Lazaridis and Balsille have received intensifying shareholder backlash for failing to effectively compete in the smartphone market, especially against Apple Inc.'s iPhone. RIM's stock fell 75% last year as Apple and Google Inc. (Nasdaq: GOOG) dominated the industry. RIM's share of the global smartphone market sank to 11% in the third quarter from 15% a year earlier.

Heins has been RIM's chief operating officer since 2008. He's said there's no need for a drastic change of plans to get RIM back on track - although industry consensus says otherwise. He's also not known for innovation - a reason the leadership replacement might not do any good for flailing RIM.

"Heins is a product execution guy, he's not a visionary," Ehud Gelblum, an analyst with Morgan Stanley (NYSE: MS), told Bloomberg News. "Heins has to give people a reason why they need a BlackBerry. It's going to be very difficult for him."

Research in Motion stock fell 8.58% Monday to close at $15.54.

Apple Inc. (Nasdaq: AAPL) to post monster quarter: Apple is gearing up for what could be a blowout quarter. The tech giant reports earnings Tuesday, Jan. 24 and analysts' estimate earnings per share of $10.08 on revenue of about $38.8 billion.

Apple last quarter missed analysts' expectations for the first time since 2004, sending the stock plunging in its biggest one-day decline ever.

Since last quarter's earnings were released, Apple product sales received a boost from the iPhone 4S, which hit stores in mid-October and sold more than 4 million units the first weekend. The iPad 2 sales, boosted by holiday shopping, also are expected to push earnings much higher than last quarter.

Look for AAPL to jump after the report. The stock has risen in after-hours trading 70% of the time following its earnings release, according to market researcher Birinyi Associates.

Apple stock climbed 1.69% Monday to close at $427.42. Wall Street has a one-year price target of about $513 - a 20% premium to Monday's close.

New kid on the block: In a busy week for IPOs, Guidewire Software Inc. is to begin trading Wednesday on the New York Stock Exchange under the symbol "GWRE."

Guidewire develops software for property-and-casualty insurers. It boasts a top selling product, ClaimCenter software, which was the industry's most widely used web-based claims system as of January 2011.

In the previous quarter ended Oct. 31 - the company's 2012 first fiscal quarter - revenue rose 51% and net income soared 152%.

But investors should be cautious about jumping on Guidewire. The company expects revenue to be down or flat for the second and third fiscal quarters compared to last. It also has failed to make much money from its cloud capabilities, and now faces increasing competition in the cloud market from aggressive competitor Accenture Plc (NYSE: ACN).

Guidewire IPO price range is $10 - $12. It hopes to raise $90 million.

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For its part, the United States plans to land on asteroids as early as 2016 using a robotic arm to scoop up samples that the spacecraft will bring home to earth.

We also will send a manned mission to Mars, where the plan is to build at least some type of base. It's why NASA launched a new robotic vehicle last November expected to land on Mars in August. Roughly the size of an SUV, the robot has 10 "eyes," a six-foot robotic arm, and is nuclear powered.

Riding Robots in The New Space Race

At the same time, we have a new generation of space entrepreneurs. That's why I keep track of Microsoft Corp. (Nasdaq: MSFT) co-founder Paul Allen and Sir Richard Branson of Virgin Galactic and their space tourism companies.

Don't get me wrong. While I find the prospects for commercial space travel exciting, my experience tells me investors will have a much better chance to make money on robotics.

First of all...Here on earth, airlines struggle to break even. Several have gone bankrupt.

So if an airline can't cope with the high costs of jet fuel, how can a company launching rockets for a limited number of tourists be any more profitable?... It just doesn't make sense.

As for robots, these businesses manage to touch the entire technology supply chain. From software to artificial intelligence to sensors to chips, robots employ all of these things.

So, even if we can't find a robot company that justifies a direct investment, we will find numerous opportunities with key suppliers. That's why I think the future of space travel is actually going to ride on robotics.

But don't take my word for it...

Just ask the senior execs at Google Inc. (Nasdaq: GOOG). They obviously believe in the future of spacebots.

In fact, Google will award $30 million to the first team that can land a robotic vehicle on the moon.

To take home the prize, the bot must travel more than 1,600 feet on the surface, then send hi-def images and video back to earth.

It's called the Lunar X Prize, and twenty-six privately funded teams are now vying for the reward. And don't think for a minute this is some kind of gimmick.

After all, it was the Ansari X Prize that provided a huge amount of support for the New Space Race and upcoming commercial travel. And that prize was worth only $10 million!

And remember, when it comes to actually working in hazardous environments like other planets, nothing beats a bot. It doesn't need oxygen, food, or coffee breaks. It doesn't get homesick for its loved ones.

Also consider that new technology promises to keep robots steeped in the latest tech changes, greatly expanding their life spans.

For instance, reprogrammable chips will provide instant upgrades so the robotic hardware lasts longer. We'll beam software patches via satellite so robot "brains" remain rich in new knowledge.

And robots will give us incredible economies of scale...

In the near future, we'll have automated factories in space or on other planets building the robots needed for exploration, experiments, mining, and helping humans.

I recently told you how an arm of the Pentagon known as DARPA wants to recycle dead satellites worth some $300 billion. To do so, it also is pushing advanced robotics.

Thus, the federal government and private industry agree on one key fact about the future - to conquer outer space, they need to invest heavily in robotics.

So, keep your eye on space technology. Eventually, it will earn robotics investors rich returns.

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The Best of the New Dividend Aristocrats

It's Illinois Tool Works Inc. (NYSE: ITW).

Illinois Tool Works manufactures a very broad range of industrial equipment. About 40% of its revenue comes from its power systems, electronics, and transportation-related products divisions.

Revenue climbed 16% to $4.6 billion for the third-quarter ending Sep. 30, 2011. Net income rose 20% to $507.6 million ($1.04 per share). (The company is due to report fourth-quarter earnings Jan. 31).

In 2010-11, organic sales growth was a healthy 10%-11% annually.

"That kind of growth in organic sales is a very good number when you're in the realm of mature products - it suggests a solid upward trend in earnings," said Hutchinson.

Illinois Tool Works also has another key component of successful companies: emerging market exposure. Half of its revenue comes from outside the United States, with substantial operations in China and India, so the company is geographically diversified with a good presence in growth markets. Organic revenue in China grew 16.2% in the third quarter from the previous year.

The stock has a P/E ratio of only 12.9, and a price/earnings/growth (PEG) ratio of 0.95. Its return on equity is an attractive 21% and its balance sheet is in decent shape with debt less than tangible net worth.

Its dividend yield is 2.8% and is more than twice covered, meaning earnings per share are more than twice the dividends per share.

"A lot of high-yield companies pay out a high percentage of their earnings, and hence the dividend is vulnerable," noted Hutchinson. "Illinois Tool's dividend isn't, and indeed has room to grow further as it has for 25 years."

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Why the EFSF Downgrade Looms Large

It's my expectation that the downgrade of the EFSF will have a larger overall impact than the individual ratings downgrades that occurred on Friday the 13th.

The EFSF was supposed to provide $440 billion in emergency funding to states in need of liquidity but were unable to access the capital markets at prices they could pay.

While no one was willing to publicly call the EFSF a bad bank, because it wasn't issued a banking charter, it was set up as a special investment vehicle (SIV) to handle the arbitrage between AAA bonds in Europe and A-like rates demanded by market participants.

In simple terms, the EFSF was expected to be able to issue cheap debt, which it would use to buy up sovereign debt at fixed rates below what the individual states could get on their own.

The problem is the downgrade will increase the cost of issuing debt at the EFSF, which will mean that its main reason for existing will be nullified by the market. In other words, the debt it issues will be less cheap.

As a non-sovereign, non-bank investment vehicle with less than a AAA rating, I believe the EFSF will find a serious lack of interest in its issuing debt.

In fact, the lack of demand for its debt - even with a AAA rating - was already a joke among market professionals.

Now with a lack of AAA support left in Europe to cover its guarantee commitments, I don't believe the EFSF will ever play a major role in stabilizing Europe.

Europe's Only Real Life Line

The S&P said in its announcement that it would consider upgrading the EFSF to AAA again if the national commitments were increased.

However, this upgrade path back to AAA was quickly damaged by Wolfgang Schaeuble, the finance minister of Germany, who made it very clear Germany did not plan on adding to its EFSF commitments.

"It is sufficient," Schaeuble told Deutschland Radio. "The guarantee sum that we have is sufficient by far for what the EFSF has to do in coming months."

That means Europe's only real lifeline now is the International Monetary Fund (IMF), which will supersize the capital base and bail out the whole continent when the needed bank recapitalizations happen.

While the EFSF downgrade has garnered a lot of near-term economic focus, the reality now is that Europe needs to work on its Union structure if it plans on regaining a path towards organic growth.

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Take natural gas, for example, which posted outstanding increases in 2002 and 2005, but has been a cellar-dweller for the last four years as a result of overabundant supply and softening demand. The industry is also still trying to digest breakthrough technology that has opened the door to vast shale deposits at a much lower cost.

On the other hand, oil finished in the top half of the commodity basket six out of the past 10 years. No stranger to volatile price swings, oil possesses much more attractive fundamentals as we continually see restricted supply coupled with rising demand.

Then there is gold...

After 11 consecutive years of gains, some are questioning whether gold can keep its winning streak alive in 2012. One of those skeptics is CNBC's "Street Signs" co-host Brian Sullivan.

However, during a recent appearance on the show, I explained how I believe the Fear Trade and Love Trade will continue to fortify gold prices at historically high levels.

One reason the Fear Trade will continue is the ever-rising government debt across numerous developed countries.

During our Outlook 2012 webcast, John Mauldin kidded me that the Mayans were not astrologers predicting the end of the world, but economists predicting the end of Europe. Whereas John believes the U.S. has wiggle room to decide on how to deal with deficits and debt, Europe and Japan are running out of time.

The situation is quite somber when you consider how much debt Europe, Japan and U.S. owes this year alone, says global macro research provider Greg Weldon.

In his preview of 2012, Weldon says that the maturing principal and interest on U.S. Treasury debt due this year totals just under $3 trillion. Austria, Belgium, France, Germany, Italy, Portugal and Spain together face nearly $2 trillion in principal and interest payments. Japan, is the leader in the clubhouse, owing just over $3 trillion in 2012.

With the combined debt for these developed countries totaling nearly $8 trillion, the interest payments alone dwarf the total gross domestic product (GDP) of many countries in the world.



Last week, Germany sold a five-year government note for less than 1%, the lowest interest rate on record. Bids for the low-yielding debt were three times more than the amount sold, even as the consumer price index stands at more than 2% year-over-year.

This means that investors have so few acceptable safe havens they are willing to accept negative real rates of returns.

This is good news for gold as a safe haven alternative against depreciating currencies such as the euro, the yen and the U.S. dollar.

The overwhelming debt burden in developed countries translates to an expected slowdown in imports from the emerging world.

However, the grandest of those, China, likely won't be as affected as much as some people assume. This is "the biggest misconception" about the country's economy, says CLSA's Andy Rothman. Exports only play a supporting role for the Chinese economy. The world's second-largest economy is actually largely driven by domestic consumption from a population more than 1 billion strong with more padding in their wallets.

Andy says 10 years of tremendous income growth and little household debt, make
China the "world's best consumption story, for everything from instant noodles to luxury cars" in 2012.

According to December Chinese trade figures, month-over-month and year-over-year imports of aluminum and copper increased significantly. This may be a result of China restocking ahead of Chinese New Year, but M2 money supply growth rapidly rose in recent months, a sign the government is attempting to reaccelerate the economy.

Also, the urban labor market has been robust over the past two years, with an annual change just below 5%-a record high over the past 15 years.



Along with rising urban employment, income growth has been tremendous as well.

CLSA says that last year was "the eleventh consecutive year of 7%-plus real urban income growth," with disposable incomes rising 152% over the past decade.

Investors shouldn't expect China's growth to be as robust as it's been, as the country's fixed asset investment growth drops below the 25% year-over-year pace of the last nine years, says CLSA. China's 12th Five-Year Plan has less infrastructure spending compared to the 11th Five-Year plan. Transport and rail spending is also expected to drop, with only water and environmental protection spending growth rising.

As shown in the BCA chart above, GDP growth has declined below 10%, but the growth is currently not the lowest we've seen in recent years. CLSA believes that China will prevent GDP growth from slipping below 8.5% for the full year, as "Beijing has the fiscal resources and political will to quickly implement a much larger stimulus."

Judging by the record number of articles mentioning a hard landing in China in late 2011, investor sentiment has swung from euphoria to excessive pessimism, according to BCA Research. Last fall, more than 1,000 articles discussed the risk of a "China Crash."



As I've mentioned before, contrarians view extremely bearish sentiment as a potential attractive entry point. BCA believes the pessimism has been priced in, as technical indicators as well as valuations for domestic and investable markets appear "deeply depressed."

What will happen over the next 10 years? I believe the supercycle of growth across emerging markets will continue with rising urbanization and income rates.

This bodes well for commodities, especially copper, coal, oil and gold, and we'll continue to focus on companies that will benefit the most from these much-needed resources.

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Gold Price Forecast: Expect Gold to Hit $2200/oz. in 2012

Today, gold price predictions like those are becoming a lot more commonplace. For instance, Goldman Sachs Group Inc. (NYSE: GS) recently set its 2012 gold target at $1,940/oz, while Morgan Stanley (NYSE: MS) now expects gold to hit $2,200.

But what's more important is to actually understand the reasons why market experts believe gold prices will continue to rise.

In fact, to support my earlier $5,000 price forecast for gold, I maintained that one of the underlying reasons was that we would eventually face a currency crisis.

At the time I wrote:

A Currency Crisis is Looming: The "PIGS" - Portugal, Italy, Greece and Spain (or "PIIGS," if you want to include Ireland) - aren't in very good fiscal shape. And they aren't alone. Iceland has already gone over the edge. The United States, the United Kingdom, and countless other economies are struggling. And that reality has ignited a crisis of confidence about fiat currencies in the minds of many investors. Money is nothing more than paper and ink, backed by the full faith and credit of the issuer. When investors find that their faith in the issuer is shaken, the value of that currency erodes. Additional sovereign-debt downgrades from ratings agencies are but one potential trigger of a currency crisis. Under such conditions, gold - the ultimate store of value, and the oldest existing form of money on earth - will soar as investors seek to protect their purchasing power.

That was two years ago...

Today, the recent downgrades of the sovereign debt ratings of France, Italy, Spain, Portugal, Cyprus, Austria, Malta, Slovakia and Slovenia by Standard and Poor's is a confirmation of those very same fears - namely, that Europe's fiscal burdens are not about to lighten.

Inevitably, that has brought about a knock-on downgrade by S&P of the Eurozone's European Financial Stability Facility (EFSF), Europe's own rescue fund.

So now we're dealing with news that the International Monetary Fund (IMF) is looking to boost its bailout fund to a whopping $1 trillion.

And get this...they're reportedly asking emerging markets - China, Brazil, Russia, India, along with oil exporting nations - to bail out the developed world.

Isn't that ironic.

European Black Swan: Potentially a $22 Trillion Problem

For the politicians, Europe is a potential fiscal nuclear device that needs to be disarmed.

According to a recent article by Al Field posted at www.24hgold.com, if just 10% of euro interest rate derivatives produce losses, it could cost the world banking system $22 trillion. That is enough to effectively bankrupt it.

This is one black swan that could well make a crash landing... and soon. You can bet none of this has been lost on the U.S. Federal Reserve either.

That's why there is increasing talk that the Fed will ride to the rescue with its third quantitative easing program, or QE 3 - something I've been saying to expect for quite a while.

And now, a major French bank has joined in on those same predictions. Société Générale SA (PINK: SCGLY) (SocGen) has indicated the Fed is will soon announce QE 3. But it doesn't end there.

They even tell us when this move towards more quantitative easing is likely.

According to SocGen, QE 3 is headed our way this coming March, focused on mortgage backed securities (MBS) purchases on the order of $600 billion over six to eight months. That would be great timing to match up with the pending presidential election. Markets will get a tremendous boost, bolstering support for Obama in the process.

SocGen also tells us what we should buy to profit from this.

They expect the euro and U.S. 10-year Treasuries to take a hit. But they do see U.S. equities, European equities, oil, and especially gold benefiting from this new round of fiat money printing.



I'm in complete agreement on this, especially when it comes to gold.

In fact, just last month, I predicted that gold would reach $2,200/oz in 2012. That's about 33% higher than its current level near $1,650/oz.

Do the fundamentals support it? Well let's check our reasoning.

Is the Fed likely to bring on QE 3? .... Will QE 3 work and for how long?

Is the Fed likely to bring on a QE 4 or a QE 5 in the future?... Where will it all end?

What's more, is Europe likely to default outright, will austerity work, or are more printed money bailouts in store?

Keep in mind, each of these massive money-printing campaigns becomes less effective than the previous ones, so the bailouts tend to grow exponentially.

Of course, in my view defaults would be the right way to go. After all, the lenders who took the risk to lend to insolvent governments would be able to absorb quick losses. The pain would be high, but relatively short.

But I believe there's only a minuscule risk that any government is willing to take the fall for that same solution.

That's why the probabilities of ongoing and ever-increasing bailouts are still very high. And they'll likely continue for some time.

But we aren't helpless. Remember, gold tends to perform well in such an environment. The past decade of annual gains for gold seems to be proof of that.

Take a look at how consistently gold has performed since 2001:

• 2001: +1.96%
• 2002: +24.8%
• 2003: +19.5%
• 2004: +5.35%
• 2005: +18.36%
• 2006: +22.95%
• 2007: +31.34%
• 2008: +5.14%
• 2009: +24.3%
• 2010: +29.8%
• 2011: +14.2%

I know of no other major asset that has turned in this kind of performance...ever. This is what a stealth bull market looks like, one that I fully expect will keep powering on.

And the central banks of the world seem happy to keep feeding it.

In fact, none of the fundamentals supporting gold have gone away. Instead, they've only become even more entrenched.

So if you don't own gold yet, what exactly are you waiting for?

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Tech Developments Killed Eastman Kodak Co. (NYSE: EK)

As film cameras headed toward extinction, Eastman Kodak's revenue plunged without a substantial product line that could compete with the growing trend toward digital photography.

Kodak was actually the first to create the digital camera in 1975, but shelved the model fearing it would derail its profitable film business.

While Kodak was successful at securing patents and developing new technology, it was unable monetize it. Kodak tried to sell more than 1,100 digital-imaging patents to make enough money to shift to a digital-product focus, but failed to reach its goal.

"Basically, a new technology came along and it eliminated the need for their core product; people don't sell film for digital photography," Business Insider Editor Henry Blodget told American Public Media's "Marketplace" program. "People like to say it's that the companies were stupid or they missed something. I think the truth is, that the market changed and they just didn't change quickly enough."

Besides failing to advance, businesses also have to contend with this year's limited growth economic environment and mild consumer spending. These factors make it nearly impossible to pay down debt - meaning a growing number of companies headed for bankruptcy this year.

Companies Headed for Bankruptcy in 2012

While 2011 was a busy year for Chapter 11 filings, 2012 corporate bankruptcies will be double in number and size, according to Fitch Ratings Inc.

Fitch says companies posing the most risk are those with a lot of high-yield and low-grade CCC bonds, as well as middle-market companies valued between $200 million and $1 billion.

"Nobody is going to want to put more money into these companies," Harvey Miller, a bankruptcy partner at the law firm Weil Gotshal & Manges, told CNNMoney. "Hedge funds didn't have a good year so that will play into it too."

Besides mid-cap companies, some big names that have posted losses for several quarters could finally reach their financial breaking point this year. The retail, restaurant, and consumer-products industries will be hit the hardest.

Investors should beware the following companies topping the bankruptcy watchlist for 2012:

Barnes & Noble Inc. (NYSE: BKS): With the fall of rival Borders last year and the company's successful Nook e-reader, you'd think Barnes & Noble would be doing well. The trouble is, it still has to compete with Amazon.com Inc. (Nasdaq: AMZN), which recently introduced a fresh line of Kindle e-readers aimed directly at the Nook. The company's net profit margin in 2011 was -1.06%. Its market cap is down to $695 million, and stock is down 32% in the past year.

"While Barnes & Noble has benefited from deep-pocket investors who have built a major stake in the company, the fundamentals aren't there to support this investment," said Global Macro Trends Specialist Jack Barnes." It is extremely overleveraged, and the company has reached the stage where it's borrowing money to pay high dividends."

Sears Holdings Corp. (Nasdaq: SHLD): Sears announced last month it was closing 100 stores. Its stock lost about 25% in one day after the news broke, and is down 41% over the past year. Its income has slipped for several quarters while its debt pile grows. Sears' third-quarter earnings per share (EPS) were a loss of $3.95. In addition to poor retail performance, Sears also lost money in real estate.

"The bet about Sears has never been about retailing," Money Morning Chief Investment Strategist Keith Fitz-Gerald said earlier this month. "The play here for years has been Sears as a land bank. But real estate is in the toilet and no amount of new merchandising can help offset this."

DineEquity Inc. (NYSE: DIN): While not as synonymous with American business as Kodak or Sears, DineEquity does represent the struggling U.S. food industry. It operates Applebee's Neighborhood Grill and Bar and International House of Pancakes (IHOP). Venerable restaurant chains haven't done well lately, with several going bankrupt during the current economic downturn, including Friendly's, Fuddrucker's and Sbarro. The company has $1.5 billion in debt on its balance sheet, which it refinanced in 2010 hoping to buy time. But its declining revenue is a sign the move didn't work. Its stock has fallen more than 17% in the past six months.

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A leveraged buyout is really nothing more than a financing technique.

Typically, a public company, a division of a public company, or a closely held non-public company is taken "private" by a group of investors who put up some equity to demonstrate they have skin in the game, and who then hypothecate the target company's assets as collateral for debt they pile onto the target company.

Sometimes borrowed money is raised in the junk bond market. Since the acquirers are leveraging the target company's balance sheet by borrowing a lot of money against the company's assets, lenders demand high rates of return knowing the company is being "leveraged."

The borrowed money is then used to pay shareholders, or as is more often the case, to pay off the "mezzanine" lenders who float enough cash for the acquirers to buy the company initially, and whose short-term loans are paid off from the issuance of junk bonds.

Not all the debt is junk. Sometimes debt issues are better quality. It's all a matter of how much leverage is necessary to make the deal happen and to make it profitable for the acquirers.

Once the target is acquired it's up to management, which often includes existing executives who are part of the buyout team, to streamline the company and make it profitable.

Loaded Down With Debt

Since the target company is now buried in debt, expenses are cut as judiciously and quickly as possible.

For instance, maybe the acquired company has too many corporate jets that are a balance sheet drag. Or, maybe they have too many employees that add to expenses.

Usually it means laying off workers, which is what gave leveraged buyouts their bad reputation.

But, that's not all that creates controversy. LBO shops charge the target company all kinds of fees.

There are investment banking fees for doing the deal, financing fees for leveraging the company, and other fees that go directly to the LBO shop.

Sometimes, the company takes on even more debt to pay a dividend to its new owners. That's a way for the LBO shop to get its equity back quickly. So much for skin in the game.

The LBO shops also pay themselves a 2% management fee out of the capital that their backers, investors like pension funds, endowments and high net worth individuals put into them so they can scour the planet for target companies to leverage up and buy.

And, they take at least 20% of the profits they make, too. It's a nice club to be a member of.

But while leveraged buyouts are the bread and butter of private equity shops, they can also dabble in venture capital financing of start-ups and other capital raising and financing opportunities.

Mitt Romney's Bain Capital Problem

Mitt Romney was a founder of Bain Capital, which grew out of Boston-based global management and consulting giant Bain & Co. He ran the LBO shop from 1984 to 1999.

Romney was very successful running Bain Capital and amassed an estimated fortune of over $250 million.

Needless to say, as Romney gets closer to becoming the Republican nominee, his role at Bain and his claim to have created 100,000 jobs are going to be heavily scrutinized.

Now personally, I'm not against leveraged buyouts.

However, I do think it's fair game to question LBOs that end up turning to bankruptcy protection to shed themselves of their pensions (which are often taken over by the taxpayer funded Pension Benefit Guaranty Corporation) so they can re-emerge under the guise of becoming streamlined companies.

This class warfare debate will find fertile ground in the rich rewards bestowed upon LBO kings who claim to create jobs while simultaneously eradicating others through creative destruction.

In the real world, c reative destruction is just part of the natural and organic birth and death cycle of businesses.

But to claim that layering mountains of debt on the shoulders of companies (companies are people too, you know) to pay private equity companies fat fees so they can generate generous returns for themselves and their investors (many of whom are public sector pension plans) seems inordinately lopsided and more destructive than creative.

Not only will Romney be cast in that dark light, he's also going to have to face the added knock that private equity managers' earnings from their operations isn't ordinary income (obviously not based on how many mega-millionaires and billionaires there are in the PE club), but are taxed at the much lower capital gains rate.

Private equity guys are bankers. So, Romney will be the poster child for everything bad that bankers have been blamed for since time immemorial. Not that he's going to be the first or last banker ever to run for the presidency of the United States.

But, given the politically charged atmosphere in Washington and around America, drawing class warfare lines to make the case for political candidates will be front and center this year.

So far, President Obama and the Democrats haven't had to weigh-in for the fight. Republican candidates are doing a good job on their own bashing each other's capitalist credentials and throwing stones from inside their glass house to the dismay of traditionally stalwart pro-business Grand Old Party regulars.

According to the Pew poll, 55% of Republican respondents, 68% of Independent respondents and 73% of Democrat respondents think class conflicts are strong, or very strong.

You can expect that these political lines will only darken as Romney emerges. News and Related Story Links:

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For example, let's say you own 300 shares of stock in Abbott Laboratories (NYSE: ABT), trading this week around $55.70 with an annual dividend of $1.92 a share. That equates to a current yield of 3.45%.

However, you decide that you would like boost your cash flow by writing covered calls.

What you'd do is write three covered calls against your 300 shares, choosing to sell the out-of-the-money $57.50 strike price calls with a May 18, 2012 expiration date.

Early Wednesday, those calls - with just four months of life left - were quoted at $1.00 a share or $100 per 100-share contract. That means selling three of them would put $300 in your account - minus a modest commission of, say, $15.

Thus, you'd be adding roughly $285 to the quarterly dividend of $144 you will receive on your 300 shares of Abbott stock - nearly tripling the amount of income from your position.

So long as Abbott's stock price stays below $57.50 until May 18, you get to keep both the stock and the premium received for selling the calls, as well as collecting the dividend.

And, since you can repeat this strategy every three months or so - adding an estimated $1,140 to the annual dividend payment of $576 ($1.92 x 300 = $576) - your annual cash flow will rise to about $1,716.

That equates to a one-year yield of 10.26% ($1,716 / 300 x $55.70 = $16,710 = 10.269%).

What about the risks? ....

Well, if Abbott's stock price falls, you suffer the same loss you would have faced by just holding the stock alone. But the premium you received from selling your covered calls helps offset part of the loss, softening the blow.

The bigger risk is that you might have to sell your shares at a price higher than where they're trading today. That is, if ABT is priced above $57.50 on May 18 and the calls are exercised, you'll have to sell the stock at that price, forfeiting any gains on the stock above that level. However, selling there would still give you a gain of $1.80 a share (or $540) from today's price.

What's more, you'll also earn the $1.00 a share ($285 net) you received for the options, giving you a total profit of almost $3.00 a share. Hardly an unpleasant outcome.

You would, of course, forfeit any future ABT dividend payments, but you could continue to earn revenue from Abbott Labs using the money you received to finance an alternate strategy known as "selling cash-secured put options" (which we'll detail in an upcoming Money Morning article) until ABT pulls back to an attractive level for repurchasing the stock.

A Second Way to Look at Covered Calls

This strategy can also be used to make stocks with fairly low yields more attractive to income investors.

For example, discount retailer Family Dollar Stores Inc. (NYSE: FDO), recent price $53.83, is a fairly attractive growth candidate given the still-high jobless rate and the iffy economy, which translates into more budget-conscious customers.

However, with an annual dividend of just 72 cents, FDO offers an annual yield of just 1.33% - hardly appealing to income investors.

But thanks to the extended period of market volatility, FDO options are carrying high premiums. To be precise, the April $57.50 call, almost $4.00 a share out of the money and having just three months of life left, was quoted at $1.10, or $110 per contract.

Thus, if you bought 300 shares of FDO stock at the present price, paying $16,149, then sold three April $57.50 calls, the $330 in option income plus the $54 quarterly dividend would increase the annualized yield on Family Dollar to roughly 9.51%. That's almost as good as what you would have gained in our Abbott Labs example.

This covered call strategy is also remarkably versatile. It can be used to produce an income stream from stocks that don't even pay a dividend, and it can be structured to provide a wide variety of yields and cash payouts by adjusting the choice of strike prices and expiration dates.

So, if you want to generate more income and higher yields from your stock holdings, consider covered calls.

The tables for options on most stocks are available on both Google Finance and Yahoo! Finance, as well as most brokerage firm trading platforms, and checking them can help you calculate how selling covered calls can boost your investment returns.

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These days, workers in Europe have a better chance of moving up in economic status than those in the United States. A study by Swedish economist Markus Jantti found that 42% of American men raised in the bottom fifth of incomes remained there as adults, compared to only 25% in Denmark and 30% in Great Britain.

Even Canada offers better economic mobility.

According to Canadian economist Miles Corak at the University of Ottawa, just 16% of men raised in the bottom tenth of incomes could not move up as adults, compared to 26% of men in the United States.

"It's becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries," Isabel V. Sawhill, an economist at the Brookings Institution told The New York Times. "I don't think you'll find too many people who will argue with that."

It seems there's evidence of downward mobility everywhere you look.

A study of downward mobility using housing data conducted by Stanford University last year revealed a middle class downsized over the past four decades. While 65% of families lived in middle-class neighborhoods in 1970, only 44% did in 2007.

The United States also ranks in the bottom third of nations on the Gini Index, a measure of income inequality that uses a 100-point scale. The U.S. score of 45 puts it well below most European nations, many of which score in the mid- to high 20s.

And then there's the widening income gap.

According to the Economic Policy Institute, the top 1% of wage earners has collected nearly 35% of all income growth over the past 30 years. Meanwhile, the bottom 90% has had to make do with just 15.9% of total income growth.

The Causes of Downward Mobility

So how did we end up in this predicament?

One big culprit is globalization. Foreign competition for labor has helped depress wages as many former U.S. middle-class jobs have migrated overseas.

That has helped make education become the defining element in how far one can advance economically. People that once could get decent-paying middle class jobs with a high school diploma are now left fighting for low-income work.

Without a college degree, getting into, or remaining in, the middle class is almost impossible.

"We're becoming two societies, two Americas," Harvard sociologist Robert Putnam told the Los Angeles Times. "There's a deepening class divide that shows up in many places. It's not just a matter of income. Education is becoming the key discriminant in American life. Family structure is part of it too."

Although certain social factors, such as divorce, can also hold people back economically, the economic destiny of most Americans is determined at birth by the wealth of their parents.

It's an increasingly rigid class structure reminiscent of 19th century Europe - but with the added curse of downward mobility.

"Success in life increasingly depends on how smart you were in choosing your parents," Putnam said. "And that flies in the face of the fundamental American bargain - that every kid ought to have access to the same opportunities."

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• Money Morning:
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• Money Morning:
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• CIA World Factbook:
  Distribution of Family Income: Gini Index
• The New York Times:
  Middle-Class Areas Shrink as Income Gap Grows, New Report Finds
• Economic Policy Institute:
  A long and persistent middle-class squeeze
• Pew Charitable Trusts:
  Downward Mobility from the Middle Class: Waking up from the American Dream
• The Washington Post:
  Many in U.S. slip from middle class, study finds

Yahoo Co-founder Jerry Yang a Pioneer

Yang started the company in 1995 with David Filo while both attended Stanford University. Yahoo went public in 1996 and at its heyday in 1999 was worth more than $120 billion.

The company survived the dot-com bubble, but with a new rise of tech standouts it has since tumbled to its current market cap of $19.7 billion.

Despite the company's struggles, Yang's contributions to the industry made him a pioneer in Web content and search.

"The near-term Wall Street reaction is that [Yang] wasn't doing a good job," Mark Mahaney, a Citigroup Inc. (NYSE: C) analyst who covered the industry since 1998, told The Wall Street Journal. "But the longer-term perspective is that he will go down as one of the top 10 Internet entrepreneurs."

Yang's personal involvement in creating Yahoo may have clouded his judgment as a board member, angering shareholders.

Investor ire intensified in 2008 when Yahoo rejected a $45 billion takeover offer from Microsoft Inc. (Nasdaq: MSFT). Yang admitted at a conference that year he knew he'd be labeled as putting his personal attachment to Yahoo ahead of shareholders' best interest.

"Yahoo suffered from the founder syndrome," Youssef Squali, a Jefferies Group Inc. (NYSE: JEF) analyst, told The Financial Times. "Nothing was good enough for his company."

Now without Yang's emotional ties to Yahoo and old-school tech mentality, Yahoo has a chance at revival - and a chance to boost its sinking stock.

Three Reasons Yahoo Inc. (Nasdaq: YHOO) Could Rally

Out with the old: Yahoo belonged to the older generation of tech companies, which is becoming polarized from a newer crop that is more in touch with consumer needs and trends. New companies flourish in mobile computing, social media, and search capabilities; Yahoo has fallen behind.

One of the reasons these newer tech start-ups are more willing to adapt to consumer needs is their younger leadership, like 27-year-old Facebook head Mark Zuckerberg. Where Zuckerberg is touted as an innovator, Yang resisted change.

And change is essential to an industry where companies die without innovation.

"[Yahoo] hasn't changed with the time," Kara Swisher, co-executive editor of tech news site AllThingsD, told American Public Media's "Marketplace" program. "It's a paradigm company of another era in computing. It doesn't have a strong mobile strategy. It is still wedded to the desktop. It is still in the old paradigm of portals versus social. It goes on and on. It missed a lot of these opportunities to change themselves. And after a while, in technology, if you don't change, you die."

A post-Yang Yahoo will have more flexibility to modernize.

Yahoo shareholders got their way: Yang's position as co-founder, director, and shareholder created a conflict of interest that led shareholders to question if Yang was acting on behalf of the company's needs.

For example, last year Yahoo entertained the idea of selling to a private equity firm. One such proposal involved Yang joining a new Yahoo ownership group with some of the private equity buyers. Activist investor Third Point LLC spoke against the alignment.

Yang "must declare if he is a buyer or a seller - he cannot be both," Third Point said in a statement.

The investor battle with Yang heated up in 2011 after the firing of then-CEO Carol Bartz when shareholders called for the resignation of several Yahoo board members, including Yang. Third Point has even threatened a proxy fight against Yahoo.

While Yang claims he left voluntarily, he faced mounting pressure from disgruntled shareholders. In a sign of their approval, Yahoo stock rallied as much as 4% in after-hours trading Tuesday after Yang's exit was announced. The share price has remained steady since Yahoo announced Thompson's appointment Jan 4.

Smoother negotiations: After botching the Microsoft deal in 2008, Yahoo wants to show shareholders it will act in their best interest when considering mergers and acquisition offers.

Yang's involvement in private equity and acquisition proposals was rumored to create a tense negotiating environment. He often disagreed with the board's consensus, leading to many dropped deals and investing opportunities.

New CEO Thompson pledged he would reevaluate the company's options, starting with its minority investments in China's Alibaba Group Holding Ltd. and Yahoo Japan Corp. The company has a 40% stake worth $14 billion in Alibaba. Selling those assets would unlock value and appease shareholders while the company regroups under Thompson's leadership.

"By clearing out some artifacts of the past, it's symbolic of the company's desire to move forward," Allen Weiner, a Garnter Inc. analyst, told Bloomberg. "With Jerry out of the way, it will perhaps make negotiations with the folks at Alibaba easier."

Yahoo Inc. stock rose 3.18% Wednesday to close at $15.92.

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• The Financial Times:
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• Reuters:
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• Marketplace:
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Here are three men, all doing the same job. One is hauling rocks. One is putting up a wall. One is building a cathedral.

This story says a lot about the attitude that each of us brings to our lives... or could if we were willing to change our perspective.

My primary occupation, for example, is writing investment advice. One reason I write is to meet my overhead. To that extent, I'm hauling rocks.

A greater objective is to help build a publishing business. The more successfully we market ourselves, the more readers we attract, the better our business performs. To that extent, I'm putting up walls.

But the real objective of my writing is to help readers achieve and maintain financial independence. When I stay focused on that, I'm building a cathedral. (And, not incidentally, meeting my lesser goals, as well.)

Idealists will counter that creating wealth has nothing to do with building cathedrals. They are mistaken.

You can improve yourself, voice your opinions, or organize around a cause without cash. But you won't effect much change in your community - or build an actual cathedral - without it.

Contrary to what some believe, money isn't about having "more stuff." Money is independence. It liberates you from want, from work that is drudgery, from relationships that confine you.

You can't reach your potential or live life to the fullest if you spend your days swimming in concerns about money. No one is truly free who is a slave to his job, his creditors, his circumstances, or his overhead.

Wealth is the great equalizer. It doesn't matter if you're a man or woman, black or white, young or old, handsome or homely, educated or not. If you have money, you have power... in the best sense.

Wealth is freedom, security and peace of mind. It allows you to help others, to do and be what you want. It enables you to follow your dreams, to spend your life the way you choose.

Money gives you dignity. It gives you choices. That's why every man and woman has the right - perhaps even the responsibility - to pursue some level of financial freedom, whether you define that as being independently wealthy or just climbing out from under your credit card debt.

When my investment advice empowers people, when it gives them security or peace of mind, I feel good about my work. I'm building a cathedral.

You can apply the same line of thinking to whatever you do.

My friend John Mackey, for instance, is the head of Whole Foods, the world's largest chain of natural and organic food stores. It is his responsibility to oversee and grow a $13-billion corporation.

In my conversations with him, however, what really excites him is showing people how to enjoy longer, healthier, more disease-resistant lives. His firm is even launching Wellness Clubs within its stores to educate customers and offer them free classes on nutrition, diet and healthier cooking.

Will this also help grow the company's bottom line? I don't see how it couldn't. But to the extent that John and his team are helping people live longer, healthier lives, they are also building cathedrals.

Want to put a touch of glory in your life? Find a way to change your perspective, to understand how what you do - in your home, in the workplace or for a charity - meets someone else's needs or improves their lives.

The choice is yours. You can haul rocks. You can put up walls. Or you can build a cathedral.

Carpe Diem,

Alex

Spiritual Wealth is a feature available to Oxford Club members only. To hear what one reader has to say about the Oxford Club click here.

How Mortgage REITs "Goose" Yields

If agency mortgage REITs simply bought home mortgages on an unleveraged basis, they would be safe but boring investments, because their yield would be only about 4% currently.

Of course, their principal would be government guaranteed, though it would fluctuate with the level of interest rates.

But since there's not a lot of money involved in selling 4% yields to retail investors, mortgage REITS goose their returns by using leverage.

They borrow in the short-term market, usually by entering into "repurchase agreements" with the mortgages they have bought (they can do this because of the guarantee on the mortgages).

Since Bernanke has kept short-term interest rates close to zero for over three years, this is very profitable, maybe adding 2.5% to the yield of an unleveraged mortgage portfolio after expenses for each unit of leverage.

Thus, a portfolio leveraged 1-to-1 (with $100 of equity and $100 of repurchase agreements) would yield roughly 6.5%, while a portfolio leveraged 2-to-1 would yield about 9%, etc.

One mortgage REIT,American Capital Agency Corp. (Nasdaq: AGNC)actually takes this to an extreme, with leverage of about 9-to-1.

Consequently, AGNCmanages to pay out a dividend yield of 19.9% -- and earn somewhat more than it pays out.

How Rising Rates Effect Mortgage REITs

However, there are no free lunches in life.

Consequently, what a mortgage REIT gains in yield through leverage, it gives up in risk.

Of course, there is little danger of principal loss on the mortgage investments - they are government guaranteed. That much is secure.

However, rises in interest rates affect mortgage REITs in two ways.

If short-term interest rates rise, the spread between their funding cost and what they earn on the mortgages becomes less profitable, and their yield declines.

More dangerous, if long-term interest rates rise, the value of their mortgage portfolio declines. Since they are leveraged, it does not have to decline all that far for their capital to be affected.

For instance, with $9.00 of debt to every $1.00 of equity for a company like AGNC, a rise of about 2% in long-term interest rates would make the company insolvent.

That's the risk. You can hedge against it using swaps and options, and AGNC does so, but it's unlikely that hedges could cover a really sustained upward move in interest rates.

The upside is that Bernanke and the Fed have said that they do not intend to let short-term rates rise before the middle of 2013.

They also have a $400 billion "Operation Twist" program of selling short-term Treasuries and buying long-term Treasuries. That works against any sudden rise in long-term Treasury yields.

So to a large degree when you invest in REITs, you are trusting Bernanke. But that has worked for more than three years, and there's no reason it should not continue to do so.

However, as a responsible investor, if you buy a mortgage REIT you should follow monetary policy closely, and reassess your position every six months or so.

Two Ways to Invest in Mortgage REITs

That being said, here are two mortgage REITs to consider:

• American Capital Agency Corp. (Nasdaq: AGNC): AGNC is large and liquid, with $47 billion of assets and market capitalization of $6.3 billion. As I discussed, the company pays a $1.40 per share quarterly dividend, giving it a yield of 19.9%. It is priced about 5% above book value and is leveraged 9:1 - which makes AGNC a high risk, high-return proposition.

• Annaly Capital Management (NYSE: NLY): NLY is also very large and liquid, with $100 billion of assets, but leverage is only about 6:1. NLY pays a dividend of $0.57 per share, while priced at only a 1% premium to book value. Thus, overall this is a more conservative choice.
So don't let the Fed's war on savings keep you from earning the yields you deserve. The right mix of high-yielding dividend stocks can help replace what the Fed has taken away.

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"Shale Oil Bubble" Fears are Overblown

Investors can profit from this frenzy by looking for prospective takeover targets in the energy sector.

According to Subash Chandra, an analyst specializing in energy stocks for Jeffries Group Inc., the stocks to watch are SM Energy Co. (NYSE: SM) and Oasis Petroleum Inc. (NYSE: OAS).

"With independents being bought out, these two have the credentials that buyers are looking for," Chandra told SmartMoney.

Another oil sector analyst, William Featherston of UBS AG (NYSE: UBS), screened 40 potential takeover targets for the best combination of desirable characteristics. Traits that would appeal to the big oil suitors include untapped energy deposits and the financial ability to extract those deposits.

Featherston agreed with Chandra's choices, and came up with several more: Texas-based Anadarko Petroleum Corp. (NYSE: APC), Houston-based Cabot Oil & Gas Corp. (NYSE: COG), and Southwestern Energy Co. (NYSE: SWN).

For investors who'd like exposure to the entire group, there's also an exchange-traded fund (ETF), the Powershares S&P SmallCap Energy Portfolio (Nasdaq: PSCE). Those who want to cast an even wider net can try the IQ Global Oil Small Cap fund (NYSE: IOIL), which also includes small oil companies outside the United States.

Meanwhile, Money Morning's Moors advises investors to look for small companies that already are operating successful oil shale fields, have good prospects for expansion, and are well managed financially.

"On average, we will once again find that small companies that satisfy these criteria tend to produce higher return for investors than larger vertically integrated oil companies," Moors said.

Moors also advises investors to not overlook the most promising players in the oil industry, the midstream providers, which are involved in the transportation and storage of oil, and particularly Master Limited Partnerships (MLPs).

"The market will produce a rising number of pipeline, processing, gathering, and storage facilities mergers, with the position of MLPs and the equity issuances from them, becoming even more decisive," said Moors.

(Note: To get the full benefit of Dr. Moors' expertise, you can sign up for his free newsletter, the Oil & Energy Investor, by clicking here.)

As for the "shale oil bubble", today those fears are completely over-blown.

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A horde of upset environmentalists claim the fracking process responsible for the boom can affect the shallow water aquifers and harm the water supply.

What's more, the process also has been linked to an outbreak of small-to-moderate earthquakes, since the highly pressurized water provides a lubricant to faults underground.

This focus on fracking has caused some ironic situations.

For instance, in Youngstown, OH, a $650 million steel mill is coming to life thanks to the natural-gas drilling boom.

The mill is going to produce steel for rolling into the pipes used in the fracking and completion of new wells.

However, the irony is that the new mill is just two miles from an injection well for disposing fracking wastewater that was closed after 11 earthquakes shook the Youngstown area last year.

The net result is that while cheap energy is good enough to build a new steel factory in the heart of the Rust Belt, the same location is not good for disposing of the wastewater from a fracked well.

Nonetheless, Aubrey K. McClendon, chief executive officer of Chesapeake Energy Corp. (NYSE: CHK) believes, "This will be the biggest thing to hit the state of Ohio economically since maybe the plow."

A Glut of Natural Gas

As the nation sees its natural gas production increase to glut-like conditions, calls for a moratorium on drilling and hydrofracking will increase.

What's more, the price of natural gas hit $2.65 per MCF recently compared to the days when it used to trade in the double digits.

As I discussed in my natural gas forecast in yesterday's (Monday's) edition, most of the un-hedged natural gas producers are going to be feeling acute production cost issues by this spring and summer.

As a result, the demand for fracking supplies, either via market demand or via a government-issued moratorium, will impact the oil service providers.

That puts CARBO Ceramics directly in the crosshairs, since a growing audience is nervous about the possible side effects to the environment caused by the fracking process.

It's time to "SELL" CARBO Ceramics, Inc. (**).

Key Points on CARBO

You see, the key points to understand about CARBO Ceramics, Inc. are:

• It's the largest private-sector fracking company.
• A moratorium on fracking in the U.S. will impact it directly.
• And there is competition in the growth cycle

CARBO Ceramics has been the poster child for success in the fracking industry. But while CRR has grown quickly over the last few years, driven by the unlocking of multistage fracking of horizontal laterals, there are risks.

It's the combining of these two technologies that's driven the shale revolution, and CARBO will certainly be one of the most affected companies if a movement to stop fracking wells takes hold.

In fact, the U.S. news cycle is full of articles portending a fracking moratorium. In the last week both an organization of doctors and elected government officials have called for an end to fracking.

"We need to understand fully all of the chemicals that are shot into the ground that could impact the water that children drink," said Rep. Ed Markey, D-MA.

There is also a growing demand by special interest groups to introduce moratoriums on hydrofracking.

The reasons may vary, but the implications to CARBO are definitely negative.

Additionally, oil and gas companies like EOG Resources Inc. (NYSE: EOG ) have started to mine their own fracking material in today's competitive world. The era of proprietary materials provided by third-party vendors is going to change.

So while the fracking itself may survive, the companies developing the wells are starting to look at ways to save on expenses like CARBO's fracking materials.

History & Background

CARBO was founded in 1987 and is headquartered in Houston, TX. The company has just over 800 employees and a market capitalization of $2.85 billion.

The company has an enterprise value of $2.85 billion, when net debt and cash is taken into consideration. In this case, the company has no net debt, and a small cash balance as of the last reported results through Sept. 30, 2011.



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• Bloomberg:
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• SF GATE:
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• Money Morning News Archive:
  Previous "Buy, Sell or Hold" Features.
• JackBarnes.com:
  Confessions of a Macro Contrarian.

What keeps me up at night now, however, is the echo of 2007. I call where we are now 2007.2. If we are facing 2007.2, then 2008.2 will follow with a vengeance.

I'm guessing the breakdown could come in the first or second quarter of this year (although it could also take as long as 18 months to develop, which would only make it 10-times as bad when it does come).

Think about what I'm about to lay out for you, and ask yourself, what if he's right?

In the spring of 2007, U.S. Treasury Secretary Henry Paulson, when addressing problems surfacing in the subprime mortgages arena said things "appear to be contained." Fed Chairman Ben Bernanke said: "We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited."

Comforting words, right?

Then, speaking to members of the Federal Reserve Bank of Chicago in May of 2007, Bernanke said, "Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market."

Comforting words, right?

Even before two Bear Stearns hedge funds imploded in June of 2007, the Fed Chairman was touting the virtues of derivatives and the widespread sale of mortgage-backed securities when he stated, "The key thing to remember is that these losses are not just held by American banks, as the bad loans were in Japan (referring to Japan's lost decade), but they are dispersed."

Comforting words, right?

Then, on August 9, 2007, after one Bear fund was shut down and the other fund temporary propped by an injection of some $3.2 billion from Bear itself, and the seemingly contained fallout from subprime and AAA mortgages hitting "dispersed" banks in Europe, the European Central Bank's (ECB) Website quietly announced that the ECB would provide as much funding as banks might wish to borrow at only 4%.

What was happening was that European banks weren't lending to each other. The commercial paper market was at a standstill, and there was no short-term funding facility open wide enough to finance their longer-term mortgage positions. And they couldn't sell their positions because after the Bear funds imploded, there were no buyers for mortgage bonds, even the super-senior AAA tranches many European banks and all the big American banks were holding.

Two hours later, 49 banks borrowed three-times what they were usually asking to borrow. And by the time trading closed in the United States on that same day, gold had spiked higher, as had safe-haven U.S. treasuries.

Of course, the equity markets were doing their own thing and were rising that summer, nearing new all-time highs (which they would reach in September 2007).

It took another year before we got our "Lehman moment." But, boy did it hurt.

Fast-Forward to Now....

We're being told by the Fed that our banks are in good shape. We're being told by bank CEOs that they are in good shape and their European exposure is limited. We're being told that there won't be any significant hit to our economy from events in Europe. We're being told that there won't be any significant spillover because European debts are dispersed and banks have derivatives hedges.

These are all lies.

Exactly like what happened in 2007, banks in Europe aren't lending to each other. The commercial paper market over here is closed to them. That's why the ECB announced it would effectively execute unlimited three-year term repos at 1%. And, by the way, they are taking just about anything for collateral, really.

Did 49 banks step up like in 2007? No, in 2007.2 (meaning now) some 500 banks stepped up and took $620 billion (489 billion euros) the following day. And they've been adding to that.

What's happening to gold in 2007.2? After selling off as part of the initial risk-on grab for equities a couple of months ago, it's rising again, and fairly quickly.

What about safe-haven bonds? U.S. bonds have been rising rapidly in price as investors clamor for safety. The 10-year closed Friday at a 1.87% yield, only 20 basis points from its all-time low yield, which it saw in September as European woes were strangling global markets.

How panicked is a lot of smart money? Yields on German and U.S. short-duration bills are less than zero. That means investors have bid up the price of these short-term safe government instruments that the premium they are paying is greater than their yield. Put another way, people are paying to place their money in safe government securities.

Comforting, right?

No, it's not.

Talk about concentration build-up. First of all, most U.S. banks and most European banks are still sitting on tons of mortgage-backed securities that they can't unload. And the U.S. housing market isn't getting any better, nor is Spain's, Ireland's, or China's.

Sure, foreclosures are down lately. But that's because of foreclosure moratoriums resulting from lawsuits. There are estimated to be 10 million homes for sale and over 11 million homeowners holding onto upside-down mortgages. What's going to happen when banks get on with foreclosing and start dumping houses again? It's about to happen.

All that nonsense about dispersed risks - don't believe it. There is no dispersion that matters because all the big banks in the U.S. and Europe and plenty of others hold the same asset mixes, the same duration mortgage pools, and the same sovereign debts.

But in the place where things are smoldering and there's kindling everywhere, European banks are buying more of their sovereign's toxic debts to stave off a collapse of the prices of the debts already on their books. It amounts to a crazy leveraging up on the same bet that sovereign debts will pay off 100 cents on the dollar.

And where are they getting the money to buy more of this crap? From the ECB, which is printing it against the backstop of the same countries who need banks to buy their constantly rolled-over debts.

It's musical chairs, and sooner or later the music is going to stop. Greece looks like it will be the first one standing, or in this case, falling down. Portugal could be next, or Spain, or Italy.

Greece has more than $1.26 trillion (1 trillion euros) of public sector debt outstanding. Do you think that a real default isn't going to crush a lot of banks? Wake up. And if you think that Greece defaulting (or even forcing a 50% haircut on private investors, that would be banks, folks) wouldn't spill over into other countries and across the globe... wake up.

Talks in Greece over private investors taking a 50% haircut - meaning they will only get 50 cents on the dollar on the 100 cents they lent out previously and the other 50% they are giving up will be replaced with longer-term bonds yielding less interest - aren't going well. Most analysts and even central bankers believe the haircut needs to be closer to 75% than 50%. Comforting words to be spoken while negotiations are ongoing, right?

Ah, then there's that little downgrade thing that happened on Friday after European markets were closed. Just because the downgrade of the U.S. from AAA to AA+ didn't cause our borrowing costs to rise doesn't mean it isn't going to happen in Euroland.

It will happen. Downgrades will trigger new capital calls as margin requirements will increase to offset the lower quality of collateral, we're talking about the same collateral folks, the same sovereign bonds. It's an increasing pile, make that pyre, and it's going to self-ignite.

We have a big week ahead; we have Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), and Bank of America (NYSE: BAC) reporting fourth-quarter numbers. We have housing starts (homebuilders are up 60% since their October lows) and new home sales. And Spain and Italy are auctioning off bonds on Thursday.

Our markets have risen nicely. And on Friday, after selling off hard on the S&P downgrade news, they rallied back impressively. I tell you, it's 2007.2.

Stocks are going one way, and credit markets are signaling trouble ahead.

Sovereign debt has replaced subprime as the powder keg. That makes the brewing storm infinitely more powerful than the subprime dust-up was. It's a question of how long before we get the Lehman moment.

We've survived, even thrived, on a series of "liquidity puts," which is what I call all central banks' stimulus and "free and easy" money thrown at banks to keep them afloat. In a politically charged 2012, that could change.

Keep this in mind. If we're facing 2007.2, then 2008.2 is coming right around the corner. It's just a matter of time.

That's why I say play the equity market diligently; we could scrape higher for a while, as we did in 2007. But, when the fat lady sings, it's going to be deafening.

And everyone knows the opera isn't over until the fat lady sings.

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Attacks Without Accountability

For one thing, the new rule does away with candidate accountability.

So no matter how vicious or untrue a super PAC's attacks on an opponent, candidates can legitimately claim "it's not my fault."

Romney did precisely that in the middle of a debate when Gingrich confronted him about Restore Our Future's barrage of attacks.

"As you know, under the law, I can't direct their ads. If there's anything in there that's wrong I hope they take it out," Romney said.

In fact, the rules governing super PACS are so laughable that comedian Stephen Colbert created one as a joke.

But in fact, former staffers and aides operate these super PACs on behalf of the candidates, making obvious coordination with the candidate unnecessary.

Getting caught is not even a concern. Given how easily the rule can be circumvented, it's nearly impossible to police.

And the folks who run the super PACs certainly aren't shy at all about what they're up to.

"We're Newt's super PAC. We take out marching orders through the media for Newt Gingrich," Rick Tyler, a former Gingrich spokesman and advisor to Gingrich super PAC Winning Our Future told Politico. "I do what Newt tells me through the media. And it's all within the confines of the law."

Super PACs Aren't Going Away

The disconnect in name only also means that candidates can publicly criticize the idea of super PACs even while reaping their benefits.

"Campaign finance law has made a mockery of our political campaign season," Romney told MSNBC morning host Joe Scarborough in December. "We really ought to let campaigns raise the money they need and just get rid of these super PACs."

Don't hold your breath.

The number of registered PACs has exploded from 80 in 2010, when they collectively spent $90 million, to more than 250 today.

And even though the Republican groups are getting most of the attention now, expect to hear more from Democrat-oriented super PACs shortly. There's already at least one super PAC backing U.S. President Barack Obama called Priorities USA Action.

"I have no faith that Democrats want campaign finance reform any more than Republicans. They talk of it, but they don't want it," Christopher Shays, a GOP Senate candidate in Connecticut who as a congressman helped pass the 2002 campaign finance law known as McCain-Feingold, told Politico.

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Ordinarily, the ratio of gas to oil on a BTU basis is 6:1. Today, with natural gas selling for $2.65 or so and crude over $100, though, the same ratio is currently 37:1 - not even close to the historical benchmark.

The next chart explains why natural gas pricing is going down and will stay down longer than most people expect.

Currently, the number of natural gas rigs is still climbing in the Eagle Ford area, while remaining level in the Bakken and Marcellus shale formations.

Why this matters is simple: These rig counts will have an impact on U.S. natural gas prices far into the future.

Here's why.

Eagle Ford shale wells, while called "gas," have a "wet sweet" production profile. In other words, they also produce natural gas liquids.

These liquids are super sweet (that is, they are very low in sulfur) and make a great blending stock with heavy sour oil, allowing producers to take two products derived at sub-spot crude oil prices and blend them into a West Texas Intermediate (WTI) equivalent.

Again, these wells are being drilled for their crude oil-like liquids rather than their gas, at close to $100 a barrel for crude versus about $2.65 for natural gas.

The kicker? They typically have to produce the gas anyway to lift the liquids out.

As a result, the natural gas market stays saturated with new incremental supplies, which works to keep natural gas prices low.

I expect this trend to continue into 2012, making higher natural gas prices unlikely.

Oversupply: A Glut of Natural Gas

A bit of history shows us why...

Before the buildout of natural gas combined-cycle power plants in the 1990s, the United States had a yearly glut in gas. Producers actually shut down their production wells for months at a time.

What's more, there was no takeoff capacity to produce more gas, since the pipelines were full and the storage facilities were maxed out.

Today, we have returned to a similar environment.

In fact, the United States has a large selection of individual natural gas basins and prices are rarely the same in each, due to pipeline takeoff capacity and other similar factors.

As a result, we could see individual basins with a short-term price of $0.00 per Mcf (1,000 cubic feet) this summer. That's no typo. The cost of natural gas in certain places could go to zero.

Further, I expect to see un-hedged natural gas producers go bankrupt this fall, since the cost to carry production on leased lands exceeds the value of the cash flows from the fields.

You see, natural gas will be worthless to its producers for a period of days or weeks at a time.

This will impact the top and bottom lines of companies that have to produce, let alone sell, into that environment.

There may even be localized negative rates created when a company has to produce from lease properties or return the ownership to the mineral rights holders.

It is a case where companies put millions into drilling wells on a ranch and then can't sell their product because there is no market for it.

The Long Term Outlook for Natural Gas

I don't expect to see a clear trend change in natural gas prices until 2013 or later depending upon the buildout of U.S. liquid natural gas export capacity.

The U.S. government has received a growing list of requests from LNG import facilities, to allow them to be converted into LNG export facilities. These conversion projects will start to come online in 2015. So far there have been plans submitted to export the equivalent of 17% of the United States' daily natural gas production, but for now that production has to sell within the United States - or not.

If all of these facilities are built, the United States could be the world's largest liquid natural gas exporter by 2020. Just a few years ago the United States was projected to be the largest consumer of liquid natural gas by 2020.

Needless to say, the swing from one extreme to the other has been staggering.

In the meantime, smart investors will stay out of the way of the Widow Maker. Expect natural gas prices to stay low for 2012 and beyond.

It is also time to start considering the impacts that a natural gas glut will have on the companies providing drilling supplies to the exploration and production (E&P) companies.

Some high-flying stocks in the O&G service sector will be negatively impacted when the rush to drill and frack a shale well is over. The golden days of the shale rush are just about over and with that, a return to gravity for some of these high-flying stocks.

In my next Buy, Sell or Hold piece, I will be looking at one of those high-flying stocks, which is facing a moratorium on its business model.

The implications are bigger than the market realizes.

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1. Massive economic and political problems inside the country.
2. The last round of sanctions that restricted Tehran's access to international banking.
3. And the European Union's (EU) decision to boycott Iranian crude imports.

I'll explain each of these further.

First, Iran is undergoing significant economic and political problems. The rial (the Iranian currency) has inflated almost 80% against the dollar in less than a year. The government has not accounted for almost $120 billion in oil proceeds kept out of the country, resulting in a split between Iranian President Mahmoud Ahmadinejad and some of his former supporters in the Majlis (parliament). Several of the president's closest advisors are, or shortly will be, under indictment for corruption. That includes a multi-billion dollar case of banking fraud, the largest in the country's history.

Ahmadinejad is in a flat out political war with both the supreme religious leader Ayatollah Khamenei and major clerics.

Now come the sanctions, which have gotten unbearably strict.

The last round of U.S., EU and United Nations (UN) sanctions began cutting Tehran off from international banking. Since global oil sales are denominated in dollars, access to exchange and clearing banks is essential.

Germany, under pressure from Washington, closed Europäish-Iranische Handelsbank (EIH). This small bank is Hamburg-based but Iranian-owned and registered by the Bundesbank (German Central Bank). American intelligence and Treasury officials are convinced (almost certainly correctly) that EIH had been a primary means through which Tehran accessed the international exchange, acquired equipment for its nuclear program, financed arms deals, and provided subsidies to Hezbollah and Hamas.

That was followed by the end of Asian Clearing Union (ACU) services for Iranian oil sales (despite Iran being one of the ACU members). That resulted in a full-blown crisis in India, where Iranian crude imports are essential. New Delhi had no mechanism to pay for the consignments until it set up a very inefficient system of rupee accounts in Turkish banks to exchange them for rials.

Iran must now resort to inefficient and costly substitutes - such as shadowy exchanges around the Dubai Exchange and barter arrangements (especially with China) via the Singapore Exchange. Since China has a trade surplus with Iran, it can effectively finance its crude purchases with its own exports.

Finally, the EU has decided to stop importing Iranian oil. Europe is the second-largest buyer of Iranian crude after China. Iran cannot find customers to replace such a large volume in short-order. The EU must be careful not to spike the price of crude through such a policy, especially for certain member countries already having problems of their own.

Greece, for example, usually receives a third of its crude oil directly or indirectly from Iran. Spain also would be immediately impacted. There's also a range of daily swap contracts in Europe involving Iranian oil as an element. These would also be thrown out of balance resulting in a price rise.

Risk is now an exacerbating concern in the oil market. The Iranian situation is rapidly becoming a major crisis.

Q) So what's the next move? How do you see this crisis playing out over the next several months?

Moors: The crisis will probably intensify. Western intelligence agencies have already concluded Iran will get nuclear weapons at the current rate of development. The attempt now is to destabilizeIran internally - hence the latest round of sanctions. Tehran will not allow this to happen. Threateningto close the Strait of Hormuz is one response;moves to destabilize the regionwill be another. Iran is a main sponsor of both Hezbollah and Hamas and neitherof these will sit idly by and have a financiallifeline cut.

Saudi Arabia will increase its own pressure against Iran, while any genuine attempt toclose the Strait will be met with an immediate Saudi response.

Q) Finally, how can investors profit? In the past, Money Morning has advocated exchange-traded funds such as the United States Oil Fund LP (NYSE: USO) and stocks as Suncor Energy (NYSE: SU) as ways to profit from higher oil prices. Are these stocks still good investments?

The longer the crisis remains, the greater the benefit from emphasizing North American-based production.

Companies - like the Calgary-based Suncor - that are active in Canada's oil sands are one way for investors to go. According to the government of Alberta, nearly 173 billion barrels of recoverable oil rest in these tar sands, based on current production costs. This represents nearly 75% of the total North American reserves currently available. Canada is the largest supplier of oil and gas to the United States, shipping approximately 75% of its exports here each month.

Kent discusses energy-related investment opportunities in depth in his ever-popular Energy Advantage newsletter.

You can learn more about his Energy Advantage newsletter and the coming oil supply constriction by clicking here.

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