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Crestmont Market Valuation Update

Courtesy of Doug Short.

Quick take: Based on the August S&P 500 average of daily closes, the Crestmont P/E is now 90% above its arithmetic mean and at the 98th percentile of this fourteen-decade monthly metric.


The 2011 article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Ed’s method for determining where the market is headed. His analysis was quite compelling. Accordingly I include the Crestmont Research data to my monthly market valuation updates.

The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart I’ve been sharing on a monthly basis for the past few years.

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The Crestmont P/E of 26.3 is 90% above its average (arithmetic mean) of 13.9. This valuation level is similar to the 85% we see in the latest S&P Composite regression to trend update and higher than the 54% above mean for the Cyclical P/E10 (more here).

The latest Crestmont P/E puts the current valuation at the 98th percentile of this fourteen-decade series.

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For a better understanding of these charts, please see Ed’s two-part commentary here:

And these articles explore key concepts for investment expectations and planning.

Also, here links to the latest updates on Ed’s Crestmont Research website.


Ed Easterling is the author of Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles. He is President of an investment management and research firm, and a Senior Fellow with the Alternative Investment Center at SMU’s Cox School of Business, where he previously served on the adjunct faculty and taught the course on alternative investments and hedge funds for MBA students. Mr. Easterling publishes provocative research and graphical analyses on the financial markets at www.CrestmontResearch.com.





Is the Stock Market Cheap?

Courtesy of Doug Short.

Here is a new update of a popular market valuation method using the most recent Standard & Poor’s “as reported” earnings and earnings estimates and the index monthly averages of daily closes for the past month, which is 1,961.53. The ratios in parentheses use the monthly close of 2003.37. For the earnings, see the table below created from Standard & Poor’s latest earnings spreadsheet.


● TTM P/E ratio = 18.4 (18.8)
● P/E10 ratio = 25.6 (26.1)


The Valuation Thesis

A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.

TTM P/E Ratio

The “price” part of the P/E calculation is available in real time on TV and the Internet. The “earnings” part, however, is more difficult to find. The authoritative source is the Standard & Poor’s website, where the latest numbers are posted on the earnings page.

The table here shows the TTM earnings based on “as reported” earnings and a combination of “as reported” earnings and Standard & Poor’s estimates for “as reported” earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.

The average P/E ratio since the 1870′s has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as the 120s — in the Spring of 2009. In 1999, a few months before the top of the Tech Bubble, the conventional P/E ratio hit 34. It peaked close to 47 two years after the market topped out.

As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. “Why the lag?” you may wonder. “How can the P/E be at a record high after the price has fallen so far?” The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.

Let’s look at a chart…
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Government Bonds: Triple Resistance Against the Trend

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


Would you have guessed eight months ago that the S&P 500 would hit the 2,000 level and the Government bond ETF TLT would be up twice as much as the broad market on the year? I can’t help but believe this has surprised a few investors. It has me.

Premium Members picked up TLT on Valentine’s Day and so far the trade has been rewarding, as TLT is up around 12%. At the time of the purchase in TLT, sentiment levels reflected just 20% of investors were bullish bonds.

The rally in TLT has pushed it up against a price point where triple resistance could be coming into play, as momentum is reaching lofty levels and sentiment has shifted a little as 66% of investors are now bullish bonds.

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ISM Manufacturing Index: Growth Again Beats Forecast

Courtesy of Doug Short.

Today the Institute for Supply Management published its July Manufacturing Report. The latest headline PMI at 59.0 came in above last month’s 57.1 percent and above the Investing.com forecast of 56.8. The August level is the highest since March 2011.

Here is the key analysis from the report:

“The August PMI® registered 59 percent, an increase of 1.9 percentage points from July’s reading of 57.1 percent, indicating continued expansion in manufacturing. This month’s PMI® reflects the highest reading since March 2011 when the index registered 59.1 percent. The New Orders Index registered 66.7 percent, an increase of 3.3 percentage points from the 63.4 percent reading in July, indicating growth in new orders for the 15th consecutive month. The Production Index registered 64.5 percent, 3.3 percentage points above the July reading of 61.2 percent. The Employment Index grew for the 14th consecutive month, registering 58.1 percent, a slight decrease of 0.1 percentage point below the July reading of 58.2 percent. Inventories of raw materials registered 52 percent, an increase of 3.5 percentage points from the July reading of 48.5 percent, indicating growth in inventories following one month of contraction. The August PMI® is led by the highest recorded New Orders Index since April 2004 when it registered 67.1 percent. At the same time, comments from the panel reflect a positive outlook mixed with caution over global geopolitical unrest.”

Here is the table of PMI components.

I’m reluctant to put too much focus on this index for various reasons, but they are essentially captured in Briefing.com’s Big Picture comment on this economic indicator.

This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey


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Regression to Trend: A Perspective on Long-Term Market Performance

Courtesy of Doug Short.

Quick take: At the end of August the inflation-adjusted S&P 500 index price was 85% above its long-term trend, down from 86% above trend the previous month.


About the only certainty in the stock market is that, over the long haul, over performance turns into under performance and vice versa. Is there a pattern to this movement? Let’s apply some simple regression analysis (see footnote below) to the question.

Below is a chart of the S&P Composite stretching back to 1871 based on the real (inflation-adjusted) monthly average of daily closes. I’ve using a semi-log scale to equalize vertical distances for the same percentage change regardless of the index price range.

The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend. That regression slope, incidentally, represents an annualized growth rate of 1.75%.

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The peak in 2000 marked an unprecedented 149% overshooting of the trend — nearly double the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 12% below trend briefly in March of 2009. But at the beginning of July 2014, it is 84% above trend, up from 79% above trend the month before. In sharp contrast, the major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, it would be around the 1057 level. If the index should decline over the next few years to a level comparable to previous major bottoms, it would fall to the vicinity of 500.

Incidentally, the standard deviation for prices above and below trend is 40.52%. Here is a close-up of the regression values with the regression itself shown as the zero line. I’ve highlighted the standard deviations. We can see that the early 20th century real price peaks occurred at around the second deviation. Troughs prior to 2009 have been more than a standard deviation below trend. The peak in 2000 was well north of 3 deviations, and the 2007 peak was above the two deviations — as is our current level.


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Two Measures of Inflation and Fed Policy

Courtesy of Doug Short.

Note from dshort: I’ve updated the accompanying charts with the latest Personal Consumption Expenditures price index from the Bureau of Economic Analysis. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison with the Consumer Price Index.


The BEA’s Personal Consumption Expenditures Chain-type Price Index for July shows core inflation below the Federal Reserve’s 2% long-term target at 1.47%, but for the past four months this indicator has hovered above its narrow range of the previous 12 months. The latest Core Consumer Price Index release, also data through July, is higher at 1.86%. The Fed is on record as using PCE as its primary inflation gauge.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee’s ability to promote maximum employment in the face of significant economic disturbances. [Source]  Note: Bolding added by me.

Elsewhere the Fed stresses the importance of longer-term inflation patterns, the likelihood of persistence and the importance of “core” inflation (less food and energy). Why the emphasis on core? Here is an excerpt from one of the Fed FAQs.

Finally, policymakers examine a variety of


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The S&P 500, Dow and Nasdaq Since Their 2000 Highs

Courtesy of Doug Short.

Here is a update in response to a standing request from a couple of sources that I also share with regular visitors to my Advisor Perspectives pages.

The request is for real (inflation-adjusted) charts of the S&P 500, Dow 30, and Nasdaq Composite. In response, I maintain two overlays — one with the nominal price, excluding dividends, and the other with the price adjusted for inflation based on the Consumer Price Index for Urban Consumers (which is usually just refer to as the CPI). The charts below have been updated through the August 29th close.

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The charts require little explanation. So far the 21st Century has not been especially kind to equity investors. Yes, markets usually do bounce back, but often in time frames that defy optimistic expectations.

The charts above are based on price only. But what about dividends? Would the inclusion of dividends make a significant difference? I’ll close this post with a reprint of my latest chart update of the S&P 500 total return on a $1,000 investment at the 2000 high.

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Total return, including reinvested dividends, certainly looks better, but the real (inflation-adjusted) purchasing power of that $1,000 is currently, over 14 years later, only 235 dollars above break-even. That equates to a 1.47% annualized real return.





Tracking the Market with Social Media

Courtesy of Doug Short.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


The Trade Followers Momentum indicator for the S&P 500 Index (SPX) is positive, but showing some short term caution signs. Seven day momentum reached extremely overbought territory last week and has now turned over. Previous peaks of high magnitude have led short term tops in the market by roughly a week or two. The peaks are often associated with sideways or slightly upward action in SPX that ultimately ends with a short term drop in price. This is the first indication of caution; however, it doesn’t imply a large consolidation in price…yet.

Breadth calculated between the strongest and most bullish stocks on social media compared to the weakest and most bearish continue to paint high readings and have mostly cleared their negative divergences. This indicator is a longer term measure of market health and suggests that the market will continue to move higher over the intermediate term due to the large number of stocks traders find attractive.

Support and resistance levels for SPX gleaned from traders tweets continue to target 2000, 2030, and 2050 as resistance. Traders are mostly tweeting higher prices which suggests they believe the market will move higher. Support is at 1955 and 1905. However, the 1955 level is not as active as the 1905 area. As a result, there is a lot of white space for the market to fall into if a decline starts from here. This adds some instability to the market.

Another sign of instability creeping into the market comes from social media momentum for volatility (VIX). After painting a series of lower highs, momentum from both StockTwits and Twitter are breaking above very long term down trend lines. This suggests traders are getting somewhat skittish and might be dancing close to the door.

Sector strength is showing support for every sector. In the past, this condition has almost always marked short term tops. It shows market participants rotating to safety which often causes choppiness in the market.

Overall momentum is still indicating higher prices in the intermediate term, but showing some caution signs near term. Rotation to safety and a fall from over bought readings on 7 day momentum suggest the market needs more time to digest recent gains.…
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A Labor Day Perspective: The Growth of our Services Economy

Courtesy of Doug Short.

In honor of Labor Day, which was signed into law as a national holiday in 1894, I’d like to share some graphical snapshots of a major change in our nation’s workforce over the decades.

The Department of Labor’s Bureau of Labor Statistics has monthly data on employment by industry categories reaching back to 1939. The first chart below is an overlay of the compete series of employment numbers for the two major categories, manufacturing and services industries.

When I say major, I’m referring to the complete domination of the labor market by these two industries — anywhere between 91.3% to 95.3% of total nonfarm employment.

In 1939 service industries employed more people than manufacturing by a ratio of 2.1-to-1.0. But that ratio was soon to change. For a clearer picture of the relative growth of manufacturing and services, the next chart illustrates just that: The cumulative growth of the two series, along with total nonfarm employment.

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The next chart shows the same data adjusted for population growth, I’ve used the Bureau of Labor Statistics’ Civilian Labor Force as the “deflator”, hence the 1948 start date, which was when the Civilian Labor Force 16 and Older began being tracked in the monthly Household Survey.

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During WWII, manufacturing employment rose dramatically, but it began returning to its pre-war pattern after the war ended. Thereafter, manufacturing employment has had a complex history with a peak in the late 1970s and a secular decline thereafter. Here are some observations about manufacturing and services over the past seven plus decades:

  • Manufacturing is far more sensitive to the business cycle. Compare, for example, the relative behavior of manufacturing and services relative to the recession bars.
  • Growth in services began accelerating in the 1960s and accelerated at an increasing rate after the double-dip recession in the early 1980.
  • Manufacturing accelerated at a slower pace in the 1960s and then oscillated around a flat line in sync with the four recessions from 1970 to 1982.
  • Manufacturing employment peaked in June 1979. It never recovered from the double dip recession of 1980-1982.
  • The spring of 1998 was the an interim high


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Daily Market Commentary: Semiconductors Gain

Courtesy of Declan.

Markets finished Friday on a flourish with a close at, or near new highs. Volume climbed to register an accumulation day, which keeps thing ticking over in favor of bulls over the long weekend.  The Semiconductors had the best of it, although these gains were posted at the open.


Gains in the semiconductor index helped the Nasdaq close at a new high.  Technicals remain strong too.

The Russell 2000 remains inside the rising channel. The push from Thursday’s tight action has swung in favor of bulls. – further gains remain favored.

The S&P is similarly in a good position, although Friday’s gain wasn’t as good as the Russell 2000.

Tuesday is set up for upside follow through following Friday’s bullish reaction to Thursday’s tight intraday action.

Accepting KIVA gift certificates to help support the work on this blog. All certificates gifted are converted into loans for those who need the help more.





 

Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!

 
 

All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Chart School

Crestmont Market Valuation Update

Courtesy of Doug Short.

Quick take: Based on the August S&P 500 average of daily closes, the Crestmont P/E is now 90% above its arithmetic mean and at the 98th percentile of this fourteen-decade monthly metric.

The 2011 article P/E: Future On The Horizon by Advisor Perspectives contributor Ed Easterling provided an overview of Ed's method for determining where the market is headed. His analysis was quite compelling. Accordingly I include the Crestmont Research data to my monthly market valuation updates.

The first chart is the Crestmont equivalent of the Cyclical P/E10 ratio chart I've been sharing on a monthly basis for the past few years.

...

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Zero Hedge

The Morning After: What Happens When A Government Destroys Its Currency

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Submitted by Simon Black via Sovereign Man blog,

Imagine this scene:

“Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight.”

 

“The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before…”

This is how an American business executive described living through Mexico’s devaluation of the peso exactly 38 years ago on September 1, 1976.

...

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Phil's Favorites

Debt Rattle Sep 2 2014: This Is As Big As We Will Get

Courtesy of The Automatic Earth.


Peter Sekaer Times Square with Father Duffy statue 1937

This it. The is the biggest we’re going to get. We won’t grow anymore. Not bigger, not wider, not taller (just thicker perhaps, in the sense of more stupid). I return to this from time to time, and still I never see even just one voice in the media with even one hair’s breadth of doubt about the overarching theme of growth at all costs. Is this a sign that economists and other poorly educated people have taken over the world, or is it simply what we are all programmed for?

The only discussion out there is how we can best return to growth. Never if we should return to it. But still, when I look around me I don’t have the feeling that we desperately need to grow bigger. Th...



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OpTrader

Swing trading portfolio - week of September 2nd, 2013

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Insider Scoop

NXP To Supply Apple With Mobile Payment Chips

Courtesy of Benzinga.

Related NXPI Stocks Hitting 52-Week Highs Morning Market Movers

NXP Semiconductors NV (NASDAQ: NXPI) gained three percent in pre-market trading Friday on a report it's providing wireless chips to the Apple (NASDAQ: AAPL) iPhone 6, enabling a mobile payment system.

The Netherlands-based semiconductor company makes so-called Near Field Communications chips that smartphones use to communic...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's the latest issue of Stock World Weekly. Click on this link and use your PSW user name and password to log in. Or take a free trial. 

Enjoy!

...

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Option Review

Puts Active On Buffalo Wild Wings

Buffalo Wild Wings Inc. (Ticker: BWLD) shares are in positive territory in early-afternoon trading on Thursday, reversing earlier losses to stand up 0.50% on the session at $148.50 as of 12:15 pm ET. Options volume on the restaurant chain is running approximately three times the daily average level due to heavy put activity in the October expiry contracts. It looks like one or more traders are buying the Oct 140/145 put spread at a net premium of roughly $1.45 per contract. As of the time of this writing, the spread has traded approximately 3,000 times against very little open interest at either striking price. The put spread may be a hedge to protect a long stock position against a roughly 6% pullback in the price of the underlying through October expiration, or an outright bearish play anticipating a dip in BWLD shares in the next couple of months. The spread makes money at expiration if shares in BWLD decline 3.3% from the current price of $148.50 to breach the breakeven point...



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Sabrient

Six Companies Push Tax Rules Most

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of Sabrient Systems and Gradient Analytics

Gradient Senior Analyst Nicholas Yee reports on six companies that are using a variety of techniques to shift pretax profits to lower-tax areas. Featured in this USA Today, article, the companies include CELG, ALTR, VMW, NVDA, LRCX, and SNPS.

Six Companies Push Tax Rules Most

Excerpt:

Nobody likes to pay taxes. But some companies are taking cutting their tax bil...



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Digital Currencies

Disgraced Mt Gox CEO Goes For Second Try With Web-Hosting Service (And No, Bitcoin Not Accepted)

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Mt Gox may be long gone in the annals of bankruptcy, but its founder refuses to go gentle into that insolvent night. And, as CoinDesk reports, the disgraced former CEO of the one-time premier bitcoin trading platform has decided to give it a second try by launching new web hosting service called Forever.net and is registered under both Karpeles’ name and that of Tibanne, the parent company of Mt Gox.

From the company profile:

“TIBANNE Co.Ltd. ...



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Market Shadows

Helen Davis Chaitman Reviews In Bed with Wall Street.

Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).

Helen Davis Chaitman Reviews In Bed with Wall Street. 

By Helen Davis Chaitman   

I confess: Larry D...



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Pharmboy

Biotechs & Bubbles

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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Promotions

See Live Demo Of This Google-Like Trade Algorithm

I just wanted to be sure you saw this.  There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.

If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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