenhouse gases. Furthermore, the company’s focus on regulated markets, its increased infrastructure improvements, increasing renewable energy asset base, and low valuation make it a buy in my view. Why I Like Exelon 1. Large, Clean Asset Base — The company operates a large low-cost and low-carbon generation fleet across the U.S. Exelon owns more than 35 GW of power generating capacity with less than 10% of its capacity coming from thermal power plants. The other utility companies are predominantly dependent on coal for their power generation. What I like about Exelon is its large clean asset base, which in my view is one of the biggest strengths of the company. It has one of the largest portfolios of solar and wind energy farms. Other than its large nuclear energy fleet, the company also owns and operates the following: More than 1.2 GW of the wind energy portfolio Exelon City Solar, the largest urban solar installation in the United States Four hydroelectric power plants 2. EPA Decision Taxing on Dirty Coal — The U.S. has already finalized its clean power plan , which focuses on cutting carbon emission from power plants. By 2030, the clean power plan will reduce carbon emissions by 32% below 2005 levels. All 50 states have utilities working toward establishing a cleaner and efficient power system using renewable energy. This decision by the EPA will be problematic for utilities relying on coal for their power production. 3. Good Dividend Yield — The company declared a regular quarterly dividend of 31 cents per share. Utility stock owners are mostly interested in a high, stable and growing dividend yield. Utilities attract investors for their stable dividend. If utilities’ stock prices fall, the dividend yield goes up. EXC has a dividend yield of 4.18%. 4. Focus on Regulated Markets — In the wake to overcome current weakness in the energy market, the company is slowly shifting its focus toward the more regulated segment of the market. The company has plans to invest $15 billion in BGE, ComEd and PECO (Exelon’s utilities) between 2014 and 2018. This will ensure stable earnings. Exelon is also expanding its footprint in the natural gas business. The company acquired Integrys Energy Group , with regulated natural gas and electric utility operations. 5. Lower Valuation — EXC stock has a P/B of 1.2x and P/S of 0.9x , which is lower than the industry average of 1.7x and 1.3x, respectively. The lower valuations are due to its lower operating ratios, compared to the general utility industry. Its operating margin at 15.5% is lower than industry average at 21.6%, while its net margin at 7.9% is also lower than the average. The reason for the lower margins is the company’s dependence on wholesale markets where prices have been low over the past few years. Its nuclear power plants have suffered from the low prices. The valuation multiples are also lower than the bigger utility companies. Market Cap ($ billions) P/S P/B Exelon 27 0.9 1.2 Dominion Resources 41.3 3.4 3.3 Duke Energy 48 2.1 1.2 Southern Co. 39.5 2.2 2 Source: Figures from Morningstar. 6. Good Recent Quarter Performance — The company reported a quarterly EPS of 59 cents per share, exceeding its guidance for Q2 2015. The company expects Q3 2015 earnings of $0.65 to $0.75 per share and has narrowed its full-year guidance range from $2.25 to $2.55 per share to $2.35 to $2.55 per share. Exelon has shown considerable improvement across all segments in quarterly revenues and net income when compared to Q2 2014, as can be seen below. (click to enlarge) (Note: Figures in millions.) 7. Exelon & Pepco Merger — In April 2014, Exelon announced its merger with Pepco Holdings, Inc. (NYSE: POM ) in an all-cash transaction. This would have led to the emergence of a leading Mid-Atlantic electric and gas utility. This was a good move by Exelon, as it would expand its regulated holdings and thus strengthen its earnings stability. It was a win-win situation for both companies. This merger recently faced heat from D.C. regulators. However, the companies will appeal the decision and analysts believe there is a 50-50 chance of the merger taking place. I think the merger should go through given its financial benefits for customers . Risks — Nuclear Base Risk While nuclear energy has its advantages in the form of no carbon emissions and low costs, it is still facing a lot of criticism worldwide given its danger of radiation accidents. However, Japan has recently restarted its nuclear power four years after Fukushima. Exelon spends nearly $1 billion annually on its nuclear plants to keep them operating safely and reliably. — Increasing Bond Yields Utility stocks can lose their attraction to yield investors as long-term bond yields rise. With the Federal Reserve expected to raise interest rates this year, bond yields are likely to increase. This will pressurize utility stocks that have benefited from the zero rate interest environment in the past few years. Stock Performance The stock is currently trading at $31.5, which is higher than its 52- week low. The company has a market capitalization value of more than $27 billion. The stock has lost 17% of its value since 2015 . Conclusion Exelon will benefit from the increasing demand for clean electricity in the near future. Though the company is facing various economic challenges in the form of low natural gas and power prices, it is trying to cover up its weaknesses through investments and M&A opportunities. The new EPA rules will improve EXC’s competitive position as compared to other utilities. I remain bullish on the stock given its growing commitments in the regulated markets, its large, clean asset base, its low valuation, and its good dividend yield. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How To Build An Alpha-Rich Portfolio Around Preferred Shares

Summary After taking a look at PFF, I decided it would be worth looking into ways that an investor could use it heavily in a low risk portfolio. The resulting portfolio underperforms SPY in a strong bull market, but does very well at limiting volatility. Looking at the max drawdown shows that over the last 4 years the worst drawdown on the portfolio was only 7.9%. If investors are considering holding cash in their portfolio to reduce the volatility, they may want to consider this style of portfolio instead. After covering the iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) and noticing that it had some very attractive risk characteristics and a very strong yield at 6%, I decided it was worth looking into the impacts of designing a portfolio for very low volatility at the portfolio level while maintaining a fairly strong yield for investors. I think this is one of the most reasonable ways to incorporate a heavy allocation to PFF in a portfolio. I built a portfolio using only a few tickers so it is reasonably simple to duplicate. Portfolio The Portfolio uses the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) as the core of the portfolio since it has been noticeably less volatile than whole market ETFs, has a respectable dividend yield with dividends regularly growing, and an expense ratio of only .07%. The next major allocation is a very long duration treasury ETF, the Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV ). The iShares U.S. Preferred Stock ETF gets the same 20% allocation as EDV. The next holding is the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) because it has a fairly low beta and fits very well in portfolios designed to minimize total risk at the portfolio level. The final allocation goes to the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA: EMB ) with 5% of the portfolio. This is incorporated because it has such unique risk factors that it ends up having only moderate correlations with each other investment while having a yield just over 4.5%. The portfolio is demonstrated below: (click to enlarge) The great thing about this portfolio is that over a sample period of nearly 4 years the annualized volatility is only 6.5% which puts the portfolio volatility at slightly under half of the volatility on the SPDR S&P 500 Trust ETF ( SPY). In other words, an investor holding 50% SPY and 50% cash would have witnessed a higher level of volatility in their portfolio. During the period the worst drawdown was falling 7.9%. All around this is a very resilient portfolio because the risk factors have been so effectively diversified. Alpha Investors may notice that this portfolio has materially underperformed SPY over the sample period, but it is meant to underperform SPY during strong bull markets. When SPY is up almost 77% in less than 4 years, I’m going to call that a strong bull market even if we saw some huge shocks in August. The annual rate of return on SPY is about 16%. The annual rate of return on the portfolio was 11.4%. If investors start from portfolio volatility (rather than beta) for establishing alpha, this portfolio would to create about half of the difference between SPY and the risk free rate. Since the portfolio only underperformed SPY by 4.66% annually during a solid bull market. If we round up the risk on the portfolio to being half of SPY, then we subtract (4.66% * 2) or 9.31% to find the risk free rate necessary to eliminate the entire alpha. The risk free rate that would have neutralized the alpha is 6.73%. I think it is reasonable to say that this portfolio performed very well on a risk adjusted basis relative to investors that were going 100% into SPY or another very similar broad ETF. Correlations A major reason for the strong performance is the correlation within the portfolio. The long term treasury ETF has only a slight positive correlation with the emerging market bond fund, but it is negative with everything else. Both SCHD and USMV have lower levels of volatility than SPY and PFF and EMB have reasonably low levels of annualized volatility combined with moderate correlations to the rest of the portfolio. Conclusion Over the last 4 years this ETF strategy has demonstrated very reasonable returns while being substantially more resilient to periods of weakness. In a prolonged bull market it will fall behind SPY, but on a risk adjusted basis it is still performing very well and if there was a major correction it would be in position to lose substantially less. In my opinion, this kind of strategy is the most reasonable way to incorporate a heavy allocation of PFF into a portfolio. Why would you want to build a portfolio with a heavy allocation to a preferred share ETF? I can think of one solid reason off the top of my head, a dividend yield over 6% at a time when interest rates in much of the economy fail to offer any compelling returns. Disclosure: I am/we are long SCHD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.