As a result of an overall sluggish global economy plus increased global supply, the price of crude oil continues to trend lower. Over the past seven months, the cost of one gallon of gasoline has declined a significant $0.88 (i.e. 24%). Today’s chart provides some long-term perspective in regards to gasoline prices by presenting the inflation-adjusted US price of one gallon of gasoline since 1980. There are a few points of interest. For one, geopolitical crises are often associated with major swings in the price of gasoline. It is also worth noting that, since the financial crisis, the resulting peaks of gasoline price spikes have been decreasing over time (see downward sloping red trendline). In the end, the recent plunge has brought gasoline prices to five-year lows..

Notes:
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November 27, 2014 – Thanksgiving Day

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Stock buybacks are always a good thing… right? That’s what the mass media has trained investors to believe, but there are times when stock buybacks are a horrible strategy.

Let’s take a look at Herbalife, which has had very visible news items as billionaires like Carl Icahn, George Soros, Daniel Loeb, and Bill Ackman publicly debate the future of the company.

Herbalife shares have lost more than half their value in 2014 because of a Federal Trade Commission investigation and a big drop in profits. 50% is a huge haircut, but I believe Herbalife is poised for even more pain.

Rapidly Disappearing Profits

Herbalife recently reported its third-quarter results and they were just awful. Herbalife earned $0.13 per share in Q3, but that was a whopping 92% decline from the $1.32 it earned last year.

That’s awful, but Herbalife says business will be even worse going forward. The Wall Street crowd expected Herbalife to grow revenues by 7% in 2015, but the company said that its revenues will fall by -1% to -2% instead.

Part of that lower guidance is from the impact of the strong US dollar. Guidance for Q4 includes an unfavorable impact of $0.31 from currency conversions. If you remember, I previously wrote that the strong dollar was going to kill the 2015 profits of companies that do lots of business overseas.

I have to admit, I am skeptical of all the multilevel marketing businesses, but Herbalife is reinforcing that preconceived notion.

FTC and FBI Investigation

The Federal Trade Commission is investigating Herbalife for what could ultimately result in charges that Herbalife is operating an illegal pyramid scheme.

In March, the FTC sent Herbalife a civil investigative demand (CID), which is a subpoena on steroids because all the evidence produced by a CID can be used by other agencies in other investigations, such as the FBI, which is also investigating Herbalife.

The FTC outcome is unknown. Heck, Herbalife could eventually be declared innocent and pure… but I wouldn’t bet on it.

Board Members Gone Bad!

When your company is in the middle of FTC and FBI investigations, the last thing you want is for your company officers to get in trouble with the law. A current Herbalife board member, Pedro Cardoso, has been charged with illegal money laundering by Brazilian prosecutors. Time will tell if the charges are true… but it looks very bad.

That’s not the only problem with the Herbalife board of directors. Longtime Herbalife Board Member Leroy Barnes announced that he is leaving. Board members leave for legitimate reasons all the time, but Barnes is the fourth Herbalife board member to leave in 2014. Talk about rats jumping the ship!

The Smoke and Mirrors of Stock Buybacks

The above issues are all serious and enough to stay away from Herbalife, but the biggest red flag I see is the abusive financial engineering that Herbalife is using to prop up its stock.

Example: In Q2, Herbalife spent over $500 million to buy back its own stock for the purpose of propping up its earnings-per-share ratio. Fewer shares translates into higher earnings per share.

The root of the problem is that Herbalife is using up all its cash AND borrowing money like mad to finance the stock buyback.

In the last year, Herbalife’s debt has exploded by over $1 billion. Herbalife is using every penny of operating cash flow and taking on new debt just to buy back its stock.

Moreover, since Herbalife’s stock has plunged by 50% this year, Herbalife wasted hundreds of millions of dollar of shareholder money by buying stock at much higher prices.

And now that revenue, profits, and free cash flow generated by operations are shrinking, Herbalife is on a collision course with insolvency.

Carl Icahn, who is certainly a much better investor than I will ever be, is a big Herbalife fan and even went as far as to call the shares undervalued. “I would tell you I do believe Herbalife is quite undervalued and it is still a good business model.”

Ahhhh… Carl… sorry, but I think you couldn’t be more wrong.

George Soros, by the way, appears to agree with me because he reduced his Herbalife holdings by 60% after the company reported those disastrous third-quarter results a few weeks ago.

I’m not suggesting that you rush out and buy put options on Herbalife tomorrow morning. As always, timing is everything, but I have very little doubt that Herbalife’s stock will be significantly lower a year from now.

Moreover, the real point isn’t whether Herbalife is headed higher or lower, but that good, old-fashioned fundamental research can help you make money in any type of market environment.

Even during bear markets.

Tony Sagami

30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

In this week’s issue:

• Weekly Commentary
• Strategy of the Week
• Stocks That Meet The Featured Strategy

In This Week’s Issue:

– Stockscores Tuesday Webinar
– Stockscores’ Market Minutes Video – Go Where the Action Is
– Stockscores Trader Training – Go Where the Action Is
– Stock Features of the Week 

Stockscores Tuesday Webinar
Learn how the Stockscores Approach to trading the market works and see the tools and processes in action during this free webinar. Tuesday Nov 25 at 6:00 PM Pacific, 9:00 PM Eastern.

To register, click here.

tockscores Market Minutes Video – Go Where the Action Is
This week, I discuss one of the most important criteria for investors who want to beat the market, very simple but often overlooked. Plus, my regular weekly market analysis.

Click here to view on Youtube

Trader Training – Go Where the Action Is
The easiest way to make money is to trade the hot market. This rule applies to stocks, commodities, currencies, real estate, collectibles – anything that is traded between people. To put your odds for success at their highest, you have to trade where the action is.

Think back to when you had your best success. Perhaps you made great profits trading Energy stocks early this year. Maybe you made a fortune flipping houses 10 years ago. It is possible that many of you did well with dividend paying stocks this year. No matter when or where it happened, your best and most memorable success likely came when there was a boom in the market you were trading. You rode a strong trend.

If you revisit any of those trades, trying to re-live the feeling of easy money, you have probably felt frustrated. Formerly hot markets are not much fun when they have gone cold. How does it feel to trade Energy stocks? Lousy!

Assets are worth owning when their price is going up. This seems obvious but it is amazing how many investors I meet who own stocks because they were going up in the past, not because they are going up now. There are a lot of investors living in the past.

We have to live in the now but how do we know where the next hot trend will be? How can we find the hot market today?

I often talk about how I never know anything about the companies that I trade, that I only trade symbols, but that is a little bit of hyperbole. I do have an awareness of the types of companies that I trade; I want to know enough to be able to see trends in capital flows.

Each day, I do a Market Scan on Stockscores to see which stocks have moved up more than expected. This tool has a filter for Abnormal Price Gain, an important distinction from just looking for %gain. One stock could make a 3% gain but, if the stock is quite volatile, that gain could not be abnormal. A 3% gain for Microsoft is very different than a 3% gain for a penny stock.

To be able to compare gain on a level playing field, we have to consider the gain in consideration of the stock’s historical volatility. That is why we use the concept of statistically significant price gain. We want to find the stocks that are gaining more than we expect given how the stock normally trades.

When we scan the market for stocks that are making statistically significant gains, we will find stocks that are up more than expected but there is a greater message there. Some stocks will be up because they are part of a hot market. I pay attention to the company names and look for themes. If I see a number of stocks from the same sector moving up, I know that there is something going on in that market.

Last month, the hot market was fear, easily traded through the VXX and XIV ETFs. Right now, the hot sector are the large cap stocks, many of which pay dividends.

As you follow the stock market, maintain an awareness for the areas of the market that are showing a disproportionate amount of strength. If you hear a number of times about a sector of the market doing well, take notice. Follow the action and play the hot market.

Doing so will have a significant effect on your performance.

Each morning, about 1 – 2 hours after the open, I like to scan the market for stocks making abnormal price gains with abnormal volume. The aim is to catch the next hot stock early in the trend. I then check the charts for predictive patterns in any of the stocks that come up from the scan.

Here are two stocks that I found this morning that look interesting:

1. BEAT
BEAT is breaking to the upside from a rising bottom after a few weeks of sideways trading. Has quite a bit of pessimism to work through but does appear to be gathering momentum to the upside. Support at $8.38.

2. IRG
IRG is showing some abnormal action today, breaking to the upside from a rising bottom after recently breaking its long term downward trend line. Looks like a counter trend rally that will probably not last too long but worth considering for a more active trader. Support at $6.99.

References

• Get the Stockscore on any of over 20,000 North American stocks.
• Background on the theories used by Stockscores.
• Strategies that can help you find new opportunities.
• Scan the market using extensive filter criteria.
• Build a portfolio of stocks and view a slide show of their charts.
• See which sectors are leading the market, and their components. 

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligenc

Briefly: In our opinion, speculative short positions are favored (with stop-loss at 2,085 and profit target at 1,950, S&P 500 index).

Our intraday outlook is bearish, and our short-term outlook is bearish:

Intraday (next 24 hours) outlook: bearish
Short-term (next 1-2 weeks) outlook: bearish
Medium-term (next 1-3 months) outlook: neutral
Long-term outlook (next year): bullish

Stock Trading Alert originally published on November 20, 2014, 6:27 AM:

The U.S. stock market indexes were mixed between -0.5% and 0.0% on Wednesday, extending their recent fluctuations as investors reacted to the release of FOMC Minutes, among others. The S&P 500 index remains relatively close to its Tuesday’s all-time high of 2,056.08. The nearest important resistance level is at around 2,050-2,060. On the other hand, level of support is at 2,040, marked by previous resistance level, and the next support level is at 2,020-2,025. There have been no confirmed negative signals so far, however we still can see some overbought conditions accompanied by negative divergences:

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Expectations before the opening of today’s trading session are negative, with index futures currently down 0.4-0.5%. The main European stock market indexes have lost 0.7-1.4% so far. Investors will wait for some economic data announcements: Initial Claims, Consumer Price Index at 8:30 a.m., Existing Home Sales, Philadelphia Fed, Leading Indicators at 10:00 a.m. The S&P 500 futures contract (CFD) continues to trade along the level of 2,040. The nearest important level of resistance is at around 2,050, marked by recent highs. On the other hand, support level remains at 2,025-2,030, as the 15-minute chart shows:

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The technology Nasdaq 100 futures contract (CFD) retraced Tuesday’s move up, as it bounced off resistance level at around 4,250. The nearest important level of support is at 4,190-4,200. There have been no confirmed negative signals so far, however, we may see a topping pattern here:

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Concluding, the broad stock market continues to fluctuate relatively close to its long-term highs. There have been no confirmed negative signals so far. However, we expect a downward correction or an uptrend reversal. Therefore, we continue to maintain our speculative short position. Stop-loss is at 2,085 and potential profit target is at 1,950 (S&P 500 index). It is always important to set some exit price level in case some events cause the price to move in the unlikely direction. Having safety measures in place helps limit potential losses while letting the gains grow.

Thank you.