MPT Part VI: Arithmetic vs Compounded Returns

I'm in Wisconsin this week chowing down on BBQed brats and watching the Brewers. My guest columnist, Dr. Pat, has graciously agreed to write this week's blogs. He'll be sharing his profound knowledge on Modern Portfolio Theory, revising his previous asset allocation charts to incorporate monthly daily instead of yearly data. He also compares portfolio allocations based on arithmetic averaging to compounded averaging of returns. Which approach an investor should use depends on her portfolio goals and investment horizon.The week will be closed out with a discussion on Post-Modern Portfolio Theory. Professor Pat casts a jaundiced eye on the claims of the theory, noting its good points, bad points, and points of sheer absurdity.

Professor Pat's discourse is mathematically rooted and although it may take an academician to grasp all the nuances, even the average investor can easily employ his charts to determine the optimum asset allocation for his portfolio. It is with tremendous gratitude and deep respect for Prof. Pat's knowledge and time that I give my blog over to him for the next five days.

MPT: Arithmetic vs Compounded Returns
Previous installments of this series on Modern Portfolio Theory have presented optimum portfolio allocations for various Required Returns. These returns have been based on the arithmetic average of the history of returns for each asset class. This installment will present the optimum portfolio allocation results based on compounded annual returns. Remember that a return is said to be compounded if the investment amount is adjusted based on the previous return. For example, if you have $10,000 invested in the Small Stocks asset class and it gains 10% in a year, then you'll be adding that gain to next year's investment amount for a total of $11,000. (And the reverse process goes for losses.)

The arithmetic average annual return for an asset class is simply the sum of the percent returns divided by the number of years. For example, if the annual returns over a three year period were +8%, -5% , and +12%, the arithmetic average return would be (8 - 5 + 12) / 3 = 5.00%.

The compounded average annual return is more complicated. For this same example it is:

To further illustrate the differences between arithmetic average return and compound average return let's consider another example. The Small Stock asset class is the highest returning asset class over the 81 years from 1927-2007, but the difference between the arithmetic return is significantly different from the compounded return. For this class the arithmetic average annual return is about 17.3% while the compound average annual return is approximately 12.6%. The arithmetic average is higher because it weights percentage gains equally with percentage losses.

If one asset class experiences a 50% loss in any one year then a 50% gain the next year will not entirely recoup the earlier loss but will in fact recoup only one half that loss (resulting in 75% of the value of the original investment). The arithmetic average return of the two years is zero but there is still an overall loss over the two years as shown by the compound average return which is -13.4%. It actually takes a 100% gain to recover from a 50% loss. In this way, a compounded average return actually numerically weights losses more heavily than gains. In general, the arithmetic average will be greater than or equal to the compounded average with the difference between the two averages positively related to the standard deviation of the data.

An arithmetic average analysis is better at predicting what is more likely to occur in a single time period such as a month or a year. A retiree who needs to withdraw portfolio gains on a periodic basis would use the arithmetic return tables. In contrast, the compounded average analysis is backward looking but is more representative for what is likely to occur over multiple time periods. Investors who don't need to make portfolio withdrawals and are interested in the long-term accumulation of wealth would elect to use the compounded return tables.

Comparison of Asset Classes in a Basic Portfolio
For the six asset classes considered by Ibbotson & Associates in their Stocks, Bonds, Bills, and Inflation (SBBI) yearbook, the results of configuring the asset allocation optimization algorithm, also known as the mean-variance optimizer, to obtain the best asset class allocations for the range of possible compounded annual Required Returns is shown in the table below. This table ranges to 12.6% because that is the highest possible compound average annual return that can be obtained. That is accomplished with a 100% allocation to the highest returning, but riskiest, asset class--Small Stocks.

As before, all of my calculations below are based on annual return data from 1927-2007 for all of the asset classes described earlier. (See April 21-24 plus April 27 blogs.)

This can be compared to the results using an arithmetic average presented in Part II of this article and reproduced below for convenience.

Comparison of Asset Classes in an Extended Portfolio
For the expanded list of asset classes discussed in Part III where REIT's, International Stocks, and International Bonds are added to the mix the optimum allocations based on compound Required Returns are shown in the following table.

This can be compared to the results using an arithmetic average presented in MPT Part III and reproduced below for convenience.

In general the differences in the tables can be summarized by noting that a greater allocation toward Large Stocks relative to Small Stocks is preferred when compounded returns are the objective rather than arithmetic average returns. Note that the allocations for the same standard deviation (measure of portfolo risk) are only the same at the low extreme of Required Return. They are not the same elsewhere.

Conclusion
Usage of these tables can be best explained by recommending that the allocations derived using the arithmetic average Required Returns are preferred in the short-term. This is applicable to situations where a particular return is needed for income and any portfolio gains are withdrawn is they are generated. The allocations based on compounded returns are best for long-term financial planning and wealth accumulation.

Tomorrow I'll be comparing the asset allocations based on annual data with monthly data.

Posted by Prof. Pat

On Wisconsin!

Next week I'll be spending time with the folks in the place where I grew up--America's Dairyland, aka Wisconsin. In general, when we're not battling mosquitoes or shoveling snow, we Wisconsinites are genial people probably because of our diets. Beer, brats, cheese, and an oompah band will put a grin on anyone's face...well, maybe not the oompah band. (Use an accordion, go to jail is my motto.) And we're not known as the Home of the Braves (until they upped and moved to Atlanta--grrr!) for nothing. I mean, how many other people are willing to risk making fools of themselves by wearing holey foam hats on their heads? Some people may label us as ridiculous but I prefer to think of ourselves as being courageous touched with a soupcon of self-deprecation. (Actually, it's probably just the beer talking.) Anyway, in honor of my homecoming, I decided to devote today's blog to Wisconsin-based companies.

When you think of Wisconsin companies, beer, sausage, dairy, and Harley's probably spring to mind. But unfortunately, one of the beers that made Milwaukee famous, Budweiser, is based in St. Louis although they do own a brewery in Milwaukee. The only other major state brewery is Miller but that company is privately held. As for sausage, Johnsonville is the largest and that, too, is a private corporation. Same with the major dairy companies. So what's left to talk about? Plenty. Of the state's major iconic firms, only Harley-Davidson (HOG) makes the list, but Wisconsin isn't just made up of artery-clogging, DT-inducing companies. The most widely held public companies have nothing to do with personal consumption. Their focus runs the gamut from large farm and mining equipment to paper products to computer technology to auto parts to business services to retail. I looked at 25 of the most actively traded Wisconsin firms and there's a quite a few that would make juicy additions to anyone's portfolio. I won't bore you with every one I like--just my top picks.

The Cream of the Crop
In my March 12th blog, we looked at heavy metal stocks, i.e. those companies engaged in large-equipment manufacturing. I cited Joy Global (JOYG) and Bucyrus (BUCY) as being the pick of the litter among the mining manufacturers. They are both based in Wisconsin and since I recommended them, they've both been in a steady uptrend hitting new highs almost daily with JOYG gaining 22% and BUCY up 31%. Although they've been huge winners for the past couple of years, their charts aren't giving any indication of exhaustion. An analyst at BMO Capital raised JOYG's price target from $85 to $95 citing not only positive earnings and a solid back-log but future growth due to the resurgence in coal-mining. The situation is identical with BUCY with a Lehman Brothers analyst initiating coverage of the stock at “Overweight” (that means the stock is a strong buy) with a price target of $140. That's double the current price! He says that the company is well-positioned to take advantage of the world-wide growing commodities demand especially coal which accounted for 73% of the companies 2007 sales. I'd be a buyer of these stocks on any sort of pull-back.

Actuant (ATU) is a diversified machinery company that makes hydraulic and electrical tools as well as motion sensors for a wide range of commercial and industrial applications. On March 19th, it blew out earnings and raised yearly guidance. Since then, the stock has risen 20% and just recently broke above its all-time high.

If you're a handyman (handygal? handyperson?), chances are you're familiar with my next pick: Snap-on (SNA). This company makes tools for the home-based DIYer (do-it-yourselfer) as well as diagnostic and test equipment for the automotive industry. It also provides loans and financial services to its franchisees. Although the Commerce Department today released figures that showed a sharp decline in personal income growth, this didn't hurt Snap-on's stock as the price is now bumping up against its all-time high. The reason for this is that 44% of the company's first quarter sales came from overseas markets which more than offset falling US sales. According to Snap-on's CEO, the company is working hard to improve its global supply chain and sees “a strong and sustainable platform for future growth.” The company also recently raised 2008 guidance and Zack's put it on its buy list. Note that this company pays a nice dividend (2% dividend yield) to boot.

You might not have heard of the next company but you've probably seen their products. Brady (BRC) makes identification systems such as bar-coded tags which identify and protect products, premises, and people. The company's stock suffered a 34% decline from its August 2007 peak, and has been digging its way back since mid-February. It finally broke out of its trading range on May 22nd when it reported record earnings on improving margins and raised 2008 revenue and earnings guidance. In March, the company announced a one million share buy-back program. The stock has risen sharply since its earnings report (over 15% from its pre-announcement level) and because of this rapid rise, I'd wait to see if it pulls-back before buying. (Note: Brady has a 1.6% dividend yield.)

Pork sausage isn't the only type of hog product made in Wisconsin. Consider motorcycle manufacturer Harley-Davidson (HOG). While Jim Cramer has been tough on this company lately, the stock's chart is painting a rosier picture. It's put in a triple bottom from the middle of January to the middle of April and has since then it's been making a series of higher highs and higher lows. One more up day and the stock will have broken out of its base. A rise through its next major resistance level of $45 will be a sure signal to go long. Perhaps the rising price at the pumps has something to do with renewed interest in the company's products? Sure, many regard motorcycles as a purely recreational vehicle but they can also be viewed as an energy-efficient form of transportation. International sales have helped Harley fend off declines in the US market, and increasing global market share can only improve its bottom line. Just today US Senator Russ Feingold from Wisconsin urged the government of India to ease import tariffs on Harley products. If further tariffs can be eased, that would bode well indeed for hog aficionados world-wide. (I'd hate to be at a world-wide Sturgis meet!) The company also pays a respectable dividend (current yield is 3.2%)

Conclusion
See? There's more to Wisconsin than just cheese. By adding a few of these Dairyland Darlings to your portfolio could be gouda for your bottom line. (Sorry!)

Since I'll be gone next week I'm turning my blog over to my guest contributor, Professor Pat who will be delving into the finer points of Modern Portfolio Theory as well as introducing concepts of Post-Modern Portfolio Theory. All you math-geeks out there get ready and dust off your propeller hats.

Wisconsin Jokes
Q: What do they call a thin person in Wisconsin?
A: Tourist.

There are two seasons in Wisconsin--winter and road construction.

Have a good weekend!

Protective Put Pesto on the Energy Sector

In Recipe #3 we looked at portfolio hedging techniques, including using put options on ETFs as a way to hedge the portion of your portfolio that's heavily weighted in one particular sector. Now, the energy sector has been a stellar performer this year, but rampant speculation has many Wall Street analysts worried that it might be setting up for a nasty tumble. Their concerns may be justified as oil dropped over $4/barrel just today.

So what's an investor who's heavily weighted in energy stocks to do? If you're in this boat and you still want to hang on to your positions, one strategy that can help you sleep at night is to purchase puts on the XLE, the Energy ETF.

The method that I'm proposing here isn't restricted to the energy sector. If you have significant holdings in any sector--be it healthcare, international stocks, software, networking, biotech, etc.--it's well worth purchasing some insurance on it especially if that particular sector is looking a little “toppy” as is the energy sector right now. Now not all ETFs are optionable, but most are. The XLE especially offers highly liquid options which makes this an attractive candidate on which to purchase protective puts. Let's consider an example on how this strategy would work.

Protective Put Example
Let's say that you have a portfolio of oil and gas stocks worth $50,000. You think that the price of oil will continue to climb over the long term but you're concerned that the speculation bubble might burst causing a price tumble in the near future. You can protect your position by buying at-the-money (ATM) puts on the XLE. Currently, the XLE is trading near $87 with one September 87 put trading at $6.80. Since one options contract represents 100 shares of the ETF, the value of a single contract at $87 is $8700.

In order to fully shield yourself from a price downturn, you'd need to purchase 6 put options ($50,000/$8700 = 5.75) to fully protect yourself. (You could buy only 5 contracts but then you're not completely covered.) The total cost of this insurance is 5 x $6.80 x 100 = $3400 which is 6.8% of your portfolio's value. This may seem a high price to pay, but consider the consequences. Suppose oil does fall in the near future resulting in your portfolio losing $5000, or 10% of its current value. What are your options going to be worth?

The answer is that it's difficult to pinpoint the value exactly since neither will your stocks march lock-step with the price of oil nor will the XLE. Comparing the chart of XLE to the chart of light sweet crude shows that the XLE does indeed follow the price of oil fairly well. When oil dropped a certain percentage, so did the XLE by roughly the same margin. That means if oil drops by 10%, then the XLE will drop by roughly the same amount. Using my handy-dandy Black Scholes options calculator and assuming that this 10% drop occurs a month from now, the value of your puts will be roughly $11 per contract. Since you have 6 contracts, that's a total value of $6600. You paid $3400 for the insurance giving you a net profit of $3200. That doesn't quite cover the loss in your portfolio, but as I said, it's difficult to gauge the exact numbers here, and it sure beats not having any insurance at all.*

Conclusion
I hope you take the time to understand this strategy, especially if you have a lot of money placed in the energy sector. Tomorrow, I'm hoping to get back on track with the results of my stop-loss research, but I felt that today's drop in oil prices warranted the resurrection of the protective put recipe.

*Technical Note: In calculating the expected value of the XLE put option, I used today's value for the option's implied volatility. This value can change and will affect the results. An increase in volatility will raise the price of the option and a decrease will do just the reverse. If you're unfamiliar with options this will have no meaning for you which is why I strongly encourage anyone who wishes to use options to learn about them first. (See the links at the top.)

My Apologies

I'm mired in stop-loss research which is taking a lot longer than I had expected (it always does). If I'm able to finish in a reasonable period of time, I'll post the results later today. If not, then tomorrow. Sorry about that!

Whoa Nelly! Setting Stops

From time to time in my blog I've mentioned the importance of setting stops. In the articles I wrote about the Turtle trading system (see May 14-21 blogs), we saw that setting stop-losses was an integral part of their system. They defined their stops based on volatility and they knew precisely at the point of purchase what their stops would be for each trade. This is just sound money management practice and setting the appropriate stop can make all the difference between portfolio profit and loss.

If you don't like the Turtles' method of defining stops based on a stock's volatility, are there are other methods that can be used effectively? That's the question I'll be tackling in the next few blogs, but first I'd like to give an overview of the different types of stops that are the most popular among investors.

The Gain/Loss Stop
This is the easiest stop to understand. You define the amount of profit (gain) at which you'll sell your stock and also define the maximum loss you're willing to take. The amount that you specify is up to you. In general, a long-term investor will probably specify a larger loss amount than a short- term investor because he or she wants to capture long-term gains and is more willing to ride out short-term market fluctuations.

There are two different stop-losses to consider: One is the stop-loss per trade and the other is a stop-loss on the overall portfolio. One popular method of setting both is the 2%/6% system. In this method, you would define the stop-loss per trade as 2% of your overall portfolio value. If, during a month, your overall portfolio losses exceed 6% , then you would exit all your positions and stop trading for the rest of the month. The next month you would start again but with an overall lower position value and stop-loss amount.

Let's consider an example. Say you have $100,000 at the beginning of May with which to trade. If you abide by the 2% rule, then you'll be limited to trading only 3 positions, but if you limit your risk per trade to 1%, then you're allowed to trade up to 6 positions. If, say, May isn't going so well for you and your portfolio loss reaches or exceeds $6000, then you would exit all your positions and stay out of the market until June. The good point about this system is that the time you spend out of the market will give you an opportunity to analyze what went wrong with your trades and also to identify new potentially winning trades for next month. Personally, I know very traders who use this system but it could be just the ticket for the novice investor who is unsure of his trading skills. Not only does this system limit damage to one's portfolio but also to one's confidence.

The Ratchet Stop
A ratchet stop is one whereby the stop-loss is adjusted upwards as the stock moves up (or downward in the case of short positions). The ratchet stop is never adjusted downwards (in the case of long positions) and if the stock happens to trade under its ratchet stop price, the stock is sold. The problem with this method is that it can lead to whip-sawing and my simulations (which I'll be presenting in the next few days) show that it's an inferior method of setting stop-losses.

The Trailing Stop
The trailing stop is probably one of the most common methods of setting stop-losses. A trailing stop maintains a stop-loss order at certain percentage below the market price of a stock (or above it for short positions). For example, if you have a 10% trailing stop on a stock trading at $100/share, then your stop-loss point is $90. (Note that most brokers will let you set trailing stop-losses.) This method sounds easy, but there are a few points to keep in mind.

The first point is determining how much of a trailing stop is appropriate? That depends on the volatility of the stock in question and the length of time it's been trending. Initially, you may want to set a very loose stop, say 20%. This will keep you from being taken out of the trade too soon. As the stock begins to move in your favor, you can tighten up the stop. If it's been in a significant uptrend (for long positions) for a long time, you may wish to tighten up your stop even further to protect your profit.

The second point is what is the best percentage to use? More volatile stocks, like lower priced stocks, require a larger trailing stop while less volatile stocks such as large-cap companies require a smaller stop. In upcoming blogs, we'll see which trailing stops are the most appropriate for these cases.

The Parabolic SAR
The parabolic SAR (an acronym for “stop and reverse”) is an indicator plotted on a price chart. Many charting services provide this feature and it's used as a tool to set stops. The parabolic SAR is a mathematical formula that calculates the stop-loss levels for both sides of the market. It moves incrementally in a parabolic (curved) fashion each day along with changes in stock price. When the price intersects the parabolic SAR, the position is stopped out and the other side of the trade can be taken. This is a really good method for setting stops except in two instances--it's ineffective in choppy and non-trending markets. Choppy markets leads to a lot of whip-sawing. In non-trending markets, your stop may never be reached and your profits won't be locked in. Note that if you can't watch the markets everyday, this method is not for you since I don't know of a brokerage firm who will accept stop-loss orders based on the parabolic SAR.

Other Stop-Loss Methods
In addition to the above methods, there are other technical factors to consider. Although some of these rely on the trader's technical expertise and experience, they're well worth the effort to learn and are not that difficult to understand. The following considerations refer to long positions but the reverse logic can be applied to shorts as well.
1. Long-term trend break. If a long-term uptrend line is broken or it breaks a major support level on larger than average volume, consider selling all or part of your position. This is especially true of your stock is showing a head and shoulders break.
2. One day price drop. If your stock has risen substantially and makes a large drop, consider exiting all or part of your position. (This is where experience comes into play.)
3. Sell-off on heavy volume. If your stock has been selling off on heavier than normal volume, consider selling all or part of your position.
4. Staying below its 10 day moving average. If a stock persists in staying below its 10 day moving average, then consider lightening up your position or exiting.
5. Moving average cross-overs. If the stock's 50 day moving average moves below its 100 or 200 day moving average, it's time to get out.

Conclusion
Setting up stops is an integral and important aspect of proper portfolio management. In upcoming blogs we'll be looking at what types of stops provide maximum portfolio returns under various conditions. Don't stop now!

Bring Back Arbor Day!

Today's blog is a departure from my usual fare. One of Dr. Kris's alter-egos, Miss Grumpypants, asked me if I would run a public service announcement. Fearing her wrath if I didn't, I meekly acquiesced but must admit that she makes some excellent points. It's a gloomy Friday anyway and I myself wanted a break from my usual market squawk. So, in an eco-friendly spirit, I turn today's blog over to Miss Grumpypants.

Harrumph!
If there's one thing that really gets my goat is environmental hypocrites--you know, those holier than thou folk who claim to recycle their coke cans while housing a garage full of gas-guzzling, greenhouse gas emitting SUVs. Celebrities are some of the worst offenders. They say they have gone green but that doesn't stop them from boarding their private jets to have lunch a thousand miles away with one of their pals. Okay, I may be exaggerating, but not by much, and pardon me for venting. But what I really don't understand is how the Greenies haven't yet embraced Arbor Day. They're all over Earth Day but yet Arbor Day, the mother of all Green holidays, is snubbed for some inexplicable reason. I mean, if you're interested in immediately decreasing global warming, reducing if not nearly eliminating world hunger while at the same time beautifying the planet why wouldn't you be embracing Arbor Day with open arms? Why indeed! After you see the facts I'm about to present, you'll wonder why Arbor Day isn't right up there with Christmas or Thanksgiving because if we followed the tenets of the holiday we'd be blessed with cleaner air, a reduction in global warming, an abundance of food, and a more beautiful planet. Doesn't this sound like the spirit of Christmas and Thanksgiving rolled into one so how can you not embrace it?

Arbor Day: A brief background
Arbor Day was the brainchild of Julius Sterling Morton, a Nebraska journalist and politician, who felt that Nebraska's wind-swept landscape and economy would benefit from a wide-scale planting of trees. Because of Morton's political influence (he was Secretary of Agriculture under Grover Cleveland) he was able to convince the Nebraska board of agriculture to set aside a special day dedicated to tree planting and increasing awareness on the importance of trees. Nebraska's first Arbor Day was born on April 10, 1872 and was an incredible success with more than a million trees planted. A second Arbor day took place in 1884 after which the Nebraska legislature made it an annual holiday. Today, Arbor Day is celebrated in all 50 states, but the dates vary from state-to-state. Most state Arbor Days are held at the end of April or beginning of May. California and a few southern states hold theirs earlier and Hawaii's is in November. At the Federal level, the last Friday in April is proclaimed to be National Arbor Day.

Why planting a tree is good for you and the planet
Trees are one of the very best ways to combat the effects of global warming because they absorb carbon dioxide (CO2), a key greenhouse gas emitted by our gas-guzzling SUVs and power plants, before it has a chance to reach the upper atmosphere where it traps in heat. While all living plant matter absorbs CO2, trees are the most efficient because of their larger size and extensive root systems. During its lifetime, a single tree will absorb approximately one ton of CO2. Some trees are better than others at CO2 absorption, but scientists agree that planting any tree that's climate appropriate will help offset the rise in global warming. In addition, trees provide other health, economic, and aesthetic benefits:

1. Because of photosynthesis, trees not only absorb CO2, but purify the air by emitting oxygen which is what we humans need to breathe. We've all heard about the continuing destruction of the Amazon rain forest which scientists refer to as the lungs of the planet. If the rain forest is totally destroyed (and I hope we can prevent that from happening), the earth will literally be gasping for breath but by planting our own trees, we might be able to replace one giant lung with many smaller ones. I don't know if this would work but it certainly can't hurt.
2. Trees block cold winter winds and provide cooling summer shade, both of which help lower home heating and cooling costs. Have you ever noticed the difference in temperature between the sunny side of the street and the shady side? This is called the urban heat island effect, and it can be significantly reduced by planting trees in heavily concreted urban areas.
3. Their root systems protect soil from erosion and help to clean ground water.
4. They provide shelter for our furry and feathery friends, and add grace and beauty to our communities which increases property values.
5. They provide an indirect source of recreation: a place to hang your hammock or swing your swing. And how can you build a tree-house without a tree?

I'm telling 'ya, what's not to love?

Where to plant trees
You can plant them anywhere: around your home or property; in your community such as parks, schools, churches, downtown areas, concrete parking lots, around stadiums; and in our local, state, and national forests. The latter option is a good one for urban apartment dwellers with limited or no balcony space.

What else can I do?
Ever hear of a Victory Garden? These were vegetable, fruit, and herb gardens grown at home to help the war effort during WWI & II. Did it work? Oh, yeah. Victory Gardens were grown by nearly 20 million Americans during WWII and accounted for up to 40% of the produce grown annually. Forty percent! If we could all pitch in and do something like that today, we could probably put an end to hunger in America if not make a significant dent in the current world food crisis, especially if we can convince other countries to follow suit.

A friend of mine with a small backyard has several large fruit trees that not only provide cooling shade in the summer but so much fruit that she's able to supply a local homeless shelter with citrus for months. Growing up in the Midwest, our family always had a large vegetable garden and let me tell you that there's nothing better than eating a sun-ripened tomato plucked right off the vine or freshly picked buttery green beans. Besides being fun for the whole family, growing your own fruits and vegetables is much cheaper, tastier, and healthier than buying stuff from the grocery store that has been sitting around for weeks or even months. If you have a garden and find yourself with too many vegetables, donate them to charity or have your kids operate an after-school fruit and vegetable stand. It's a fun way for them to earn money while learning the basics of entrepreneurship. Also, you can save significantly on flowers if you grow your own. I had two dozen rose bushes plus pots of cymbidium orchids around my last house and never wanted for fresh cut flowers. Plus, the flowers enhanced the look of my yard. And yes, I did have a Victory Garden which I called a garden. Besides white peaches and nectarines, I grew asparagus (the only patch in Southern California that I knew of), herbs, tomatoes, peppers, beans, and pumpkins that vined their way down my back slope. Different varieties of grapes twined over my back fence and provided the most exquisitely delicious fruit--like nothing you'd ever get in the store or even the farmer's market. Yum-oh! (Grapes are so easy to grow that if you don't watch it, they'll take over everything.)

Conclusion
This concludes my brief public service announcement. I hope you can see that planting trees and other edibles is a very cost-effective way of not only benefiting the earth but us as well. So please mark Arbor Day on your calendar and let's give the holiday the respect that its due, but you don't have to wait for the next Arbor Day to plant a tree or a garden. So indulge your green thumb. Let's go green by planting green. We can save the planet, one tree at a time.

For further information on tree planting and global warming, go the the Arbor Day Foundation website: www.arborday.org.

Is There Still Gold in Them Thar' Hills?

I've avoided mentioning gold since it had such a terrific run-up in the past year, but lately it's been languishing. If you don't happen to own any gold positions, is now a good time to jump in? Perhaps, considering that black gold, otherwise known as crude oil, is jumping over barrels everyday reaching new highs. There are economic differences between yellow gold and black gold. You want to own the yellow variety as a hedge against inflation, and so far, inflation hasn't been much of a concern to economists. But if the analysts are correct in predicting that oil could rise to $150/barrel if not $200/barrel, that could have a considerable impact on inflation. And according to yesterday's minutes from the last FOMC meeting, the Fed signaled that there will be no more rate cuts. If oil prices keep rising, you can bet that inflation is going to rear its ugly head.

If you do agree with Wall Street that oil is heading higher, what gold stocks look attractive right now? Well, this morning I pursued the charts in the gold sector and sad to say that most of them look tired. Many are well off their recent highs with some losing between 50-70% of their peak value. The good news is that the GLD (the gold ETF) looks like it's putting in a double bottom and if it can break through its $94 resistance level, then it's likely clear sailing until the next resistance level at $100.

There are a few bright spots among the gold mining slag. One plus about the stocks I'll be mentioning is that they are cheap price-wise with most of them trading under $10/share. That's a lot cheaper than the GLD which is currently at aroung $91/share. Here are my picks of the rock pile:

Top Picks
MRB, Metallica Resources: Not only did this stock not suffer along with the rest of the gold group, it's been on a juggernaut since breaking out of its base in late 2005. Since then it's risen over 300% and is currently trading at its all-time high of $8.25. The company not only is a gold producer, but is involved in silver and copper production as well, and with the world demand for copper exploding, this stock should do well even if gold demand starts to fade.

EGO, Eldorado Gold: This stock chart parallels that of MRB. It, too, broke out late in 2005 and has since racked up over a 200% gain. It gapped up today breaking short-term resistance to set a new high at $8.14. This company does not mine anything other than gold and its chart closely reflects the movement of the XAU, the gold and silver index.

Other Good Picks
AZC, Augusta Resources: This stock has doubled in price since its November 2006 inception. It broke out of its 2 1/2 month trading range just a few days ago and it, too, is making a new high around $4.70. Not only does the company produce gold, but copper, silver, and molybdenum as well.

GBN, Great Basin Gold: Similar story for this stock. It's almost doubled in value since late 2005 and is testing its recent high of $3.75. It produces copper as well as gold.

GRS, Gammon Gold: This gold and silver producer lost half of its value from its October peak of $12. Since the February low, it's managed to recoup most of its loss and is nearing minor resistance at $10.50. If it can break that then chances are good it will at least rise to its previous $12 high.

AAUK, Anglo American: This stock has risen 150% since the fall of 2005 and is nearing its all-time high of $38.75. This company has a smaller exposure to gold than the ones given above and could make an attractive adjunct to other gold stocks by providing a bit of diversification within the industry. The company has diverse mining interests, including platinum, silver, copper, molybdenum, vanadium, coal, diamonds, and iron ore plus other metals used in the production of steel. If you're looking for a diversified mining play in one package, consider this puppy. It's also the only one of this bunch that pays a dividend. (Current divident yield is about 2.5%.)

Conclusion
Of the above mentioned stocks, only EGO, GRS, and AAUK are optionable and would be good candidates for a covered call strategy. To answer the title question, “Is there gold in them thar' hills?” I would say yes, but you gotta pick the right hill. Happy prospecting!