SmallCap Trading Techniques

[I Like Bottom Fishing]

Best Investments for 2014 You ask for my best picks, so here they are my friend.

http://www.investorsalley.com/reports/emailspecial/2014/bestinvestments.html

We asked our analysts to pick their favorite (and least favorite) investment ideas for the year ahead. We are happy to share the results of their vast amount of research with you.

As you'll see, many aren't bullish on the overall stock market, but they all feel there are big profit opportunities within the markets if you know where to look.

To start, let's look at some individual stocks that our analysts identified as big potential winners. And one of the best ways to make money in the stock market is to spot stocks to buy with high growth potential before Wall Street and the big investment firms recognize these budding winners.

One way to do that is to shop for companies that have been losing money but are showing signs of profitability - "turnaround" stocks, I like to call them.

Best Investments for 2014: Turnaround Stocks

This active investment approach - when done right - has powered record returns for many successful investors. Private equity funds have generated massive returns this way.

In spite of this, it remains underutilized by most individual investors.

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The typical turnaround stock has stumbled badly, with the share price punished severely for overblown media mishaps or trouble in the sector.

That's why finding turnaround stocks to buy is not for everybody. There are some reasons people tend to shy away from it...

First, finding the best turnaround investments requires more patience than trading or flipping stocks over the short term. A turnaround stock usually takes a year or longer to show results.

http://www.investorsalley.com/reports/emailspecial/2014/bestinvestments.html

Second, you have to be prepared to live with price volatility. There's often high volatility during the turnaround period.

Also, it's highly unlikely you will time things so perfectly that the stock doesn't slip more before it climbs higher.

However, if you have the patience and money to play with, turnarounds can be some of the best investments you'll ever make - and provide the type of returns most short-term investors will never realize.

But there's more to it than a rebound in profits and revenue - the best turnaround stocks to buy also have undervalued share prices.

For example, investors wouldn't want to buy stocks like Tesla Motors Inc. (Nasdaq: TSLA) and Delta Air Lines Inc. (NYSE: DAL), even though they indeed have analysts' blessing and are likely about to see their bottom line substantially improve.

But these are not ideal stocks to buy for individual investors for two reasons: 1) They have both seen share prices skyrocket this year, with their stock up 444% and 102%, respectively, and 2) are already heavily owned by institutional investors.

Plus, Tesla-type stocks are far more likely to suffer an earnings shock than an earnings pop at this point because everyone expects them to turn profitable and enter a growth phase. If their earnings disappoint even slightly, investors' exit will be abrupt as large funds withdraw.

So, investing in rags-to-riches stocks means choosing those that are not mainstream.

That means look for stocks that are braced to enter a strong growth period but are under-owned by the large institutions. Then, when the larger institutions do recognize their financial strengths, your portfolio will be well positioned to enjoy the surge in stock prices.

Looking at the market now, here are a few companies that have the potential to be the next best "turnaround" investments out there.

The first such candidate right now is Mosaic Co. (NYSE: MOS).
The Mosaic Company is down nearly 15% year to date. It is the world's largest producer of phosphate and North America's second largest producer of potash. Its products are absolute necessities in the growth of corn, rice, and cotton. That makes them very different from the discretionary choices everybody fancies at the moment in a rush that is obviously closely related to holiday shopping.

My rationale for wanting to own it is pretty simple.

The world's population is continuing to expand and population trend watchers believe there could be 9 billion inhabitants on planet earth by the year 2050. Where is all the food going to come from, especially when there is a limited amount of room to plant new fields for crops? Mosaic is attempting to help answer those questions by producing fertilizers that will yield more crops at a lower cost.

Mosaic is, in effect, doubling-down on phosphate.

Recently, the company purchased CF Industries Holdings' (NYSE: CF) phosphate business unit for $1.8 billion, which will add 1.8 million tons of phosphate annually. Also, the wheels are already in motion with Ma'aden, the Saudi Arabian Mining Company, for production of an additional 3.5 million tons by 2016.

The company currently has a yield of 2.1% and is actively buying back shares, which can add anywhere from 1% to 2% to returns.

Next up is Chinese ADR Yanzhou Coal Mining Co. Ltd. (NYSE: YZC).
Coal has been as unloved as it gets this year, which is why shares have been confined to the proverbial waste bin. It's off nearly 40% year to date and may be a perfect candidate for coal's rebound.

My rationale for this one is straightforward as well.

China is energy starved. Not surprisingly, the Red Dragon is currently the world's largest importer of coal. Regardless of the "talk" surrounding China's use of alternative, renewable energies, the truth is that a viable coal-based alternative is still decades in the making.

Plus, the company has a yield of 4.7% at the moment, which is hefty compensation while you wait and an added bonus for income oriented investors.

HCP, Inc. (NYSE: HCP) is a healthcare industry-oriented REIT that's gotten clobbered to the tune of 20% this year. But the company is primed for a big turnaround.
The company's portfolio of assets includes senior housing, skilled nursing, life science, medical offices, and hospitals.

My thinking here is that, as the baby boomer generation is heading to the doctor more often, they'll find themselves shopping for the best nursing homes. Those with the best amenities will come out on top. I think demographics are going to buoy HCP's share price.

But what really puts this one on my buy list is the fact that it's dividend "royalty." A member of the S&P 500 Dividend Aristocrats Index with 28 consecutive years of dividend increases, HCP currently pays a hefty 5.5% dividend yield.

The next candidate is Atlantic Power Corp. (NYSE: AT).
The company has seen its stock slashed this year from more than $10 a share to less than $5. A weak economy and high leverage forced the company to cut its dividend by more than 60%. AT fell off a cliff after the payout cut announcement on Feb. 28, slipping 40.7% by Mar. 4.

But the reason this is a potential turnaround stock to buy is that this company appears to have the means to weather the storm and get back on a profitable track long term.

AT has a strong collection of electric power generation assets, with 29 plants capable of producing more than 2000 megawatts of electricity. The majority of its plants produce clean energy using solar, wind, biofuels, and natural gas to produce power. All of the plants are located in major markets across the United States and Canada.

The company is focusing on paying down its debt load to reduce the chance of future financial problems. In the last quarter it paid down more than $170 million of long-term debt and is looking to sell non-core assets to further reduce indebtedness. Even after cutting the dividend, the shares still yield more than 8% at the current price. Atlantic Power shares sell for about one-half of book value and appear to have substantial recovery potential over the next few years.

Patient investors could easily see the stock double back to where it was before the dividend cut.

This next potential turnaround stock to buy has ties to the lucrative oil and gas industry - ION Geophysical Corp. (NYSE: IO).
The company provides advanced seismic acquisition equipment, software, seismic data-processing services, and seismic data libraries to the global oil and gas industry. These are used by exploration and production companies to generate high-resolution images of the Earth's subsurface during exploration, exploitation, and production operations.

This is a business that should see strong growth in the years ahead as oil and gas companies scramble to boost production to meet increasing demand.

The short term has been a little more difficult for this company. The stock price has been punished for missing Wall Street's earnings forecasts. Now shares have slipped more than 25% in the last few months.

In spite of the short-term difficulties, the company has exposure to what will be the fastest-growing segments of the energy exploration industry.

With 20 locations around the world, ION is providing data for companies looking for oil and gas below the oceans, in the Arctic, and in the unconventional fields in the United States. The company also just added several data libraries, including portions of the Arctic, Latin America, Africa, and Australia, that should see strong demand and improve the top and bottom line.

Increased exploration and production activity in the Gulf of Mexico should also help the company regain footing in 2014. Analysts expect earnings to double next year and grow more than 15% annually for the next five years.

If they are close to right, this stock has the potential to soar as oil and gas demand picks up.

Realogy Holdings Inc. (NYSE: RLGY), a real estate services company, is a perfect example of a turnaround stock to buy that could soon welcome a surge in institutional appetite that would drive its shares higher.
Realogy offers real estate and relocation services in the United States and internationally. The company franchises some of the leading names in real estate brokerage, including Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA, Sotheby's International Realty, and Better Homes and Gardens Real Estate.

Reology has 3,600 offices worldwide in 102 countries and territories and about 238,900 independent sales associates worldwide.

The company also owns a real estate brokerage division that operated under the Owned Real Estate Brokerage Services segment. It owns and operates a full-service real estate brokerage business under the Coldwell Banker, Sotheby's International Realty, ERA, Corcoran Group, and CitiHabitats brand names.

Realogy has been losing money lately, but analysts expect it to show positive earnings next year. The consensus analyst estimate of five-year earnings growth for the real estate firm is 22%, and the company appears ready to enter a boom phase as real estate markets improve. In spite of the anticipated strong growth, institutional investors own just 54% of the shares outstanding.

http://www.investorsalley.com/reports/emailspecial/2014/bestinvestments.html

Multi-Fineline Electronics Inc. (Nasdaq: MFLX) is another one of these ideal turnaround stocks to buy. This company is anticipated to stage an earnings breakout and enter a strong growth phase, analysts say.
Based in California, Multi-Fineline engineers, designs, and manufactures flexible printed circuit boards and related component assemblies for the electronics industry. It works with original equipment manufacturers and electronic manufacturing service providers in the electronics industry for applications such as mobile phones and smartphones, tablets, consumer products, portable bar code scanners, data storage, and medical devices.

So, Multi-Fineline is among great rebound stocks to buy because it's ready to benefit from increased consumer spending for consumer electronics and pent up demand for business IT products over the next several years.

In fact, Multi-Fineline is expected to turn a profit in 2014 after losing money this year. And its earnings growth for the next five years is anticipated to be 20% annually.

Yet in spite of this bright outlook, large institutions and other big funds own just 33% of this stock outstanding right now, making it the perfect time to add it to your list of stocks to buy now.

As the improvement at Multi-Fineline attracts more attention, the buying pressure from these large investors could easily push the stock price substantially higher in 2014 to provide savvy investors with a nice return.

The next turnaround investment is an engineering and construction company that builds complex offshore platforms for the oil and gas industry. It constructs floating and fixed facilities, as well as pipelines.
The company is McDermott International (NYSE: MDR).

The company has seen earnings fall since 2007 from $2.66 to what might be $.40 per share this year.

The stock has fallen over the same time from above $60 per share to less than $8 today.

The near-term outlook for business is moderate, with backlogs staying fairly stable at around $5 billion.

However, here's why I'm keeping my eye on this one...

Global demand for oil and gas is going to increase over the next five years as will demand for offshore drilling and storage facilities.

Earnings should better than double in 2014 and could easily be back above the $1.50 mark in five years. A stronger economy that leads to higher oil and gas prices could push that number closer to $2.00. The stock can easily sell at three to four times the current price at some point over the next five years, giving patient investors a solid return on their investment.

LSI Corp. (Nasdaq: LSI) is another company with results suppressed by a weak economy. It currently trades slightly above $8 a share.
The company makes semiconductors for the storage and networking markets. The continued contraction of the personal computer and hard disk drive markets has continued to hurt LSI's earnings.

There are signs now that excess supply in these markets is being worked off and the business will stop declining. Sales should finally begin to grow again in 2014 according to most analysts and industry observers.

This combined with LSI's renewed focus on the fast growing flash drive market should allow them to resume stronger earnings growth over the next few years. The company's new hybrid drive products are expected to be well received by cloud computing, Web providers and other segments of the industry.

As the company continues to introduce new products and the PC markets stabilize LSI should be reporting record profits. After several years as a lagging issue the company could become a growth leader over the next market cycle and reward patient investors.

Finally, Casella Waste Systems Inc. (Nasdaq: CWST) remains a favorite of many turnaround investors.
The company has seen weak results as a result of the fragile economy in its operating regions. Landfill volumes have been down, and the pricing of recycled products has been very weak.

At about $6 a share, the stock is about one-third of where it was in 2008.

But as the housing market recovers and new construction and home refurbishing picks up, so will Casella's business. Increased building will generate substantial waste volumes.

Consumer spending growth will also help.

The company has a valuable collection of assets, including 17 recycling centers, 10 landfills, 31 transfer stations and four waste-to-energy operations.

If an improving economy allows management to focus on their goals of producing free cash flow and paying down debt, shares of Casella could provide patient, disciplined investors with monster returns. This stock could easily double or more over the next several years.

Best Stocks for 2014: Healthcare Stocks Will Soar Thanks to Obamacare

Regardless of your personal views of Obamacare, our country's new healthcare can make you money.

As the Patient Protection and Affordable Care Act - known informally as Obamacare - overhauls the American healthcare system, investors who aren't properly positioned could miss one of the biggest wealth creation opportunities to hit the markets in decades.

Certain stocks will absolutely skyrocket when the new health insurance law goes into effect on January 1, 2014 and thereafter as more and more people sign up. And there's no reason why you can't buy them now and ride them to the top.

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Bottom BlueSignificant Growth is Coming
Healthcare spending and costs are about to explode. Obamacare will add approximately 30 million new patients into the healthcare system, driving up the demand for healthcare. And, of course, all the new patients bring increased costs. People who know estimate that Obamacare will pump $900 billion into healthcare spending - once they work out the glitches.

Furthermore, government forecasts show that total healthcare spending will grow at an average rate of 5.7% a year, far outpacing the predicted growth rate of GDP. According to the Congressional Budget Office, healthcare spending in America will balloon to 22% of GDP in 2038, from 16.4% in 2011.

Add in the aging demographic in the United States, where 10,000 new people qualify for Medicare every day, and it will all have a profound effect on profits and bottom lines in the private sector.

But not all healthcare stocks will profit equally - or at all. You see, Obamacare's provisions channel millions of dollars into certain companies, essentially a reshuffling of the cards.

The new healthcare law is also bringing a complex set of new taxes and penalties with its promise of higher sales and increased revenue. Some members of the healthcare sector stand to lose more than they gain under the new world order.

6 Companies & 4 Sectors that Stand to Benefit Most

"While almost everyone is hung up on the law itself and its economic sustainability," says Money Morning Executive Editor Bill Patalon. "Smart market-watchers are moving to invest in the individual sectors poised to profit."

The biggest profit spikes will come in four of healthcare's most important industries:

1) Large pharmaceutical companies
Last year, spending on medication in the United States reached a remarkable $320 billion. That number is expected to increase to $390 billion just 2 years from now in 2015, aided in part by the country's 30 million new insurance holders.

My favorite plays in this industry are:



Regeneron Pharmaceuticals (REGN) - an integrated biopharmaceutical company that invents and manufactures medicines for the treatment of serious medical conditions. The company is best known for Eylea, a treatment for age-related macular degeneration (AMD) - the leading cause of blindness in developed countries. At least 2 million Americans suffer from AMD, and thanks to the rapidly aging population, that is expected to increase by 50% by 2020.
REGN reported $2.40 EPS for the 3rd quarter, which more than doubled the consensus estimate of $0.92. A number of banks have recently raised their outlooks for the stock, including Jefferies Group, Credit Suisse, Cowen & Company, and BMO Capital Markets. Those analysts expect 28% annual sales growth from the company and nearly 55% earnings growth next year.



AmerisourceBergen (ABC) - one of the largest global pharamaceutical services companies, known mostly for distributing prescription drugs in the United States and Canada.
The company's latest earnings report for the 3rd quarter of 79 cents per share beat analysts' estimates of 74 cents. Revenue was up 28% on a year-over-year basis.

Like Regeneron, AmerisourceBergen also has strong analyst price targets, with Raymond James, Credit Suisse, Mizuho, and others expected shares to increase over the next year.

Furthermore, the company recently approved a $750 million stock buyback on top of the $450 million it has left on its existing program. And the company increased its quarterly dividend again in the 3rd quarter, which continues a recent trend.



CVS Caremark (CVS) - all these shiny numbers for Big Pharma should also help the largest pharmacy chain in the United States. The premise is simple: As more people get insurance, more will go to doctors for ailments they otherwise may have handled themselves. Of course, more doctor visits means more prescriptions will need to be filled. And with more patients having prescription drug coverage as part of their health insurance, the number of prescriptions is expected to rise dramatically.
In addition to retail, the company also operates the MinuteClinics brand, which should see a rise in patient traffic for the reasons listed above.

CVS reported outstanding 3rd quarter earnings that were up 24% year-over-year. It pays investors a 1.4% dividend.

PowerShares Dynamic Pharmaceuticals (PJP) is a good ETF if you'd prefer to avoid trying to pick specific winners from this industry.
2) Hospital management companies
Near-universal health insurance coverage means hospitals could be required to do fewer procedures for free. That's guaranteed payment from thousands of patients who wouldn't have been able to pay before. By law, hospitals must serve all patients who show up at their emergency rooms regardless of their insurance coverage - or lack thereof. According to Bloomberg Industries, hospitals receive no compensation for between 25-30 percent of all procedures they perform as of now. That means higher profits and much smaller write-offs for hospital companies in the future.

The prospect of higher compensation is one reason why the stocks of HCA Holdings (HCA), Tenet Healthcare (THC), and Community Health Systems (CYH) have soared more than 180 percent in the past two years. Some estimates show that as many as 27 million Americans who presently don't have insurance could end up being insured and, as a result, use hospital services more often.





HCA Holdings (HCA) is one of my favorites among the hospital management companies. The company operates 162 hospitals and 112 freestanding surgery centers in 20 states and England. Revenue per equivalent admission rose 3.9% on a same facility basis in the company’s latest earnings report in November. HCA recently repurchased nearly 10.6 million shares for approximately $500 million.
3) Medical device/technology companies
As more insured patients go to hospitals and doctors, usage of medical technologies to diagnose particular diseases should increase. While some higher-priced medical device makers have struggled as hospitals are still wary about the effects of Obamacare on their profits, a huge opportunity exists for smaller diagnostic companies.



Navidea Biopharmaceuticals (NAVB) is a small-cap company focused on the development and commercialization of diagnostic and radiopharmaceutical imaging agents for cancer and other diseases.
The company's main product is Lymphoseek, which is an injectable agent used in external lymph-node imaging and intra-operative lymphatic mapping. Breast cancer is among the most misdiagnosed diseases, and Lymphoseek assists physicians in better identifying and treating breast cancer. Lymphoseek just received FDA approval in March 2013 and has the potential to become the standard of care in lymphatic mapping.

http://www.investorsalley.com/reports/emailspecial/2014/bestinvestments.html

The iShares Dow Jones Medical Devices ETF (IHI) tracks this industry if you'd rather invest in an ETF.
4) Health insurance companies
Under Obamacare, insurance providers will be gobbling up new customers by the millions. And with the single-payer penalty (or tax), many of these new customers will be the insurance industry's favorite kind - those who are healthy and paying for services they hardly use.

Even with the endless back-and-forth over how the law will affect insurance companies, shares of the 5 biggest publicly traded insurance companies - Aetna (AET), WellPoint (WLP), UnitedHealth Group (UNH), Humana (HUM), and Cigna (CI) - have advanced by an average of 32 percent in the past year, outpacing the S&P 500's 24 percent climb (as of November 1, 2013).



For the purposes of choosing my favorite stock of the many health insurance companies, I'm going to put aside the many predictions of how quickly the uninsured will sign up and go with a sure thing: Medicaid. The government-sponsored health plan for the poor is undergoing its biggest expansion since it was created in the 1960s, providing an enormous boon for health insurers that specialize in Medicaid and Medicare.

So far, 26 states have opted to expand their Medicaid programs under the provision established in the new healthcare law, representing $4.6 billion in new Medicaid spending.

While the large health insurers above stand to benefit from Medicaid expansion, particularly UnitedHealth and WellPoint, the 2 biggest providers of Medicaid coverage, my pick in the space is a smaller company.



Molina Healthcare (MOH) - unlike UnitedHealth and WellPoint, Molina gets a majority of its revenue from Medicaid and, thus, stands to benefit more from its expansion. The company provides healthcare to Medicaid patients in California, Washington, Utah, and Michigan. Unlike some of the nation's biggest insurance companies, such as Aetna, Molina chose to participate in the public insurance exchanges being set up at the state level.
Analysts expect Molina's earnings per share to rise an eye-popping 39% in 2014 to $2.23, which would make it the fastest growing health insurance company tracked by Thomson Reuters.

Molina currently trades at 23 times forward earnings, and the stock has already jumped 126% in the last 2 years alone.

If you would prefer to bet on the health insurance industry as a whole, the closest ETF is the iShares Dow Jones U.S. Health Care Provider (IHF).
It should be said health insurance companies face plenty of new regulations as a result of health care reform. As I'm sure you've heard, health plans offered on the exchanges must have 10 essential benefits, and these will cost insurance companies.

In the end, profits are climbing at health insurance companies as overall heath costs drop. I have no doubt health insurance companies will continue to find a way to grow as they are handed many new customers who are required to buy policies.

To play the overall health care sector instead of a particular industry, check out the Health Care Select Sector SPDR (XLV), which is a broad health care fund (and the largest health care-focused ETF). This fund gives you a total, well-rounded play from biotech firms to drug makers to equipment makers.

An alternative ETF is the Rydex S&P Equal Weight Health Care ETF (RYH), which, as the name implies, holds a variety of health care stocks in an equally weighted index, with exposure to medical equipment and device makers, insurers, and hospitals.

Obamacare can be quite a mess to navigate (no pun intended), but there's no doubt about the profit opportunities that exist for investors who choose wisely inside these four industries. We may not see such enormous potential across an entire sector in a long time.

Best Stocks for 2014: Cheap Stocks with a Dividend

Individual investors have always had a soft spot for cheap stocks to buy, but get scared away because traditional Wall Street dogma would have you believe that these stocks are too speculative and dangerous for most individuals.

But cheap stocks can be among the best stocks to buy because they bring several advantages to a portfolio.

For starters, if you're buying a quality low-priced stock, you're getting high value for a discount. That's an obvious benefit.

There is also a not-so-obvious benefit...

Large institutional investors such as pension funds and some mutual funds are prohibited from buying stocks that trade below $5. As stocks slip below that price, analysts often stop covering the company due to a lack of interest from larger investors.

The lack of analyst coverage gives you a chance to buy before the stock comes to the attention of large institutional buyers. With cheap stocks, investors are less likely to be trading against the high frequency and short-term traders who need higher-priced, more liquid stocks to conduct their routine business.

Another note about cheap stocks: Hunting for cheap stocks to buy will often take investors to foreign companies' stocks trading in the United States.

Some investors avoid these shares - but you shouldn't. There are very profitable and affordable opportunities in this space. They can also offer a nice balance in your portfolio to shares of U.S. companies that haven't tapped into overseas economic growth.

Using the widely available web-based stock screeners, an investor can quickly compile a list of international low-priced stocks that trade at discounted valuations and have outstanding long-term potential.

I put together a couple cheap stocks to buy now that are both under $5, are benefiting from economic recovery, and have more than 4% dividend yield...

One such company is Alumina Limited (NYSE ADR: AWC), an Australian aluminum company.
Alumina, which mines and refines aluminum, operates eight refineries and two aluminum smelters and owns or has interest in seven mining operations. It has a shipping operation that transports aluminum-related raw materials.

Alumina has a 40% stake in a joint venture with Alcoa (NYSE: AA), Alcoa World Alumina. Aluminum prices have been falling in the face of weak global demand, and inventories have piled up over the past couple of years. But as excess inventory is pared down, aluminum companies are stocks to buy now. These companies will see their bottom line and stock price increase fairly rapidly.

Along with other global aluminum producers, Alumina has been reducing capacity and lowering its cost structure by closing unprofitable facilities.

The company also sold stock earlier this year and used the proceeds to pay down debt levels and reduce interest expense. This reduced cost structure will add to the company's earnings growth potential when the markets do recover.

The few analysts who watch Alumina estimate that earnings should average gains of 15% annually over the next five years - but its stock could soar much higher.

Now Alumina stock is trading at 90% of book value, so the growth potential does not appear to be reflected in the current stock price. Alumina looks like a bargain stock that could easily double over the next five years.

Teekay Tankers Ltd. (NYSE: TNK) is another cheap foreign stock to buy now that appears to have enormous recovery potential over the next few years.
The Bermuda-based company has a fleet of 27 double-hulled vessels of various sizes and has seen its stock price decline as the shipping industry suffered from overcapacity and a weak economy. It's among the ideal shipping stocks to buy as the global economy improves.

The recovering economy should help increase oil demand and the need for shipping crude oil and refined products worldwide. Overcapacity is a rampant problem in the shipping industry, but some older vessels are being scrapped, and new orders have slowed. Eventually the overcapacity problem should ease.

However, shares of Teekay Tankers are priced in a way that ignores the likelihood of improved capacity. The stock trades at just 80% of book value and is down more than 30% over the past year.

Although there are very few analysts that follow the stock, those that do think it will turn the corner next year and report profits for 2014. The company has paid a dividend for 22 straight quarters now, and the shares yield 4.38% at the current price.

TNK traded at $12 before the global recession set in, and a recovery to even half that amount over the next few years would double the money of those who purchased the stock now.

Best Stocks for 2014: IPOs

After Facebook's disaster, the IPO market looked bleak.

But thanks to a string of successes in 2013, the IPO market is heating up again.

In fact IPOs that debuted in 2013 are up a combined 35.29%, with a 3-to-1 ratio of positive to negative offerings out of the more than 100 IPOs this year.

As we conclude 2013 and enter 2014, the overall pessimism that engulfed the IPO market since Facebook went public has certainly disappeared.

http://www.investorsalley.com/reports/emailspecial/2014/bestinvestments.html

Before we show you which IPOs to look forward to, here's a recap of some successful debuts.

The IPO market started rebounding at the end of 2012.

After the big hiccup with Facebook, there was pent up activity. Investors started moving toward anything with growth, and things started to return to normal.

One of the better recent IPOs was Tableau Software Inc. (NYSE: DATA). The Seattle,WA-based firm is a provider of cloud-based applications and its list of over 10,000 clients includes Apple and Coca-Cola.

Tableau went public in May with a $31 price tag and closed above $50 on its first day of trading. It recently traded 132% higher than its offering price, at $72.

Tableau's IPO is part of a successful trend in cloud-based companies going public.

In addition to Tableau, these include Workday, Demandware, Splunk, ServiceNow, Guidewire Software and Palo Alto Networks - and high-end branded goods such as Michael Kors Holding Ltd. and Prada that appeal to consumers in emerging markets.

Based on the performance of the above companies, there are plenty of reasons to be excited for upcoming IPOs.

And by following these rules, you will be ready to profit.

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Market Timing & Trading Months
In the complex world of trading stocks, we often try to monitor our performance by months, and over the years, have noticed seasonal patterns that develop. Many of these coincide with seasonality in the markets, while some are specific to our style of trading. We'll begin by looking at our three favorite trading months, with reasons why we like them.

3 Best Trading Months

JANUARY: Absolutely our favorite month as the "January Effect" takes place. The "January Effect" is essentially buying in stocks that were heavily sold for tax loss reasons at the end of the year. This is especially true in small caps and speculative stocks. January is also often a very strong month for the markets as post holiday sales figures are released. Even in a bear market, January will always provide us with a strong performance.

JUNE: Summer doldrums? Not a chance. June is typically the month traders try to make enough to compensate for the doldrums of late July and August. More importantly, it is Russell re-constitution, and positioning in small caps prior to the institutional buying that occurs when new stocks are added to the Russell 2K can result in exceptional short term percentage gains.

NOVEMBER: Typically, October is the worst month for the markets, and November is a rally month as the "Santa" rally begins and mutual fund tax loss selling is over since their fiscal years typically end October 31. Market lows are often set in October, with rallies out of those lows in November.

3 Worst Months for Trading and Why:

Our final three months are our least favorite for trading. While they sometimes produce strong performance, these are typically our lowest percentage months for gains.

MARCH: Generally speaking, we're so tired from active trading in January and February that trader's fatigue sets in. We try to focus on companies reporting year end results during the month, and although March isn't a great overall market month historically, we have managed decent percentage returns over the years. However, we often just find ourselves a little burned out by the end of March.

OCTOBER: Historically, the worst performing month for the markets. Combine that with mutual fund tax loss selling, which ends October 31, and you get one of the most difficult months for trading. We typically enter more shorts in October than any other month, and try to position in stocks that were hit by fund tax loss selling for a little rebound in November.

AUGUST: Like most traders, fund managers, and brokers, we take our vacation in August, usually two weeks. That alone shortens our trading month considerably, but since volume is typically light in August, we don't feel like we miss too much. If a certain sector is performing well due to external influences, such as hurricane repair stocks in 2005, then we try to catch those. Otherwise, we don't do much, and don't expect to return a very high percentage. The first two weeks are usually the best just for the end of second quarter earnings reports.

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Yellow BottomThe Secret to Playing IPOs
Ever since the Dutch East India Company became the first to issue stocks and bonds to the public in 1602, investors have seen initial public offerings (IPOs) as the road to riches.

Think back to the dotcom craze of the late 1990s. You'll remember it spawned a feeding frenzy among investors chasing after internet IPOs on an almost daily basis.

It wasn't long before investors on Main Street took the bait after watching hordes of new college graduates in Silicon Valley become instant millionaires.

But as companies with unproven business models executed massive IPOs with sky-high prices, many investors who succumbed to the siren call got clobbered.

Pets.com for instance, raised $82.5 million in an IPO in February 2000 before imploding nine months later. And EToys.com stock went from a high of $84 per share in 1999 to a low of just 9 cents per share in February 2001.

In both cases, small investors were left holding the bag. The point is IPOs have always been high-risk, high-reward.

Here's what you need to know...

First of all, most companies go public to raise capital, either by issuing debt or stock. After all, being publicly traded opens the door to potentially huge returns for the owners.

But that's not all.

Public companies pay lower interest rates when issuing bonds. They also can issue more stock to grow through mergers and acquisitions.

Then there's the prestige factor, the pure ego satisfaction of hobnobbing with the fat cats on Wall Street.

But from an investor's point of view, the road to prosperity with companies going public is often fraught with peril.

You see, most IPO s leave retail investors completely behind. Typically only the biggest clients with the deepest pockets are going to get in on a hot IPO.

These institutional clients usually have a cozy relationship with one of the underwriters - such as investment banks Goldman Sachs, JPMorgan Chase or Morgan Stanley.

The underwriters work behind the scenes with the company to compile the proper regulatory filings with the Securities & Exchange Commission, handle the paperwork and determine the offering price of the stock.

If the underwriters know the IPO will be in great demand and the price is likely to jump, they'll shower their favorite institutional clients with an allocation at the initial price.

But retail investors can still make money on companies going public. You just have to do your homework.

For instance, Amazon.com (Nasdaq: AMZN) went public on May 15, 1997, with an IPO valuation of $441 million. Today it's $138 billion.

EBay Inc.'s (Nasdaq: EBAY) IPO valuation on Sept 24, 1998 was $2 billion. Today it's $67 billion.

Just remember, don't buy a stock just because it's an IPO -- buy it because it's a great investment. 99% of the time, the success of an initial public offering (IPO) is determined by the firm - or firms - who sponsor it, and how early you can get in.

And the best time to buy IPOs is AFTER the initial mania settles down.

This could be weeks or months after the initial offering. The key is to be patient.

There are two reasons these delayed entries into IPOs can be golden for those who jump in at precisely the right time:

You have a better idea of what the business is... and what its true potential can be.
The price is usually settled or even deflated.
Top 7 IPOS to Watch

1) Square - Last August Starbucks partnered with Square in a $25 million deal that lets the mobile payments company process all of the coffee giant's debit and credit transactions. Square should continue gaining popularity as the "mobile wallet" industry takes off. Besides being a major player in this up and coming industry, Square is often thought of as a takeover target.

2) Chrysler - After a 15-year hiatus from trading on the markets, Chrysler will once again trade publicly. In the second quarter of 2013 Chrysler saw its profits rise 16% year-over-year. What's more, the Auburn Hills, MI-based company now has annual net profits of $750 million.When Chrysler has its IPO sometime in late 2013 or early 2014, it hopes to have the success that rival carmakers GM and Ford have had lately, up 45% and 70% respectively this past year.

3) Aerie Pharmaceuticals - Aerie is a NJ-based developmental drug producer primarily engaged in developing glaucoma treatments. In May the company successfully completed a Phase 2b clinical trial for its leading glaucoma drug AR-13324. Like many bio-techs the firm does not earn a profit, losing $10.4 million the first half of 2013. Yet, glaucoma, which affects 2.2 million Americans and is the leading cause of blindness, has no known cure.

4) Glam Media - Glam Media is a vertical-media company with entertainment and lifestyle Websites and blogs mostly geared toward a female demographic. The New York, NY-based company generates revenue through ads and has been profitable since 2010. Glam continues to grow through acquisitions and currently has 356 million unique visitors per month to its site. In June of 2012 Glam was rated the #1 digital lifestyle Website in the world by comScore.

5) Rapid7 & 6) WhiteHat Security - One or both of these companies could be the next huge cybersecurity play, as both are thought to go public in 2013. Rapid 7 saw its revenue grow by 75% in the third quarter of 2012 and continues to expand its product portfolio. WhiteHat was founded by a former Yahoo! Inc. (Nasdaq: YHOO) information security chief, and dozens of Fortune 500 companies rely on WhiteHat for protection. As the world becomes more complex, uncertain, and digital, expect cybersecurity companies to grow in importance and value. Plus, both of these are prime takeover targets by larger security and defense firms.

7) Dave & Buster's - Last October it pulled its IPO off the shelf, but keep an eye out for an offering some time in late 2013/early2014. The company provides the best arcade and gaming experience for adults and was hoping to join other restaurant companies such as Bloomin' Brands Inc. (Nasdaq: BLMN) and Chuy's Holdings Inc. (Nasdaq: CHUY) that have had successful IPOs this past year.

3 IPOs to Avoid

All three of these companies present huge risks for investors and should be avoided.

1) Pinterest & 2) Tumblr - Both of these companies face issues similar to Facebook's in terms of generating profits and revenue from their user base, as well as monetizing mobile users. Pinterest has not proven its business strategy is legitimate and has even admitted it does not know how to turn its user base into profits. While just as popular as Pinterest and Facebook, Tumblr is an even riskier IPO to consider, and generates minimal revenue. Even though both sites are incredibly popular, their fate as public companies could easily follow Facebook's path.

3) Living Social - The vouchers website might go public in 2013, but its business structure is too similar to Groupon Inc.'s (Nasdaq: GRPN), which has done awful since its IPO. After touching $30 on its IPO day, GRPN immediately began to sell off and currently trades around $8. If Living Social has an IPO make sure to avoid it.

Best Sector of 2014: Energy

Right now, many investors are getting swept up by trendy, headline-making companies like Facebook (Nasdaq: FB) or Twitter.

Investing in stocks like these can be risky if the timing is wrong. That's especially true now, when U.S. budget battles can trigger stock market volatility that sends trend-based stocks like Facebook into a free fall.

Instead, investors should look at low-risk, high-gain "must-have" markets.

The best must-have markets are in front of us at all times - so necessary to our daily lives that they will not disappear.

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Even better: They're largely immune to Washington's hijinks.

And they're flooded with money.

That's why it's the perfect time to invest in energy.

Money Morning Chief Investment Strategist Keith Fitz-Gerald says energy is a "$12 trillion market that isn't going away any time soon."

These Billion-Dollar Numbers Say it All

You see, the world's population is growing at an astounding rate.

Today, there are 1.8 billion middle-class consumers in the global economy. By 2030, we can expect 3 billion more - that's a 266% increase.

And the existing power infrastructure can't keep up with that rate of growth.

For instance, power quality issues in the Unites States already cost more than $250 billion a year to resolve. In South America, the demand for electricity will double by 2020, and it completely lacks the grid to support that kind of growth - so outages will become commonplace.

That means there's going to be major investment in increasing energy supply to keep up with soaring demand. And those are just energy infrastructure problems facing the Americas.

The accompanying map shows how much global energy investment is needed in the coming years to keep up with demand.



This is why investing in energy will deliver gains far longer than any of today's trendy stocks.

Just look at these shocking numbers that reveal how big of an investment opportunity the energy market is (numbers courtesy of McKinsey Global Institute):

The U.S. will spend at least $540 billion per year in order to meet energy demands from 2013 to 2030. Worldwide, that number is roughly $700 billion per year. And energy is not an expense that will get slashed by cost-cutting governments. "There's not a government in the world that can't afford to keep the lights on. This spending is absolutely at the top of the priority list," Fitz-Gerald said.
On the low end, that means the world will spend approximately $12 trillion on energy needs by 2030; Fitz-Gerald believes we are looking at a figure closer to $15 to $17 trillion. To put that figure in perspective, there is approximately $1.22 trillion of U.S. currency presently in circulation, of which $1.17 trillion is in Federal Reserve notes.
Oil demand will increase with population growth, but the oil we need is increasingly challenging to access. The last decade has seen a doubling in the average cost to bring a new oil well on line. "We've got to drill deeper, we've got to drill horizontally, and we've got to use new technology to get the same amount of oil to the surface and in production," Fitz-Gerald explains.
Plus, there's going to be more reliance on these hard-to-reach, unconventional energy sources as a growing percentage of the world's oil fields are down for repairs, are badly in need of capital investment, and are increasingly subject to terrorist and military action.

Up to $1.1 trillion is spent by governments annually on resource subsidies. Several countries commit at least 5% of their gross domestic product (GDP) to energy subsidies.
For instance, in 2011, the United States government spent $24 billion on energy subsidies. To break it down even further, renewable energy and energy efficiency accounted for $16 billion, and the fossil-fuel industry received $2.5 billion in tax breaks, according to the Congressional Budget Office. "I think that the percentage of GDP spent on energy subsidies is going to rise because the trade-off is between supplying energy and massive civil unrest; governments will obviously choose the former," Fitz-Gerald notes.

7 Bullish Cases for Silver in 2014

In this time of economic uncertainty, investing in silver and other precious metals instruments is a must.
By devoting even a small portion of a portfolio to precious metals, investors gain valuable protection against inflation, stock market drops, and any other repercussions from Washington's debt-ceiling drama.

So far in 2013, investing in silver has been rocky. Silver prices have dropped nearly 30%, likely under pressure in the short term due to sluggish key factors in global markets.

But despite the short-term performance, silver prices are still a whopping 250% higher than its 2008 lows.

And long-term prospects look particularly bullish.

The growing demand for emerging products, China's introduction of silver futures, new movement in India, and continued U.S. government dysfunction all point toward silver market growth.

Taking these factors into account, plus 2013's fresh lows, means right now is a great time to get on board with silver. Here are several important factors that will push silver prices higher in the year ahead.

Silver has a tendency to follow gold's lead, so our first step is to look at how the yellow metal has been performing. Gold bottomed in late June and then set a new higher low mid-October at $1,275. At $1,350, gold is now trading slightly above its 50-day moving average - a bullish technical signal.
Silver has followed much the same pattern, and at $22.70 recently traded just above its own 50-day moving average, which is another bullish technical signal.
In the chart below, I've outlined in blue how the silver price has stayed above the blue support line and recently broke above the wedge formation. The next price targets are $23, then $24.50, then $29, as indicated in orange.

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Over the next few months, silver will likely follow gold's lead, which is bullish as we head into the strong Asian buying season thanks to Indian festivals, weddings, and harvests, in addition to the Chinese New Year. Indians have increasingly turned to silver as a substitute for gold in response to government duties and taxes to slow gold buying.
On the topic of India, silver demand in India - the world's biggest buyer of the white metal - is insatiable. It will be one of the biggest factors supporting higher silver prices in 2014. And it all stems from a move the government made to limit gold buying. India - the world's biggest gold buyer - imposed heavy import duties on the yellow metal this year to try and narrow India's swollen trade gap. The government raised the import duty on gold three times this year to 10%. In July, the government told importers that one-fifth of their purchases would have to be turned around for export. Only 80% would be available for domestic use. Data released in October showed Indian silver imports are set to hit a record this year. As these numbers show, silver has become the "go-to" precious metal for India's investors.
Industrial demand for silver is also strong because of growing applications in technology, like batteries, solar panels, and antibacterial applications, just to name a few.
The gold/silver ratio is around 60 right now. It trended up from 50 to 67 over the past year, but has dropped since August. Look for it to head back toward 45 to 50, meaning silver's price will likely climb faster than gold's.


2 Silver ETFs to Buy

Here are two interesting ways to play silver now before the price climbs higher:

Global X Silver Miners ETF (NYSE: SIL) is a one-stop shop of the larger primary silver miners. This should offer good exposure and leverage to silver, especially as silver equities are trading at historically very cheap levels.

ProShares Ultra Silver (NYSE: AGQ) offers a two-for-one leverage on the silver price, both up and down, but with no margin calls.

Fastest-Growing Industry for 2014: Mobile Payments

More Americans are cutting up their credit cards, and it's for a reason you might not expect.

The rise of mobile applications and Near-Field Communications (NFC) technology continues to carve market share from plastic payment methods.

And now, the trend is going mainstream in one of the most trafficked businesses in America.

Starbucks Corp. (Nasdaq: SBUX) announced this week that it currently receives 11% of its U.S. and Canadian sales through its mobile application. And that figure is expected to rise as the company continues to market its convenient closed-loop payment system.

The company's President and Chief Executive Officer Howard Schultz couldn't have been more excited about the trend.

"Starbucks is a clear leader in mobile payments and we are encouraged by how consumers have embraced mobile apps as a way to pay," he said during an Oct. 30 conference call.

Of course, some analysts predict this is just another fad that will fade.

But as we explained in the Six Questions that Can Make You Rich, mobile payment applications are here to stay.

The technology answers "yes" to all six questions. Most important, the ability to expedite payments in a more convenient, less onerous manner is a major benefit to consumers of all stripes.

And this isn't just an American trend.

Earlier this month, the head of electronic channels at the Spanish bank La Caixa, Benjami Puigdevall Esteve, said that he thinks NFC technology is going to take Europe by storm in 2014.

And as this becomes a global phenomenon, there's still time to invest and capture your share of an industry poised to reach more than $58 billion by 2017, according to eMarketer.

Five Stocks to Buy Now Before Mobile Payments Soar

As consumers continue to do even more with their mobile devices, expect retail companies to adopt new systems to accommodate this growing, profitable trend.

Here are five stocks to buy now that are poised to provide the biggest return as consumers continue to transition from cash and plastic to cell phone payment systems:

VeriFone (NYSE: PAY): VeriFone is a company without a lot of name recognition. But it's a critical behind-the-scenes service operator to some of the biggest financial institutions in America. Best known for the iPhone-based VeriFone application, the company recently partnered with Micros Systems to develop mobile payment technologies for restaurant consumers.


Vodafone Group Plc (Nasdaq: VOD): For investors looking to make a play in emerging markets, Vodafone and ICICI Bank launched M-Pesa - a mobile money transfer and payment service - for consumers in countries like India, Kenya, Tanzania and even the Democratic Republic of Congo. And the technology is revolutionizing the way people are able to acquire funds. Using just a text message, people can transfer and receive small amounts of money through their phones. This is a game changer in these countries, as people had no choice but to use cash at all times to pay for food, public transport, and basic goods. Customers are also delighted because it will reduce crime with fewer people forced to carry cash. The service is now being rolled out to more than 220 million people in India, with a target of covering the entire country within the next few years.


eBay Inc (Nasdaq: EBAY) is the owner of Paypal, an original leader in online payments and mobile platforms. In October 2010, Paypal lauched its Titanium+Conference mobile payment program, which allows small businesses to design custom payment systems for smartphones. It is estimated that nearly 100 million active accounts already exist.


Visa (NYSE: V): Credit card companies aren't going to take the transition from plastic to tech lightly. Companies like Visa and American Express are pushing capital into new mobile payment start-ups. Visa announced in May that it is creating its own digital wallet platform to enable "One Click" purchases online (Similar to Amazon) and at checkout counters with their mobile devices. The company also pumped $27.5 million into Square Wallet, a tech company that eliminates the need for cash registers and replaces them with a swiping device similar to a Fob. Square is widely used at Starbucks.


Amazon.com Inc (Nasdaq: AMZN): If there is money to be made on distribution of capital and the processing of goods and services, you can be sure that Amazon's name will pop up. The company targeted its rival Paypal in 2006 with its propritary Amazon Payments. Unfortunately for Amazon (which has done everything else right in recent years), the service has underperformed. Expect Amazon to hit a home run with its next attempt.
Worst Investments for 2014: Sell These Stocks & ETFs Now

There are events unfolding right now that show you need to know how to invest in a market correction...

First, this bull market - the most unloved bull market in history - has continued for 54 months now. That's a full 11 months longer than the average bull market run since 1953.

Second, the forces keeping this bull market going are almost completely divorced from any economic reality.

Unemployment and underemployment - the sheer number of Americans who've flat out given up looking for work - remains appallingly high, at 14%. Economic growth, limping in at under 2% per year, is anemic.

Yet, the markets have surged for more than four and a half years... hitting as high as 15,628... shattering all records as they go.

Now market crash indicators like the Hindenburg Omen are alerting investors to prepare now. And the rising yield on 10-year Treasuries could trigger a selloff.

But a market correction, crash, or downturn is nothing to fear if you know how to invest for that scenario. A good investor is prepared to stay in - and make money in - any market.

In fact, the only sure way not to make money is to be out of the market.

So, here's where to start.

How to Invest When Markets Fall

Inverse exchange-traded funds (ETFs) can be a powerful hedge against a downturn or crash. Even more than a hedge, they can be a tool to make money while everyone else is losing theirs.

Bearish investors nowadays have a truly staggering array of short plays to make using ETFs. If you can think of it, there's an inverse ETF to short it: commodities, market cap ranges, precious metals, indexes, entire sectors, whole national economies, currencies - nearly anything.

Inverse ETFs can be a bit more expensive than "traditional" ETFs, but they allow investors easy access to the short game, without the hassle and expense of maintaining a margin account.

If you're expecting any of the major indexes to go through a correction, you would naturally target an inverse ETF. You can always use an ETF that returns a one-to-one inverse of the daily return of whatever you fancy:

ProShares Short QQQ (ETF) (NYSE Arca: PSQ) will return the daily inverse of the Nasdaq.

ProShares Short Dow30 (ETF) (NYSE Arca: DOG) returns the daily inverse of the Dow Jones Industrial Average.

ProShares Short S&P500 (ETF) (NYSE Arca: SH) returns the daily inverse of the S&P 500.

For more aggressive investors, or those with a higher risk tolerance, the UltraShort and UltraPro class of ETFs can provide multiples of the inverse of the Dow Jones Industrial Average, the Nasdaq, the S&P 500, and even the Russell 2000. (Word of warning - those considering leveraged ETFs would do well to remember that multiplied gains can turn quickly into multiplied losses.)

The ProShares UltraShort S&P500 (ETF) (NYSE Arca: SDS) is perhaps the largest inverse ETF in existence, with $2 billion in assets. It's also the best-selling inverse product of 2013, with $1.1 billion in inflows this year. SDS is geared to provide 200% of the inverse daily return of the S&P 500 (before fees and expenses).

You'll be in good company among the other bears in the woods. ProFund Group's alternative ETF unit, ProShares, is one of the country's largest alternative ETF managers.

ProShares has reported inflows of around $3.8 billion into inverse products, so far, in 2013.

A Whole Wide World of Shorts

Far from just indexes, investors can take short bets on a variety of currencies with inverse currency ETFs. Although costs for these tend to be higher than index ETFs, the rewards can be just as nice, and there's nigh unlimited opportunity for speculation.

Technology, basic materials, consumer goods, real estate, even semiconductors are available for one-stop short selling. Wherever your bearish sentiment may lead, ProShares offers an ETF to short - with varying liquidity, assets under management, and costs, of course.

For instance, if you believe that the euro will decline relative to the dollar, you want to take a position in ProShares UltraShort Euro (ETF) (NYSE Arca: EUO). This will return twice the inverse of the daily decline of the euro to the dollar.

Or if you have a notion that oil might tank, but don't know the best way to parlay those depressed prices into gains, you can buy ProShares UltraShort DJ-UBS Crude Oil ETF (NYSE Arca: SCO). This is one of the most popular inverse oil ETFs around, albeit with higher costs than most inverse index ETFs. It gives twice the inverse daily performance of West Texas Intermediate (WTI) crude.

If you feel a correction or a crash is in the offing, you could play that for profit by shorting the entire financial sector. The ProShares UltraShort Financials (ETF) (NYSE Arca: SKF) will return twice the inverse of the daily Dow Jones financials sector.

Warning to the Down-Market Profit Hunter

Before you get into trading inverse ETFs to invest in a market correction, there are some important things to consider...

It's very important to note the use of the word daily in relation to the inverse index ETFs. That's a crucial caveat.

It means these are by no means buy-and-hold investments, and treating them that way is dangerous. It's not wise to let these simply "ride out" a market downturn or crash, because your holdings of inverse ETFs can take a hit on a rally, no matter how brief.

As we've reported before, one must always remain vigilant and attuned to their portfolio performance to succeed, and this rule of thumb definitely applies to inverse ETF speculation.

These are better thought of as trading vehicles or tactical tools. You'll need to make continual adjustments to your position should a trend emerge.

That being said, if you want more on how to invest in a market correction, ETFs are just one way that you can have your fill of short plays - and make a killing while all others are being killed.

More Than One Path to Post-Crash Riches

There's also the Chicago Board of Options Exchange Volatility Index (VIX). Some call it the Fear Index, and it's held to be the best gauge of volatility around. In fact, it may be one of the best contrarian indicators in the world.

When volatility takes hold and drives down the price of options on the S&P 500, the Fear Index almost always enjoys a healthy bump. During the recent broad market downturn, the VIX saw some powerful, historic upward surges. For instance, August 21, 2013, saw the VIX jump by 6.91%. And for nearly all of this August, money has been pouring into call options on the VIX to the point where open interest has peaked to its third-highest volume in history.

Avoid These Stocks At All Costs

Speaking of ETFs, prudent investors will best avoid any exposure to real estate investment trusts (REITs), and mortgage REITs in particular.

The Market Vectors Mortgage REIT ETF (MORT) is down 24% in less than five months. And a number of its components are down more than 30%.

But it's going to get worse. A lot worse. And that's why I'm issuing a warning, because practically every "properly diversified" portfolio in America cashes these REIT checks.

Many people depend on them.

This is dangerous, especially when two of the most widely held mortgage REITs also happen to be two of the worst.

To be sure, aside from the one (big) exception you'll see today, a longtime high-yield darling is about to get crushed...

The REIT Spoiler

You can pin this one on the U.S. Federal Reserve, too...

Thanks largely to its pernicious tinkering of monetary policy - first via artificially low interest rates and then via direct injection of capital into the financial system to the tune of $85 billion per month of direct bond buying ($45 billion specifically spent on mortgage-backed securities) - the Fed has created an environment in which interest rates are destined to rise.

In fact, the mere mention by Ben Bernanke back in May that the Fed will soon "taper" its bond-buying program now has caused interest rates, as measured by the benchmark 10-year Treasury Note, to rise to their highest levels in more than two years.

With the biggest buyer moving out of the market, MBSs are sure to take a hit. Moreover, the pace of rate increase has been anything but subtle, with the 10-year yield spiking to 2.90% - a 40% jump in three months.

Because mortgage REITs generate income by essentially borrowing money at short-term rates and then investing in higher-yielding MBSs, any significant increase in the cost of borrowing can devastate mortgage REIT book value.

And they're about to lose their safety net...

As the Fed has basically, and repeatedly, told the markets that tapering is a fait accompli, it means that the buyer of last resort for MBS is about to remove - or at least slowly pull back - the MBS safety net.

Adding more uncertainty to the mortgage REIT equation is so-called "agency risk."

The current debate over the fate of mortgage-related agencies Fannie Mae and Freddie Mac, and the future limited role these embattled agencies could play in the MBS space, also has caused the smart money to jettison mortgage REITs.

Two of the worst mortgage REITs to own right now also happen to be two of the most widely held ones, and they are Annaly Capital Management Inc (NYSE: NLY-C) and Two Harbors Investment Corp. (NYSE: TWO).

In the case of Annaly, the fund invests primarily in MBSs guaranteed by Fannie and Freddie, so it's little wonder why the exodus from this fund has sent NLY cascading some 25% over the past three months. As for Two Harbors, the spin-off of its equity-REIT Silver Bay Realty operations in May turned it into much more of a conventional MBS play. The market saw this, got spooked, and the result was a 20% smackdown over the last three months.

So, are there any REITs that still are okay to own these days? The short answer is yes...

The REIT Exception: Safe and "Substantial" Income

Vornado Realty Trust (NYSE: VNO) is a traditional REIT.

Unlike mortgage REITs, Vornado actually invests directly in prime real estate properties such as office buildings, and the rents from these properties are what Vornado uses to generate income for unitholders.

That income is substantial, as the company owns buildings in the best, highest-rent locations around the country, including economically vibrant New York City, San Francisco, and Washington, D.C.

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Vornado doesn't pay 10%-plus on your principal, of course, like NLY and TWO. It gives you something much more powerful: the ability to keep your principal, just in case you ever want your money back.

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