DailyWealth

35% Return on Capital Is Normal Here - $HYG

Fri, 06 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Someday, my friend Rahul will be a famous investor. I like to say he's the "future Warren Buffett of India."

I trust him so much, a year ago I gave him a substantial chunk of money to manage in Indian investments for me. It's performed extremely well (admittedly emerging markets are up big this year). Rahul is speaking at our upcoming Alliance conference on Monday, so I asked him to share a few words about what's going on right now in India. Here's what he had to say...

My friend Jim's return on capital is 35%...

Yes, that is thirty-five percent on his money in his business... and he doesn't borrow any money.

His business? Power generation. How can you make 35% on a power plant? Jim's plant is here in India...

Specifically, Jim runs a company that operates a "merchant" power plant. A merchant power plant is one which does not have a long-term sale agreement with any customer... It sells power for short durations (usually under a year) to the highest bidder.

With the economy growing at a very rapid rate, India has a chronic power deficit... While long-term power-sale agreements are made at rates between 3.5 cents to 5.5 cents per kilowatt-hour (or unit), merchant power plants are commanding rates up to 8 cents per unit. Peak power is being purchased by consumers in many cases at 20 cents per unit.

I spend most of my time researching companies and talking to businesspeople. I've found that Jim's scenario is not the exception but the norm in many smaller companies in India...

Rahul is right. I visited India a year ago... Rahul took me around to see some of his favorite investment ideas. One was a company called Seshasayee Paper. In short, the company bought a massive paper operation from the Northeastern U.S., took it apart, and moved it to rural India.

In its fiscal year ending in 2007, its return on equity was 34%. In its fiscal year ending in 2008, it had a 28% return on equity. If you annualize its latest quarter, the return on equity is down to 22% – still admirable.

You'd think a business with such a return on equity would trade at a premium to its equity value (essentially its liquidation value). Nope. It trades at a 26% discount.

The shares of this paper company have more than doubled since their October 2008 lows. So you'd think they'd be expensive. Nope. Even after that big run, shares are still only trading at five times trailing earnings.

There is no estimate for this company's future earnings... because there are basically no brokers who follow it. Just Rahul. India has thousands of small companies. Rahul picks through them to find the best opportunities, like Seshasayee.

After my trip, I was impressed with Rahul... and I was impressed with the ability entrepreneurial Indians have to turn hard work into profits. When he says the future is bright for India, I believe him.

By the way, don't think Rahul is bullish on India just because he's Indian...

He came to the U.S. and graduated from an Ivy League school, fully expecting to find his career in the States. But while in the States, he realized the REAL opportunity was back home in India – in businesses like his friend Jim's power plant and Seshasayee Paper.

While Rahul lives in India, he's in the States this week, speaking at our Stansberry Alliance Conference on Monday. We look forward to seeing many of you there.

Good investing,

Steve

A Still-Safe 18% Dividend - $NLY $HTS

Thu, 05 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Exactly one year ago in DailyWealth, I told you about "the greatest moment in American finance." My headline was "You Should Take Advantage of This No-Risk Trade Right Now."

If you took my advice and bought shares of "virtual bank" Annaly, you're up 42% today... And we're only halfway through the trade.

A year ago, I told you we had the opportunity for 85% capital gains, PLUS 39% in dividends – for a total return of more than 120% in two years.

While I told DailyWealth readers about Annaly, I told my paid subscribers in True Wealth my favorite way to play it... through shares of another virtual bank: Hatteras Financial, which has done even better.

The "virtual bank" business is incredibly simple... They borrow money at a low interest rate and invest it at a higher interest rate in an ironclad safe, government-guaranteed investment. They earn the difference – the "spread." As I told you last year, when these guys are in their sweet spot, they make a fortune.

Right now, they're in their sweet spot. And there's still plenty more in profits ahead. But the share prices have fallen lately.

I'm not worried. The trade is still on track. Look, Hatteras should pay $5 in dividends in 2010. With its stock price around $27.50, Hatteras' dividend yield is about 18%. Let me be clear...

That's an 18% dividend, with your money invested in government-guaranteed investments.

Hatteras is now trading for a reasonable price again, at only 1.09 times book value, as opposed to its recent peak around 1.4 times book value.

In short, I'm not worried about Hatteras or Annaly. They're both great income vehicles... They capture the spread between what they earn in interest and their interest cost. That spread is currently around 3% – that's huge.

And the Federal Reserve can't raise rates until at least next summer (2010). So Hatteras and Annaly will be able to borrow money cheaply for at least another six months.

My plan with virtual banks is to sell well before it appears the Fed will raise rates. So for 18% dividends... plus even bigger potential capital gains... own Hatteras or Annaly now. Plan on selling once they rise above a price-to-book value of 1.4 (for a capital gain of 30% or more from current levels, PLUS dividends). Or sell sometime in the first quarter of 2010, well before the Fed considers raising rates.

This should be easy money... If you bought a year ago, when I told you about Annaly in DailyWealth, you'll end up with more than 100% in capital gains and dividends. Even if you didn't buy then, you've got a great chance now: a safe total return (capital gains plus dividends) approaching 40% in less than six months.

Good investing,

Steve

The Best Simple Gold Indicator Around - $GOLD

Wed, 04 Nov 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Just over 2% per year... that's all gold has gained since the end of 1979.

Gold sure hasn't done much.

If you look over the last 41 years, gold performed better... about 8% per year. It did well in the 1970s because of inflation fears – similar to fears we have now. Then gold did nothing for the 1980s and 1990s.

Today, I'll share with you an incredibly simple gold indicator that does an amazing thing... It captures the upside in gold, and it actually makes money when gold does nothing.

For the conclusion up front, this chart tells the story... The gold line is the price of gold, and the black line is the simple gold indicator. If you invested $10,000 using this indicator, it turned into $1.28 million.

As you can see, the gold indicator kept up with the price of gold in the 1970s... Then when gold went to sleep for 20 years, this indicator kept making money. And now that gold is going again, you're making big money.

The indicator is incredibly simple, too... It requires less than an hour of work a year to follow. Yet, since 1968, when this indicator said "buy," the price of gold rose at a compound rate of over 17% per year. And when this indicator said "move to cash," gold fell at a compound rate of worse than 2% per year.

The indicator is simple. You look at the price of gold once a month. You buy (or keep holding) if the price of gold is above its nine-month average. And you move to cash if it's below its nine-month average.

There's nothing magical about the nine-month average, by the way... You can use the eight-month, 10-month, and 11-month averages for "buy" signals, too. Same goes for the "move to cash" signals.

Testing this indicator since the end of 1979 gives similarly good results. In "move to cash" mode, the price of gold lost about 3% compounding per year. And in "buy" mode, gold gained around 7.5% compounding per year.

While 7.5% compound annual gains in buy mode since the end of 1979 doesn't sound as sexy as 17% a year since 1968, keep this in mind: Without this indicator, gold has only compounded at 2.3% a year since the end of 1979.

I've loaded you up with numbers here, but the concept is actually simple...

Own gold when it's above its nine-month average. Move to cash (earning interest) when it's below its nine-month average. Doing this simple thing since 1968 would have turned $10,000 into $1.28 million – for a compound annual gain of 12.5%.

The secret to the indicator, of course, is that it limits the pain of your bad years.

Consider this table of the 10 worst 12-month periods for the price of gold compared to how the simple indicator performed during those 12-month periods. Gold lost over 30% in every case. The worst the indicator performed was a 3% loss. Take a look:

End of 12-month period Simple Gold Indicator Gold

3/31/1982 14% -37%
9/30/1981 -3% -36%
8/31/1976 5% -36%
6/30/1981 -3% -34%
11/30/1981 7% -34%
7/31/1981 3% -34%
8/31/1981 2% -32%
5/31/1982 13% -32%
7/30/1976 5% -32%
12/31/1981 14% -32%

I can't take credit for this simple indicator. My friend Mebane Faber wrote about a similar system in his book, The Ivy Portfolio. In that book, Meb describes why it works:

"When markets are declining people become more fearful and use a different part of their brain than during periods when markets are going up," he writes. So the reason it works is "rooted in human psychology."

Meb says it's "simple" and "timeless." And he's right.

You can make it a lot more complicated. But simple is elegant. A few minutes a year turned $10,000 into $1.28 million over 41 years, without any number gymnastics. Why make it more complicated?

Right now, the simple gold indicator says "buy."

Good investing,

Steve

The Best Three Gold Coins to Buy Right Now - Canadian Maple Leaf

Tue, 03 Nov 2009 08:00:00 EST

By Tom Dyson

"What if my bank account gets wiped out?"

My friend has nightmares about a virus attack on the global computer network. He says terrorists are developing programs that will wipe out bank databases. Account records will vanish, he says, and no one will know who owns what or how much. It'll wreak havoc on the financial system.

I have different "financial wipe out" nightmares. I worry the federal government will run out of credit and won't be able to backstop the FDIC. They'll be hundreds of bank failures, like there were in the Great Depression. In my nightmare, I lose my savings in a bank collapse.

Here's another bad dream: Inflation gets so bad, the Feds impose currency controls and then devalue the dollar. My money gets stuck in the United States... losing its value.

These fears are some of the reasons I'm building a stash of gold coins... and why you should, too. Gold is real money. You can take the coins anywhere you want in the world, and they'll always have value. Gold coins are the ultimate "safe haven" insurance asset.

And here's the bonus: Right now, there's no "opportunity cost" of owning gold. Usually, you're giving up the chance to earn interest on your cash when you buy gold. But now, the dollar is paying next to no interest.

Yesterday morning, I had breakfast with one of the largest private gold bullion dealers in the world. His name is Michael Checkan. He runs a business called Asset Strategies International. I asked Michael what gold coins he likes right now...

Michael told me you should keep two things in mind when you buy gold coins. First, you want a good deal. He says you should buy the coins with the lowest premium to the international gold spot price you can find. Right now, there's an orderly market in gold coins and you shouldn't pay more than a 5% premium to spot. As I write, gold is at around $1,060. So you shouldn't pay more than $1,113 an ounce for your coins.

Secondly, you should buy coins with the highest worldwide acceptability, so you'll have no problem selling them anywhere in the world. For example, Michael says Asians prefer 24-karat gold coins, but the American Eagle and the Krugerrand are only 22-karat gold. They aren't so popular in Asia. He also says the South African Krugerrand, the British Sovereign, the Mexican Peso, and the Austrian Corona gold coins are "passé" and not as popular worldwide anymore. You won't get such a good deal when you sell these.

So which coins should you buy?

Michael likes one-ounce Canadian Maple Leaf coins best. He also likes Australian Kangaroo one-ounce nuggets and the new American Buffalo coin.

The national mints sell these coins to wholesalers at a 3% premium to spot gold. The wholesalers take another 0.5% and the retailer takes 1.5% in profit. So you pay a 5% premium to spot. (The Buffalo is a new coin and supply is still a bit tight. If you buy fewer than 10 coins, you may have to pay a 6% premium.) These coins are all 24-karat gold, they are all popular worldwide, and you can hold all three of these coins in your IRA. When you sell, you should expect to receive the spot gold price plus about 1%.

There's never been a more important time to own gold than right now, even if it's just a few gold coins. We're entering severe financial turbulence, and gold coins are the ultimate insurance. Canadian Maple Leafs, Aussie Kangaroos, and American Buffalos are the best coins to buy right now.

In my next essay, I'll discuss what you should do with your gold coins once you've bought them...

Good investing,

Tom

This Is Where I'll Go to Escape America - #Cafayate #Argentina

Mon, 02 Nov 2009 08:00:00 EST

By Tom Dyson

"Tom!"

My wife screamed. I turned around. She was clasping her backpack. The pocket was open.

"He took my purse!" she said.

The thief had followed us, waited until we reached a major street crossing, unzipped the backpack, and pulled the purse out. The thief disappeared into the crowd and we never saw him. It was the perfect crime. We lost $125 and the camera with all our pictures on it.

My wife and I have come to South America to look at property. We're not planning to move here... We just want an escape pod in case we ever need to flee from the United States. Our first stop was Punta del Este in Uruguay. Then we went to Buenos Aires, the capital of Argentina...

Buenos Aires has great restaurants, museums, parks, and shops. It's also noisy, polluted, and crawling with thieves. Fun to visit, but it's not a place we'd ever want to live...

So I came to Cafayate.

Cafayate is a small town in northern Argentina. It's set in the most spectacular scenery I've seen since I crossed the Canadian Rockies in a railroad boxcar three years ago. The town is small, but sophisticated. It reminds me of an art community in the Colorado Rockies. There's a large plaza in the center of town with world-class restaurants and outdoor cafes around it. You can get a full steak dinner and a bottle of wine for $5 in these restaurants.

The weather is perfect... warm air with a mild breeze... all year round. The mountains get snow on them, but Cafayate is in a valley and so close to the equator, it's always warm.

But here's the real reason I'm so excited about this town: Doug Casey is building a world-class resort here. He says it's going to be the world's finest community on the face of the globe. Doug is a brilliant guy who has traveled the world 100 times, so it's an extraordinary claim. If anyone can pull it off, it's Doug and his partners.

Here's how Doug described some of Cafayte's choice aspects:

The centerpiece is an 18-hole golf course designed by Bob Cupp, whose last project was the $140 million Statue of Liberty course in New York. Bob says this may be the best course in South America and one of the top 100 in the world.

...We're growing every type of fruit, berry, and vegetable that you can imagine, organically right on site. So the food is a far cry from what you're used to getting at McDonald's. If you get tired of the fantastic beef, you can fish in either of our two lakes. We're in the middle of a wine region with thousands of acres of grapes planted around us.

What gets me even more excited than the location, however, is the people behind the project. There just aren't a lot of people out there who still believe in 100% personal responsibility, small government, and minding your own business. I know Doug and his partners believe in these things.

I'm playing golf on Doug's development this afternoon... and touring it tomorrow. I can't wait to see this place. It's going to be a libertarian Shangri-la for American expats. More in my next column.

Good investing,

Tom

Get Your Money Saved for This Right Now - #IRA

Fri, 30 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Better get your money saved..

On January 1 – just two months from now – our desperate government will foolishly give us a too-good-to-be-true deal...

You could make $336,000 – potentially much more – all because of government desperation. But you need to get your act together to make the most of it.

It takes a bit of explaining... But I can't wait to take part in it. It is the best return on your money with next-to-no risk I can imagine. As one financial planner put it: "Would you rather pay taxes when you plant the seeds or harvest the crop?" This is a chance to pay on the value of the seeds, not the crop.

What I'll do on January 1, 2010 is incredibly simple. I will convert six figures worth of my IRA into a Roth IRA. Doesn't sound like a big deal... but it REALLY is. Let me explain...

Let's say you have a $100,000 IRA (just to keep the math simple). And let's say you're 50 years old. If that IRA account grows 10% a year for 20 years, it will have $672,000 in it. At that point, you'll be 70 years old and you'll have to start taking money out...

The government will likely take as much as half of it.

If it's a traditional IRA, the government will treat the money you take out as income and will tax you on it. With America's government debts expanding so rapidly, I hate to consider how high tax rates could be in 20 years... I wouldn't be surprised to see some income tax rates reach 50%.

In short, with a traditional IRA, the government could take half of your money in taxes – that's $336,000 in our example.

But if you convert it to a Roth today, the government will get none of that money... the entire $672,000 will be yours, TAX-FREE. Here's why...

The government's budget deficit is the worst ever – by far. It needs your tax dollars right now. So it would rather take $33,000 in tax from you now (on your $100,000 worth of "seeds") than $330,000 or much more from you in the future (on your $672,000 worth of "crops").

In short, the government will allow anyone to transfer a traditional IRA into a Roth IRA starting January 1, 2010. By doing this, you're making an incredibly safe "gamble." You're giving up $33,000 today to let your wealth grow TAX-FREE forever.

You see, once your money is in a Roth IRA, it is no longer the government's to grab – you've already paid them their taxes.

That's the difference between a Roth IRA and a traditional IRA... In a Roth, you fund it with after-tax money and let it grow tax free. In a traditional IRA, you fund it with pre-tax money, and then you have to pay taxes on that money when you take it out.

You'll get so many benefits if you do the switch...

For example, if inflation hits, and your $672,000 dollars turns into 10 times that – $6.72 million – the government still can't tax you... You've already paid your tax bill on that money. You're a tax-free multimillionaire.

Another benefit is tax rates today versus tax rates in 20 years... By converting to a Roth IRA now, you're paying taxes on your IRA at TODAY'S income tax rate, which is most likely lower than future income tax rates.

Here's one of the biggest benefits of all: You do not have to pay your $33,000 tax bill out of your $100,000 IRA – you can pay it out of other money. So you can have the full $100,000 at work for you, tax-free. This is the way to do it, if at all possible.

Even better, the government will give you a few years to pay off the full tax bill. You can spread out the payments through the 2012 tax year. So in reality, your $33,000 tax bill won't have to be paid in full until April 15, 2013 – or October 2013 if you take an extension on your taxes. From the beginning of 2010 until October 2013 – it's like taking a four-year tax-free loan from the government.

So get your act together. Start getting your money saved up outside of your IRA. And convert your traditional IRA to a Roth IRA on January 1, 2010.

The government is willing to take your tax payment on the seeds instead of the crops... and it's willing to give you nearly four years to pay the bill. It's foolish. Jump on it!

Good investing,

Steve

What the "Man Who Made Too Much" Says About Gold - $GLD

Thu, 29 Oct 2009 08:00:00 EST

By Chris Mayer

The U.S. dollar is a sort of monetary brand.

And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their "must-have" cachet. Sometimes, a brand can disappear entirely, as did Pan American Airways or "Members Only" jackets. But there is always something else waiting to take its place. So it is with the U.S. dollar, a brand making lows in the financial markets.

The dollar has been the "Coca-Cola of monetary brands," says James Grant, editor of Grant's Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of the New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the "Gray Lady" fetches only $8 per share.

"What happened?" Grant asked. The World Wide Web happened, he says. "The Times has hundreds of reporters, but this is a story they seem to have missed." As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against its headquarters building.

The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The U.S. Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant's Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him "The Man Who Made Too Much" after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we've never seen before. The monetary base is essentially the Federal Reserve Bank's currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.

You've probably seen this chart, or some variation of it. Still, there haven't been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that's because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, "almost 1-to-1 between the two," Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson's interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, "gold has been a perfect hedge against inflation."

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching "$3,000 or $4,000, or $5,000 per ounce" as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

As for a replacement waiting in the wings, Grant offers up gold. Indeed, a kind of "de facto gold standard" seems to be taking shape. The SPDR Gold Trust, the largest gold-backed security in the world, is now the sixth largest holder of the metal in the world. Anybody with a brokerage account can easily buy gold today through the trust, which trades on the NYSE under the ticker GLD.

It's still early. Most people still own no or very little gold. As it becomes clearer what's happening, they will buy more gold, especially as it is now easy to do so.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I'm betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: "Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency." Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

Regards,

Chris Mayer

The Most Accurate Investment Forecast in History - #REIT

Wed, 28 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Jeremy Grantham made the "Two Big Calls" better than anyone in history.

1) He called the peak in the dot-com bubble...

In a fantastic interview with Outstanding Investor Digest in May 2000, Grantham saw no hope of anything but a bust – at a time when everyone was buying stocks. The interview headline was "Bubbles have always given back everything, there have been no exceptions – NONE."

2) Grantham said "buy" in March 2009, a day after the market hit bottom. It then soared nearly 60%.

On March 9, he wrote a letter to his customers saying, "We now believe the S and P is worth 900 at fair value or 30% above today's price. Global equities are even cheaper." While everyone else was scared to death, Grantham was buying.

Two big calls, right on both counts. So I always read Grantham's insights.

His latest quarterly letter came out this week. Yet again, it's full of gems of wisdom. But the most amazing part of the letter came at the end, when he shared his track record...

Grantham publishes his seven-year forecasts every quarter. In short, over the last seven years, nobody did it better than he did. With the exception of U.S. real estate stocks (REITs), Grantham got the order right – the ones he predicted to perform the best did. And vice versa. Take a look:

Asset Class Estimated Rank 7-Year Forecast* Actual 7-Yr Return Actual Rank

Emerging-Market Equities 1 10.0% 14.3% 1
Int'l Small Cap 2 8.9% 7.7% 3
U.S. REITs 3 8.1% 1.5% 10
Emerging-Market Debt 4 6.9% 9.2% 2
EAFE 5 6.5% 4.0% 7
Foreign Bonds 6 4.6% 6.8% 4
U.S. TIPS 7 3.1% 5.3% 5
U.S. Small Caps 8 2.8% 3.0% 8
Lehman Aggregate 8 2.8% 4.4% 6
U.S. T-Bills 10 2.1% 2.1% 9
U.S. Large Value 11 1.1% 0.9% 12
S and P 500 12 0.5% 0.8% 13
U.S. Large Growth 13 -0.2% 1.2% 11
* real return/year

This was not guesswork... The probability of picking them in that order or better is 1 in 900, according to Grantham.

In Grantham's latest seven-year forecast, he says the outlook for bonds is terrible. For stocks, it's not much better. Your best bet is in foreign stocks... And if you have to invest in U.S. stocks, stick with high-quality blue chips (most of which collect half their earnings overseas anyway).

After increasing his holdings of U.S. stocks in March, Grantham now says they're more than 20% overpriced today. (Remember, they've risen some 58% since their March lows.)

Grantham is now taking some money off the table. He says, "I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels." ("Painfully" starts at -15%.)

All in all, Grantham says it's "a safe bet that seven lean years await us."

He called the dot-com bubble in 2000. He said to "buy stocks" in March 2009. And his predictions over the previous seven years might be the most accurate big-picture forecast in investment history.

Jeremy Grantham is a man worth listening to. If you're seriously into markets and politics, his latest letter is worth hours of close study. (You may not agree with everything he says... but based on his track record, it's worth considering.)

You can find Jeremy Grantham's latest quarterly letter at www.gmo.com.

Good investing,

Steve

A Shocking Presentation from a Master Speculator

Tue, 27 Oct 2009 08:00:00 EST

By Tom Dyson

I just heard an amazing speech.

I'm at the South American business forum. It's a conference for 100 of South America's most elite university students. The students won a competition to be here. They're taking the event very seriously...

We're in the old Argentine stock market building in Buenos Aires. It is 154 years old and one of Argentina's grandest buildings. Giant portraits hang on the walls, the floors are made of marble, and hardwood banisters as wide as skateboards line the staircases. It's Friday evening. A full symphony orchestra is blasting out a Revel concerto in the basement. The music carries to every corner of the building...

The presenters include the "director general of ecology commission at the United Nations" and the "copresident of intergovernmental panel on climate change." There's even a Nobel Peace Prize winner here. I arrive early and catch a panel discussion between two United Nations bureaucrats on global warming.

Then Doug Casey takes the stage...

First, he tells the students to ignore everything they've heard so far. The speakers are all government stooges with no idea how the real world works. "Their ideas are nonsense," he says.

Heads rise. Some students giggle in embarrassment.

Doug then explains how inflation, not bankers, caused the financial crisis... why democracy is a terrible way to organize society... how global warming is a hoax... and why most modern schools and universities are a complete waste of time if you're looking for an education.

Some students are beginning to get upset. I see heads shaking in disagreement. One girl is so keen to argue, she puts her hand up and interrupts Doug's presentation. I hear more giggles.

Then Doug gives the students advice. First, he tells them to stop worrying about global warming and do something productive like start a business. To get rich, he tells them, all they have to do is produce more than they consume and save the difference in real money.

Then he tells them to read two books: The Market for Liberty by Linda and Morris Tannehill and his own book, Crisis Investing for the Rest of the 90s.

The Market for Liberty shows how society would function without a government. It's an amazing book. You can download it free here.

Crisis Investing for the Rest of the 90s is Doug's best book. It accurately predicted the events of the financial crisis and has been a close companion of mine for the last 12 months. You can buy a used copy on Amazon for less than a dollar.

Finally, Doug gives us his favorite investments...

He likes the Argentine cattle business. Cattle prices, adjusted for inflation, are at an all-time low. Farmers can't make any money at these prices and they're deserting their cattle businesses. So few people want to farm beef these days, Argentina, once the beef capital of the world, has recently become a net importer of beef. Doug is building a huge cattle and dairy herd on a ranch in the north of Argentina.

Doug also likes gold. He thinks it's going to $4,000 or $5,000 an ounce in the future as the Fed tries to inflate its way out of the crisis.

Selling government bonds is Doug's third speculation. Governments have artificially suppressed interest rates around the world, he says. When the bubble bursts, interest rates will go through the roof. Government bonds will collapse in value when this happens.

Doug received a hearty round of applause at the end of his speech. Some students enjoyed the controversy. But I wonder how many heard the message...

Good investing,

Tom

The Perfect Place for Expatriates - #Uruguay

Mon, 25 Oct 2009 08:00:00 EST

By Tom Dyson

I'm writing to you from a farm in South America...

There are three horses outside my bedroom window. My host, Fitzroy, lets horses roam his property. In the morning, we find them munching grass on the front lawn. And when we're having afternoon tea on the back patio, they'll come wandering slowly past...

In a moment, my wife and I will walk across the garden, past the horses, to the main house, where we'll join Fitzroy's family for breakfast. The housekeeper, Alexandra, is there. She's already set the table, pressed the oranges, and prepared a large plate of organic sausage, ham, and eggs.

After breakfast, we'll saddle the horses and Fitzroy will take us for a trot around his property...

We're in Uruguay, in a town called Punta del Este.

They call Uruguay the "Switzerland" of South America because of its powerful banking secrecy laws. It's also one of the last countries in the world where you can own property anonymously. Finally, there's no tax on foreign earnings. So Europeans and South Americans move here to avoid income taxes.

These laws attract money to Uruguay. Uruguay is the second-richest country in South America, after Chile.

For six weeks every summer, Punta del Este is the most important party town in South America. If you're a celebrity here, this is where you come for your summer vacation. If you're a wealthy aristocrat from Brazil, Argentina, or Columbia, you come here to party with the celebrities.

During this "party month," tables at nightclubs sell for $10,000 a night, rents jump 4,000%, and it takes two hours to move across town because of the traffic.

Luckily, high season doesn't start until January. For now, we're the only tourists in town...

For full-time residents, Punta del Este is a sleepy seaside town. Three-quarters of the houses and apartments are empty. Most of the restaurants are closed. And they disconnect the traffic lights. The standard of living for these folks is extraordinarily high...

Fitzroy, for example, lives in a large country house with wooden floors and big windows. He has a lake, a forest, and a horse paddock on the grounds. On the other side of the lawn, there's a cottage for the housekeepers and another cottage for guests.

He told me his country estate would sell for around $750,000 if it were on the market today. The same property in England or America would cost 10 times as much...

We went on a tour of Punta del Este's real estate market with Fitzroy. We found dozens of seaside cottages and small homes for under $200,000. They come with neat lawns, brightly painted walls, and fruit trees. Most of them even have separate quarters for housekeepers. A full-time housekeeper costs $400 a month. The country club charges $150 a month for offseason membership. And the top private school charges $200 a month per pupil.

The weather is wonderful. It never freezes. In the summer, you rarely need air conditioning. Travel connections are great, too. The international airport is two hours away and offers direct flights to the United States and Europe.

In short, Punta del Este is the perfect location for expatriates. It's cheap, easy to reach, and the quality of life is unbeatable, even in America. Best of all, there's going to be a property boom here as money flees from the bankrupt governments in America and Europe.

If you ever get the chance to visit Punta del Este, I highly recommend it. Just make sure you avoid the party season... unless you like that sort of thing.

Good investing,

Tom

The Next Currency to Crash - $YCS

Fri, 23 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"What's your slam-dunk currency trade right now?"

I asked my friend Jack that question earlier this week...

Jack's the best guy I know at currency analysis. I've known him for 16 years. Back in the mid-1990s, we worked 20 feet away from each other at a firm specializing in international investing. Jack taught me a lot about currencies and managing my trading (cutting your losses and such).

This week, I drove down to tiny Palm City, Florida, where Jack's Black Swan Trading group is based. We spent a few hours catching up.

Jack explained his favorite trade right now... and he explained an easy way for an individual investor to take advantage of it...

In short, Jack thinks the Japanese yen today is like a ticking time bomb. It's ready to explode... We just don't know when. As of this month, the time may be right.

You see, right now, the Japanese yen is extremely overpriced. It's just off a huge high versus the dollar. The only time it's been higher against the dollar was in early 1995.

Since that's the only similar high in the yen's history, let's take a closer look at what happened next...

In 1995, the Japanese yen was comically overvalued. Everyone knew it. But just like the last six months, the yen kept going higher. Then the bottom fell out.

Soon after the yen peaked in 1995, it crashed... The yen lost 20% of its value in three months and a total of over 40% of its value in three years. That's an astonishing fall in the value of a developed country's currency.

Back then, if you'd bet against the yen with just a little leverage, you could have made a whole lot of money – easily triple-digit gains... even more depending on how you traded it.

Jack told me we're seeing a similar setup today in the yen... and the potential is there for similar gains.

You see, the Japanese can't raise interest rates, since the economy is in the tank. And the Japanese government is issuing more debt to make up for its shortfall in tax revenues. So in essence, it's creating more money out of thin air.

Look, when a currency pays no interest, and its government is writing I.O.U.s, then the value of a currency should fall. Nobody wants something that pays no interest and is increasing in supply.

But for the last six months, the Japanese yen has done the opposite of what it "should" have done. It's gone up... until this month. Jack believes after its huge rise from April, the yen may finally be changing its trend.

In the past, it was tough for individual investors to bet against the yen, particularly in retirement accounts. You couldn't trade futures or options, and you couldn't go short. But now, there's a way to bet against the yen AND get a bit of leverage AND do it all in your retirement account. It's through the ProShares UltraShort Japanese Yen Fund (YCS).

Here's a chart of YCS over the last six months. You can see as the yen has strengthened, these shares have crashed... down from $25 to $20 in the last six months.

But the fund is already up from $20 to $21 this month as the yen has weakened. (It's a "double inverse" fund, meaning for every 1% move down in the yen, this fund should move up 2%.)

A move back to April's level of $25 would be a 25% gain from YCS' lows around $20 – and even then, the Japanese yen would still be near its all-time highs versus the dollar. My point is, even after that gain, there's still much more room to run.

If you know my writing, you know I look for three things in a trade: 1) cheap, 2) ignored or hated, and 3) an uptrend. In the yen's case, we have all three.

Time to follow my friend Jack's advice (the best currency analyst I know), and bet against the yen. The double-inverse Japanese yen fund (YCS) is the smartest way to play it. Thanks, Jack!

Good investing,

Steve

The Road Map to Making a Fortune in Emerging Markets - $NLC

Thu, 22 Oct 2009 08:00:00 EST

By Chris Mayer

Two weeks ago, I returned from my second visit to the financial capital of India, the city of Mumbai (formerly Bombay).

On the first go-round, I was mainly in tourist mode and visited several other cities, too. This time, I spent a week here just working, meeting businessmen, and talking with investors.

I got a different perspective simply living there on a day-to-day basis. I got a sense for more mundane things like the harrowing daily commute. I got a better feel for how the city works. Mumbai looks and feels chaotic and messy, but for millions, it gets the job done.

Some parts of Mumbai are tough to stomach, such as the widespread and seemingly hopeless poverty. While at a stoplight, little kids came up to our car window begging. One was carrying a little baby, barely clothed, dirty. It was sad to see.

One of the things about India that I always find striking is the contrasts. There is great poverty in this city, but also great wealth. Often, they are side by side. For instance, we visited the oldest gold market in the city. It's part of a larger market that also houses a temple to the goddess Mumbadevi, from whom some think the city got its name. This market was packed with people. Cars, including ours, rolled slowly down the narrow streets, honking their horns at indifferent pedestrians.

Old, dilapidated buildings lined the streets with shops selling everything from linens to pineapples. In the gold market, we saw several blocks of gold merchants selling gold in all its forms. We stopped to visit the largest market maker for gold in the city.

We entered a decrepit building with towering slums around it. We got in a creaky elevator little bigger than a phone booth, with an attendant who opens and shuts the door. The elevator looked about a hundred years old. We got to our floor and went down a filthy hallway so narrow that you had to turn your shoulders to get by other people in the hall. Finally, we got to this gold merchant's office.

When we got inside, we entered a modern looking office – clean, wooden floors; air conditioned; a wall-mounted TV playing the Indian version of CNBC. You'd never know the squalor and chaos that exists just outside the door.

When it comes to India, I also always think of the infrastructure opportunity here. Our other daily trips throughout the city brought home how rough the basic infrastructure is. The roads are often clogged with cars and people and the occasional cart drawn by man or beast. The effects of this poor infrastructure are wide and deep.

India, for instance, actually wastes more fruit and veggies than it consumes, according to The Economic Times, India's largest financial daily. India is the second largest producer of fruits and vegetables in the world, but 30%-40% never make it to their destination.

As the Times reports: "Gaps such as poor infrastructure, insufficient cold storage capacity, unavailability of cold storage in close proximity to farms and poor transportation infrastructure all are contributing factors."

There are also routine brownouts and blackouts throughout India, often lasting for seven hours or more, which lead to food spoilage. It may seem hard to believe, but after being here for a week, I believe it.

Somehow, so far, India has managed to overcome many of these obstacles. The economy is still growing more than 6% annually. We saw more evidence of this, too, when we spent some time going over a cross section of midcap and small-cap Indian stocks. Many are growing 30%-40% per year, and have done so for 15 or 20 years.

One of the people we met on this trip was Jayesh "Jimmy" Seth, who runs KC Securities, a large brokerage firm in Mumbai. We also met his son, Harsh, a 22-year-old Northwestern graduate who returned home to make it in Mumbai.

Over lunch one day, Jimmy told us the advice he gave Harsh: "When you are in America, take note of all the daily conveniences you enjoy. Write them all down. Then, when you come back to Mumbai, check that list again. Whatever's missing, start a business around that."

It's a good piece of advice, as India has lots of gaps to fill, such as those basics of infrastructure. I think it's a brilliant strategy for all emerging markets. Look for the gaps in these emerging markets. Find what they don't have but want or need. Invest in the companies that fill those gaps.

For U.S. investors, you can play this idea with shares of water, agriculture, and energy producers. The huge and growing countries of India and China simply don't have enough of these resources to grow. They must buy them.

For instance, my readers have made good money on Nalco Industries (NLC), one of the world leaders in water filtration equipment and services. We've also made great returns in Potash, the world's largest agricultural fertilizer company.

I'm also bullish on smaller, local India plays. More will become available to U.S. investors as India grows. These ideas – and the resource investments I just mentioned – are the road map to making a fortune in emerging markets.

Sincerely,

Chris Mayer

Gold Guru: "$1,000 Is the New Floor for Gold" - #CNBC

Wed, 21 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"$1,000 an ounce is thought by some to be gold's ceiling..." John Doody wrote last week to his subscribers. "We see it as now the FLOOR."

When John Doody talks about gold, I listen...

This year, his Top Ten List of gold stocks is up over 100%. John says his Top Ten list has averaged a 30% annual return since the start of his newsletter, Gold Stock Analyst. John has been writing Gold Stock Analyst for about 15 years.

One thing I like about this former economics professor is that it's all about the numbers to him... It's not about conspiracy theories like it is with so many gold bugs. For example, John will actually tell you when gold stocks are overpriced according to his model – imagine that with dyed-in-the-wool gold bugs!

So why does John think gold will keep going up now, when many others say it's bumping up against its ceiling? I asked John that yesterday...

It's simple, he said, if you just compare the price of gold to interest rates.

In short, when interest rates are high, then gold (which pays no interest) falls. And when interest rates are low (like they are now), gold rises. To keep it apples to apples over time, John subtracts inflation from interest rates.

In the 1980s and 1990s, you earned high rates of interest on your cash. So gold was flat for those two decades. Plain as day.

But for much of this decade and the decade of the 1970s, you typically earned NEGATIVE interest on your cash (after you subtracted inflation). So gold has soared.

John sees those negative real interest rates continuing. So gold will keep rising. Simple as that.

For the specifics, currently, the consensus inflation rate forecast for the first half of 2010 is around 2%. But banks basically pay you no interest. So you have a choice: Own gold, which pays no interest. Or hold cash, which pays you NEGATIVE interest, when you take inflation into account.

Yesterday, John explained that since the Federal Reserve will likely keep interest rates very low for a very long period of time, gold can keep going higher.

I asked John if gold had become too popular these days. He said absolutely not...

"Look, hedge funds are just starting to get into gold. Retail investors haven't bought. CNBC calls gold a bad inflation hedge. Central banks haven't bought. If gold was popular, I'd have a hundred thousand subscribers, not a couple thousand. We've got a long way to go. $1,000 isn't the ceiling... it's the new floor."

John ran the numbers, and in a sneak preview of his upcoming issue, he proves how the price of gold has "beaten" inflation fivefold since it first started freely trading 40 years ago.

"CNBC says that gold has only gone from a peak of $850 in 1980 to $1,050 today – for a $200 gain," he said. "So CNBC's conclusion is that gold is not a good inflation hedge... That's just plain wrong, but the people believe it."

To be brutally honest, if you plan to be a serious investor in gold stocks – and you're willing to do your homework – you're foolish if you don't read John's newsletter. John updates his unique valuation numbers every month for the 75 precious metals companies he follows. Plus, he writes up a detailed analysis about once a quarter on each company.

It is the best starting point in the business. It's the first place I go to find out how much gold each company has in the ground and what its cash flows are.

If you agree with John – that $1,000 gold is the new floor, not the ceiling – chances are, you're buying gold stocks. And if you're buying gold stocks in size, you ought to do it with John's help.

Good investing,

Steve

My Favorite Ways to Hold Cash - $SHV

Tue, 20 Oct 2009 08:00:00 EST

By Tom Dyson

In yesterday's DailyWealth, we discussed America's huge new appetite for saving cash and paying off debt.

For the first time in years, individuals want cash. The paradox is that at the same time, investors hate cash. The government, the mainstream press, and even most newsletter writers have emphatically discouraged its ownership, leading most investors to dump their cash in favor of stocks, gold, and other noncash assets.

With cash so desirable, yet so shunned by investors, I think now's the perfect time to own it. But the thing is, hiding bank notes under your mattress is not a sensible way to invest in cash. The cash doesn't pay you interest, and you run the risk of theft or fire destroying your nest egg.

I'm not particularly comfortable leaving my money in a local bank, either. Already, 170 banks have collapsed in this crisis, and thousands more will follow. If I were a banker, my first motivation would be making sure my institution was a safe warehouse for people to deposit their money. I'd trade on this reputation. Profit would be a secondary consideration.

But nowadays, depositors don't care about the safety of their deposits. FDIC insurance allows modern bank managers and loan officers to pursue profits without considering their reputations. So naturally, most banks have reached too far for profits, and the worst offenders will eventually collapse.

I don't count on FDIC insurance. I worry the government will bankrupt itself in its fight against the recession. When the crunch comes, it won't be able to honor the promises it has made through the FDIC system.

So where do I think you should put your cash?

The first, absolute safest, cheapest way of storing your cash is to buy Treasury bills. When you buy a Treasury bill, you lend the U.S. government your money for less than one year. These ultra short-term debts of the federal government have virtually no credit risk or interest-rate risk. The downside is, you'll get less than 0.5% interest per year in these instruments.

You can buy these bills through your broker, possibly your bank, or visit www.treasurydirect.gov. It's the Treasury's official site for selling its bonds. You can open an account at Treasury Direct and manage your investments directly through the Treasury's website. You'll pay no commissions or trading fees this way, unless you ask the Treasury to sell a bill in the open market before it matures, in which case, it'll charge you a flat $45 fee.

You can also buy T-bills on the stock market, using exchange-traded funds. This is a convenient option if you don't feel like opening a new account with the Treasury, or you want to be able to sell at short notice.

The iShares Barclays Short Treasury Bond Fund (SHV) holds a basket of the shortest-term T-bills. It has an expense ratio of 0.15%. It has $1.6 billion in assets. This year, its price has fluctuated between a high of $110.47 and a low of $110.18.

If you want to earn more interest than T-bills will pay – and have the flexibility of checking – I recommend you open a checking account or take out a CD with EverBank. EverBank promises to pay an interest rate in the top 5% of nationwide interest rates. It doesn't charge checking fees or monthly fees, and it offers even higher "teaser" introductory rates for the first three months. Right now, it pays 2.51% for the first three months and 1.72% thereafter.

Steve Sjuggerud and I know Frank Trotter, EverBank's founder. Frank is a prudent banker and his bank is safe. But if it's important to you, the checking account is FDIC-insured. EverBank controls more than $6 billion in assets.

Cash is the most contrarian asset in the world right now... and there's huge demand for it at the same time. With economic risk and uncertainty the highest they've been in decades, I recommend you start building a cash pile immediately.

Good investing,

Tom

Money-Compounding Machines in India

Fri, 16 Oct 2009 08:00:00 EST

By Rahul Saraogi

When we look at the Indian markets today, it gives us a tingling feeling at the bottom of our hearts...

We see a market with demographics, demand, entrepreneurship, rule of law, the English language, functioning capital markets, and a culture of minority equity ownership. Above all, we see a market that is giving us the ability to build positions in the compounding machines of the 21st century at prices that are unimaginably cheap.

So quite honestly, we don't think it matters what the Sensex (India's Dow) is going to do over the next week or month or year. We don't think it matters whether the U.S. economy will enter a double dip recession or not. It does not even matter when or by how much central banks will raise interest rates.

We just need to accumulate holdings in these exciting companies – these compounding machines – and sit tight for a very long period of time.

India continues to be considered (with other emerging markets) as a risk play relative to developed markets, going up and down based on risk taking and risk aversion. In order to make sure that our compounding machine is not interrupted by periods like October 2008, we construct our portfolio with stocks of companies that will continue to perform even if the stock markets were to shut down for a period of time.

And in order to make sure that we are not forced to fold our hand, we avoid leverage at all costs.

We seek to find good companies at attractive prices and then just hang on to them. Most of our time is spent avoiding and ignoring the noise and excitement around us. A lot of people know the right thing to do but many of them are carried away by the noise and emotion around them.

We are very fortunate to have excellent partners who share our investment philosophy and have enabled us to implement this compounding machine. We love what we do and to borrow from Warren Buffett again, we "tap dance to work very morning."

Regards,

Rahul Saraogi
Chennai, India

The Federal Reserve Is Openly Telling You to Buy Gold and Silver

Thu, 15 Oct 2009 08:00:00 EST

By Porter Stansberry

At the end of last year, I began writing about what I saw happening as the Federal Reserve started assuming the liabilities of the investment banks and the federal government began deficit spending at an unprecedented pace.

I've been calling these changes the "End of America" because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world's reserve currency.

To get an idea of why I'm concerned, have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.

What you see here is Bullard's estimate of the future growth of Federal Reserve assets.

A lot of people seem to have forgotten something that is very much on Bullard's mind: The growth of the Fed's balance sheet isn't nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.

Even though these direct purchases are unprecedented, that's only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.

That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss.

Since the expansion of its balance sheet got started in earnest last fall, the trade-weighed value of the dollar has fallen 15%. Keep in mind, the Fed's assets form the base of our monetary system. The more it grows, the more money and credit become available to the banking system. And the faster the money supply grows, the more likely the value of the dollar will continue to fall.

As Bullard points out, a doubling of the monetary base won't necessarily cause an immediate doubling of inflation... But suppose it takes 10 years? The average inflation rate would still be 7% a year. If inflation does grow to this average level, at least a few of those years will see inflation running at or near double digits.

Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least 50%. Likewise, we would see high-yield corporate bonds yielding at least 20% – double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.

It's going to happen. I guarantee it.

My forecast only assumes the Fed's actions don't continue past what's been announced so far. My bigger concern is what happens if Congress decides the Fed did such a good job fixing the housing bubble that perhaps it should lend a hand on health care or the entitlement time bomb? Although a small handful of people have been writing about the enormous fiscal challenges that all the Western democracies face over the next decade, I'm sure most of today's equity investors don't really understand what lies ahead.

Consider these numbers: Right now, today, without counting any of the unfunded liabilities of our government (which are very real obligations, by the way), our national debt is $12 trillion. There are roughly 100 million American households. So that's a national debt of roughly $120,000 per family. That's more than the average American owes on his mortgage.

Think about what this means in terms of interest payments. Even with interest rates at all-time lows around the world, the U.S. will spend almost $400 billion on interest to service our existing national debt – that's a 3.3% interest rate. Currently, the U.S. takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes.

It seems obvious to me this money will never be repaid – could never be repaid. The only real question is how much of a "haircut" our creditors are willing to accept in terms of the loss of purchasing power of the U.S. dollar. So far, inflation remains relatively benign. Our creditors don't seem to be losing very much. But we know this will change and could change rapidly, as the Fed continues to expand its balance sheet with less and less creditworthy assets. At what point will our creditors finally decide they can't finance any more of our deficit spending because we're simply not worth the risk?

No one in Washington realizes you can't borrow money endlessly. By the time Barack Obama leaves office (assuming he is reelected), the national debt will likely exceed $20 trillion. What will our creditors charge us to finance this debt? How will our debts compare to the value of our economy? It is impossible to know what will happen. But here's the one thing that seems most obvious: Our borrowing costs will go up, a lot.

At some point in the next few years, our creditors are going to stop believing in our ability to pay our debts in honest money. I don't know what will break first, but we can't go on printing money to prop up our banks and spending money we don't have to prop up our culture of entitlement.

And I don't believe there's any way to avoid it – certainly not with the political system we have in place right now. To protect yourself, you'll have to be very good at managing your assets. You also need to make sure to take the advice we've been issuing for years: Buy and hold plenty of real, honest money that cannot be debased by the government. Buy and hold plenty of gold and silver.

Good investing,

Porter Stansberry

What I Learned Inside the Vault - $CLCT

Wed, 14 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

I couldn't believe David handed it to me.

I was holding seven-figures of value between two fingers, inside an impenetrable vault.

I knew exactly what I was holding... It was one of the world's rarest stamps. Ounce for ounce, it might be one of the world's most valuable items.

When I entered the Collector's Universe building, I'd asked David if he'd ever seen one of those stamps in person before. He grinned, but didn't say anything. He simply started the tour. When we later got to the vault, he explained that grin. (I enjoy going on company visits... you learn so much.)

David Hall is the president and cofounder of Collector's Universe, a company that authenticates and grades a variety of collectibles, including coins, stamps, sports cards, autographs, and more. So it's not surprising that one of the world's most valuable collectibles was there that particular day.

David's company single-handedly changed the way rare coins are traded. Before 1986, you had to be an expert in coins. After 1986, you didn't have to know much at all... You just had to look for the company's patented sonically-sealed container. (The coin-grading division is called Professional Coin Grading Service. And today, thousands of PCGS-graded coins sell on eBay every day, sight unseen.)

Collector's Universe trades on the stock market under the symbol CLCT. As of its latest report, it had $24 million in cash and no long-term debt. Yet its market value is only $42 million. Subtracting the cash, what the market is essentially saying is David's highly successful coin-grading and collectibles-grading business is only worth $18 million.

For years, David had been using the cash flows from coin grading to expand into other areas, most recently grading and authenticating diamonds. But this year, the expansion plans got nixed. The company is going back to its bread and butter.

With no plans for expansion now, there's no need for over half of the company's value to be sitting in cash. If I were on the board, I'd recommend distributing most of that cash to shareholders... either in a one-time distribution or with the start of a dividend. If the grading business truly generates the cash flow David described, and there are no expansion plans at the moment, then the company could sustain a high dividend for a long time.

I haven't done the research into David's company's stock to recommend it in my newsletter. The reason is, quite frankly, it's too small to recommend to my paid subscribers... The bottom would fall out the day I say "sell."

I tell you this story because there are hundreds more stocks like CLCT out there... hundreds of microcap companies that have no brokerage-firm coverage selling for little more than cash in the bank. Yet they have legitimate cash flows from their businesses.

With a little digging, you can find them. I love these ideas because they're "too small." You're not going to get burned in Wall Street's game because companies this size are too small for Wall Street to pay attention to.

The work isn't that hard if you know a bit about investment analysis... but it is work. Read the 10-K. Read or listen to the quarterly conference calls. And then call the company and ask questions about things that don't make sense or add up. If you're paying next to nothing and you're buying into an uptrend, then your chances are better.

If you're willing to roll up your sleeves a bit, you'll find hundreds of microcaps worth digging into deeper. You could make a few times your money in them.

Good investing,

Steve

Two Ways to Profit on a Huge New Currency Trend

Tue, 13 Oct 2009 08:00:00 EST

By Tom Dyson

The Reserve Bank of Australia hiked its interest rate this week...

This was a big piece of financial news. Central banks around the world have been cutting rates for two years, and interest rates are as low now as they've ever been.

When a company raises its dividend, its stock becomes more attractive to investors. Its share price rises. When a bank raises interest rates on its savings accounts, people deposit more money in the bank. It's the same way in the currency markets. Rising interest rates make a currency more attractive and it rises against other currencies with stable interest rates...

The governor of Australia's central bank hinted there would be more interest rate rises on the way. This could be the start of a new trend of rising interest rates around the world. Analysts say Canada, New Zealand, South Korea, and Norway are likely candidates to follow Australia's lead.

If this is the start of a new trend of rising world interest rates, you can expect big new trends in the currency exchange markets, too. That's because interest rates are the single most important driver of exchange rates in the currency markets.

Australia's currency has risen this week as investors celebrate the higher interest rates they'll receive for owning it.

On the other hand, the dollar has fallen 15% in the last seven months. Newspapers will say it's because the Saudis want to price oil in euros or because the Fed prints too much money. This is garbage. The real reason is, it has the lowest interest rate of any major currency in the world except Japan, and speculators expect these low rates to remain indefinitely.

So how do you make money from a new global trend of rising interest rates?

While other central banks are considering raising rates, the Fed has so far refused to join the party. The dollar is the worst-performing major currency in the world this year as a result.

Two weeks ago, the Bureau of Labor released its monthly unemployment report. The report showed that somewhere close to 6 million jobs have vanished from the American economy in the last 18 months. As I write, jobs are still disappearing, albeit at a slower pace.

The employment situation hasn't been this bad since World War II ended and defense contractors eliminated 4.3 million jobs no longer needed for the war effort. With the ongoing unemployment bloodbath, rate hikes in America are unlikely until next year.

First, this gives you a great opportunity to buy the dollar right now, while it's cheap and no one is anticipating rate hikes from the Fed. For regular investors, UUP is the best way of profiting if the dollar rises. It's a fund that replicates the performance of the dollar against a basket of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. By the time Bernanke announces his first rate hike next year, the dollar will have already rallied 10% or more.

Second, a trend of rising interest rates on currencies is great for people looking to buy gold at lower prices. Gold has no interest rate. So when interest rates rise on world currencies, they become more attractive – and they rise – relative to gold. This is especially true with the dollar. It's the world's reserve currency and gold is incredibly sensitive to movements in its interest and exchange rates.

As long as unemployment keeps rising, there's no way the Fed raises interest rates and gold prices will stay high. But next year is a different story. The first hint of rate increases by the Fed will send shockwaves into the gold market. If you're looking to buy gold, wait until Bernanke starts raising interest rates. By then the market will have already discounted the rate hikes and gold will be forming a low point.

Good investing,

Tom

What the Man Behind the Most Profitable Short Sale Ever Says Now

Mon, 12 Oct 2009 08:00:00 EST

By Tom Dyson

Robert Prechter just closed out the most profitable short sale in history...

Prechter is one of my favorite stock market analysts. He writes a newsletter called the Elliott Wave Theorist. Over the past three years, the advice in his newsletter has been sublime.

Prechter is pessimistic. He thinks America is heading into the worst depression in 300 years... the worst since the founding of the American Republic. Doug Casey, founder of Casey Research, is another bear. He jokes Prechter is the only analyst who thinks things will be worse than he does.

Prechter makes his stock market predictions by studying America's social mood. When he expects an improvement in the social mood, he'll predict a rise in the stock market. When he sees Americans becoming pessimistic, he turns bearish.

In 2007, for example, America was feeling more prosperous than ever before. But problems were beginning to appear... especially in the real estate market. House prices had peaked a year earlier, and the credit markets had started to lock up. New Century Financial collapsed in March 2007.

Prechter knew these problems would infect America's social mood. On July 17, he told his readers to expect a major decline in the stock market:

"Aggressive speculators should return to a fully leveraged short position now," he wrote.

Here's another example: In February 2009, the stock market had fallen 58%, the largest bank in the world, Citigroup, was on the brink of bankruptcy, and Wall Street was in total panic. The daily sentiment index was registering 3% bulls for the S and P 500. In short, the social mood was the darkest it had been since the 1970s. Prechter sensed a turning point.

On February 23, Prechter told readers to expect a strong bounce in the stock market and advised them to close out their short positions. "To be successful," he said, "you have to sell when people love 'em and buy when they don't."

Prechter claims selling the S and P in July 2007 and closing the position in February 2009 was the most profitable short sale in history. "This [800-point profit]," he says, "is surely the largest number of points that anyone has ever made, or will ever make, in the S and P futures in 19 months, and maybe ever."

Less than two weeks after I'd received this letter, the social mood turned positive and the stock market started a record-breaking rise. Here's what Prechter predicted this new trend would do to America's psyche...

"Regardless of its extent, [the rally] should generate substantial feelings of optimism. At its peak, the President's popularity will be higher, the government will be taking credit for successfully bailing out the economy, the Fed will appear to have saved the banking system, and investors will be convinced that the bear market is behind us."

As I write, seven months later, the S and P is up over 60% from its lows... As Prechter warned, a wave of optimism is washing across the investment community. Except for his remark about the President's popularity, which is waning, Prechter's description of the social mood in America could not have been more accurate.

Thing is, Prechter has now turned bearish again. The S and P has rallied to his target area of 1,000 to 1,100, and he says a new turning point in the social mood is at hand. In his August issue, he advised his clients to get bearish again...

"Investors should continue to keep the bulk of their wealth in cash and the safest possible cash equivalents, in the safest institutions," he writes. "If you actively invest in the stock market with money you can afford to put at risk, it's time to return to the short side."

Although it's worth noting Prechter's pessimism, I wouldn't bet against the market until it displays a bit of weakness – like if the S and P 500 fell to its lowest low of the past month (around the 1,025 area). This ensures you're betting with the short-term trend, rather than against it.

Good investing,

Tom

A Simple, Incredible System that's Beaten the Market by 10% a Year

Fri, 09 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"Using a form filed with the government that's available to everyone, we've found ways to beat the market by as much as 10% a year."

Investment analyst Mebane Faber told me that recently (in so many words), over dinner with my good friend and mentor Van Simmons.

Mebane ("Meb" for short) is a relatively unknown young analyst, but he's doing fantastic work...

Last week, I told you about his simple investing system that didn't lose money for 35 years. (It's from his book, The Ivy League Portfolio.) What's more, it beat the market with less risk. And astoundingly, you only have to look at your portfolio once a month – 12 days a year. It's simple, but incredible... the mark of a great idea.

Last night, he explained another simple but incredible idea...

"Big investors – those with over $100 million – have to disclose their investment holdings in government filings called 13Fs," Meb explained. "The information is backward looking... But I've studied it, and it turns out it can be extremely valuable."

One thing Meb does is "clone" the big hedge-fund managers, like George Soros, David Einhorn, and Seth Klarman. Through these government filings, he can use these gurus' expertise without paying them big fees.

Meb explained that "mining" these government forms to copy the best portfolios works best with investment managers who hold stocks for a long period of time... investors like the world's second-richest man, Warren Buffett. Let's take a closer look at how you could use Meb's ideas to "clone" Warren Buffett's portfolio out of the government filings...

The 13F filings are quarterly. To keep it simple, Meb takes Buffett's top-10 holdings and equally weights them in his portfolio. Three months later, when the new 13F filings come out, he changes the portfolio.

Meb said, "It turns out that a simple portfolio that invests in Buffett's top 10 stock holdings, equal-weighted and rebalanced quarterly, beat the market by 10% a year from 2000 through 2008."

(A recent academic paper, called Imitation is the Sincerest Form of Flattery, corroborates Meb's research. It used a similar strategy from 1976 to 2008, and it beat the market by 11% per year.)

"Mining" these 13F forms turned out to be so valuable, Meb created a way to backtest these ideas automatically. He and his partner Maz Jadallah founded AlphaClone and made his program available to the public... for way too cheap (with a free 14-day trial and a "Guest Pass").

Now, you can easily backtest the performance of a portfolio that simply follows the stock ideas of the biggest and best money managers as soon as their portfolios are available through government filings.

If you're interested in picking your own stocks, or you'd like to see how you could have performed if you'd followed the best hedge-fund managers in the business, give AlphaClone a try.

And keep an eye out for Mebane Faber. This young analyst keeps delivering original, simple ideas.

Good investing,

Steve

An Answer to the Biggest Question Investors Face Right Now - $CRB

Thu, 08 Oct 2009 08:00:00 EST

By Chris Weber

One year ago, in the October 1, 2008 issue of the Weber Global Opportunities Report, I used as a title "The Immediate Danger is Deflation."

My view was, to put it briefly, that the world's central banks can try to inflate as much as they can, by creating money and supplying it to banks. But if banks are afraid to lend it out, or are rebuilding their capital base, and if businesses and consumers are afraid to borrow – and rebuilding their own balance sheets, meaning saving more and spending less – then there is not much that central banks can do.

One year later, I am sorry to see no real evidence that things have changed. If anything, consumers are even more afraid to borrow and spend now than they were a year ago. The heightened threat of becoming jobless may have a lot to do with this. Those who borrowed madly in the past are now in a kind of hangover. They are now trying to save more.

The markets themselves are bearing witness to this. If they feared inflation, interest rates would be much higher than they were a year ago. Instead, they are lower. A year ago, the US 10 year T-note yielded almost 4%. Today it yields just 3.17%.

The Commodities Index, CRB, has fallen from 325 to 259 in the same year. Though the Dow Jones has risen sharply since last March, remember that last October 1 it was close to 11,000, not the 9,700 area it is now. London's FTSE is up a bit: from 5,000 to 5,100. But that's just 2%. Japan has fallen from over 11,000 to 9,800.

Nearly every piece of real estate can be purchased for less money today than was the case one year ago. In other words, cash has been king this past year. And that is another way of saying that deflation dangers have still not gone away.

But one area has done better than the rest. Let's turn to precious metals.

One year ago, gold was $860. Now it is $1,042. Silver was $12.30 last September 30. Today it is $17.43.

For my readers who have been with me for years, I know I have been repeating the same mantra for all that time: Have the core of your net worth in a mix of cash and precious metals.

For my new readers, I repeat this, and point out that this approach has saved a lot of money that would otherwise have been lost. Both cash and precious metals buy more than they did one year ago, two years ago, and even farther back. I meant it as a cautious method to conserve money in perilous times, but it has turned out to be pretty much the best approach one could have.

There are those who are absolutely certain that the future will be high and even hyperinflation. There are others equally certain that deflation will be our eventual outcome. To me, it seems like nothing has changed in the 35-plus years I've been in this business. Back when I started out, there were the same arguments, the same certainty on both sides. Only the names of the combatants have changed.

For me, let's just say I'm not smart enough to know what the outcome will be. The only thing on earth that I am absolutely certain of is that I will die; that indeed everyone alive today will one day die. Speaking only for myself, I may die tonight or I may live 50 more years.

Beyond that, I am reasonably certain that history shows that paper money not backed by gold or silver loses value over time. One million dollars 50 years ago was a lot of money. It was even more money 100 years ago. Today, well, it's not chicken feed, but let's say it doesn't buy what it did 50 years ago, or even 20 years ago.

But in terms of assets like stock and property, one million dollars (or euros, etc.) buys more than it did one year ago.

This may just be a temporary development; it may be the start of a new trend. I am not going to bet everything I have on either one or the other. Instead, I've been protecting myself from both. And that's why I have been owning and building cash right along with the precious metals I own.

I have cash in case I am wrong about inflation vaulting the price of gold and silver higher. I have gold and silver in case I am wrong about the value of holding cash. I have tried to protect myself against both inflation and deflation. I own some real estate in case that goes up. It would make sense for me to own some general stocks that would do well if the world economy does well too.

In other words, my watchword has been to protect yourself in case you are wrong: to protect yourself against being hurt by any eventuality. This was my view one year ago, and it remains my view today.

To me, the future is unclear right now. We stand on a kind of knife edge. On one side lies deflation, and on the other inflation. I have tried to hedge myself against both, and yet not be hurt if either happens. The recommended combination of cash and precious metals has not only done well in the past year. It has done well since 2000.

And while I am watching developments every day, I see no reason to change my approach, which has worked so well. Of course, it has worked in the sense that it has given me more money in my net worth than a decade ago. But more important, it has enabled me to sleep well during all that time – a decade which has been very turbulent and disappointing for many if not most. And to me, this gift is priceless.

Good investing,

Chris Weber

Pocketing Cash from those Oblivious California Fools - $PZA

Wed, 07 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Greetings from sunny California... one of my favorite places to visit, but a place I'll never call home.

I choose to live in Florida. Florida has no state income tax. And in my hometown, you can still park your car at any beach or on Main Street without feeding a meter. Not in California. And with California's current financial situation, it can never go back.

That's why I won't move to California. I know it'll cost me...

California's state income tax is among the highest in the country. And it is likely going higher... No wonder more people are moving out of the state than moving in. Property prices have crashed (so government revenues from property taxes have crashed). California's public schools rank among the worst. Unemployment is at record highs. The list goes on.

Instead of working on these problems, California's politicians are "balancing" their massive budget deficit by "using accounting tricks that couldn't fool a grade-schooler," according to legendary bond-fund manager Bill Gross. California has created questionable "IOUs" at a faster rate than your typical Latin American dictator. And California has the worst credit rating of any state.

In short, California is broke. It's no secret. But somehow, California's politicians are in complete denial. To solve its problems, California needs massive government spending cuts (ha!) and massive tax hikes (just try to pass those).

If California is in such trouble, who would do something as foolish as loaning California money? Well, I did... In January of this year, I recommended you buy California government bonds..

We were actually making a safe bet. I figured the U.S. government wouldn't let California fall apart. And the bonds were paying very high yields for government bonds – tax free.

We were actually making a safe bet. I figured the U.S. government wouldn't let California fall apart. And the bonds were paying very high yields for government bonds – tax free.

Back then, investors were scared. The best opportunities often appear during times of fear. So I recommended a way to profit from "those oblivious fools."

Today, I recommend you pocket your profits from that trade...

Back in January, I recommended the PIMCO California Intermediate-Term Bond Fund. The total return since I recommended it has been about 10%. That might not sound exciting, but a double-digit return in less than a year in boring municipal bonds is exceptional. Even better, a decent portion of that gain – all the income – is tax free!

But now, the trade is over. Here's why:

In short, the "free" money is behind us. Investors are not nearly as scared as they once were. The reward in California municipal bonds is no longer worth the small risk.

California tax-free bonds only pay about 1% interest above the national average for state tax-free bonds. The thing is, California is essentially bankrupt. Other states (while struggling) aren't.

As recently as June, the "spread" between California bonds and the other states was more like two percentage points. The current spread around one percentage point isn't worth it...

So take that double-digit profit and move it to higher ground. My favorite place to move that money and keep it tax free is the PowerShares Insured National Municipal Bond Fund. The symbol is PZA.

The tax-free yield is about 4.5%. You'd have to earn 6% in a taxable account to equal 4% tax-free.

I love California. But I don't want leave my investment dollars in the hands of California's government, not for such a tiny return. Pocket your cash from those oblivious politicians. Take the 10%. And move it to higher ground, in something like PZA.

Good investing,

Steve

How to Earn 9% from a Cash War Chest - $HTH-PA

Tue, 06 Oct 2009 08:00:00 EST

By Tom Dyson

Gerald Ford is a banking legend...

In the 1980s, when the savings and loan (S and L) industry collapsed, Gerald Ford bought more than 30 failed S and Ls. He turned these S and Ls into profitable banks, and made a fortune. He used the same strategy after the recession of the 1990s, making a second fortune.

Today, with a net worth of $1.3 billion, Gerald Ford is No. 559 on the Forbes list of the world's richest people.

As we exit the great credit crunch of 2008, Ford is eager to repeat this trick for a third time...

The FDIC insures bank deposits. When a bank fails, the FDIC seizes the bank and auctions off the leftover assets to other banks. Ford plans to buy these broken banks from the FDIC. He's already raised $2 billion in cash for this purpose, and he's secured a license from bank regulators to participate in the auctions.

I suspect Ford is going to make another billion from this plan. So earlier this year, I advised readers of my newsletter to contribute their money to Gerald Ford's $2 billion "busted bank" war chest.

We could have bought stock in Gerald Ford's holding company. It's called Hilltop Holdings. It trades on the NYSE under the symbol HTH. We would have been entitled to whatever profits Gerald Ford's busted bank strategy makes. And we would have been entitled to vote on anything related to Gerald Ford's company. In short, we would have been co-owners with Ford.

But we did not buy stock with Gerald Ford. We loaned him money instead...

By making the loan, we ensured our money is totally secure. Gerald Ford has a legal obligation to pay us income and redeem our loan at full value. We'll take him to court if he fails to pay us back a single cent he owes us. If we'd bought stock, we'd have no such power.

Besides, I knew Gerald Ford would need plenty of time to make his acquisitions. While he looks for opportunities, we're getting 9% a year in income. Shareholders get no income. (Gerald Ford hasn't been able to make a deal. You can read about his frustrations in this recent Forbes article.)

Most people don't realize it, but you often have the choice to make a loan instead of a stock investment when looking at a company you like. There are over a thousand "loans" like the one we made to Gerald Ford trading on the major stock exchanges. These loans have symbols just like stocks. You can buy and sell them through any discount broker with two clicks of a mouse. They go in your IRA and command the same commissions and fees.

Take the symbol "ATT" on the NYSE as an example. It's a 6.375% senior note issued by ATT. Or "CPV." It's a 6.75% bond issued by CBS Corp, trading on the NYSE. Comcast issued a 7% bond that matures in 2056. Its symbol is "CCT" on the NYSE.

The Gerald Ford loan we made is a "preferred share" issued by his holding company Hilltop Holdings. You can find it under "HTH-PA" on Yahoo Finance. It trades on the NYSE. We're up 32% so far, but it's still a good buy under $25. (It's trading around $24.60 today.)

Right now, we're in a time of extreme uncertainty. The stock market has had a huge 60% rally in seven months. And several indicators I follow are pointing toward a potential drop. At this point, I'm much more comfortable making loans to companies, where they must pay me back in full and they have to pay me interest each quarter. This way, I don't have to worry about stock market volatility or dividend cuts.

The next time you consider investing in a company, take five minutes to see if it has any loans floating on the NYSE or the Nasdaq. You'll get a much more stable investment with a guaranteed income stream.

Quantum Online is the definitive source of exchange-traded fixed-income securities. It's free to set up a username and password. Once you're in, enter a symbol or scroll through the lists of fixed-income securities.

Good investing,

Tom

These Charts Will Save You a Fortune - LQD

Mon, 05 Oct 2009 08:00:00 EST

By Tom Dyson

Last month, I showed you corporate bond fund LQD...

As long as this bond fund is rising, you have nothing to worry about. Russell Napier, a well-known stock market historian, studied market tops and bottoms over the last 100 years and showed corporate bonds tend to lead the stock market by several months at important turning points.

When this bond fund starts falling, you should exit the stock market, but until then, you have a green light to speculate...

LQD has turned lower in the last four trading sessions. Please keep an eye on this chart. If it breaks below 103, immediately exit the stock market. A large decline may be imminent.

LQD isn't the only indicator I follow to track the health of the market. I also watch the British pound...

The British pound is one of the most important financial indicators in the world. Britain was at the epicenter of the credit crisis. It had a huge housing and mortgage bubble... even bigger than the housing bubble in the U.S. Britain also had a huge banking and finance bubble. In this bubble, London became the world's largest financial center. Finance represents almost 10% of Britain's GDP.

In other words, the pound is the perfect symbol for housing and financial excess. When the pound is rising, it means the pain is subsiding and the storm clouds are breaking. When the pound is falling, financial misery is increasing.

Here's the chart of the pound. On Friday, the pound broke down to new four-month lows.

Here's another bearish development. Commodities are falling in terms of gold...

Gold is a safe haven. People turn to gold when they're afraid of financial chaos. But when they're optimistic, people use more energy, eat more food, and live in bigger houses. These activities require industrial commodities like oil, copper, aluminum, and corn.

So the relationship between gold and industrial commodities is an excellent barometer of fear and greed in the stock market. When commodities fall against gold, there's fear in the air. But when they rise against gold, people are growing optimistic.

This chart shows the price of gold set against the CRB Index of commodities. This barometer led the stock market by three weeks in March, when the bull market started.

In September, the commodity-gold ratio broke down to a new four-month low. It hasn't made a new low for three weeks. But watch this one. There may be misery coming in the stock market if it makes a new low...

If you invest in the stock market, you need to follow the performance of these three charts. They're among the best gauges of fear and greed in the market. As their prices go, so goes the stock market.

Right now, these charts are hinting at a new downtrend. My advice, hold off on making new buys, cut your most risky positions, and tighten your stop losses.

Good investing,

Tom

This System Works So Well, I'm Not Sure I Should Tell You About It

Fri, 02 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

If I weren't working on the same research myself, I wouldn't have believed it's possible...

The results of this system are so powerful, I hesitate to share them with a large audience. But I get paid to share the best investment ideas I find. So I feel compelled to tell you about this one...

In short, investment analyst Mebane Faber came up with an incredibly "dumb" system that beats the market. It crushes it actually...

Meb's system delivers the investment "Holy Grail" – higher returns with lower risk. It's hard to believe, but the system really is incredibly simple. And it's totally legit. While the traditional disclaimer "past performance doesn't equal future performance" applies, the fact is:

From 1973 (the start date for his data) through 2007, Meb's simple system never had a losing year. (Think about that!)

In 2008, when everyone lost money, Meb's simple system beat everything and was barely down. (I'm not sure what the exact figure was, but I assure you, it was only slightly negative.)

I remembered Meb's story when I opened up the most recent issue of Fortune... It turns out, Harvard and Yale's college endowments are down 27% and 25%, respectively, in the 12 months ending June 30. I tell you this because I first learned of Meb's system in a book he wrote, called The Ivy League Portfolio: How to invest like the top endowments and avoid bear markets.

The book is interesting... He shows you how Harvard and Yale have beaten typical money managers over the long run, among other investment ideas. It's worth owning just for that section.

But what interested me most wasn't Harvard's famous system in the front half... it was Meb's unknown system later in the book. Way in the back, after all the stuff about the endowments, I found Meb's little timing system.

He wrote the book before the Great Recession. How has his system performed since? It's hitting new highs:

But that's the way it's always been... I think the worst performing 12-month period (out of all possible intra-year 12-month periods) was a loss of less than 10%. Great stuff.

In the simple version of Meb's system, you only look at the markets 12 days of the year. And there are only five funds to own: U.S. stocks, foreign stocks, bonds, commodities, and real estate stocks.

In Meb's system, you have 20% of your portfolio in each of these five asset classes... and you are either in or out of each of them every month. So you might be only 40% invested one month, then 80% invested another month, depending on the system.

Look, Mebane Faber came up with this system... and he deserves credit for it... So I'm going to ask you to get it from him. Go to www.TheIvyPortfolio.com and get his book. Read his blog. If you want to know the "science" behind it, click on the "Timing Updates" tab and download his academic paper.

It's worth learning...

It's had only one down year since starting in 1973. And it's delivered the investment "Holy Grail" of higher returns with lower volatility... all in a portfolio of just five things that you only have to look at a dozen times a year.

What more could you want? Check it out: www.TheIvyPortfolio.com.

Good investing,

Steve

The Last Great Offshore Tax Shelter

Thu, 01 Oct 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"I can't believe Porsche allows people to do this," I said out loud as I came out of the hairpin turn and sped back up to 100 miles an hour.

On Tuesday, I drove brand new Porsche cars on Porsche's private race track in Leipzig, Germany. Porsche let me (and my colleagues from The Atlas 400 Club) push their new, $100,000+ cars as hard as we wanted.

I was flying around the track in a new 911 Carrera. My wheels were squealing at the brink of spinout about a third of the time. And yet I could hardly keep up with my DailyWealth colleagues Ned and Brian in the new Panamera Turbo in front of me.

That day was unquestionably one of the most exciting things I've ever experienced. It was arranged for The Atlas 400 Club by my old friend Joel Nagel. A while back, he happened to meet the CEO of Porsche Germany at an international Rotary conference, and they hit it off. Joel speaks fluent German. And over dinner at the CEO's house, Joel put this day together for us.

While we were flying back to Munich that night, I sat next to Joel. He's an American attorney based in the States. And for most of his legal career, he's done tax planning. He told me he recommends his clients keep a portion of their assets offshore if possible.

I asked him about what's going on in Switzerland... With banks like UBS turning over records to U.S. tax authorities, it seems like its famous bank privacy laws are disappearing.

Joel said, "Oh, Switzerland is definitely still open for business." And he told me about a completely legal offshore option...

With what he called "the last, best tax shelter," you can...

· Grow your wealth without paying income tax on the gains.

· Choose how your money is invested.

· Access your funds without triggering taxable capital gains.

· Pass your money on to your heirs, without being subject to estate tax.

· Legally avoid reporting this offshore program to the IRS.

The idea at its core is simple and crafty: It's life insurance... But the important part is, the insurance is from an offshore life insurance company that issues U.S.-compliant policies.

The "trick" is, the money is officially the life insurance company's. But you can have it invested on your behalf by Swiss advisors. The Swiss are happy to do it... They're investing money from an offshore insurance company, not from you, the American.

Since it's legally life insurance, the money you've built up in that policy can be passed on to your heirs outside of estate tax. And you can access it by borrowing against it.

Now, I assume the fees are high. You're paying the cost of life insurance and then you're paying for an investment manager to invest your premiums. So it probably doesn't make sense to consider this unless you're able to put six figures into the premiums for a few years.

I don't have all the details... It was just a casual conversation with Joel. I'm not a tax advisor or a lawyer. And I'm not sure I got everything exactly right.

But my friend Joel Nagel is an attorney specializing in tax planning. We've been friends for a long time. And he's an interesting guy, definitely worth getting to know.

If something like this sounds interesting to you, don't take my word for it... To get in touch with Joel for more information (and for corrections on whatever I got wrong) about "the last, best tax shelter," e-mail him at nagellaw@aol.com.

Good investing,

Steve

This Asset Is Like Gold, Only Better

Wed, 30 Sep 2009 08:00:00 EST

By Chris Mayer

In the past few years, there's been an explosion of investor interest in "hedges."

Investors want to own foreign real estate for a hedge against a big depression in the United States. They want to own gold for a hedge against a dollar crisis. They want to own oil for a hedge against inflation.

But consider this "hedge factor"...

Between 1941 and 2002, average farmland values outpaced the growth of inflation by 2%.

In fact, some call farmland as good as gold with yield – because you clock in steady income from rents while you wait for the value to grow. I can think of no better asset to own during any kind of financial crisis.

In some ways, farmland is even better than gold or silver. At least farmland is an intrinsically useful thing. It provides a tangible yield in the form of good things from the earth. We all have to eat. As consumers trim their sails, they'll give up a lot before they give up their calorie intake.

Governments, particularly in times of crisis – like now – have a tendency to flood the system with money in an attempt to "goose" the economy. Mostly, such efforts have succeeded in destroying the value of the currency in question.

Anyway, if you believe that we will continue to feel the bane of inflation, then farmland's performance in the 1970s will give you some comfort... While you lost half of your money in the S and P 500, your farmland kept its value nicely. Again, I think that's rooted in the fact that farmland is intrinsically useful. It produces useful and needed things.

Now imagine what farmland might do in today's climate, in which you have not only the likely prospect of inflation, but also a tightening supply of farmland and rising demand for crops. You have biofuels eating up more of our grain supply. I imagine you'll do quite a bit better than in the 1970s.

Farmland treated British investors great just last year. As British housing prices collapsed in 2008, British farmland value rose by 21%. Over the last five years, Brit farmland rose a total 135%. Forget commercial property. That's not a bad ROI in my book.

And there's one more way to look at it: This hedge can outperform gold. In Britain, the farmer outpaced the gold owner. Expanding land values rode up 115% since 1983, versus gold at 81%. You can be sure institutional investors are already placing their long-term bets. Almost half the farmland bought there last year was snapped up by banks and funds.

The obvious investment conclusion: If you're worried about the dollar, the economy, or any other problem, buy farmland today. This is hard to do directly through the stock market... so I encourage you to consider a private deal. You can play agriculture through companies that manufacture irrigation equipment, produce fertilizer, or operate grain-handling facilities.

Check these investments out soon. I think we're in for broad farmland/agriculture rally that should be good for hundreds of percent returns. As you can see from farmland's past results, it's a great hedge in all kinds of environments.

Sincerely,

Chris Mayer

These Commodity Stocks Are on the Brink of Disaster - $UNG $XOI

Tue, 29 Sep 2009 08:00:00 EST

By Tom Dyson

Investors in natural gas stocks have lost their minds. They're about to lose their wallets, too...

There's a major wipeout coming in the natural gas business. North America has too many natural gas producers. The industry needs a major cleaning out. The most inefficient, high-cost producers must fold. This will bring supply and demand back into balance.

Low prices are the market's mechanism for culling the weak players. Four weeks ago, natural gas prices hit a seven-year low of $2.50 per thousand cubic feet. But so far, nothing's happened. No player wants to cut production when they've invested so much money developing it. "Getting $3 is better than nothing," they think. "Better to pump out more now before it falls even farther."

In the last four weeks, gas has jumped above $4 and is closing in on $5. With higher prices, production is growing. According to industry researcher Baker Hughes, the number of rigs drilling for natural gas in the United States has gained in nine of the last 10 weeks. Meanwhile, the oversupply of gas is so great, we've almost run out of room to store it.

The Energy Information Administration says U.S. natural gas inventories rose again last week. They are now a just a chip shot from the record high hit in November 2007. Natural gas storage in producing regions – including Texas, Louisiana, and Oklahoma – already reached a record high last month.

Aubrey McClendon, CEO of Chesapeake Energy, the largest independent gas producer in America, figures America's natural gas industry will fill up all available storage by the end of the year. There'll be "involuntary curtailments," he says.

This chart compares UNG, the exchange-traded fund (ETF) for natural gas (in black), with XNG, the AMEX index of natural gas producers (in blue). XNG is an index of natural gas producers like Chesapeake, Devon, Anadarko, and Apache.

In the last two years, the price of natural gas has fallen almost 70%, yet natural gas stocks are still trading at almost the same prices. In other words, investors in natural gas stocks have totally ignored the huge collapse in natural gas prices.

And get this...

This chart shows the AMEX oil producer index (in black) cast against the AMEX natural gas producer index (in blue). The AMEX oil producer index contains names like ConocoPhillips, Chevron, and Hess.

Natural gas stocks have thrashed oil stocks over the last nine months, even though the price of oil gained 60% over this time, while the price of natural gas lost 13%.

The guillotine is about to fall on natural gas production. And I can't see any reason for this strength in natural gas stocks. My only conclusion: Investors in natural gas stocks are living in la-la land. The dream ends when storage runs out or gas prices fall back down again.

Aggressive traders should immediately short high-cost, speculative natural gas stocks. Conservative investors should wait for the storm to pass. They'll be able to pick up the highest-quality producers at bargain prices. I expect some of these companies will be paying 20%-30% dividend yields in the aftermath.

I'll let you know when the time comes...

Good investing,

Tom

The Hardest Trade Today - #biotech #stocks

Mon, 28 Sep 2009 08:00:00 EST

By Dr. Steve Sjuggerud

I hate to say it, but this year has been "easy."

The "hard trades" have fallen out of the sky and into my lap. When the bond market was at risk of imploding, True Wealth readers made the hard trade and got into risky bonds safely, trading a "junk bond" fund for a 52% profit. We bought stocks in March, when the market looked awful, and are up 40%. And this summer, when real estate was the "hard trade," we bought commercial real estate. We're up 37% and there's more to come.

While everyone was panicking and looking out for the Next Great Depression, we've probably had the best year in the history of True Wealth. But now that everything is up, what is the "hard trade"? Sometimes it's difficult to pinpoint...

Look, the stock market rose 50% in six months from its bottom in March. That was the best six-month rally in our lifetimes. What's the easy trade for everyone now? To sell! People LOVE to lock in small profits. But that's not how you make BIG money in your investments.

The hard trade right now is this: DON'T SELL. The harder trade is to add new positions. In True Wealth, we're taking the harder trade... We're adding a speculation: biotech. If you catch just one biotech bull market, you may never have to work again...

In the early 1990s, biotech stocks roared 1,347% (according to the Datastream Biotech Index). Every $100,000 invested turned into nearly $1.5 million. And since 1983, biotech stocks have launched into four separate triple-digit bull markets. The average bull market in biotech lasts about two and a half years... and the average gain is a stunning 565%.

So you can see why we want to catch the next bull market in biotech. Even better for us, we're far overdue for a real biotech stock boom. The Nasdaq Biotech Index is still nearly 50% below its highs a decade ago. The great thing is, while stock prices have gone down, the innovation has continued... and so have sales.

Biotech stock prices have stayed flat, but sales have been going up. So by definition, the price-to-sales ratio of biotech stocks has gone way down. We're seeing values today that we haven't seen since, well, the last 500%+ boom in biotech, from 1998 to 2000.

We're Seeing Biotech Prices We Haven't Seen Since the Last Huge Bull Market

So as measured by price to sales, biotech stocks are a bargain... they're as cheap as they've been in over a decade.

Also, in what boggles my mind, biotech stocks are completely ignored right now. I find this crazy. It's the exact opposite of a decade ago. Ten years ago, NOBODY wanted to hear about gold. I know that for a fact. And EVERYONE wanted the next great technology back then...

Now, everyone wants gold... but who cares about biotech?

Meanwhile, the major biotech index (the S and P Biotech Index) quietly broke above its February 2009 high to hit a new high for the year. Biotech is in a definite uptrend.

The three criteria we look for in an investment are: 1) cheap, 2) hated or ignored, and 3) an uptrend. Biotech offers the rare combination of all three of those factors right now.

It's time to make the hard trade and buy.

Good investing,

Steve

How to Retire With No Savings

Fri, 25 Sep 2009 08:00:00 EST

By Dr. Steve Sjuggerud

"Do you have any savings?" I asked my friend Tony this week.

"Not really, no," he answered.

Tony is in his 50s. And he didn't sound worried in the least. How is that possible?

I was surprised Tony was so relaxed...

My wife, for example, couldn't consider living like that. My wife is hard-wired to save instead of spend. She really doesn't spend. And even though we have saved and invested well... she STILL worries.

Tony quit his job three years ago. And then he sold off a good deal of his possessions to finance living his dream.

Tony now builds extremely fine guitars. He's earned critical acclaim. He's doing what he always wanted to do. And he intends to do it for the rest of his life.

This week, I visited Tony in Indiana. I came to visit so he could help me build my own guitar...

"This is my retirement," Tony said, pointing his arms around his shop.

"The Larson Brothers built guitars until they died in their 70s," he reminded me. "And John D'Angelico and Jimmy D'Aquisto built guitars until they died, too." Tony intends to do like these legends did.

A few years ago, he had a "good" job as a computer graphic artist. And before that, he worked as a cabinetmaker. But making cabinets or pushing a computer mouse were not what he wanted to do with his life.

Guitars were always his passion. He'd been building and tinkering with them since the 1980s. So he took the leap. If it didn't work, he figured, he could sell off the contents of his guitar workshop and return to being a graphic artist.

I am not as bold as Tony. But I do admire him for following his passion. He took what must have seemed like an enormous risk three years ago. But now he's able to say something most people will never be able to say... he's living his dream, doing what he wants to for a living.

Tony has "retired" with basically no savings. And yet he is happy, because he has set up the rest of his life to do what he loves.

Is following your dream worth a shot? Can you turn that into a way to make money? If it doesn't work, do you have something to fall back on? You only live once... Think about it.

Good investing,

Steve

The Easiest Way to Tell If Gold Is in a Bubble

Thu, 24 Sep 2009 08:00:00 EST

By Chris Weber

When spot gold closed on September 11 in New York at $1,005.10, it was the highest price on record... though by the time you read this, it may have been surpassed.

Gold traded higher than this, back on March 17, 2008. When that day opened in Asia, the early morning Australian and Hong Kong markets pushed gold quickly up from $1,000 to a high – so far an all-time inter-day high – of $1,033.

But as Europe opened later in the day, the price fluctuated between $1,020 and $1,030. As the U.S. markets opened, the price plunged down to $1,000 and ended just three dollars more than this.

So if you are going by the closing trade of that day, which happens to be New York as time zones go, then what happened on Friday, September 11 broke the record.

This breakthrough has drawn a lot of publicity. Hedge funds are now heavily tilted toward the long side of the gold futures market. Many gold stocks sit near all-time highs. Mainstream newspapers and magazines are starting to carry stories about gold.

This bullish sentiment has led many people to ask me if gold is far too popular now... or even in a "bubble."

My answer: I see nothing like a bubble yet. Ask your friends or neighbors these questions:

"What do you think about gold or silver as an investment?" and if they answer in a positive manner, further ask: "What are the best ways to own it? How do you own it? What percentage of your assets do you have in the precious metals area?" If this seems too invasive, ask, "What percentage of a person's assets do you think should be in the precious metals area?"

That's what I do. The people I ask have no idea what I think about gold or silver. I ask just as a sort of person – maybe on the slow side and not that bright – who wants to know about the area.

From what I'm told, almost no one is in gold or silver. Maybe a few shares of Newmont Mining, but as a percentage of their total net worth, we are talking tiny here.

People who think gold is in a bubble are often people who did not see real bubbles when they happened. In the real estate boom, the easy profits were on everyone's lips. Same with the Internet bubble 10 years ago.

When I mentioned gold back in 2001 and 2002, when I accumulated it, I got looks from people as if I were crazy.

These days, the crazy looks are gone. But now I often only get answers that gold or silver may be a good investment, but they don't have any themselves. Try it yourself.

Of course, if you've been mouthing off about how great gold and silver are, you probably want to ask people who don't already know your views: They won't think you are trying to "lay your propaganda" on them.

Granted, the public awareness of gold and silver as investments is much, much higher today than in 2001. No one was buying then, and people thought you were crazy if you told them you were. But things haven't changed in that the average person still does not own any.

When everyone you know is talking about how to make "easy money" buying gold or silver, then we may be in a different era. But right now, I think both metals have more room, and most likely much more room, to go.

Good investing,

Chris Weber

How to Legally Smuggle Gold - #Gold

Wed, 23 Sep 2009 08:00:00 EST

By Dr. Steve Sjuggerud

Did you know the President confiscated all the gold of American citizens in 1933?

It's true... all in one quick swoop of the pen:

UNDER THE EXECUTIVE ORDER OF THE PRESIDENT Issued April 5, 1933 All persons are required to deliver ON OR BEFORE MAY 1, 1933 all GOLD COIN, GOLD BULLION, AND GOLD CERTIFICATES now owned by them to a Federal Reserve Bank, branch, or agency, or to any member bank of the Federal Reserve System.

It was the height of the Great Depression. And the U.S. government desperately needed to shore up its financial position. So in a dramatic move, it took everyone's gold.

Could it happen again? Well, put it this way: Who could have imagined it would happen the first time around?

Every day on the radio, I hear ads about buying gold as a store of wealth. But folks who held gold as a store of wealth in the Great Depression had that "wealth" confiscated by the government.

I had lunch with my longtime friend Michael Checkan on Saturday. Michael's business is called Asset Strategies International. He finds legal ways to protect and diversify your wealth. Michael told me about a neat little idea he came up with. I thought the idea was worth sharing with you...

"When the U.S. government confiscated gold back in 1933," Michael told me, "you were allowed to keep your gold jewelry. The President didn't ask for Grandma's wedding ring."

So Michael started a gold jewelry company, called First Collector's Guild. This company is different from other jewelry companies. It thinks about the gold first...

For example, each piece of First Collector's jewelry measures exactly one ounce or five ounces of gold. Most gold jewelry is 14-karats (which is only 58% pure) or 18-karats (which is 72% pure). But each First Collector's piece is 24-karat gold – which is 99.99% pure.

These pieces are, of course, jewelry... not currency.

For example, if you wanted to, you could carry 100 First Collector's necklaces out of the country, and you wouldn't run afoul of the currency laws. And then you could convert them to money at most gold dealers in the world. It's like legal gold smuggling.

Now, I don't recommend doing this on any scale. First off, you'd look like Mr. T. going through customs. And secondly, it's just not cost effective.... First Collector's jewelry is handmade and costs a premium over the price of gold. But a gold dealer will only pay you a discount to the gold price. Finally, I'm not a lawyer, but I'm sure that if you tried to bring a load of First Collector's jewelry across the border, someone would decide you're somehow breaking a law.

However, for a small portion of your gold, First Collector's jewelry is an interesting idea...

My DailyWealth colleague Tom Dyson was also at the lunch, and he was considering buying some for his wife. "My wife would like some jewelry, but I don't like getting ripped off through jewelry-store markups. If I bought this, my wife would get something she wants to wear... and I'll be confident that it's not worthless. It has real gold value."

If you feel the way Tom does, you might consider Michael's necklaces or bracelets... You specify the length, gold weight, and style you want. It takes four to six weeks to arrive at your doorstep.

With this idea, you can keep your significant other happy while you're confident you own something with real value. And in the extreme case, if we see another 1933 again, your gold should be safe.

It's an interesting idea. For a small portion of your gold holdings, jewelry from First Collector's is worth considering...

Good investing,

Steve