by Sheena Martin, Contributing Editor
Friday, November 20, 2009

Takeovers are big news in the market at the moment.

In fact, did you know that takeovers have the biggest one-day gain in stocks for any asset?

As my colleague – and takeover expert – Louis Basenese says, they’re “some of the safest companies you can own. According to FactSet Merger Stat LLC, the average one-day return for shareholders of the target company is 48%.”

Furthermore, Louis says, “Industries naturally go through cycles of consolidation – waves of mergers, acquisition and takeovers.”

One industry riding this wave as it comes out of recession is oil. And I have a takeover target making strides in oil exploration that could put money in your pocket in a few months time.

The British Are Coming

Small U.K.-based exploration company Tullow Oil PLC (LSE: TLW) is a gem for a “Big Oil” firm breaking into reliable production in Africa.

In early November, Tullow signed a deal with oil major Royal Dutch Shell (NYSE: RDS.A) on a smaller, developed project. The agreement saw Shell purchase a 33% stake in Tullow’s offshore oilfields in French Guiana, which have a combined rate exceeding 95,000 barrels per day.

As a result, Tullow shares climbed by 8% in November. But that’s not the only deal…

Tullow’s Major Oil Discoveries

In March 2009, a field more than twice the size of Lake Michigan was discovered off the coast of Ghana. Production estimates top one billion barrels of oil and Tullow has partnered up with Anadarko Oil Corp. (NYSE: APC) on the project. And the companies’ third partner, privately owned Kosmos Energy, had its stake bought out for $4 billion by ExxonMobil Corp. (NYSE: XOM) last month.

Given that, there is considerable potential for ExxonMobil to go after Anadarko and Tullow as the project progresses.

What’s more, Tullow has made significant oil discoveries in Uganda. And with easy to access oil reserves, Tullow has enjoyed almost 100% success in exploration on the Ugandan side of the Lake Albert Rift Basin.

That success rate, particularly in a region not popularly known for its oil riches, is few and far between.

Lots of Oil… But Nowhere to Go

Given the sizeable potential of oil production in Uganda alone, you might wonder why one of the big oil companies hasn’t reeled Tullow in by now. I mean, Tullow has already done all the legwork in exploration and discovery. Shouldn’t that make it easy for another company to profit?

Well, there are still hurdles to clear. For instance, what are small villages in Uganda going to do with nearly one billion barrels of oil?

In addition, no oil pipelines run through Uganda. And there are no refineries in the region.

Tullow will use trucks to feed local energy demand early on, but it continues to seek a partner that can head up pipeline construction and possibly a small refinery.

To sweeten the deal, Tullow announced in August that it would share profits from in its Ugandan production in return for refining and a pipeline to the Indian Ocean, costing about $5 billion to $6 billion. The company plans to announce a partner early next year.

Who Are the Players?

Recent rumors suggest ExxonMobil is considering partnering with Tullow on its Uganda project, as well as taking Tullow’s stake in Ghana.

Other interested investors include Royal Dutch Shell, BP (NYSE: BP), China’s state-owned oil giant CNOOC Ltd. (NYSE: CEO), India’s Oil & Natural Gas Corp. Ltd. (ONGC_a.NS) and Italy’s Eni SpA (NYSE: E), which has a 43% stake in pipeline builder Saipem (SPM.MI).

If any of them throw their budgets behind Tullow, its shares should benefit as a result. And there’s a big reason for them to do so: A pipeline and refinery in Uganda gives easy access to Asia, which is thirsting for energy.

Don’t let Tullow Oil’s 2009 revenues fool you. It scaled back overall production by 16% at the beginning of 2009 in order to focus on capital investments in Ghana and Uganda.

Instead, focus on the more than $334 million that Tullow boasts in operating cash flow. The firm is well positioned to develop production in Ghana and Uganda. And it bodes well that Shell has already demonstrated its confidence in Tullow’s discoveries.

The bottom line is that Big Oil will continue to flock to African production and Tullow has done all the legwork in proving profitable reserves. Tullow investors will profit from the crude production and marketing. And the stock should continue to advance as further infrastructure is constructed.

Consider buying Tullow now before it joins forces with more Big Oil firms and the stock rises before you can grab your share.

Good investing,

Sheena Martin

P.S. For more on how my takeover expert colleague, Louis Basenese, digs out the most profitable takeover targets like E*Trade Financial (Nasdaq: ETFC) check out this article.

by Robert Williams, Publisher
Friday, November 20, 2009

David Fessler has a sector that warrants your attention. But first, I want to officially raise a red flag in another market.

Something’s amiss in the municipal bond market. Year-to-date, “munies” have behaved more like momentum stocks than their intended purpose of providing a safe yield.

Consider this: A handful of closed-end muni funds have averaged a 46% return so far this year.

The rally, of course, was borne out of the financial crisis, when investors and institutions alike went furiously scrambling to safety.

The novice move was into cash. But the smart money flowed strategically into the bond market. And a lot of the action was in municipal bonds. (The junk bond market is similarly overheated.)

What’s noteworthy, however, is that when the market’s sanity returned in March, the muni rally chugged on. Counterintuitive, to say the least.

So what gives? The stimulus package.

Specifically, sales of “Build America Bonds,” created under President Obama’s economic stimulus package, rose 28% in the third quarter, as municipalities chased the bonds’ abilities to lower interest costs.

More than $51 billion of such bonds have been issued since their inception.

“The federal government pays sellers 35% of their interest cost. The subsidy is needed by states coping with an 8.2% annual decline in tax collections in the first half,” according to a Bloomberg report.

Clearly, the bonds are propping up the muni market. (The effect they’re having is quite intriguing. But beyond the scope of this article.)

For now, just take note that the federal Build America subsidy is only available for bonds issued by before midnight on December 31, 2010. Beyond that, all bets are off. (Can you say “thud?”)

Ahead of the tape,

Robert Williams

by David Fessler, Energy & Infrastructure Expert
Friday, November 20, 2009: Issue #1142

As the old saying goes, “You’re either a contrarian, or a victim.”

It just so happens that one of the savviest contrarians I know is my colleague, Louis Basenese.

And nobody takes that to heart more than Lou does. I’ve scratched my head in bewilderment on many occasions after reading one of Lou’s bold predictions – only to see his intuition prove uncanny time after time.

So today I’m stealing a page from the “Basenese Playbook” and taking a look at the severely battered transportation sector, one that pretty much everybody hates. However, I think, it’s not only about to come off life support, but perhaps become one of the hottest investments in 2010.

The Transportation Sector: The Market’s Most Important Domain

Airlines, railways, package carriers, even oil and gas pipelines are all industries that make up the transportation sector.

But why should you care about it?

Because transportation is actually the most important sector – and for good reason: growth or contraction here serves as a proxy for both U.S. and global economic growth.

It stands to reason that if more “stuff” is being shipped, it means companies are producing more goods to satisfy business and consumer demand. In turn, this is a good indication that the U.S. economy – and that of the rest of the globe – is in decent shape.

Right now, however, there’s a big change underway in U.S. freight transportation. Thing is though, it’s hardly received any attention. So let’s take a closer look…

And the World’s Most Efficient Transportation System Is…

Let me toss a few statistics your way…

• Every day of the week, nearly 43 million tons of goods are hauled around the United States.
• The price tag of those goods is around $29 billion.
• This 12 billion ton-mile (one ton of freight moved one mile) occurs on the nation’s 4,016,741 miles of highways and roads, 94,942 miles of railroads and 26,000 miles of waterways.
• The process also includes thousands of miles of air routes and over 1.7 million miles of oil and gas pipelines.
• It accounts for nearly $400 billion – nearly 3% of total GDP.

When you think about it, the U.S. transportation and shipping system is highly efficient – and routine to the point of being almost boring!

But not from an investment standpoint.

An Impressive Nine Months for the Transport ETF… But the Rails Are Dragging

When the stock market hit bottom in March, so too did the transportation sector, as measured by the iShares Dow Jones Transportation Average (NYSE: IYT).

The ETF is a good proxy for the sector, as it tracks the Dow Jones Transportation Index (^DJT) and contains 20 companies that represent a diverse cross-section of the transportation area.

Year-to-date, IYT is only up by 11.4%. But since the fund hit its low of $38.28 on March 9, it’s blasted higher by 84.4%. That compares to a 57.7% gain for the Diamonds Trust (NYSE: DIA), its equivalent ETF that represents the Dow Jones Industrial Average (^DJI).

That said, some less than impressive third quarter earnings have prevented IYT from forging any higher. Notably, the rail firms have disappointed the most…

• Burlington Northern Santa Fe (NYSE: BNI): As I reported here a couple of weeks ago, BNI is soon to be part of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) empire. But the firm announced a 30% drop in third quarter profit and doesn’t expect much improvement in the fourth quarter.
• Union Pacific (NYSE: UNP): The company reported a drop in freight volumes and a subsequent 26% fall in third quarter earnings.
• CSX (NYSE: CSX): fared the best of all with a 23% loss, beating Wall Street’s expectations.

The Intermodal Method: A More Strategic Way of Shipping

Fuel. A short word… but a big problem when it comes to freight transportation. It’s the biggest cost associated with the shipment of goods and is the bane of the trucking industry. When diesel prices hit $4-plus a gallon last year, for example, many smaller trucking companies simply vanished.

But the companies that remained – especially the larger ones – began looking for novel ways to reduce their fuel costs. And one of them includes intermodal shipping.

Intermodal freight – a shipping method that combines both highway and rail movement – is down over 17% from this time last year.

On the surface, this reflects the continued struggles for the U.S. economy and many others around the world, caused by declining demand from businesses and consumers. But there are a couple of rays of hope…

• Intermodal freight volumes have either been flat, or on the increase since June.
• Domestic container volumes have risen recently, too, albeit slightly (up 1.3% during the third quarter).

One reason that intermodal shipping is seeing an increase is the continued gloomy state of the trucking industry amid rising gasoline prices.

However, uncertainty remains. For example, there is still excess capacity and pricing is extremely competitive. As a result, trucking looks increasingly less attractive than intermodal – both as a means of freight shipment and, more importantly, as an investment.

America’s Green Twist on Efficient Freight Transportation

Other reasons why intermodal shipping is gaining traction include the fact that the method is more cost-effective and greener. For example, it uses 33% less fuel than shipping by truck alone. And most rail trains can move a ton of freight about 400 miles on a gallon of diesel.

In fact, increased savings was one of the major reasons that J.B. Hunt Transportation Services’ (Nasdaq: JBHT) CEO, Kirk Thompson, decided to ink a new intermodal deal with Norfolk Southern Corp. (NYSE: NSC).

“The conversion of highway freight to the more efficient, cost-effective, safer and more environmentally friendly services that we jointly provide, will not only benefit shippers and the general public, but our shareholders alike,” said Thompson.

The idea behind the deal is to accelerate the switch from truck traffic to truck-rail intermodal transportation for freight shippers.

Dave Yeager, CEO of The Hub Group (Nasdaq: HUBG), a freight company specializing in intermodal services and logistics, agrees: “We believe that business conditions are better and have become more stable. The future remains bright for intermodal due to the excellent service, a cost advantage over trucks, and the environmental benefits.”

We agree, too. And if you want to use this trend to play an economic recovery, consider picking up a few shares of J.B. Hunt, Norfolk Southern, or The Hub Group. They all stand to benefit as the economy continues to slowly recover.

Good investing,

David Fessler

P.S. If you’d like to hear me talk more about developments in the energy and infrastructure areas – and the best investments within them – a note for your diary: From March 17-20, 2010, I’ll be speaking at the Investment U Conference.

This time, the annual event takes place in balmy San Diego, California at the five-star Grand Del Mar Resort. Joining me will be fellow Investment U analysts – Alexander Green, Louis Basenese, Karim Rahemtulla, Marc Lichtenfeld, and Lee Lowell, plus many more. This is one of the top investment conferences of the entire year and you’ll leave with a ton of valuable investment ideas, strategies, tips and recommendations. You’ll also get our outlook for 2010 and participate in workshops and educational sessions – basically everything you need to profit.

For full details, and to reserve your spot, visit this link, or call: 800.926.6575 (ext. 105 or 106) or 561.243.6276.

by Louis Basenese, Small Cap and Special Situations Expert
Thursday, November 19, 2009: Issue #1141

With interest rates resting at historic lows, we can all agree they will eventually rise.

And when they do, you’ll want to make sure you own something called Senior Secured Floating Rate bonds.

I know… these under-the-radar bonds aren’t headline makers. But please don’t let their relative obscurity – they’ve only been around since the early 1980s – convince you to overlook them.

Senior Secured Floating Rate bonds (SSFR) are actually ideally suited for the current environment and deserve a place in every investor’s portfolio. Here’s why…

The Problem With Most Bonds & Interest Rates

When it comes to bonds, the equation is simple: As interest rates decline, the value of bonds goes up. Unfortunately, however, the inverse is also true – as interest rates rise, the value of bonds declines.

And don’t kid yourself, here. We’re not talking about a minor decline in value. Even a subtle increase in interest rates will wreak havoc on the value of bonds.

Take U.S. Treasuries, for example. A mere 1% rise in the Fed funds rate will lead to an 8.5% decline in the value of 10-year Treasuries. And a 2% rise would cause a 17% price drop, according to Barclays Capital.

If you invest in bonds, you don’t want any part of that rout. So what’s the solution? That’s where SSFR bonds come in…

Senior Secured Floating Rate Bonds – Breaking Down the “S,” “S” and “F”

Despite an intimidating and long-winded name, Senior Secured Floating Rate bonds are quite simple:

• “Senior”: This refers to bondholders’ position in the event of liquidation. They’re the first in line to collect.
• “Secured”: This means the bond is backed by specific collateral, such as a company’s cash, accounts receivables, inventory, buildings, equipment, trademarks, or patents. This characteristic results in much higher recovery rates in the event of a bankruptcy. According to Credit Suisse, recovery rates on senior loans since 1995 average 70 cents on the dollar, compared to 43 cents for typical junk bonds.
• “Floating”: This is the most important part. “Floating” refers to the interest rate on the bonds. They simply reset or “float” every 30 to 90 days by a pre-determined amount (the spread) to reflect changes in a base interest rate, like the U.S. Federal Funds Rate or the London Interbank Offered Rate (LIBOR).

For example, if the benchmark LIBOR is 3% and the bond promises to pay 2% more than LIBOR, the interest rate will initially be set at 5%. Ninety days later, if LIBOR increases to 3.5%, then the interest on the bond will reset to 5.5%, and so on.

Meanwhile, a fixed-interest rate bond, paying 4% at the outset, will never pay more than 4%, regardless of how high (or fast) interest rates climb.

This isn’t rocket science. But this simple adjustment means SSFRs aren’t subject to significant price erosion as interest rates rise. And that’s why they exhibit a rare negative correlation with most bonds.

In short, no other type of bonds can offer the same preservation of capital and higher income. However, as with all investments, you need to make sure you execute the right strategy…

How to Invest in Senior Secured Floating Rate Bonds the Right Way

Before you buy individual Senior Secured Floating Rate bonds, it would be remiss of me to not warn you about the risks. Namely, if the company that issues an SSFR goes belly up, so could your entire investment. Although recovery rates average 70 cents on the dollar, that’s not a guarantee.

That’s why I recommend you spread your risk and go with a well-diversified, closed-end fund that invests in hundreds of Senior Secured Floating Rate bonds at once. Such an approach ensures the impact of any bankruptcy is minimal. It also provides daily liquidity.

You can easily search for available funds at www.closed-endfunds.com. Simply click on the “Asset Classes” tab in the left-hand column. Then on the next page, in the “Classifications” drop-down box, select “Loan Participation Funds.”

In the end, even the village idiot knows interest rates are headed higher. Such inevitability makes now the perfect time to position your portfolio to profit from it.

Good investing,

Louis Basenese

P.S. A few months ago, I revealed my favorite closed-end fund that invests in Senior Secured Floating Rate bonds to members of The Oxford Club. It’s already up by double-digits. But it still yields a healthy 6.5%. Moreover, it’s run by the most experienced investment management company – one that basically pioneered SSFR investing for everyday investors. To immediately find out the identity of this fund, consider joining The Oxford Club.

by Sheena Martin, Contributing Editor

Even as U.S gas prices climb, petroleum traders still have no interest in buying right now.

And why would they? The summer driving season is at an end. Consumers are still trying to save cash, especially with the holidays approaching. And inventories are still bearish.

Last week, the Department of Energy (DOE) said gasoline demand is at 8.844 million barrels per day – the lowest number since late January 2009. And with practically no demand, refiners are still running at only 80% capacity, on average.

So with refinery woes persisting, it might seem odd to devote attention to investments in the industry. However, that’s precisely why you should. A contrarian strategy often pays dividends – and the recent challenges have shaken out the weak players and created opportunities for survivors.

Simply put, companies with significant cash flow are in strong positions to conquer their weaker peers. And that includes this one…

Delek’s Two Potential Refinery Targets

During its recent third quarter conference call, Delek U.S. Holdings (NYSE: DK) announced that it will aggressively seek to acquire refining and retail assets.

Referring to the company’s only oil refinery in Tyler, Texas, CEO Uzi Yemin said, “We don’t want to stay single-asset.”

There’s a precedent for this, too. In 2005, when the market was suffering in a similar way to today, Delek purchased its refinery in Tyler. And now, it’s ready to strike out again.

With the recent downturn in refining, there are multiple choices for Delek to consider. Yemin has two goals in mind…

• Delek is looking to purchase niche, inland refineries and high-quality convenience stores.
• The right acquisition will not exceed about 2.5 times Delek’s operating cash flow.

There are two potential contenders here. Marathon Oil Corp’s (NYSE: MRO) 79,000 barrel per day refinery in St. Paul, MN. is believed to be on the block and also has the advantage of being close to Canadian crude supplies.

In addition, the bankrupt Flying J’s 35,000 barrel per day refinery in Salt Lake City is for sale.

Given where the refining industry is right now – and where it could go from here – there is a chance for investors to play the industry cautiously. The fact is, demand will return as effects of the recession wane.

Some analysts say Delek will purchase a refinery within the next six months, thus giving it a bigger piece of the U.S. refining capacity pie. This is significant, given that the last U.S. refinery was built 40 years ago.

While Delek reported a net loss of $5.1 million from continuing operations ($0.10 per share), versus net income from continuing operations of $24.4 million ($0.45 per share) a year ago, the company’s cash position during the recent quarter exceeded $107million, with net debt to capitalization was less than 30%.

So if you can accept a little risk, an early investment is best bet.

Good investing,

Sheena Martin

P.S. For more on how you can profit from rising oil prices, check out this column from my fellow energy expert, David Fessler. David also writes a column devoted exclusively to energy and infrastructure in The Oxford Club’s Communiqué newsletter. You can find out more about that – and how to get his specific recommendations – here.

by Robert Williams, Publisher
Wednesday, November 18, 2009

When I saw the latest cover of BusinessWeek – “Why the Commercial Real Estate Crisis Looks So Scary” – I immediately fired off a text to my friend and Investment U colleague, David Fessler.

“We scooped ‘em by six whole months,” I texted.

Dave’s been tracking (and cautioning us about) the commercial real estate market for the better part of a year now. (You can read Dave’s June article on the commercial real estate fallout or his April article on the commercial real estate sector.)

“Last year, commercial real estate sales fell off a cliff, plunging 73%… But it’s going to get worse… much, much worse,” asserted Dave, months ago.

He nailed it. The market is indeed cracking.

BusinessWeek reported that $6.4 billion worth of commercial real estate investments didn’t qualify for refinancing during the first 10 months of this year. And 30 U.S. cities now have over $1 billion in troubled commercial loans versus only eight in such cities a year ago.

The percentage of delinquent commercial mortgage securities sits near 4%. (It was less than 2% when Dave penned his first article.)

What’s particularly ominous, however, is that collectively, banks are holding roughly $1.7 trillion in commercial loans on their books.

Worse still, roughly $1.4 trillion in derivatives – you know, the financial weapons of mass destruction that crashed the residential market – underlie the loans, too. Ugh. Should the market for these securities go bust, we could all be on the breadline within a month.

But don’t move all your assets offshore yet. With little fanfare, the Fed just intervened.

We’ll give a full report as the situation warrants. For now, just make sure you don’t own one of the overvalued stocks discussed in Marc Lichtenfeld’s article.

Ahead of the tape,

Robert Williams

by Marc Lichtenfeld, Healthcare Expert
Wednesday, November 18, 2009: Issue #1140

To celebrate my parents’ anniversary, I took the family to see Grease last weekend. As musical theater buffs, I figured that they’d love the seeing the show, especially with my kids who had never seen a Broadway quality production.

Unfortunately, they still haven’t. The show stunk. The “actor” who played Danny Zuko couldn’t act. And American Idol winner Taylor Hicks was so bad as Teen Angel, it was laughable. It was one of the worst productions I’ve ever seen – and I should know, as I’ve been in some pretty awful shows (if you saw Last Exit to Brooklyn in San Francisco in 1995, I apologize).

But the purpose of this column is not a theater review, but rather the first of a two-part discussion of value. The tickets were quite expensive and there are few things more aggravating than not getting value for your money.

This often applies to investing, too. Here are the four overvalued stocks to avoid adding to any portfolio…

Avoid a Portfolio Beating From These Four Overvalued Stocks

When the market reverses, overvalued stocks are often the ones that take the biggest beating. So with many calling for the market to do just that, I screened over 5,000 stocks to come up with a few that are as overvalued as those Grease tickets.

Specifically, I looked for companies that are trading at more than 20 times cash flow, with earnings growth of less than 5% and a declining return on assets. Here’s the list…

• Cohen & Steers (NYSE: CNS)

The company is an asset manager, with a specialty in real estate. Since the market bottomed in March, the stock has nearly tripled in value. But that’s where the good news ends. Revenue will decline for the second straight year in 2009. In addition, operating margins are razor thin and the stock is trading at 34 times cash flow.

The market already seems to have priced a healthy real estate rebound into CNS shares. But any suggestion of another downturn in real estate and CNS shareholders may feel worse than Danny Zuko after being stranded at the drive-in.

• Harley Davidson (NYSE: HOG)

In an economy where everyone is worried about the job market, it’s no surprise that big ticket, discretionary items like a new motorcycle are low on the priority list.

Harley Davidson’s results prove this. Revenue is expected to fall by 22% in 2009 and shrink another 1.3% in 2010, according to estimates. The stock currently trades at 27 times earnings, 20 times forward earnings and 137 times cash flow. The company is also loaded with debt. Right now, its bikes represent better value than its shares.

• Rogers Corp. (NYSE: ROG)

Rogers is an industrial materials manufacturer. It makes products like printed circuit board components, polymers and foams. But times are tough and the firm has seen its cost of goods increase to the highest level in 10 years. Those higher costs, combined with declining revenue, led to negative operating margins for the first time in a decade.

Despite these problems, the stock is still trading at crazy levels – 67 times cash flow and 20 times forward earnings. If those lofty valuations are to hold up, Rogers will not only have to see an increase in business, but get its costs under control, too.

• Travelzoo (Nasdaq: TZOO)

Tourism is another sector that has struggled amid a recessionary climate and high unemployment. Many firms have been forced to slash prices in order to drum up business – a tactic that can erode profit margins.

And the struggle is set to continue for Travelzoo. Revenue growth is expected to sink from 17% to 8.6% in 2010. In addition, trading at 11 times its book value, over 50 times next year’s earnings, and 99 times its cash flow, TZOO appears priced for perfection. Any disappointing results will likely result in a crash landing for the stock.

Not only that, it’s operating in a fiercely competitive industry, with other online travel sites such as Expedia (Nasdaq: EXPE), Priceline (Nasdaq: PCLN) and privately owned Travelocity all battling for a piece of the pie.

If any of these overvalued stocks are in your portfolio, or on your watchlist, you may want to think twice about being “hopelessly devoted” to them. When it comes to investing, there are worse things you can do than let a winner become a loser… but not many. So be sure to employ a tight trailing stop on these stocks if you happen to own them – and be very careful about buying them if you don’t.

Next week, I’ll give you several names that still remain good values, despite the market’s recent run.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

Editor’s Note: If it’s value you’re looking for, look no further than The Oxford Club. For just $79, you’ll receive an entire year’s worth of our experts’ top stock recommendations and other investment ideas, plus many other top tips and strategies that you can use to build your wealth and protect your profits in a market that would like nothing more than to take them away. See the full list of what a membership will give you.

This analysis is from Sheena Martin, Contributing Editor, Investment U
Tuesday, November 17, 2009

The continually weak U.S. dollar is a constant source of debate among economists and the media.

And most of the chatter is decidedly negative. But there are a few benefits, including the effect it has on the bloated U.S. trade deficit. Both economists and the U.S. government are hoping that such dollar weakness will help reduce the nation’s trade deficit, one of the most criticized aspects of the U.S. economy.

Sure enough, during the recession, America’s trade deficit with many other countries has shrunk. It’s already seeing increased exports of locally produced goods with falling demand for imports of highly priced foreign goods.

But then there’s China – one of the largest exporters to the United States…

By pegging the yuan to the U.S. dollar, American imports of Chinese goods are artificially cheaper and give American companies opening factories in China a contrived subsidy. This explains the soaring trade imbalance with China, which holds 83% of American’s non-oil trade deficit.

Consequently, the Obama administration has implemented additional tariffs on imports of both steel and tires from China. And unsurprisingly, China has criticized these actions as “trade protectionism,” expressing fear that the United States is more concerned with propelling itself out of recession, rather than aiding China’s economic interests.

No surprise there either!

China Faces Obstacles With Ties to the Weak U.S. Dollar

That said, China also faces obstacles, due to its close ties with the weak U.S dollar.

Liu Mingkang, Chairman of the China Banking Regulatory Commission, says the weak dollar and low interest rates have created “unavoidable risks for the recovery of the global economy, especially emerging economies.”

Without a doubt, this has forced China to pay close attention.

In its third-quarter monetary policy report, the People’s Bank of China suggested that it might consider using a basket of other major currencies – not just the dollar – to guide the exchange rate.

In light of this, China has been diversifying its foreign exchange reserves (which top $2 trillion) in order to move away from the dollar into other major currencies and to hedge against the U.S. dollar’s fall. This gradual diversification will help avoid bid market fluctuations, while allowing the yuan to appreciate for the first time in 18 months.

Moreover, choosing to strengthen the yuan would represent a major policy shift and could alleviate problems between the weak U.S. dollar and the yuan. That’s because U.S. and European manufacturers would benefit from cheaper exports in China, in addition to decreasing America’s trade deficit with China.

On the other hand, costlier Chinese goods could create other problems, such as pushing up U.S. inflation and potentially causing the Fed to hike interest rates.

The easiest way to play this situation without having to directly dive headlong into the world of currencies is to consider an ETF like the WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB). The fund’s goal is to reflect money market moves in China and changes in the yuan against the dollar. This could be a wise move for investors as China looks at strengthening its domestic currency.

Good investing,

Sheena Martin

by Karim Rahemtulla, Options Expert
Tuesday, November 17, 2009: Issue #1139

To put it bluntly, some people are just downright afraid of the options market.

It’s too bad. Most believe the popular misconceptions and myths about options – among them, that they’re too complex, too confusing and too risky – or are just reluctant to the leave the relative comfort zone of stock investing.

It’s also a mistake. Many investors are missing out on some huge gains when all it really takes is a better understanding about the options landscape.

And that’s what I’m here for. Because while options terminology is different, it’s not really that complicated. So let’s run down a few of the basics…

Options Terminology 101

When it comes to option trading, you’ll find that there are two basic varieties – calls and puts.

• Calls: A call option is the right, but not the obligation, to buy a stock at a certain price. This is called the strike price. It’s the right, but not the obligation, because you’re only on the hook for the amount of money that you paid for the option. So right off the bat, you know you can never lose more than what you paid. The extra bonus is that the upside is unlimited. If you want to bet on a higher share price, you buy a call option.
• Puts: A put option works in the opposite way to a call. It’s the right, but not the obligation, to sell a stock at a certain price. So if you’re betting that IBM (NYSE: IBM) will decline, you’d buy a put option. And again, the strike price that you choose is the level at which you have the right to sell IBM. However, you’re not obligated to do so.

Now let’s break it down a bit more by detailing the kind of options that you can buy and sell…

Three Terms You Need to Know When Trading Options

When we’re talking about options strike prices, there are three distinct terms you need to know, so that trades make sense.

• In-The-Money (ITM): This refers to options whose strike prices are below the current share price if you’re buying calls and above the share price if you’re buying puts.

For example, if IBM is trading at $120, you can buy a call option if you think it’s going higher, or a put option if you think it’s going lower.

If you bought an in-the-money put option, you’d choose a strike price above the current price. So an in-the-money put on IBM would be the $125 strike, giving you the right to sell at that price.

The reason for wanting to buy in-the-money options is simple: you’ll pay less net premium. This simply refers to the amount over and above what we call an option’s intrinsic value. In the examples above, the intrinsic value in each case is $5 ($120 minus $115 for the call, and $125 minus $120 for the put). The net premium would be any amount over the $5 intrinsic value.

• Out-Of-The-Money (OTM): This refers to options whose strike prices are above the current share price if you’re buying calls and below the current share price if you’re buying puts.

For example, if IBM is trading at $120, an out-of-the-money call option would be the $125 strike, while an out-of-the-money put option would be $115. You’d only make this OTM trade, though, if you think IBM is going to go well above or below your strike prices. The premium paid for both of these OTM options would have no intrinsic value at all, just value for time and risk.

• At-The-Money (ATM): This refers to options where the strike price is within a few cents of the current share price. So if IBM is trading at $120, an ATM call and an ATM put would have a strike price of $120.

Again, the amount of money you pay for each option (the premium) wouldn’t have any intrinsic value, but would be purely made up of risk and time premium instead. In addition, an at-the-money option would move dollar-for-dollar with the share price over time, but the premium you paid for time and risk would erode as time passed.

That wraps up this session. And as you can see, options terminology, while different, isn’t all that complex. Essentially, it’s largely based on how time and risk are priced. But the bottom line is that if you’re trading options – the fastest-growing area of investor interest today – you must know the lingo.

Good investing,

Karim Rahemtulla

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The horror stories you hear about investors losing their shirts in the options market are often because they just don’t understand the basics and get in too deep. But with Karim’s 400 Report service, you’ll get a steady stream of specific options recommendations (what to buy, when to buy, when to sell) that takes the guesswork out and reduces your risk of going it alone. Check it out here.

This analysis is from Martin Denholm, Senior Editor, Investment U
Monday, November 16, 2009

A GDP growth rate of 9% would be an impressive performance over the course of a year.

But it’s nothing short of outstanding over just one quarter.

Yet that’s the projected fourth quarter performance for Brazil – a country far removed from the United States both geographically and economically.

Leading the charge is a surge in domestic consumption, as optimistic Brazilians (no doubt also buoyed by the decision to award Rio the 2016 Olympic Games) pump money into the economy.

If that fourth quarter projection holds, it would provide a major shift in fortunes and a solid springboard for 2010. You see, even with that impressive 9% estimate, Brazil’s full-year GDP growth is only expected to fall between 1% and 1.5%, as the country’s struggling export market has dragged the economy down.

However, this area is also showing signs of revival. Despite a projected 22% drop this year, due to the 30% spike of the Brazilian real currency, export sales to the U.S. spiked by 20% in October.

Brazil’s Surging Popularity as a BRIC Nation

Brazil is one of the well-known BRIC nations (Brazil, Russia, India, China) and has surged in investor popularity over the past few years.

The resource-rich country (agriculture and commodities are crucial economic drivers) owes its more recent success to the fact that domestic consumers largely drive its economy, so it’s remained relatively sheltered from the worst of the global downturn. And with unemployment down and wages increasing since March, consumers are fueling the economic resurgence. So despite the struggles for Brazil’s export market this year, consider that it accounts for less than 25% of its annual GDP.

Investors are happy, too, sending the Brazilian Bovespa stock index up 71% year-to-date (as of November 12). With that performance, you might expect the market to be overvalued now. Not so. Compared to the S&P 500 and its fellow BRIC nations, it’s cheap. The Bovespa trades at 13 times 2010 earnings, significantly less than 18 for the S&P, 18.4 for India and 19 for China.

On top of that, Moody’s kicked up Brazil’s credit rating to investment grade in September.

Global investors are latching onto Brazil’s newfound strength, too. Deputy Trade Minister Welber Barral says foreign direct investment is expected to grow by 33% in 2010 – from $30 billion to $40 billion.

Here’s how to cash in on that strength yourself…

How to Benefit From Oil Market Muscle and Brazilian Strength Through One Company

Both Investment U’s commodities specialist, Lee Lowell, and energy expert, Dave Fessler, have written about the likelihood of oil prices rising to $90 and then $100 over the next 2-3 months.

You can check out Lee’s column here and Dave’s column here.

Given their bullish oil price projections and Brazil’s end-of-year strength (and continuing into 2010), one of the best ways this double rising trend is through heavyweight Brazilian oil firm, Petroleo Brasileiro – better known as Petrobras (NYSE: PBR).

As of November 12, the company’s shares had blasted past their five-year average annual return of 42%, surging to a 101% year-to-date gain. Responsible for a good chunk of that gain was the major oil discovery off the coast earlier in 2009. What’s more, it’s still trading for just 14 times earnings.

For a broader, more diversified play on Brazil, take a look at the country’s ETF – the iShares MSCI Brazil Index (NYSE: EWZ). It tracks the price and yield performance of Brazilian stocks on the Bovespa.

Best regards,

Martin Denholm