Get the SCOOP on the Next Big Shale Play

Popular Posts: 4 Hot Energy Stocks Yielding More Than 5%5 Midcap Energy Stocks Powering Up for 2014Beware of These 3 Funds – You May Be VERY Overweight In XOM Stock Recent Posts: Get the SCOOP on the Next Big Shale Play 4 Hot Energy Stocks Yielding More Than 5% The Best Emerging Market Bond ETF You've Never Heard Of View All Posts

America's ride towards energy independence has really been driven by one thing — shale. As producers continue to use hydraulic fracturing and dive head first into our various shale rock formations, they've been able to unlock a sheer abundance of natural gas and oil.

As a result, fields like the Bakken and Marcellus have been become household names.

However, as the Bakken and company have become standard fields in the energy lexicon, much of their "booms" have already been realized from early investors. Sure, these super fields will continue producing plenty of energy for years to come. But the initial euphoria that comes with finding the next big thing has already passed by many investors.

Which is why investors looking to "wildcat" their way to gains should perhaps focus some attention to the Southern Central Oklahoma Oil Province, or SCOOP shale.

SCOOP is just beginning its journey on becoming a massive liquids rich shale play. That could mean some big bucks for early energy firms and their investors.

Getting the SCOOP

Like Texas, North Dakota and Pennsylvania, Oklahoma has a long history of oil production and is steeped in energy tradition. The state has been a huge source of crude oil and natural gas for decades, and around 9% of all active oil wells currently lie within the Oklahoma's borders. And like its fellow energy-rich states, hydraulic fracturing is helping rewrite that history forward.

Underlying most of Oklahoma, the Woodford shale is an interesting mix of natural gas, natural gas liquids and shale oil. However, given the Woodford's vast size and complex nature, those various energy types aren't spread evenly throughout the shale. There are places that are more "gassy" than others.

That's a big problem considering the relatively low prices of natural gas.

However, the SCOOP portion of the Woodford — covering about 3,300 square miles — is very liquids-rich. Featuring multiple pay zones and a variety of NGLs and shale oil, early estimations predict that the SCOOP could contain upwards of 70 billion barrels of oil. Putting that into perspective, the latest U.S. Geological Survey estimates only put the Bakken at 7.4 billion barrels of undiscovered and technically recoverable oil.

Aside from the larger resource potential, the SCOOP has the Bakken beat on another front as well — infrastructure.

Given Oklahoma's history as an oil producer — dating all the way back to the early 1900s — the state is littered with midstream infrastructure. There are literally thousands of miles worth of pipelines and gathering systems that crisscross and dot its countryside, including the United States’ main oil storage depot in Cushing. With this extensive network of energy logistics in the SCOOP's backyard, producers have much easier time getting their oil to market than say, someone trying to tap a remote well in the Bakken.

All in all, that reduces costs and makes the SCOOP are desirable place to drill.

Still Time To Get In

With drilling activity in the SCOOP just starting to get underway, investors an early opportunity to get in before it really takes off. Several energy firms have already made the SCOOP a major part of their CAPEX and exploration plans.

One of the biggest winners could be Continental Resources (CLR). Already, the Bakken's superstar, CLR has made the SCOOP its No. 1 focus in the upcoming few years. The firm has been snapping up acreage in the region and now sits on an impressive land holding of 330,000 net acres. The company plans on applying the same cost cutting and surgical-like drilling techniques that its uses in the Bakken into its new SCOOP acreage.

Overall, CLR estimates that its acreage in the SCOOP will produce around 1.8 billion barrels of crude. Perhaps more impressive, Continental estimates that those 2,240 future wells will generate returns on investment of between 40% and 55%. That's some hefty profits for the top-notch energy producer if they come to fruition.

But CLR isn't the only one drilling the SCOOP and smaller maybe better in the untapped shale play. Two ideal picks could be Eagle Rock Energy Partners (EROC) and Cimarex Energy (XEC).

EROC — which is structured as an upstream master limited partnership (MLP) — holds nearly 16,000 acres in the liquids-rich window of the SCOOP. Given the firm's small size, that acreage position is actually quite large and could be major driver to the MLP’s future distributions – currently at a 10% yield. So far, Eagle Rock saw an impressive 31% increase in its production as nine SCOOP shale wells went online during the past quarter.

Meanwhile, midcap XEC owns roughly 120,000 net acres across the Woodford — nearly 75,000 are right on the "fairway" of the SCOOP shale. That's basically the area of the Woodford that begins to transition from dry gas to shale oil. Overall, that means Cimarex is sitting on best possible acreage to benefit from all three categories of hydrocarbons.

For investors, the Southern Central Oklahoma Oil Province is now out of the bag. SCOOPing up shares of CLR, XEC and EROC are the best ways to play it.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

5 Stocks Set to Soar on Bullish Earnings

DELAFIELD, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

>>5 Rocket Stocks Worth Buying This Week

This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.

That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

>>5 Stocsk Ready to Break Out

Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

>>3 Big Stocks on Traders' Radars

With that in mind, here's a look at several stocks that could experience big short squeezes when they report earnings this week.

FactSet Research Systems

My first earnings short-squeeze trade idea is FactSet Research Systems (FDS), an integrated financial information and analytical applications provider to the global investment community, which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect FactSet Research Systems to report revenue of $223.66 million on earnings of $1.24 per share.

>>4 Hot Stocks to Trade (or Not)

The current short interest as a percentage of the float FactSet Research Systems is pretty high at 13.6%. That means that out of the 39.98 million shares in the tradable float, 5.63 million shares are sold short by the bears. This is a high short interest on a stock with a relatively low tradable float. Any bullish earnings news could easily spark a large short-covering rally for shares of FDS post-earnings.

From a technical perspective, FDS is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last three months and change, with shares soaring higher from its low of $100.76 to its intraday high of $119.08 a share. During that move, shares of FDS have been making mostly higher lows and higher highs, which is bullish technical price action.

If you're bullish on FDS, then I would wait until after its report and look for long-biased trades if this stock manages to take out its 52-week high at $119.08 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 302,936 shares. If we get that move post-earnings, then FDS will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that move are $130 to $135 a share.

I would simply avoid FDS or look for short-biased trades if after earnings it fails to trigger that move and then drops back below some key near-term support levels at $114 a share to its 50-day moving average at $111.05 a share with high volume. If we get that move, then FDS will set up to re-test or possibly take out its next major support levels at $108 to $107 a share, or its 200-day moving average at $103.37 a share.

Arrowhead Research

Another potential earnings short-squeeze play is nanomedicine player Arrowhead Research (ARWR), which is set to release its numbers on Wednesday after the market close. Wall Street analysts, on average, expect Arrowhead Research to report revenue of $530,000.

>>5 Stocks Under $10 Set to Soar

The current short interest as a percentage of the float for Arrowhead Research is pretty high at 9.4%. That means that out of the 20.01 million shares in the tradable float, 1.59 million shares are sold short by the bears. This is a high short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then shares of ARWR could easily explode higher post-earnings as the bears rush to cover some of their short positions.

From a technical perspective, ARWR is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares moving higher from its low of $1.81 to its recent high of $9.30 a share. During that uptrend, shares of ARWR have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of ARWR within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on ARWR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $9.30 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 554,658 shares. If that breakout hits, then ARWR will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $11 to $12 a share.

I would simply avoid ARWR or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at its 50-day moving average of $7.70 a share to more support at $7 share with high volume. If we get that move, then ARWR will set up to re-test or possibly take out its next major support levels at $6 to $5.45 a share.

Lennar

Another potential earnings short-squeeze candidate is homebuilder Lennar (LEN), which is set to release numbers on Wednesday before the market open. Wall Street analysts, on average, expect Lennar to report revenue of $1.56 billion on earnings of 45 cents per share.

>>5 Big Trades for Year-End Gains

The current short interest as a percentage of the float Lennar is extremely high at 20.4%. That means that out of the 167.62 million shares in the tradable float, 39.97 million shares are sold short by the bears. If this company can report a solid quarter that pleases the bulls, then shares of LEN could easily rip sharply higher post-earnings as the bears jump to cover some of their bets.

From a technical perspective, LEN is currently trending just above its 50-day moving average and below its 200-day moving average, which is neutral trendwise. This stock has been trending sideways for the last two months and change, with shares moving between $32.15 on the downside and $37.79 on the upside. Any high-volume move above the upper-end of that range post-earnings could trigger a big breakout trade for shares of LEN.

If you're bullish on LEN, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $36.61 to $37.79 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 5.29 million shares. If that breakout hits, then LEN will set up to re-test or possibly take out its next major overhead resistance levels at $40 to $44 a share. Any high-volume move above $44.40 will then give LEN a chance to enter new 52-week high-territory, which is bullish technical price action.

I would avoid LEN or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $34.56 to $34.09 a share with high volume. If we get that move, then LEN will set up to re-test or possibly take out its next major support levels $32.15 to its 52-week low at $30.90 a share.

Sanderson Farms

Another earnings short-squeeze prospect is poultry processing player Sanderson Farms (SAFM), which is set to release numbers on Tuesday before the market open. Wall Street analysts, on average, expect Sanderson Farms to report revenue of $714.38 million on earnings of $2.15 per share.

>>4 Stocks Under $10 to Trade for Breakouts

Back in late October, Stephens downgraded shares of Sanderson Farms due to falling chicken prices, especially in leg quarters, and higher feed costs. The firm lowered its price target to $65 from $81 per share.

The current short interest as a percentage of the float for Sanderson Farms is notable at 7.7%. That means that out of the 20.24 million shares in the tradable float, 1.44 million shares are sold short by the bears. This is a decent short interest on a stock with a very low tradable float. Any bullish earnings news could easily spark a large short-squeeze for shares of SAFM post-earnings.

From a technical perspective, SAFM is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending over the last two months, with shares moving higher from its low of $59.77 to its intraday high of $71.34 a share. During that uptrend, shares of SAFM have been making mostly higher lows and higher highs, which is bullish technical price action.

If you're bullish on SAFM, then I would wait until after its report and look for long-biased trades if this stock manages to take out Monday's intraday high of $71.34 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 208,948 shares. If we get that move, then SAFM will set up to re-test or possibly take out its 52-week high at $75.30 a share. Any high-volume move above $75.30 will then give SAFM a chance to trend north of $80 a share.

I would simply avoid SAFM or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support at $67.22 a share, and then below both its 50-day at $65.95 and its 200-day at $64.75 a share high volume. If we get that move, then SAFM will set up to re-test or possibly take out its next major support levels at $62 to $59.77 a share.

Apogee Enterprises

My final earnings short-squeeze play is Apogee Enterprises (APOG), a designer and developer of valued-added glass products, services and systems, which is set to release numbers on Wednesday after the market close. Wall Street analysts, on average, expect Apogee Enterprises to report revenue of $202.59 million on earnings of 35 cents per share.

The current short interest as a percentage of the float for Apogee Enterprises stands at 4.6%. That means that out of the 27.95 million shares in the tradable float, 1.24 million shares are sold short by the bears. If the bulls can get the earnings news they're looking for, then shares of APOG could experience a sizeable short-covering rally post-earning as the bears rush to cover some of their short positions.

From a technical perspective, APOG is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last six months, with shares soaring higher from its low of $22.06 to its recent high of $36.49 a share. During that uptrend, shares of APOG have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of APOG within range of triggering a big breakout trade post-earnings.

If you're in the bull camp on APOG, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 52-week high at $36.49 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 213,441 shares. If that breakout hits, then APOG will set up to enter new 52-week high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $50 a share.

I would avoid APOG or look for short-biased trades if after earnings it fails to trigger that breakout and then drops back below some key near-term support levels at $34.50 to $34.07 a share, and then once it takes out its 50-day moving average at $32.97 a share with high volume. If we get that move, then APOG will set up to re-test or possibly take out its next major support levels at $30 to its 200-day moving average at $28.47 a share.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

RELATED LINKS:

>>5 Stocks Insiders Love Right Now

>>Hedge Funds Hate These 5 Big Stocks -- but Should You?

>>5 Toxic Stocks to Sell to Avoid the Christmas Carsh

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

UBS Execs: Less Advisor Turnover, Lower Comp Costs Ahead

UBS Group (UBS) CEO Sergio Ermotti agrees with Morgan Stanley (MS) CEO James Gorman, at least on one point: The proposed disclosure of upfront payments paid to advisors who switch broker-dealers should reduce turnover.

The transparency, he said on a call with equity analysts Tuesday, “is going to clearly prevent or slow down the amount of people, the turnover of financial advisors, in the industry.”

Over time, this means that firms like UBS and Morgan Stanley will see “a beneficial effect on compensation,” Ermotti added. “But this is not something that you will see on a quarter-by-quarter basis. It's going to take time … it's clearly a good news in respect of improving the economics of the difference.”

According to CFO Thomas Naratil, UBS is not the biggest spender on advisor recruiting on Wall Street.

“We are not the high payer for recruiting bonuses at this point in time. We have a very disciplined process on that,” Naratil said during the conference call.

“We think that we've got a very attractive model as a firm that's focused on wealth management. As a result, we don't have to pay the highest price to get the best-quality advisors. And I do think that, that's an important aspect in the model for competition. It's not about buying, it's just about compensating people for making the move.”

Today’s upfront payments “are a function of record-low levels of industry attrition. The industry … pays those amounts because people don't want to move,” Naratil added.

Earlier in the call, Ermotti and Naratil discussed UBS’ latest earnings. The firm said Tuesday that it had a third-quarter profit of 577 million Swiss francs ($644 million) vs. a $2.1 billion-franc loss in the year-ago period.

The results included charges of 586 million francs for litigation, regulatory and related matters, issues that — along with larger capital requirements — are likely to limit the bank's ability to meet its profit targets in 2015, the bank says.

“As we anticipated, the third quarter saw a number of headwinds. Client activity decreased significantly and risk aversion increased as clients intensified their focus on capital preservation,” said Naratil during the call. “Nevertheless, performance was resilient, as we delivered [an adjusted] pretax profit of CHF 484 million in a challenging quarter.”

In the latest period, the bank trimmed operating expenses and staff. Its total headcount fell to 60,635 from 62,628 last year. Also, UBS says it has set aside some $803 million to settle claims in the United States tied to mortgage-backed securities.

Wealth Results-Americas

The unit recorded a pretax profit of $218 million, up 32% from $165 million in the year-ago quarter but down 11% from the second quarter, which had a record profit of $245 million.

Invested assets were $919 billion, an increase of 3% from $892 billion in the second quarter and up 10% from $832 billion in the year-ago period. Revenues were $1.748 billion, an improvement of 12% from $1.565 billion a year ago but down 2% compared with $1.780 billion last quarter.

“Additionally, at $1.3 billion, recurring income increased to record levels,” Naratil said. “This was offset by a decline in transaction-based fees on seasonally slower client activity, as well as higher loan loss allowances and a $20 million trading loss related to pressure on Puerto Rico municipal securities.”

The number of advisors rose to 7,137 from 7,099 in the second quarter and 7,032 a year ago.

“FA attrition remained at historical lows, and the business continues to enjoy strong momentum,” Naratil noted.

Net new money was $2.1 billion, giving the unit 13 straight quarters of positive inflows.

Average invested assets per financial advisor increased to $129 million, up 2% from Q2 and up 9% from $118 million a year ago.

Average fees and commissions per financial advisor were $994,000, down 1% from $1,005,000 in Q2 and up 12% from $890,000 in a year ago.

---

Check out ThinkAdvisor’s 2013 Q3 Earnings Calendar for the Finance Sector.

 

Why Forward Contracts Are The Foundation Of All Derivatives

Tweet 0 Disqus Email Print Feedback Share Tweet 0 Disqus Email Print Feedback 0 Disqus Why Forward Contracts Are The Foundation Of All Derivatives October 23 2013| Filed Under » Arbitrage, Currency Derivatives, Forwards The most complex type of investment products fall under the broad category of derivative securities. For most investors, the derivative instrument concept is hard to understand. However, since derivatives are typically used by governmental agencies, banking institutions, asset management firms and other types of corporations to manage their investment risks, it is important for investors to have a general knowledge of what these products represent and how they are used by investment professionals.

Forward Derivative Contract Overview

As one type of derivative product, forward contracts can be used as an example to provide a general understanding of more complex derivative instruments such as futures contracts, options contracts and swaps contracts. Forward contracts are very popular because they are unregulated by the government, they provide privacy to both the buyer and seller, and they can be customized to meet both the buyer's and seller's specific needs. Unfortunately, due to the opaque features of forward contracts, the size of the forward market is basically unknown. This, in turn, makes forward markets the least understood of the various types of derivative markets.

Many potential issues may arise. For example, parties that utilize forward contracts are subject to default risk, their trade completion may be problematic due to the lack of a formalized clearinghouse, and they are exposed to potentially large losses if the derivatives contract is structured improperly. As a result, there is the potential for severe financial problems in the forward markets to overflow from the parties that engage in these types of transactions to society as a whole. To date, severe problems such as systemic default among the parties that engage in forward contracts have not come to fruition. Nevertheless, the economic concept of "too big to fail" will always be a concern, so long as forward contracts are allowed to be undertaken by large organizations. This problem becomes an even ! greater concern when both the options and swaps markets are taken into account.

Trading and Settlement Procedures for a Forward Derivative Contract

Forward contracts trade in the over-the-counter market. They do not trade on an exchange such as the NYSE, NYMEX, CME or CBOE. When a forward contract expires, the transaction is settled in one of two ways. The first way is through a process known as "delivery." Under this type of settlement, the party that is long the forward contract position will pay the party that is short the position when the asset is delivered and the transaction is finalized. While the transactional concept of "delivery" is simple to understand, the implementation of delivering the underlying asset may be very difficult for the party holding the short position. As a result, a forward contract can also be completed through a process known as "cash settlement."

A cash settlement is more complex than a delivery settlement, but it is still relatively straightforward to understand. For example, suppose that at the beginning of the year a cereal company agrees through a forward contract to buy 1 million bushels of corn at $5 per bushel from a farmer on Nov. 30 of the same year. At the end of November, suppose that corn is selling for $4 per bushel on the open market. In this example, the cereal company, which is long the forward contract position, is due to receive from the farmer an asset that is now worth $4 per bushel. However, since it was agreed at the beginning of the year that the cereal company would pay $5 per bushel, the cereal company could simply request that the farmer sell the corn in the open market at $4 per bushel, and the cereal company would make a cash payment of $1 per bushel to the farmer. Under this proposal, the farmer would still receive $5 per bushel of corn. In terms of the other side of the transaction, the cereal company would then simply purchase the necessary bushels of corn in the open market at $4 per bushel. The net effect ! of this p! rocess would be a $1 payment per bushel of corn from the cereal company to the farmer. In this case, a cash settlement was used for the sole purpose of simplifying the delivery process.

Currency Forward Derivative Contract Overview

Derivative contracts can be tailored in a manner that makes them complex financial instruments. A currency forward contract can be used to help illustrate this point. Before a currency forward contract transaction can be explained, it is first important to understand how currencies are quoted to the public, versus how they are used by institutional investors to conduct financial analysis.

If a tourist visits Times Square in New York City, he will likely find a currency exchange that posts exchange rates of foreign currency per U.S. dollar. This type of convention is used frequently. It is known as an indirect quote and is probably the manner in which most retail investors think in terms of exchanging money. However, when conducting financial analysis, institutional investors use the direct quotation method, which specifies the number of units of domestic currency per unit of foreign currency. This process was established by analysts in the securities industry, because institutional investors tend to think in terms of the amount of domestic currency required to buy one unit of a given stock, rather than how many shares of stock can be bought with one unit of the domestic currency. Given this convention standard, the direct quote will be utilized to explain how a forward contract can be used to implement a covered interest arbitrage strategy.

Assume that a U.S. currency trader works for a company that routinely sells products in Europe for euros, and that those euros ultimately need to be converted back to U.S. dollars. A trader in this type of position would likely know the spot rate and forward rate between the U.S. dollar and the euro in the open market, as well as the risk-free rate of return for both the U.S. dollar and the euro. For example, th! e currenc! y trader knows that the U.S. dollar spot rate per euro in the open market is $1.35 U.S. dollars per euro, the annualized U.S. risk-free rate is 1% and the European annual risk-free rate is 4%. The one-year currency forward contract in the open market is quoted at a rate of $1.50 U.S. dollars per euro. With this information, it is possible for the currency trader to determine if a covered interest arbitrage opportunity is available, and how to establish a position that will earn a risk-free profit for the company by using a forward contract transaction.

Example of a Covered Interest Arbitrage Strategy

To initiate a covered interest arbitrage strategy, the currency trader would first need to determine what the forward contract between the U.S. dollar and euro should be in an efficient interest rate environment. To make this determination, the trader would divide the U.S. dollar spot rate per euro by one plus the European annual risk-free rate, and then multiply that result by one plus the annual U.S. risk-free rate.

[1.35 / (1 + 0.04)] x (1 + 0.01) = 1.311

In this case, the one-year forward contract between the U.S. dollar and the euro should be selling for $1.311 U.S. dollars per euro. Since the one-year forward contract in the open market is selling at $1.50 U.S. dollars per euro, the currency trader would know that the forward contract in the open market is overpriced. Accordingly, an astute currency trader would know that anything that is overpriced should be sold to make a profit, and therefore the currency trader would sell the forward contract and buy the euro currency in the spot market to earn a risk-free rate of return on the investment.

The covered interest arbitrage strategy can be achieved in four simple steps:

Step 1: The currency trader would need to take $1.298 dollars and use it to buy €0.962 euros.

To determine the amount of U.S. dollars and euros needed to implement the covered interest arbitrage strategy, the currency trader would divide the spot contract price of $1.35 U.S. dollars per euro by one plus the European annual risk-free rate of 4%.

1.35 / (1 + 0.04) = 1.298

In this case, $1.298 U.S. dollars would be needed to facilitate the transaction. Next, the currency trader would determine how many euros are needed to facilitate this transaction, which is simply determined by dividing one by one plus the European annual risk-free rate of 4%.

1 / (1 + 0.04) = 0.962

The amount that is needed is €0.962 euros.

Step 2: The trader would need to sell a forward contract to deliver €1.0 euro at the end of the year for a price of $1.50 U.S. dollars.

Step 3: The trader would need to hold the euro position for the year, earning interest at the European risk-free rate of 4%. This euro position would increase in value from €0.962 euro to €1.00 euro.

0.962 x (1 + 0.04) = 1.000

Step 4: Finally, on the forward contract expiration date, the trader would deliver the €1.00 euro and receive $1.50 U.S. dollars. This transaction would equate to a risk-free rate of return of 15.6%, which can be determined by dividing $1.50 U.S. dollars by $1.298 U.S. dollars and then subtracting one from the answer to determine the rate of return in the proper units.

(1.50 / 1.298) – 1 = 0.156

The mechanics of this covered interest arbitrage strategy are very important for investors to understand, because they illustrate why interest rate parity must hold true at all times to keep investors from making unlimited risk-free profits.

The Link Between Forward Contracts and Other Derivatives

As this article illustrates, forward contracts can be tailored as very complex financial instruments. The breadth and depth of these types of contracts exp! ands exponentially when one takes into account the different types of underlying financial instruments that can be used to implement a forward contract strategy. Examples include the use of equity forward contracts on individual stock securities or index portfolios, fixed income forward contracts on securities such as treasury bills, and interest rate forward contracts on rates such as LIBOR, which are more commonly known in the industry as forward-rate agreements.

Finally, investors should understand that forward contract derivatives are typically considered the foundation of futures contracts, options contracts and swap contracts. This is because futures contracts are basically standardized forward contracts that have a formalized exchange and clearinghouse. Options contracts are basically forward contracts that provide an investor an option, but not an obligation, to complete a transaction at some point in time. Swaps contracts are basically a linked-chain agreement of forward contracts that require action to be taken by investors periodically over time.

The Bottom Line

Once the link between forward contracts and other derivatives is understood, investors can quickly start to realize the financial tools that are at their disposal, the implications that derivatives have for risk management, and how potentially large and important the derivatives market is to a host of governmental agencies, banking institutions and corporations throughout the world.

Why Teva's Generic Version of Xeloda Has Significant Potential

Last week, Israel-based Teva Pharmaceuticals' (NYSE: TEVA  ) generic product portfolio received a major boost after the Food and Drug Administration approved the company's generic version of Xeloda, a cancer drug. Roche's (NASDAQOTH: RHHBY  ) Xeloda is an orally administered chemotherapy treatment for colorectal and breast cancers that have metastasized. Given the fact that Xeloda generated $1.6 billion in sales for Roche in 2012, Teva's generic version has significant potential.

Need for a low-cost version
According to data from the National Cancer Institute, around 142,820 people will be diagnosed with either colon or rectal cancer in 2013. In fact, in men, colorectal cancer is the fourth most common cancer after skin, prostate, and lung cancer. It is also the fourth most common cancer in women after skin, breast, and lung cancer.

Roche's Xeloda, which was approved in 1998, is used for treating colorectal and breast cancer that have metastasized, or spread to other parts of the body. The drug has been licensed in more than 90 countries globally. Additionally, the drug has been well accepted in the colorectal cancer treatment market.

According to pharmaceutical and health care research firm Decision Resources, the colorectal cancer treatment market is expected to see a decline in growth going forward. This is primarily due to generic competition. That market was worth $8.3 billion in 2011, but Decision Resources expects the market to slip to $7.8 billion in the U.S., France, Germany, Italy, Spain, the U.K., and Japan.

In the first half of 2013, Xeloda sales rose 2% to $832 million. Growth was primarily driven by an increase in sales from China and Latin America. Generic competition will have an impact on Xeloda sales going forward, however. With the approval of its generic version of Xeloda, Teva is expected to be a major beneficiary from this trend. In fact, Teva is the first generic drug company to get U.S. approval for a generic version of Xeloda.

Teva's competition
Teva will still face competition in the colorectal cancer generic market. The company's version of Xeloda is expected to compete with cytotoxic agents such as oxaliplatin, which is a generic version of French drugmaker Sanofi's (NYSE: SNY  ) Eloxatin/Eloxatine. In 2012, sales of Eloxatin totaled $1.3 billion. Generic competition has had a major impact on Eloxatin, however, with sales falling to $159 million in the first half of 2013.

The sharp decline in Eloxatin sales was mainly due to the relaunch of oxaliplatin by Hospira (NYSE: HSP  ) in August 2012. The generic version had originally been launched in August 2009 after a favorable ruling in patent litigation with Sanofi. In 2010, though, Sanofi and Hospira entered into an agreement, which led to the eventual suspension of Hospira's sales at the end of June 2010. Under the terms of the agreement, Hospira had the right to relaunch the product well in advance of patent expiration.

The decline in Eloxatin sales suggests that Xeloda sales could also see a similar trend. It should also be noted that a study has shown the efficacy of a Xeloda-Eloxatin drug combo that could effectively make the two drugs partners rather than competitors.

Conclusion
This will definitely give a boost to Teva's top line, which in the quarter ended June 30 slipped 1% due to a drop in revenue of generic medicines in the U.S. and Europe, as well as exchange rate fluctuations.

With last week's FDA decision, Teva's generic product portfolio has received a major boost. The colorectal cancer treatment market is set to see increasing generic competition, and Teva, with its generic version of Xeloda, is well positioned to benefit from this trend.

Every good investor wants to build that perfect portfolio that they can set and forget forever. Fortunately, it's easier than anyone ever knew. We've uncovered the pillars of such a portfolio today and we're willing to share The Motley Fool's 3 Stocks to Own Forever. Simply stated, we think they're the best stocks for true long-term investors to know about, and you can uncover them for free today, instantly; just click here now.

5 Rocket Stocks to Buy Before They Blast Off

BALTIMORE (Stockpickr) -- Last week was "brutal" for U.S. stocks. The venerable S&P 500 fell a whopping 1.07%, the worst five trading sessions since the correction at the start of the summer. Ouch?

It may sound like a joke, but a 1% weekly drop has really been that rare this summer. And now, as earnings season draws to a close, Mr. Market is firing on all cylinders.

Despite last week's pullback in equities, stocks are still excruciatingly close to the all-time highs that got set at the start of the month. Indeed, it's far too early to start thinking about a top here. And that's exactly why it makes sense to take a look at five new Rocket Stock names this week.

For the uninitiated, "Rocket Stocks" are our list of companies with short-term gain catalysts and longer-term growth potential. To find them, I run a weekly quantitative screen that seeks out stocks with a combination of analyst upgrades and positive earnings surprises to identify rising analyst expectations, a bullish signal for stocks in any market. After all, where analysts' expectations are increasing, institutional cash often follows. In the last 211 weeks, our weekly list of five plays has outperformed the S&P 500 by 82.4%.

Without further ado, here's a look at this week's Rocket Stocks.

Apple

Apple (AAPL), a Rocket Stock? Yes, you read it right. Despite a 15% drop in this stock's share price year-to-date, Apple is some huge upside potential ahead of it.

Right now, one of Apple's biggest catalysts comes on Sept. 10, when the firm is expected to announce a new iPhone (or iPhones) as well as a long-awaited TV. But no matter how Apple's media day ends up next month, this stock is dirt-cheap right now.

As I write, Apple sports a price-to-earnings ratio of just 11-- a tiny multiple that reflects investors' belief that the firm can't continue the breakneck growth it's achieved in recent years. But back Apple's mammoth cash position out of the equation, and Apple's P/E drops flat to 7. That's a lower cash-adjusted P/E than just about any other company in the tech sector. Apple boasts product attributes that should make it trade at a premium, not a discount: It's the only remaining PC maker that actually earns meaningful margins, it's the incumbent smart phone and tablet maker, and it owns the biggest music, video, and app ecosystem in the world.

Clearly, Apple's price is out of sync with the market now. To counter that, management has been working to provide shareholder returns of their own in the form of dividends and share buybacks. Because of the material size of Apple's cash position, those payouts could significantly concentrate Apple's shareholder base in the next few years.

AAPL is testing a long-standing resistance level. If shares clear resistance this summer, it could be the end of the downtrend.

Vale

2013 hasn't exactly been a banner year for shares of Vale (VALE) either. Since the calendar flipped to January, the Brazilian mining firm has shed more than a quarter of its market cap, a downtrend that only got broken late this summer thanks in large part to strong second-quarter numbers released last week. Vale is the largest iron ore miner in the world, with more than 300 million metric tons of the metal coming from its mines annually. Vale also produces coal and metals such as nickel and copper.

Vale's fortunes are tied in lock-step with commodity prices: when hard commodities are skyrocketing, so too are Vale's margins. But this year, softening demand for iron has sent investors fleeing from any name with excessive commodity exposure. A low cost structure should help to diffuse the risks at play here. In general, VALE's mines produce higher-quality ore, a fact that gives the firm claim to higher selling prices and better production efficiency. That helps to offset some of the costs in shipping its metals all over the world.

Ultimately, iron is an extremely cyclical business. But the good news is that warming economic engines around the world in 2013 should parlay into a cautious ramp-up in demand for iron ore. With rising analyst sentiment building in shares this week, we're betting on VALE.

Bank of America

Bank of America (BAC) has been a stranger to our Rocket Stocks list for the past several years -- and for good reason. The risk-reward tradeoff in the country's biggest banks haven't looked all that appealing for a while now. After all, regional banking names offer similar exposure with bigger dividend payouts and fatter margins, while avoiding the headline risk inherited from problematic acquisitions made in the heat of the financial crisis.

But BofA is starting to look attractive again.

One of the biggest reasons for BAC's sudden attractiveness is the fact that it's already taken the kicks in the teeth that came with writing off billion of dollars in debts and shaking the skeletons out of its labyrinthine balance sheet. Investors today get to jump in to a firm that's already done most of the hard work. The Fed continues to be a major boon for the banking sector. As long as money remains effectively free, BAC is able to earn hefty margins, especially now that mortgage rates are becoming upwardly mobile again. While we're not headed for another high-rate environment anytime in the foreseeable future, banks still don't need high rates to earn high returns.

Lots of regulatory eyes on BofA means that the firm won't be allowed to repeat its mistakes of the past anytime soon. While it also means that shareholder returns will be an afterthought for regulators, BAC has plenty of internal investment options as it rebuilds its coffers. And with a strong investment business in play right now, a rising market tide should continue to lift shares of Bank of America in 2013.

Home Depot

Strong housing data has provided a shot in the arm for Home Depot's (HD) performance in 2013, spurring shares close to 30% year-to-date. Home Depot is the world's largest home improvement retailer, with around $75 billion in annual sales. The firm boasts a network of 2,250 stores spread across the world -- albeit primarily in the U.S. and Canada.

As consumers adjust to a housing market that isn't going up and away, Home Depot provides an alternative way to built equity and upgrade. Homeowners' natural interest in their biggest lifetime investment provides a truly captive audience for home improvement stores, and HD's big box model works exceedingly well as converting that audience into paying customers.

That doesn't mean that Home Depot hasn't made mistakes -- oh, has it ever. The firm nearly sunk itself by leveraging its way to too many stores in 2008, and its more recent entry into China turned out to be a flop. What's more important, however, is the fact that management has been adept at righting the ship each time the firm hits the rocks. Calculated risks should continue to yield palpable profits in 2013.

BlackBerry

A decade ago, BlackBerry (BBRY) owned the smartphone business. Back then, the idea that anyone else would sell more-Web-connected devices was unthinkable -- especially in the enterprise arena that BlackBerry dominated. Today, the only thing that's unthinkable is the notion that BBRY could regain its throne. But this comeback kid is still a Rocket Stock name worth watching this week.

Put simply, desktop computer firms out-innovated BlackBerry when they transitioned their software and hardware into the mobile world. Clearly, the consumer trickle-down model works: sell a sexy handset to consumers, and it'll work its way into the enterprise arena, replete with administrator-level control. Now BlackBerry is working hard to court consumers again instead of IT managers. The stakes are high in the handset game -- and it's in carriers' best interest to push BlackBerry's products to avoid too much pricing power from Apple's iOS and Google's (GOOG) Android phones.

BlackBerry's model is equally attractive. By selling service subscriptions (typically through carriers), it's able to book recurring revenues that have gone a long way in keeping the firm afloat despite lackluster handset sales. Important new offerings like the BB10 operating system and new phones could help get BBRY back on track. I doubt very much that BlackBerry will regain its throne -- but it doesn't need to in order to deliver substantial shareholder returns. With around $6 per share in cash on its balance sheet and zero debt, BBRY is better positioned than 90% of Wall Street gives them credit for.

To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.

-- Written by Jonas Elmerraji in Baltimore. 

8 Fascinating Reads

Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are eight fascinating ones I read this week.

Wisdom
Business Insider pulled a list of quotes from Back Swan author Nassim Taleb's Facebook page. Here are a few: 

Journalists cannot grasp that what is interesting is not necessarily important; most cannot even grasp that what is sensational is not necessarily interesting. We often benefit from harm done to us by others; almost never from self-inflicted injuries.  The artificial gives us hangovers, the natural inverse-hangovers. The only problem with the last laugh is that the winner has to laugh alone. Intelligence without imagination: a deadly combination. When someone writes "I dislike you but I agree with you," I read "I dislike you because I agree with you."

Leg up
Matt Bruening cites data from the Pew Economic Mobility study: 

So, you are 2.5 times more likely to be a rich adult if you were born rich and never bothered to go to college than if you were born poor and, against all odds, went to college and graduated. The disparity in the outcomes of rich and poor kids persists, not only when you control for college attainment but even when you compare non-degreed rich kids to degreed poor kids!

Losing interest
CNBC viewers are fleeing, writes ValueWalk: 

Many of CNBC's leading programs have seen a downward spiral in terms of ratings. The quarterly data show that Mad Money, Squawk on the Street, and the Kudlow Report have posted their worst rated quarter ever

CNBC continues to lose ratings. The latest Nielsen Media Research statistics show that the business network's total number of quarterly viewers fell to their lowest level since the second quarter of 2005. In the all-important age group of 25-54, CNBC witnessed its lowest level quarter since 1994. That's not an impressive track record for a network that's "First in Business Worldwide."

Dedication 
Alfred Feld has worked at Goldman Sachs (NYSE: GS  ) for 80 years, writes The Wall Street Journal: 

One day into his job at Goldman Sachs, Alfred Feld found his name on a list of employees the firm had targeted for layoffs.

Then fate, and a supportive boss, intervened.

Eighty years later, Mr. Feld is still at it at Goldman.

"I came so close to being fired after one day," Mr. Feld, 98 years old, said Wednesday. "I'm glad that didn't happen.

Patent trolls
The New York Times writes a profile of a patent troll: 

[The] number of patent infringement suits has more than doubled in recent years, to 4,731 cases in 2012 from 2,304 in 2009, according to that RPX report. The cost to businesses, which pass along the expense to consumers, is immense.One study found that United States companies -- most of them small or medium-sized -- spent $29 billion in 2011 on patent assertion cases.

Backfired
BusinessWeek profiles Sears Holdings (NASDAQ: SHLD  ) Eddie Lampert's management style: 

An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company's leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.

Instead, the divisions turned against each other -- and Sears and Kmart, the overarching brands, suffered. Interviews with more than 40 former executives, many of whom sat at the highest levels of the company, paint a picture of a business that's ravaged by infighting as its divisions battle over fewer resources.

Now's the chance 
Barry Ritholtz says we need to fix our crumbling infrastructure while we can -- when interest rates are low: 

Thanks to the Federal Reserve's zero interest rates and quantitative easing policies, borrowing costs are near generational lows. The costs of funding the repair and renovation of America's decaying infrastructure are as cheap as they have been since World War II.

But the era of cheap credit may be nearing its end. And thanks to a dysfunctional Washington, D.C., we are on the verge of missing a once-in-a-lifetime opportunity.

Due dilligence
Warren Buffett biographer Alice Shroeder talks about how Warren picked stocks before he took over Berkshire Hathaway (NYSE: BRK-B  ) : 

Enjoy your weekend. 

More big-picture stuff 
My new report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it. 

Why PVH's Earnings May Not Be So Hot

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on PVH (NYSE: PVH  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, PVH generated $235.9 million cash while it booked net income of $318.3 million. That means it turned 3.6% of its revenue into FCF. That sounds OK. However, FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at PVH look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 26.4% of operating cash flow coming from questionable sources, PVH investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 16.8% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 47.9% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

Selling to fickle consumers is a tough business for PVH or anyone else in the space. But some companies are better equipped to face the future than others. In a new report, we'll give you the rundown on three companies that are setting themselves up to dominate retail. Click here for instant access to this free report.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add PVH to My Watchlist.

Why Quindell Portfolio, Telford Homes, and Torotrak Should Beat the FTSE 100 Today

LONDON -- The FTSE 100 (FTSEINDICES: ^FTSE  ) is slumping again today, dropping 102 points to 6,660 by mid-morning, all but wiping out yesterday's 108-point gain -- and so the erratic see-sawing continues from last week, when fears abounded that economic stimulus measures were coming to an end. But while some may be poring over day-to-day moves and looking for the reasons, what really counts is that the index is still up nearly 7% since early April and up about 24% over the past 12 months.

But which individual shares are moving today? It's mostly smaller companies from the various FTSE indexes. Here are three in positive territory.

Quindell Portfolio
The Quindell Portfolio share price has been through dramatic swings of late, and the software and consultancy firm is quick to deny rumors of active shorting. Today the price is up 4.2% to 8.9 pence on the announcement of a new contract with Honda to provide a number of accident management services in the U.K. The deal builds on a cooperation period that started in January this year and will run for three years.

Quindell shares were trading at about 14 pence before the recent slump, and they're now on a forward price-to-earnings ratio of only about four based on current forecasts for the year to December 2013. If recent fears are indeed unfounded, that could be a nice bargain. (LSE: TRK  )

Telford Homes
Telford Homes shares, like those of the whole homebuilding sector, have had a great year: The price is up more than 130% over the past 12 months. That includes a 1% rise to 271 pence this morning, after the firm released preliminary results showing a 75% rise in sales for the year to 803 properties.

Telford's operating margin is up to 9.7% from 6.2% a year ago, and that contributed to a tripling of pre-tax profit to £9 million. The annual dividend was boosted by 60% to 4.8 pence per share. That's a yield of less than 2% on the current share price, but it's headed in the right direction, and we should see another significant rise next year.

Torotrak
Final results from Torotrak gave the company's shares a 2.5% boost to 30.5 pence this morning after the automotive drive transmissions pioneer announced a 74% rise in revenue and a pre-tax profit of £30,000 -- that might not sound a lot, but it marks significant progress from last year's £1.6 million loss. Chief executive Jeremy Deering said, "We are now in a better position than ever to deliver sustainable growth in value for shareholders."

It's still a couple of years before significant profits are expected, mind, and current P/E valuations are pretty meaningless. It's one for high-tech growth fans, perhaps.

Finally, if you're looking for investments that should take you all the way to a comfortable retirement, I recommend the Fool's special new report detailing five blue-chip shares. They'll be familiar names to many, and they've already provided investors with decades of profits. But the report will only be available for a limited period, so click here to get your hands on these great ideas -- they could set you on the road to long-term riches.

US Steel: How Long Can Steel Prices Defy Gravity?

The bear case on steel stocks like US Steel (X) and AK Steel (AKS) has been that lower iron-ore prices would ultimately lead to lower steel prices. That hasn’t happened yet, but JPMorgan’s Michael Gambardella and team haven’t given up hope.

Agence France-Presse/Getty Images

They explain why they favor Steel Dynamics (STLD) and Nucor (NUE) over US Steel and AK Steel:

For the steel companies, we continue to believe that lower raw material costs and increased imports will pressure sheet prices lower. Given this cautious stance, we continue to prefer Nucor and Steel Dynamics (over AK Steel and US Steel) given their variable cost structures and significant leverage to an eventual recovery in non-residential construction.

Count Axiom Capital’s Gordon Johnson among those that agree it’s just a matter of time before steel prices fall and drag down US Steel’s stock with them:

…a very interesting American Metal Market (AMM) article from this morning suggests, in addition to the above, HRC volumes will be weak in C4Q14 (which would weigh negatively on US Steel's margins structure). We believe US Steel's stock is currently discounting HRC prices at ~$670/ton in 2014 & 2015. [The article says steel prices have fallen to $640 a ton. Ed.]

US Steel has dropped 0.9% to $33.33 at 1:35 p.m. today, while AK Steel has gained 1% to $6.36, Nucor has advanced 0.4% to $50.12 and Steel Dynamics is unchanged at $21.06.

3 Big Stocks on Traders' Radars

BALTIMORE (Stockpickr) -- Put down the 10-K filings and the stock screeners. It's time to take a break from the traditional methods of generating investment ideas. Instead, let the crowd do it for you.

From hedge funds to individual investors, scores of market participants are turning to social media to figure out which stocks are worth watching. It's a concept that's known as "crowdsourcing," and it uses the masses to identify emerging trends in the market.

Must Read: 5 Hated Earnings Stocks You Should Love

Crowdsourcing has long been a popular tool for the advertising industry, but it also makes a lot of sense as an investment tool. After all, the market is completely driven by the supply and demand, so it can be valuable to see what names are trending among the crowd.

While some fund managers are already trying to leverage social media resources like Twitter to find algorithmic trading opportunities, for most investors, crowdsourcing works best as a starting point for investors who want a starting point in their analysis. Today, we'll leverage the power of the crowd to take a look at some of the most active stocks on the market recently.

Without further ado, here's a look at today's stocks.

Must Read: 5 Rocket Stocks to Buy to Avoid the Selloff

Rite Aid

Nearest Resistance: $6

Nearest Support: N/A

Catalyst: Technical Setup

Drugstore chain Rite Aid (RAD) continued its selloff to start the week, dropping 5.5% on Monday as sellers stepped in at the same time that buyers were nearly nonexistent.

The violation of $6 support earlier in the month was the initial sell signal in RAD, but Monday's crack below $5 is an important indication that this stock still has downside risk ahead of it. The technical minimum-measuring objective in RAD puts a target down at $3.50 for shares.

Must Read: Sell These 5 Toxic Stocks Before the Next Drop

Zynga

Nearest Resistance: $3.25

Nearest Support: $2.75

Catalyst: Technical Setup

Zynga (ZNGA) dipped 1.4% for technical reasons on Monday, dropping down to test support at $2.75 before catching a bid and ending the session back in the middle of the sideways channel that's corralled shares since June. Right now, Zynga is still consolidating in that channel. We'll get our first glimpse at this stock's next move depending on which way it exits that range.

A breakout above $3.25 is a buy signal, and a violation of support at $2.75 means that it's time to sell before ZNGA drops further.

For another take on Zynga, it was also featured recently in 5 Stocks Under $10 Making Big Moves Higher.

Must Read: 5 Stocks Insiders Love Right Now

GoPro

Nearest Resistance: N/A

Nearest Support: $70

Catalyst: New Cameras

GoPro (GPRO) rallied more than 10.7% on Monday, kicking off the week on a high note after the release of a new set of cameras. The Hero 4 series of action cameras is expected to go on sale in October. GPRO has been a big momentum name since shares IPO'd earlier this summer, and the new highs this stock is making this week looks even more bullish amid another broad stock correction.

Making new highs is significant from an investor psychology standpoint because it means that everyone who has bought shares in the last year is sitting on gains. As a result, the "back to even" mentality is less of a concern than it would be for a name with a higher proportion of shareholders sitting on losses. For traders who aren't risk-averse, there's still time to build a position in GoPro now, just keep a tight protective stop in place.

Must Read: Must-See Charts: 5 Big Stocks to Sidestep the Selloff

To see these stocks in action, check out the at Most-Active Stocks portfolio on Stockpickr.



-- Written by Jonas Elmerraji in Baltimore.

RELATED LINKS:

>>3 Big Stocks With Big Volume to Trade for Big Breakouts

>>4 M&A Deal Stocks That Could Cut You a Paycheck This Fall

>>Here's How to Profit From QE5

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in the names mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to

TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

Follow Jonas on Twitter @JonasElmerraji

Here's Why General Electric Company Is Putting Billions into Aviation

General Electric's (NYSE: GE  ) aviation unit -- GE Aviation -- has been 'powering a century of flight' across the globe. During the First World War, the company designed America's first airplane engine "booster" or turbosupercharger, and in the 90-odd years that have passed, it's crossed several important milestones. GE built America's first jet engine and has emerged as one of the world's leading producers of commercial aircraft engines. The company plans to invest $3.5 billion in the aviation unit by 2017. Let's find out what's making the company do so, and whether it will take GE to new highs.

Focus on GE Aviation
It's not difficult to understand why GE is investing so heavily in aviation as the segment generates the lion's share of the company's industrial sales and profits. In the recently concluded second quarter, the segment was the second-highest revenue earner among all industrial businesses. It made up for 22.6% ($6.1 billion) of GE's industrial revenues, losing only to the Power business, which accounted for 23.4% ($6.3 billion). In terms of industrial segment profits, GE Aviation took the ace position, contributing 28.7%, ahead of the Power segment's 27.2%. But this may not be the only reason why GE is pumping $3.5 billion into aviation -- it has also to do with the segment's huge upside potential.

GE Aviation, Source: Flickr

Fuel-efficient engines are in high demand
The U.S. aircraft major Boeing has forecast that between 2013 and 2032, global passenger traffic will increase 5% annually, spurring demand for 35,280 new aircraft. One crucial element that helps traffic grow is attractive fares. But, keeping fares in check isn't easy for airlines as the soaring fuel costs make up one-third of their total operating expense bill. This has turned the tide toward fuel-efficient planes.

Oil-guzzling Boeing 747 or Airbus A380 are fast falling out of favor, prompting aero-majors to come up with new planes and reengineered versions of old planes that score high on fuel efficiency and cost savings.

There's a fuel-save promise attached to the entire new breed, whether it is Boeing's built-from-scratch 787 Dreamliner that boasts "10% lesser cash seat mile costs than peer planes," or reengineered 777X that touts "12% lower fuel consumption and 10% lower operating costs than the competition." The 737 Max aims to "reduce fuel use and CO2 emissions by an additional 14% over today's most fuel-efficient single-aisle airplanes." Airbus' all-new A350 XWB claims to be 25% more fuel-efficient than existing planes, and the reengineered A320neo and A330neo assert 14%-15% savings.

Aircraft makers can live up to their lofty claims with the help of advanced engineering and better engines. And this is where GE Aviation's opportunities lie. The company has an added advantage as its engines are used by all three major commercial aircraft segments -- regional, narrow body, and wide body. Rival Pratt & Whitney serves only regional and narrow-body airplanes, while Rolls Royce caters primarily to the wide-body segment.

GE Testing Next-Gen Jet Engine with 3D Printed Parts, Source: Flickr

A big LEAP
GE has been quick to spot the prospects and is busy building next generation engines for next generation aircraft. Its GEnx engines have already won plenty of accolades and have become the company's fastest-selling engine family, with an order backlog crossing the 1,300 mark. It offers 15% better fuel efficiency compared to the older CF6 engine, and at the same time reduces carbon-dioxide emissions. The GEnx engines power Boeing's 787 Dreamliners.

But GE's latest engineering marvel is the LEAP engine that goes a mile further in delivering performance. The engines will be manufactured in collaboration with Snecma (Safran) of France. GE is using 3D printing (also known as additive manufacturing) to make 19 fuel nozzles for the engine, which could lower fuel costs by 15% and help save up to $1 million annually, per airplane. The LEAP engines will power Boeing 737 Max, Airbus A320neo, and COMAC C919.

The $3.5 billion investment will go into upgrading facilities and equipment around the globe, with a major thrust on the U.S. The plan includes building a LEAP engine manufacturing plant in West Lafayette, Indiana for $100 million. GE will also make LEAP engines at its existing factory in Durham, North Carolina. David Joyce, GE Aviation president and CEO, has said, "Beginning in 2015, the LEAP engine will experience a dramatic production ramp-up for the remainder of the decade." The company wants to ramp up total engine production by 30% to 3,300 engines by 2020 from 2,600 engines in 2013.

Last thoughts
GE is grabbing the opportunity thrown by the booming commercial aircraft market with both hands. The company knows it has a critical role to play in aircraft makers' and airlines' pursuit of fuel-efficient next-generation planes. By establishing new standards of efficiency and fuel savings in engine technology, GE has set its sight on the future of aviation, and newer highs for itself.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Goldman Sachs: ‘Positive Sentiment is Building,’ Still Not Worth Buying, Nomura Says

Once the highest of high-flying bank stocks, Goldman Sachs (GS) has recently been a laggard.

Reuters

Its shares have dropped 5.5% this year, while JPMorgan Chase (JPM) has fallen 2.2%, Bank of America (BAC) has dipped 0.7% and Morgan Stanley (MS) has gained 2.4%.

Nomura’s Steven Chubak and Sharon Leung, however, believe “positive sentiment is building” for Goldman Sachs. They explain:

While Goldman Sachs shares have underperformed YTD (down -6% vs. +3% for S&P Fins.), recent discussions suggest that positive sentiment is building. Despite revenue headwinds in some core businesses (e.g. FICC), growing contribution from higher-multiple segments, coupled with future sources of capital relief (e.g. Volcker sales), should help drive value. We have been more cautious on the shares given "bindingness" concerns, i.e., that the recently proposed Supplementary Leverage Ratio (SLR) will become the binding capital constraint for Goldman Sachs (vs. risk-based measures), dampening long-term ROE potential. However, there are additional capital / earnings levers which could meaningfully improve GS’ ROE profile. Findings indicate the most likely path (deleveraging) could yield as much as a +100-200bp ROE uplift, or 7-14% upside vs. our current TP ($156).

Still, Goldman’s valuation remains a concern so Chubak and Leung leave their rating unchanged at Neutral.

Shares of Goldman Sachs have gained 1% to $167.56 at 10:52 a.m. today, while Morgan Stanley has risen 1.4% to $32.16, Bank of America has advanced 1.1% to $15.45 and JPMorgan is up 0.6% at $57.22.

 

After Profit Drops Again, An Investor Dares Ask: Has Wal-Mart Lost Its Way?

Has Wal-Mart(WMT)'s ship sailed?

Wal-Mart, the world's largest retailer, looks like it has lost its way, said John Schwinghamer, a Montreal portfolio manager who sold all of his shares of Wal-Mart Thursday after a key measure of the company's profitability fell in consecutive quarters for the first time in at least 20 years.

ASSOCIATED PRESS

The measure was Wal-Mart's earnings per share, which dropped by 3.5% in the quarter ended April 30, following a 20% drop in the previous quarter, according to S&P Capital IQ. Wal-Mart blamed severe weather across large swaths of the U.S. for much of the latest decline.

Shares of Wal-Mart dropped by 2.4% Thursday after it reported the dismal results. The world's largest retailer by revenue said it also didn’t expect sales at its U.S. stores to rise during the current quarter.

Over the past 20 years, earnings per share have only declined three other times and never for two quarters in a row, giving pause to some investors in what has long been considered a safe-haven stock.

"This is a game changer and a warning sign to investors that Wal-Mart is facing challenges in the competitive environment that they may not easily overcome this time," said John Schwinghamer, who manages about $200 million.

Mr. Schwinghamer declined to say how many shares he had held.

"I liken it to an ocean liner that's been going straight ahead for 20 years and all of a sudden it's turned," he said. "It's hard to get back on course when that happens."

Wal-Mart spokesman Randy Hargrove said the company is focused on long-term value for shareholders and has "been very deliberate about its strategy for continued growth and planned investment."

Other long-time investors haven't lost hope in the Bentonville, Ark. retailer.

"We're getting a Wal-Mart rollback here," said Michael Farr, president of Farr, Miller & Washington, who said he was considering adding more to his Wal-Mart stake after the Thursday dip.

Farr, Miller & Washington manages $1.1 billion and generally, no position reaches more than 4% of assets under management.

"While the earnings per share drop is worrisome and may be a sign of economic distress among U.S. consumers, over the long term you can't lose faith in corporate America," Mr. Farr said. "As the economy recovers, so will Wal-Mart."

Russia Vetoes Crimea Resolution In U.N. Security Council

Russia vetoed a U.S. sponsored resolution resolution Saturday to make illegal a referendum for Ukrainian peninsula, Crimea, to secede and join Russia. The mostly Russian speaking Crimea will vote on joining Russia on Sunday.

Thirteen of the Council's 15 members voted in favor of the draft text, Russia voted against, and China abstained. A veto by any of the Council's five permanent members –- China, France, Russia, the United Kingdom and the United States -– means a resolution cannot be adopted. The resolution would have reaffirmed Ukraine's "sovereignty, independence, unity and territorial integrity" and declared that tomorrow's referendum, which could lead to Crimea's break with Ukraine, "can have no validity".

Russia's veto eliminates that as a possibility within the U.N.

Russia's Permanent Representative to the United Nations, Vitaly Churkin, said it was "no secret" that Russia was planning to vote against the resolution, the U.N. noted on its website. He added that Moscow would respect the decision of the Crimeans but could not accept the basic assumption of the draft resolution which aimed "to declare illegal the planned March 16 referendum where residents of the Republic of Crimea should decide on their future".

Crimea is an autonomous region of Ukraine much in the way Hong Kong has a separate government but remains part of China.

Liu Jieyi, Permanent Representative of China to the U.N., said Beijing sought a "balanced" solution to the conflict within a framework of law and order. He called on countries to refrain from action which could further escalate the conflict.

The resolution vote today marked the seventh time the Security Council was convening to discuss Ukraine.

Ukraine entered a deep political crisis in late 2013 when then-president Viktor Yanukovych rejected a trade deal with Brussels in favor of moving the country closer to Russia. Millions in Kiev, Ukraine's capital, saw Yanukovych as acting on behalf of a foreign nation rather than the good of Ukraine. He was impeached through extra-legal means on Feb. 22 and allegedly fled to the Russian naval base in Sevastopol, located on the Black Sea coast in southern Crimea.

When pro-Western politician Arseniy Yatsenyuk took the helm of Ukraine, he quickly summonsed allies in Brussels and at the International Monetary Fund to help save the country's ailing economy. But one of Yatsenyuk's first orders of business was to eliminate Russian as the second official language of Ukraine. Many ethnic Russians took offense. And the mostly Russian peninsula of Crimea quickly became the new hot zone of Ukraine's latest revolution. Washington moved to essentially replace Brussels, which was once the third party in this torrid affair.

Crimea's leaders voted to secede last week, but the voters will decide on the matter tomorrow.

Eight U.S. Senators are currently in Ukraine's capital waiting for fireworks.

U.S. Sen. Ron Johnson said that the United States should hold Russian President Vladimir Putin responsible for any bloodshed in Ukraine, the independent Kiev Post reported.  Ukraine has reported around 100 civilian deaths since protest erupted in the fourth quarter of 2013.

Human Rights Watch documented the involvement of self-defense units in the abductions of at least six activists from the  so-called Euromaidan movement, which organized the months of protests in Kiev

"I'll tell you what, from my standpoint there is one person I hold accountable for this aggression and it's Vladimir Putin. If there's further bloodshed, there's also one person I will hold responsible," Johnson told a news conference in Kiev today. "There's one person that can stop it, that can prevent it. That's Vladimir Putin."

See: 'Blame Putin', Wisconsin Republican Johnson Says  – Kiev Post

Legal Or Not, Crimea Referendum Will Reshape Ukraine Crisis – CNN

Crimea As Consolation Prize As Russia's Ukraine Costs Rise – The Washington Post

Top 10 Countries Where Justice Prevails

3 Stocks Spiking on Unusual Volume

DELAFIELD, Wis. (Stockpickr) -- Professional traders running mutual funds and hedge funds don't just look at a stock's price moves; they also track big changes in volume activity. Often when above-average volume moves into an equity, it precedes a large spike in volatility.

>>5 Stocks With Big Insider Buying

Major moves in volume can signal unusual activity, such as insider buying or selling -- or buying or selling by "superinvestors."

Unusual volume can also be a major signal that hedge funds and momentum traders are piling into a stock ahead of a catalyst. These types of traders like to get in well before a large spike, so it's always a smart move to monitor unusual volume. That said, remember to combine trend and price action with unusual volume. Put them all together to help you decipher the next big trend for any stock.

>>5 Hated Earnings Stocks You Should Love

With that in mind, let's take a look at several stocks rising on unusual volume recently.

AerCap

AerCap (AER) engages in leasing, financing, selling and managing commercial aircraft and engines in the U.S., Russia and Germany. This stock closed up 3.1% to $38.27 in Wednesday's trading session.

Wednesday's Volume: 2.48 million

Three-Month Average Volume: 1.15 million

Volume % Change: 82%

From a technical perspective, AER spiked notably higher here right above some near-term support at $34.38 with above-average volume. This spike is quickly pushing shares of AER within range of triggering a major breakout trade. That trade will hit if AER manages to take out Wednesday's high of $38.55 to its 52-week high at $39.10 with high volume.

Traders should now look for long-biased trades in AER as long as it's trending above some near-term support levels at $36 or at $34.38 and then once it sustains a move or close above those breakout levels with volume that hits near or above 1.15 million shares. If that breakout triggers soon, then AER will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $45 to $47.

YRC Worldwide

YRC Worldwide (YRCW), through its subsidiaries, provides various transportation services primarily in North America. This stock closed up 9.9% at $21.89 in Wednesday's trading session.

Wednesday's Volume: 2.49 million

Three-Month Average Volume: 1.66 million

Volume % Change: 115%

From a technical perspective, YRCW spiked sharply higher here and broke out above some near-term overhead resistance at $20.77 and above some past resistance at $21.87 with above-average volume. Market players should now look for a continuation move higher in the short-term if YRCW can manage to clear Wednesday's high of $22.25 with strong volume.

Traders should now look for long-biased trades in YRCW as long as it's trending above Wednesday's low of $19.52 or above $18.50 and then once it sustains a move or close above $22.25 with volume that hits near or above 1.66 million shares. If we get that move soon, then YRCW will set up to re-test or possibly take out its next major overhead resistance levels at $25 to $27.

Papa John's

Papa John's (PZZA) operates and franchises pizza delivery and carryout restaurants under the Papa John's trademark worldwide. This stock closed up 2.2% at $47.92 in Wednesday's trading session.

Wednesday's Volume: 364,000

Three-Month Average Volume: 296,015

Volume % Change: 50%

From a technical perspective, PZZA spiked notably higher here right above some near-term support at $46.01 with above-average volume. This move is starting to push shares of PZZA within range of triggering a near-term breakout trade. That trade will hit if PZZA manages to take out Wednesday's high of $48.02 to its 52-week high of $49.33 with high volume.

Traders should now look for long-biased trades in PZZA as long as it's trending above some near-term support at $46.01 or above its 50-day at $44.59 and then once it sustains a move or close above those breakout levels with volume that's near or above 296,015 shares. If that breakout triggers soon, then PZZA will set up to enter new 52-week-high territory, which is bullish technical price action. Some possible upside targets off that breakout are $55 to $57.

To see more stocks rising on unusual volume, check out the Stocks Rising on Unusual Volume portfolio on Stockpickr.

-- Written by Roberto Pedone in Delafield, Wis.

RELATED LINKS:

>>5 Industrial Stocks to Skirt the Selling

>>3 Tech Stocks Under $10 to Watch

>>5 Stocks Set to Soar on Bullish Earnings

Follow Stockpickr on Twitter and become a fan on Facebook.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including

CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.

Lew: Debt ceiling crunch to come sooner than thought

Treasury Secretary Jack Lew said it's likely he will run out of debt ceiling wiggle room at the end of February.

NEW YORK (CNNMoney) Treasury Secretary Jack Lew called on Congress to move soon to raise the nation's debt ceiling to ward off any risk of a U.S. default, saying the crunch will come by the end of next month.

The nation's borrowing limit is suspended until Feb. 7. After that, unless Congress has authorized an increase or has chosen to extend the suspension, the Treasury Department will have to deploy special accounting maneuvers to continue to pay all the country's bills in full and on time.

Originally Lew had estimated that those "extraordinary measures" could last until sometime between the end of February and early March.

But on Tuesday, in a public interview at the Council on Foreign Relations, Lew said he now believes it's most likely he'll run out of wiggle room by the end of February.

And he stressed that any last-minute drama over the debt ceiling could cut the U.S. economy's potential for growth and undermine confidence.

"Why would anyone want to hurt the U.S. economy and hurt the recipients of payments they're entitled to?" Lew said.

"Everyone knows these obligations are not made when you raise the borrowing authority. The obligations are made when you vote on appropriations bills and when you vote on tax bills."

And, he added, it causes undue anxiety among investors and consumers when lawmakers push the issue to the last minute.

It appears they may not finalize their strategy until their annual retreat at the end of January, although they may float trial balloons sooner than that, said Greg Valliere, chief political strategist for the Potomac Research Group.

But, Valliere said, it's a mid-term election year and "they don't seem eager to fight or instigate a crisis when they're getting tremendous mileage out of bashing Obamacare."

[video] LG Nexus 5 Android 4.4 Smartphone Review

The video this transcript is based on appeared on December 19.

NEW YORK (TheStreet) -- TheStreet's Gary Krakow loves the new Nexus 5 Android smartphone but has some questions about the design.

VIDEO TRANSCRIPT:

It's the latest, top-of-the-line pure Google Android phone - the Nexus 5 - made by LG. It was the first to run the purest of pure Android operating systems, in this case the new Android 4.4 KitKat.

The handset is beautifully thin and lightweight - somewhat deceptively hiding its real dimensions. The Nexus 5 has a big 5-inch high definition screen, 2 gigs of memory, a fast Qualcomm Snapdragon 800 processor and weighs a scant 4.6 ounces. Like all previous Nexus phones there is no bloatware, just the Android operating system and nothing else. So it's fast and smooth. The 5 lives up to the Nexus name.

I also found a few things I didn't like - the 8 megapixel camera sometimes had problems focusing. An update being pushed out this week should help. Some games seem to run slower on Snapdragon processors and the Nexus 5 is no exception. And the volume control rocker switch is on the bottom when you hold the phone in the landscape mode. I constantly tuned down the sound inadvertently. It's sometimes easy to block the small speaker port on the bottom and the volume needs all the help it can get.

The Nexus 5 is available from Best Buy, Radio Shack, T-Mobile, Sprint and the Google Website for an unsubsidized price of $349 to $399.

Written by Gary Krakow in New York.

Stock quotes in this article: GOOG 

Radio Shack is falling apart

Earlier this year, RadioShack (ticker: RSH) installed a new management team that was tasked with turning around a rapidly deteriorating business. RadioShack's legacy products like cables, adapters, and computers have been under pressure for years. Moreover, the company's move to focus on selling mobile devices was faltering in the face of strong competition from Best Buy (BBY) and others.

In the second quarter, RadioShack showed some signs of life, posting its first comparable store sales gain since 2010. But at the time, CEO Joseph Magnacca warned that investors should expect an uneven performance over the next few quarters as the company implemented its new strategy.

On Tuesday, investors saw exactly what Magnacca was talking about. RadioShack reported a significant drop in sales and an even more dramatic fall in earnings for the recently ended third quarter. While management did have some good news to report on the success of RadioShack's new concept stores, these efforts may be too little, too late.

A sales stumble or something worse?

In the third quarter, comparable store sales dropped 8.4% year over year, with declines in all product categories. Gross profit dropped from $341 million to $243 million, with about half of the decline attributable to writedowns for inventory that is being discontinued and sold below cost to wholesalers and clearance businesses.

Part of the shortfall in sales may be attributed to clearance activity, as RadioShack decided to simplify its stores by cutting the number of SKUs (distinct products) that it carries from 4,500 to 3,500. This reduction in SKUs could be a longer-term headwind to revenue if some customers can no longer find what they are looking for at RadioShack. But that effect should be offset by the introduction of new products like fitness gear.

A bigger worry is RadioShack's performance in the mobile category. The company's strategy still revolves around selling lots of smartphones and tablets and then adding on higher-mar! gin accessories like cases and chargers. But the mobile market may be moving away from RadioShack.

Trouble in mobile

The U.S. smartphone industry is increasingly dominated by just two players: Apple (NASDAQ:AAPL ) and Samsung (NASDAQOTH: SSNLF ) . As of August, a whopping 65% of U.S. smartphone subscribers used an Apple or Samsung device, and that percentage has been growing rapidly. This emerging duopoly could be a big problem for RadioShack.

Apple already has a significant retail footprint in the U.S., with more than 250 Apple Stores here. CEO Tim Cook hopes to eventually sell half of all new iPhones in the U.S. through the Apple Store, up from less than 15% today. It's not clear how Apple could reach that goal, but possible strategies include aggressively adding new Apple Stores, providing better trade-in offers, or offering new enticements to customers who buy through the Apple Store.

Meanwhile, Best Buy unveiled the "Samsung Experience Shop" earlier this year. These shops have received priority placement within Best Buy stores, and feature consultants hired and trained by Samsung to assist customers who are interested in Samsung devices. Best Buy has now rolled out around 1,400 of these stores-within-a-store.

The likely result is that the Apple Store will gain market share for iPhone sales over time, while Best Buy will gain market share for sales of Samsung phones. Retailers like RadioShack that rely on being an "honest broker" will be less useful the more the smartphone market becomes a two-horse race. Adding insult to injury, if RadioShack continues to lose shares in mobile, it will also have trouble selling high-margin mobile accessories.

Not dead yet, but not much hope

I think it is unlikely that RadioShack will be able to establish its relevance with a new generation of customers. The company is too reliant upon selling mobile devices and accessories, and market conditions are deteriorating for "neutral" retailers, compared to brand-oriented stores ! like the ! Apple Store and Best Buy's Samsung Experience Shop.

As a result, RadioShack will not be able to recover the revenue it has lost over the last two years. Furthermore, the company's operating expenses are already quite low, so it doesn't have the ability to cut its way to profitability. RadioShack has a fairly strong balance sheet, which could allow it to stagger on for a few more years, but by the end of the decade I expect this storied company to disappear.

The Motley Fool is a USA TODAY content partner providing general news, commentary and coverage from around the Web. Its content is produced independently of USA TODAY.

<SCRIPT language='JavaScript1.1'SRC="http://ad.doubleclick.net/adj/N4538.USAToday/B2304017.8;abr=!ie;sz=550x300;ord=[timestamp]?"></SCRIPT><NOSCRIPT><AHREF="http://ad.doubleclick.net/jump/N4538.USAToday/B2304017.8;abr=!ie4;abr=!ie5;sz=550x300;ord=[timestamp]?"><IMGSRC="http://ad.doubleclick.net/ad/N4538.USAToday/B2304017.8;abr=!ie4;abr=!ie5;sz=550x300;ord=[timestamp]?" BORDER=0 WIDTH=550 HEIGHT=300ALT="Advertisement"></A></NOSCRIPT>