“There are the haves, the have-nots and the have-not-paid-for-what-they-haves, and the prevalence of the latter may be the biggest single source of vulnerability for the U.S. recovery.”

Now that’s the kind of statement that grabs a girl’s attention, and I think it should grab yours too.

Monday, July 06, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research

Stress Test The Consumer - by Christopher Swann

People can be divided into three classes, it has been said: the haves, the have-nots and the have-not-paid-for-what-they-haves. The prevalence of the third category may be the biggest single source of vulnerability for the U.S. recovery.

A stress test of the consumer could reveal more distressing results than the one conducted on the banking system.

Debt is at high levels - 130 percent of disposable income, or more than twice its peak in the late 1980s. A slide in net wealth has reduced the collateral Americans can draw upon for emergency loans. Finally, it is no harder to borrow money for new consumption or to roll over existing debt.

Like a compromised immune system, this weakness makes consumers extremely susceptible to further shocks. Traumatic as the recent bout of retail restraint may have felt, worse may be in store. After all, consumption rose by 18.5 percent in the secen years to 2008. So far it has only fallen back by less than 2 percent.

There are several potential mishaps that could swiftly undermine consumer spending and set the recovery back to square one.

Among the most likely problems would be a continued slide in house prices. Even on the conservative measures used by the Federal Reserve, the value of residential real estate has fallen 18 percent since 2006.

With signs of recovery still tentative, a further 10 percent slide is well within the realm of possibility - inflicting a further blow on the balance sheet and sense of well-being of American households. 9If nervousness over swelling government debt pushes up bond yields, the outcome could be still worse.)

Homeowner’s equity, already down to 40 percent from close to 60 percent, would plunge to 35 percent. This would send household wealth down to its lowest level since the mid-1980s. While Americans can’t immediately rebuild the $12 billion of net worth lost over the past 2 years - equivalent to more than a year’s worth of consumption - further losses will heighten their sense of caution.

A second threat is also looking increasingly likely - wage cuts. Fifteen percent of employers surveyed by the Society for Human Resource Management reduced pay in the past six months, a threefold increase from earlier this year. It is no longer implausible to imagine nominal wages starting to decline on a nationwide basis.

The Employment Cost Index is already rising at its slowest rate since the early 1980s. Wage deflation would make it even harder for Americans to repay the $10.5 trillion of mortgage debt they hold or the $2.5 trillion of consumer credit.

Martha Olney, a professor at Berkeley, envisages disproportionate cuts in spending if wages dip. “For households that are paying 60 percent of their income in mortgage and credit payments a 10 percent pay cut does not mean a 10 percent fall in disposable income,” she says. “It’s a 25 percent fall.” This is the danger of leverage.

Even under a rosy scenario it could take years for American consumers to repair their finances. If the savings rate rises to 8 percent of disposable income - about $860 billion a year - it will now take four years for debt to return to its 2002 level. This steady drain alone is equivalent to almost 10 percent of consumer spending.

After such a substantial loss of wealth. Americans will be pressed to be even more frugal. Along the way American will be hyper-sensitive to any jolts from weaker than expected employment, house prices or financial markets.

Consumer spending may not merely stagnate as most economists expect. It could yet decline more sharply. And like the banks, consumers will almost certainly need more support from the central bank and government before this economic malaise is over.

If you asked Mark Andreessen, who sits on the Facebook board, the answer would be advertising, Advertising, Advertising!

And considering that he’s the founder of the world’s first Web browser company, Netscape, he probably has some idea what he’s talking about.

“This calendar year,” Andreessen told Reuters in an interview, “they’ll do over $500 million.” And really, that isn’t bad for an up-and-coming business. Not bad at all. But, he believes, just wait until the social networking site starts pushing advertisements more aggressively. Because that’s when revenue will climb sky high.

If you remember, on Monday, June 29, 2009, I wrote another blog about Facebook, detailing the new advertising scheme they’ve begun to implement. And while the board and management are holding back on letting that beast have its head until they get more conclusive results, with over 225 million users, it does have the potential to do exactly as Andreeson brags.

Don’t expect them to make any drastic changes just yet though. Because they want to build up the site even more first. Still concerned mostly about making it user-friendly and enticing to even the most ardent Facebook nay-sayers, they’ll worry about raking in the big bucks later.

Maybe when they start to, they’ll consider an IPO, but for now, they’ll stay private. And don’t expect that to change for at least a few more years according to Facebook Chief Executive Mark Zuckerberg just a few months ago.

So investors drooling over the burgeoning company will just have to be patient a little while longer. In the meantime, check out the publicly traded companies that The Xcelerated Profits Report is digging up right now. There’s no better time to get involves than now…

Monday, July 06, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research

Since the Obama administration took office in January, we’ve seen hundreds of billions pumped into the economy and the U.S. budget deficit now forecast to top the one trillion-dollar mark in the coming years.

Many believe it’s only a matter of time before we also see much higher inflation - perhaps even hyper-inflation.

That prospect has kept the gold bugs banging the drum to buy the metal, with the television and radio cluttered with ads that tout the benefit of doing so.

Last week, Lou Basenese noted the numerous reasons why the price of gold should be moving higher - but countered with the reasons why the price has continued to languish around $935.

Today, I’m going to look at another important factor that drives gold prices…

The Dollar-Gold-Inflation Relationship

While the recent rash of government spending hasn’t propelled gold prices to new highs, it has contributed to a decline in U.S. dollar.

Having reached a hit 89.70 less than two months after President Obama took office, the Dollar Index has since pulled back to around the 80.00 level. It could easily be lower, but because it’s measured against a basket of other currencies, the price is relative.

For example, the euro makes up about 60% of the Dollar Index weighting, since there are 16 nations using Europe’s single currency. And because Europe is also battling fiscal problems, in addition to Japan and Britain (whose currencies are also weighed against the dollar), the greenback has held its ground.

Most of the time, a weaker dollar will cause gold prices to rise, while a stronger dollar usually sees gold decline.

Add in the prospect of inflation (or hyper-inflation) at some point and the scene is set for gold to potentially make new, all-time highs.

Except we’re not even close to that point yet. Inflation is nowhere to be found - as evidenced by the Consumer Price Index falling by 1.3% in the 12 months through May. That was the largest drop in 50 years.

So how do we play gold in the short-term?

Don’t Blindly Follow The Crowd Into Gold

The main reason why the gold market concerns me at the moment is that despite almost everyone being bullish, the metal hasn’t been able to set new highs.

The long side is crowded with bulls, just like the technology sector was back in 1999. And we all know how that turned out.

That said, the gold market is much different than the tech sector. I believe every investor should have some gold or another precious metal in his or her portfolio… but there’s a better way to do it than by simply buying it outright at the moment.

The easiest way to do so is by following this ratio…

Use The Gold/Silver Ratio To Make Your Gold And Silver Purchases

In the selloff that began in March 2008, gold prices fell about 34% from high to low. By contrast, silver prices fell 60%.

This relationship is important because by the time the market set lows in October 2008, the gold/silver ratio (how many ounces of silver it takes to buy an ounce of gold) was trading at 81:1 - an extremely high level.

A ratio of 80:1 is considered high, while and 40:1 is considered low.

From the October lows to the recent highs, the gold/silver ratio has corrected itself, with silver more than doubling (and making new recovery highs in June), while gold has risen just 49%. However, the ratio remains around 69:1.

Here’s how to use the gold/silver ratio to make savvy metals purchases…

How The Gold/Silver Ratio Works

Investors who always keep a percentage of their assets in precious metals should keep a close eye on the gold/silver ratio.

Having a “ratio” position is a strategy that you want to adhere to all the time because it’s such a dependable trade and carries less risk than just being long, or short on the metals.

It works by basically timing your gold and silver purchases according to the ratio. For example, when the ratio is relatively high (as it is now, at 69:1), we swap gold for silver. When the ratio is relatively low, we buy back into gold.

So right now, the 69:1 ratio is too high to buy gold. I’m looking to make my next swap from silver back into gold when the ratio drops to around 40:1.

Personally, each time I cycle through a complete swap - gold to silver and back to gold again - I increase the value of the trade and hold more ounces of gold or silver than I started with.

Go The ETF Route With The Gold/Silver Ratio

If you don’t always have a percentage of your portfolio in precious metals, you can simply play the “ratio” using the SPDR Gold Shares (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV).

When the ratio is high, you can short GLD while buying SLV, using the same dollar amount for both positions. When the ratio approaches 40:1, just reverse the positions.

Jim Stanton

Editor, The 1-2-3 Trader

P.S. If you’re looking to buy silver right now, it’s about 40% below its 2008 high and approaching a critical area around the $12.90 level.

As you can see on the chart below, the trendline off the October 2008 lows comes in around $12.90, with the 50-day and 200-day moving averages located in the same area.

• A break below $12.92 will set up a weekly sell signal.

• If a weekly sell signal isn’t triggered and silver can test and hold the $12.90, it could represent a good, low-risk buying area.

“The important levels to watch early in the week are last month’s lows, which were reached around June 24 and are the higher support numbers posted below. In early pre-market trading, the Dow and S&P 500 futures have traded below their June lows while the Nasdaq 100 and smaller cap futures have not. The futures have rallied off their worst levels but are still below fair value.

“Unless something strange happens prior to 9:30, the stock futures will gap down on the open and some may trade below the June lows. As I’ve mentioned before, at times these gap-down openings can create a “false” low and they could reverse back up, especially if the NASDAQ and smaller cap indexes stay above their June lows.

“However, the three major European indexes all opened below their June lows and so far, have not shown signs of a reversal. They may be waiting on how the US indexes react after the open so we’ll just have to wait and see how the first hour or so of trading unfolds.”

And now that the first hour of trading has occurred? Well, as you can see, they’re squarely down, but not down anywhere far enough that they can’t recover later on in the day.

It appears that investors are feeling sluggish and unmotivated after the long, lazy weekend. Might they wake up after a cup or two of caffeine?

Maybe, but we’ll just have to wait and see.

Monday, July 06, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research

Editor’s Note: Alexander Green returns as guest columnist today to show you a powerful strategy that zeroes in on companies with double-digit profit margins and soaring share prices. Having used this proven momentum strategy for several years, Alex shows you how to find these market-thrashing stocks - even while the market continues to struggle. Alex is Investment Director of The Oxford Club and an editor at Investment U. We’ll continue to bring you the IU team’s investment insights over the coming weeks, as we expand our market coverage.
Martin Denholm, Managing Editor, Smart Profits Report

Forget What The Media Say… Opportunities Abound

The investment landscape isn’t pretty right now.

The federal deficit is ballooning. Credit is tight. Home prices are still falling. The dollar is weak. Fuel prices have jumped. The economy is in the tank. And last year, the stock market experienced its worst year since 1931.

Who in his right mind would buy stocks now?

I would.

In fact, it’s only because so many investors keep repeating the mantra in the paragraph above - as the national media does endlessly - that they don’t.

And when they realize how many opportunities they’ve missed, they’re really going to regret it.

So do yourself a favor and turn off all the talking heads on TV. They don’t know any more than you do about how the economy will perform in the second half of 2009… where interest rates will go… or where the S&P 500 will finish the year.

Fortunately, you don’t have to know. And you don’t have to guess, either. Here’s why…

Focus On Businesses, Not The Market

If you want to make money in the stock market, stop thinking about the economy and the market… and start thinking about business.

Not just any business, of course …

Think about businesses that have tens of thousands of new customers beating a path to their door. Businesses that are reporting record sales and profits. That have huge order backlogs. That have double-digit profit margins. Businesses that are growing so fast, they don’t know if they can keep up with demand.

In this economy, of course, businesses like these are a rarity. Most businesses are doing lousy. For instance, this is a terrible time to be a banker… a steelmaker… a homebuilder… an auto manufacturer… or retail merchandiser.

But there are other businesses out there that are enjoying the best of times. Let me give you an example…

Trumping The Recession

I’ve been recommending a small, but rapidly growing company with great earnings momentum and double-digit profit margins. It has more than 17 million customers in 120 countries.

Sure, it has competition. But as its CEO says, “We’re way ahead of everyone else.”

The recent financial collapse has only hastened its business. The company is receiving more than 43,000 new orders a day. In fact, it picked up more than 1.5 million new customers during the last quarter.

The firm has posted earnings growth of 24% or better in every quarter since the recession began in December 2007. It has the technology, the customer base, the market niche, and the profit margins to really blast off in the months ahead.

In fact, look at the chart below…

While the market did a belly flop last fall - and is also down for 2009 - this stock is up more than 230% over the past seven months alone.

So why aren’t you hearing about stocks like this?

Follow The Momentum To Profits

Because the media thrives on bad news, not good. It specializes in heartbreak and cynicism.

I, on the other hand, spend my days screening for companies just like the one I just mentioned. It’s called momentum investing.

It requires you to forget about the economy, “most businesses” and the Dow Jones Industrial Average.

Instead, you focus solely on companies that are knocking the cover off the ball - and likely to report sharply higher profits in the weeks ahead.

Incidentally, when you’re fortunate enough to uncover companies like this, there’s one thing you really ought to do: Buy them.

Good investing,

Alexander Green

Editor’s Note: Alex’s subscribers have known about the stock he mentioned above for a while now - plus a number of other double-digit growth companies. If you’d like to get all Alex’s latest picks, take a look at his Momentum Alert.

This morning, when the unemployment figures were first announced, I took issue with statements being made by the AP, claiming that executives were letting their employees go out of caution. That’s an erroneous and dangerous claim to make though.

It’s dangerous because misdiagnoses usually are. Let’s face it: The economy is sick. So how are we going to make it better if we keep giving it the wrong medical readings?

And it is wrong. Both the facts and common sense point to continuing fear among consumers, which is holding them back from making purchases outside of grocery runs and Wal-Mart Stores Inc. (NYSE: WMT) stops. That’s why General Mills Inc. (NYSE: GIS) reported such an excellent quarter, but high-end retailers such as Macy’s Inc. (NYSE: M), Tiffany & Co. (NYSE: TIF), and even the middle class-geared J.C. Penney Company Inc. (NYSE: JCP) have shown poor sales so far this year.

That’s why I wasn’t surprised when both Walgreen and Rite Aid reported a serious drop in sales of such non-necessities as sunglasses, lawn furniture, and other summer goods. For that matter, you shouldn’t be surprised either.

Fortunately for both of them, drugstores such as those two naturally get two thirds of their revenue from prescription sales. So neither of them slid as much as you may think. In fact, even while both of their stock took tumbles today - then again whose didn’t? - Walgreen had some positive data to report, with same-store sales rising 3.4% last month. Rite Aid didn’t fare nearly as well, but its same-store sales only fell by 0.6%.

Thursday, July 02, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research

Lessons for Apple in Mays, Madoff

by The Investment U Research Team

In many ways Steve Jobs return to Apple (Nasdaq: AAPL) was overshadowed by the demise of Billy Mays and the Bernie Madoff’s sentencing.

However, there are lessons for Apple in both of these men.

Billy Mays tragic loss should give iPhone and iPod creators pause to consider what would happen if the company did lose Steve Jobs. While Tim Cook has performed strongly by many analysts accounts, he does not bring true star leadership power that Jobs does.

Apple should start addressing this now. Even Berkshire Hathaway’s (NYSE: BRK.A) Warren Buffett has Charlie Munger, and I’m sure a host of recorded and written statements of contingency plans in the meantime.

The other lesson for Apple is from Bernie Madoff. The New York Times was a little blasé when they mentioned Jobs return, “With Mr. Jobs’ return widely expected, Wall Street’s reaction to the news on Monday was muted.”

The reaction may have been muted, and there may be no change in stock price, but what wasn’t mentioned was the innumerable lawsuits that are being prepared right now on behalf of dissonant shareholders.

You see while Apple is famous for its secrecy, this case of protection may have gone too far. A CEO’s life, and especially one as pivotal and influential as Job’s, is a material fact for a company.

Omitting the true state of Jobs’ health is akin to forgetting to mention that your brand new product has production flaws. The lesson from Bernie for Apple should be clear: do not lie, cheat or steal, or there will be consequences.

The real question for Apple is whether the consequences will affect the stock price…

Sure enough, as I stared at the YahooFinance homepage, 9:30 a.m. rolled around and within the next ten seconds, the Dow’s 55-point gain of yesterday shot down to a 27.36 loss. The Nasdaq and S&P quickly followed with drops of their own.

By 9:32 a.m., the Dow had fallen by 98.40 points, and another 6 minutes later it had eaten through an additional 36.2.

It’s understandable considering the latest numbers that just came in today. Reducing the workforce by a larger-than-expected 467,000 jobs in June, employers did what they felt they had to do in order to stay afloat. And investors are now doing the same, as we hit a 26-year high in our unemployment rate.

The AP put it this way: “The Labor Department report, released Thursday, showed that even as the recession flashes signs of easing, companies likely will want to keep a lid on costs and be wary of hiring until they feel certain the economy is on solid ground.”

The problem with that statement is that it implies employers are acting out of fear instead of necessity.

Things may or may not be looking up since January - and I’m going to side with Warren Buffet and say that they’re not - but that’s beside the point at the moment. What does matter right here and now is that consumers don’t have the confidence to go back to “life as usual” just yet. They’re still saving, which means they’re not spending, at least not the way they used to.

And in a consumer-driven economy, we’re not going to see any real improvement until they do.

Thursday, July 02, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research

Almost half of all American adults no longer believe that home ownership is a realistic way to build wealth.

That’s according to Gail Cunningham of the National Foundation for Credit Counseling, quoted in Barron’s this week.

Given that home ownership is a cornerstone in almost every wealth-building plan, this is astonishing. Even if the days of selling a house for an enormous profit are over, building equity in a home beats the pants off paying rent.

Of course, home ownership is not always better than renting, but in most cases, it still is. And even if home prices are flat, building a little bit of equity makes it worth the cost of ownership, especially when you add in the tax breaks associated with owning a home.

Home Ownership Statistics Are Disconcerting

Trouble is, some of the statistics about home ownership are frightening:

• One-third of those surveyed don’t believe they’ll ever be able to afford a home.

• 42% of those who once purchased a home, but no longer own it, don’t think they’ll ever be able to afford to buy another one.

In Tuesday’s column, Karim Rahemtulla detailed the problem that the large number of short-sales are causing in the housing market.

Today, I’m going to give a couple of tips to both house-hunters looking for bargains and investors looking to “buy on fear.”

Real Estate - Buying When There’s Blood in The Streets

There’s an old Wall Street axiom that says you should “buy when there’s blood in the streets.” And throughout the real estate market, there is clearly blood in the streets.

In some markets like in Oakland, California, where prices have dropped 32% in the past year and 75% of first quarter home sales were distressed sales, there’s not only blood in the streets, there’s a virtual river of the stuff flowing down Broadway & 17^th St.

But if you’re considering buying a property - either as a primary residence, investment property, or vacation home - now is probably a good time to start looking. Desirable vacation and retirement spots such as Southern California, Miami and Naples, Florida, Phoenix, Arizona, and Las Vegas, Nevada have suffered a particularly bad beating and likely contain many desperate sellers and foreclosed properties.

And even in markets that have held up relatively well compared with the rest of the nation, you can likely find some bargains…

Home Ownership: Use Desperation To Your Advantage

Take Asheville, North Carolina, for example…

The average sales price of a home there is only off by about 15% from the peak, but homes are now sitting on the market for an average of 144 days, up from 94 days. The number of houses sold in 2009 is down by one-third from last year.

Even Austin, Texas, which has weathered the real estate storm better than most, has seen the average price of a single-family home decline by just 3% from a year ago, but volume has slipped 25%.

As Karim suggested on Tuesday, the best strategy may be to find a desperate seller who is forced to compete with short-sales and the foreclosures. Plus, you’re likely to get the deal wrapped up in a much more timely fashion than if you’re dealing with the banks’ lawyers. Sure, you may find bargains on foreclosed properties and short-sales, but the process will take much longer.

For those of you not looking to buy a house but still like the idea of buying fear, consider this option…

Go Contrarian On Commercial Real Estate

Many experts believe commercial real estate will be the next big shoe to drop. And my colleague at Investment U, Dave Fessler, recently published some alarming statistics about the upcoming commercial real estate fallout. Take a look:

• During the first quarter, businesses vacated 8.7 million square feet of retail space. Not only was that a 10-year high, it compares with 8.6 million square feet vacated for all of 2008.

• Vacancy rates at regional malls, strip malls, and neighborhood centers are increasing at the highest rate in 30 years.

But if you’re looking for an uber-contrarian way to play this commercial real estate trend, consider REITs (Real Estate Investment Trusts) that specialize in commercial property.

Take a look at Kilroy Realty Corp. (NYSE: KRC). Founded in 1947, it develops and manages office and commercial property in Southern California - one of the hardest hit markets in the country.

The firm just cut its dividend to $1.40 per year, but that still equates to a beefy 6.9% yield. It’s cash flow positive and has a healthy return-on-equity.

Currently trading around $21 per share, it’s down considerably from its high of $88 back in February 2007.

And while it’s not always easy to buy when everyone else is selling, history has proven time and again that it is precisely those who are able to buy in scary times are the ones who make that make the most money.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld

I’m going to say it’s probably a mix of the two.

And regardless, the proof is in that for whatever reason, General Mills is still on the must-have list for grocery store runs. After all, if you have to cut down on those no-hassle but expensive meals out on the town and you have to slum it by actually making a meal yourself, wouldn’t you want something that involved as little hassle as possible?

Unless you’re a culinary artist or have too much time on your hands, I’m going to guess that the answer is yes.

Enter General Mills, with Green Giant frozen vegetables, Totino’s, Pillsbury dough, Bisquick, Betty Crocker, Hamburger Helper, etc. etc. etc… and of course a little Haagen-Daz for good measure. Hey, a little ice cream never hurt anybody, right?

If you’ve been stocking up on any of those recently like millions of other Americans, you’ve helped General Mills double their fourth-quarter profits, beating even the best of expectations. The food manufacturer managed to pull in $358.8 million from March through May, compared to the $185.2 million they saw same time last year. If we’re talking about profits per share, that’s the difference between $0.53 and $1.07, an obvious step upward.

Anybody who invested in General Mills is probably out celebrating tonight, while the rest of us poor consumers continue slipping in an extra container of Haagen-Daz into our grocery carts.

Wednesday, July 01, 2009 - by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research