DailyWealth

$TLT - Why Gold Is a Sure Long-Term Bet

Fri, 21 May 2010 08:00:00 EST

By Porter Stansberry

What a spectacle...

In an utter and complete repudiation of its founding principles, the European Union's central bank (ECB) has decided to copy the U.S. Federal Reserve's 2008-2009 strategy of "papering over" Europe's massive debt problems. The ECB will provide nearly unlimited credit to Europe's sovereign borrowers, while also buying troubled assets from Europe's largest banks.

This latest development has caused a significant change in what I call "the most important chart in the world."

Readers of my investment advisory are familiar with the chart by now... as we've been publishing it nearly every month... and even more frequently in the daily S&A Digest. It shows the value of U.S. government long bonds (represented by the fund "TLT"), the price of gold (represented by "GLD"), and the price of silver (represented by "SLV").

This is the battle for monetary supremacy... The market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?

For more than 60 years, the U.S. dollar has unquestionably been the world's safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.

And that's what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury (more about this below), investors realized there's no real difference between the U.S. dollar and the euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold... and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.

DailyWealth $TLT

FTSE NAREIT - Read This Research and Make a New Fortune Every Decade

Tue, 09 Mar 2010 08:00:00 EST

By Tom Dyson

If you'd have put your savings with money manager Jeremy Grantham in 1985, you would have multiplied your money 13 times and beaten 99% of other investors.

Grantham is the chief investment strategist for a giant asset management business named GMO, which manages around $100 billion. He cofounded GMO in 1977... and he's made billions for his investors. His core mutual fund has returned almost 11% a year since 1985, trouncing the S and P 500.

But to make a even more money from Grantham, don't invest in his mutual fund. Read his quarterly investment updates instead...

If you did nothing else but follow the predictions in Grantham's reports, you'd make a new fortune every decade...

Grantham's investment reports are the clearest, no-nonsense appraisals of the investment markets you'll find anywhere. They are free and available to the public. And the long-term predictions Grantham makes are legendary in their accuracy.

Take the predictions he made 10 years ago, in a report published in July 2000...

Grantham predicted large-cap American stocks and tech stocks would be the worst performers. Specifically, he said the S and P would decline 1.8% a year on average for a decade... and be a worse investment than cash.

"We've just experienced the greatest bull market in American history," said Grantham. "I'm sure it's going to be followed by the usual consequences."

If you had shorted the stock market the day you read this report, you could have made a fortune over the next three years as the technology bubble popped and America fell into recession.

Then Grantham advised his readers to buy real estate investment trusts (REITs). REITs are stock market vehicles for buying real estate. Grantham showed that despite the biggest bull market in America's history, REITs were trading at a 25% discount to physical real estate, while physical real estate was trading at fair value.

"The REITs are cheap – really, seriously, absolutely cheap," he said. "There are no cranes all over America. The market's in a sweet spot. The bankers aren't lending ridiculously. Real estate is a good solid asset with a good solid return."

If you'd followed Grantham's advice then, you would have caught the full real estate boom. Between 1999 and 2007, the benchmark FTSE NAREIT index rose 244%.

Grantham did it again in 2007. "It's bubbly time!" he said in his April 2007 report. "The busting of the bubble will be across all countries, and all assets with the probable exception of high grade bonds."

In early 2009, at the bottom of the credit crunch, Grantham declared the market was finally "cheap" and said market returns over the next seven years would be "much above the average of the last 15 years." So far, he's right again.

So what's Grantham saying right now?

Grantham published his forecasts for the next seven years in his most recent letter. (You can read it here, along with all Grantham's archived letters.)

Grantham likes emerging-market stocks and bonds, but his favorite investments are high-quality U.S. stocks. These are the stocks with the most dependable businesses, the longest track records, the most cash, and the strongest brand names.

The five biggest positions in Grantham's fund right now are Wal-Mart, Microsoft, Google, ExxonMobil, and Pfizer.

Good investing,

Tom

$WMT, $MCD - My Two Favorite Stocks for Generating Income in Today's Market

Mon, 08 Mar 2010 08:00:00 EST

By Tom Dyson

In last week's DailyWealth, Steve Sjuggerud published compelling research suggesting the worst is past and there's another bubble coming. The Federal Reserve is the reason. We've never before seen recessions when the Federal Reserve is in "accommodating" mode and interest rates are at zero.

"The recession is most certainly over," he wrote. "In fact, the more likely scenario is a boom."

I hate to take the opposite side of a trade from Steve. He has an uncanny ability to always be right. But I'm not convinced the recession is over. My reason is simple: The Fed's usual policies are not working any more.

I found this last week...

"Lending falls at epic pace," screamed the front-page headline of the February 24 issue of the Wall Street Journal.

It seems America's banking system is so troubled by losses on commercial and residential real estate loans, it's refusing to lend more money. And the economy is so grim, no one wants to borrow money anyway. So the number of loans outstanding in the banking system is declining.

In 2009, U.S. banks registered their largest full-year decline in loans outstanding in 67 years, according to the Journal. The worst carnage happened in the final quarter of 2009. In the final quarter, banks wrote down $53 billion in loans, the highest write-off rate since the FDIC began collecting data 26 years ago.

When credit contracts and the market forces bankers to write down loans, you get hundreds of bank failures.

Three banks failed in 2007. Twenty-five banks failed in 2008. One hundred and forty banks failed in 2009. Fifteen have failed already this year, and the FDIC says hundreds more will fail soon.

The FDIC is the government branch charged with insuring banking deposits and seizing failed banks. It maintains a secret list of problem banks. To prevent panic, it won't name the banks on the list. But it does publish the size of the list. Right now, there are 702 banks on it... a 16-year high.

(Few people know this, but the reason most of these banks haven't failed already is the FDIC lacks the staff and the money to seize them right now.)

In short, I believe America reached the limits of indebtedness in 2007... and no matter what the Fed does, it can't stop the forces of thrift. America is saving more, spending less, and borrowing less. While these conditions persist, there's no way the recession disappears.

In other words, we're in a once-in-a-century debt deflation and the Fed's interest rate policy can't stop it.

As Richard Russell, one of my favorite newsletter writers puts it, "There's a hard rain a' coming."

In light of this situation, cash should form the bulk of your investments. Don't worry about interest. You'll be so busy snapping up ridiculous bargains at the bottom of the shakeout, you won't care about a couple of years without interest. Cash should be invested in T-bills or T-bill mutual funds. You shouldn't trust your bank to remain solvent or the FDIC to insure your deposits. Keep a little under your mattress and a little in the bank for your day-to-day needs.

As for stocks, buy businesses that are loaded with cash and generate massive amounts of additional cash each year. To do this, they must have recession-resistant business models and minimal debt. These businesses will pay you dividends while everyone else is starving for cash. These dividends will feel extremely valuable.

I like Wal-Mart and McDonald's. They check all my boxes... and their stock prices both rose during the Great Bear Market of 2008.

The beauty of this approach is, if I'm wrong and Steve is right about the recession being over and another boom coming, these two stocks will still keep generating cash and paying larger dividends each year. Heads you win, tails you win, too.

Good investing,

Tom

$SSRI, $SA - Why I'm Buying Back into Gold Stocks Now

Fri, 05 Mar 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Back in December, I got spooked about gold...

I actually told my subscribers to sell their gold. We sold a position we'd bought back in 2003, when gold was incredibly unpopular.

Here's what tipped me over the edge... The morning the issue was going to print, I'd already seen ads for gold on TV. I'd already heard ads for gold on the radio on my drive to the office. And it was only 5:30 a.m.

The financial data at the time backed up my anecdotal evidence... Investors were loading up on gold.

If you know me at all, you know I want to buy when nobody is paying attention, and I want to sell when everybody is interested. In December, everybody was interested. So in December, we sold our gold.

The timing was excellent. The price of gold peaked in early December. And so did the price of gold coins. Coin prices have fallen maybe 20% since then. The precious-metals stocks we sold – Silver Standard and Seabridge – have also fallen since we got out, by roughly 20%.

My opinion of gold has changed 180 degrees since December. It's because investor opinion about gold has switched, from remarkably bullish to pretty darn bearish, pretty quickly. Let me show you what I mean...

Back in December, the "sentiment surveys" showed investors were at highs for the year. Now that has changed... Two weeks ago, public opinion hit its lowest level since last April (when gold was at its lows for 2009, below $900. Now THAT was a time to buy). That's what we want to see.

Investors have also fled gold stocks since December... For example, the Rydex Precious Metals Fund saw its assets fall by more than half from December to today (from over $350 million to $177 million now). Traders like to use Rydex funds to chase trends. They were bullish on gold stocks in December. Now they've given up on gold stocks. That's what we want to see.

Meanwhile, gold's "price action" is just great right now... The dollar has soared in recent weeks. But gold is soaring more. Also, investors who didn't want dollars now don't want euros either. They don't want paper currencies at all. They're buying gold. New highs are part of bull markets, and gold is now hitting all-time highs in terms of euros. That's what we want to see.

The bull market in gold is back!

Typically, I'll try to find a crafty way to get into an attractive asset... I try to find a way that has extraordinary upside with little downside risk. For example, when my True Wealth readers first got into gold, we bought gold coins. Our downside risk was limited to the gold content of the coin. (We pocketed 273% profits on our MS63 Saint Gaudens coins.)

Often I find a "backdoor" way to buy... an undiscovered way. I try to at least. But today, the "backdoor" way into gold is right through the front door...

In the latest issue of True Wealth, I shared my indicator that has led to 100%-plus gains within 12 months, every time it's signaled "buy" since 2001 (as far as the indicator goes back).

I don't think it's fair to my paid subscribers to share this indicator with you here for free in DailyWealth. But I will tell you its message:

Buy gold stocks now.

Good investing,

Steve

$SSRI, $SA - Why I'm Buying Back into Gold Stocks Now

Fri, 05 Mar 2010 08:00:00 EST

ETFs - Why You Should Learn How to Invest Outside of Stocks...Immediately

Thu, 04 Mar 2010 08:00:00 EST

By Chris Weber

A year ago I was getting calls from old friends saying that they were scared to be in stocks any longer.

These were people who just had bought and held for decades. In fact, a year ago was the right time to start buying stocks, not selling them.

Nowadays, I see the opposite comments. People are proud to own stocks. Of course they are... since they've risen 60% in the past year.

As one reader put it (in the February 24 review of my letter in www.stockgumshoe.com/reviews, a site where readers rate the newsletters they read): "I am a traditional market investor, dividing my investments primarily between stocks and mutual funds."

Now I'm no Sherlock Holmes, but a sentence like this tells me that this reader is middle-aged at the youngest. And it all makes perfect sense, really. Take a person who started investing in 1982. From then until 2007, he'd had a full quarter-century of gains. If the market fell, as it did in 1987 or from 2000-2002, it always snapped back.

The fact that a 25-year bull market for stocks had never happened before in history that probably means little to him. After all, it happened to him. It was the experience of his entire life.

But what if a 25-year bull market was an anomaly? A once in a lifetime event? For someone who, say, turned 30 around 1982 and is now nearly 60, this is a hard thing to contemplate. All your life things have been a certain way. You've come to accept them as normal. Any change is thus temporary. That is, until it isn't, and you are left holding on to past dreams.

I've seen this happen several times over my life. As a kid in the late 1960s, I listened to investors who had ridden the great stock bull market from 1949 to 1966. The Dow soared from about 150 to 1,000 during those 17 years, a great rise of over 550%. They thought it would last forever, and when the Dow briefly touched new highs of over 1,000 in early 1973, they all thought they were back to the races. In fact, they were in for hard times. By mid-1982, the Dow was well below where it had been in 1966.

Then came the people who had gotten rich in the precious metals markets during the 1970s.

Silver soared from $1.29 to nearly $50: a rise of over 6,000%. Gold rose by 2,300% from 1971 to 1980. For many of them, all through the 1980s they waited while what they thought was a temporary correction turned into a 20-year bear market. Many held all during this period with only hopes and memories to sustain them.

I believe we are seeing the same thing now with those who hold stock as a huge portion of their total investments. Getting back to the reader quoted above, his use of the term "mutual funds" already dates him from the time when these were every investor's dream. Younger investors well understand that with mutual funds, you are paying managers a fee that is too high for what they give back. Exchange traded funds, or ETFs, accomplish the same thing at a much lower cost.

And to say that you are diversified between stocks and mutual funds is to say that you are not truly diversified at all. A recent letter to me from another reader shows he understands this. A new reader, he comes on with 2% in cash and 98% in stocks, and he knows he has too much in stocks.

Probably most new readers are in this position. For them I would advise setting a trailing stop and selling if that stop is reached. This stop can be 25% from the recent post-March '09 highs.

In my way of thinking, the stock market has given a rare reprieve to those who hold most of their money in it. This is a time to be moving out. You don't even have to abandon the stock market entirely (though I myself very nearly have). You can just lower the percent you hold in stocks to 33% or so.

Cash and physical metals could make up the other two-thirds. You can have some precious metals stocks, but try to arrange things so that you own them with as little risk as possible, and have patience. A new leg down in the general market could take down all stocks, even the mining stocks.

I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again.

Regards,

Chris Weber

Japanese Stocks - Buying the World's Cheapest Stock Market

Wed, 03 Mar 2010 08:00:00 EST

By Dr. Steve Sjuggerud

There is no greater investment value in the world of stocks today... and possibly in all of history... than small stocks in Country X.

Astoundingly, Country X has 200 companies trading on its stock exchange for less than the cash on the books. Said another way, they're selling for less than FREE.

If you could snap your fingers and buy all the shares of one of those companies, you'd have more cash than you spent... and you'd get an entire business for free.

Take a look at just how cheap smaller companies in Country X are compared to some "popular" markets:

Index Dividend Yield Price-to-BookRatio Price-to-SalesRatio

China (Shanghai) 1.36% 3.20 2.23
U.S. (Nasdaq) 0.86% 2.64 1.85
India (BSE30) 1.07% 3.31 2.15
Country X 2.36% 0.83 0.40
The popular markets have an average price-to-sales ratio of about 2. Meanwhile, small stocks in Country X have a price-to-sales ratio of 0.4. Small stocks in Country X would have to rise FIVEFOLD to be on par with these other markets.

The average price-to-book ratio of the other countries above is about 3. Small stocks in Country X would have to rise nearly FOURFOLD to be in line with these other countries based on this measure.

You might think, for stocks to be this cheap, something has to be terribly wrong in Country X... But I assure you it's quite normal.

It's a nice place to visit. I was there a few years ago and was amazed. The cab drivers wear dress suits and gloves and are incredibly polite... Heck, even the street-sweepers dress formally.

Country X is not Pakistan or Venezuela... or some other dangerous place to put your money. But its shares – unbelievably – are a better value than stocks in Pakistan and Venezuela.

Country X is actually less corrupt than the U.S., according to Transparency International's 2009 Corruption Perception Index. Citizens obey the laws, and your money is safe.

Brazil and Russia might be hip with investors... Stock markets in those countries were up over 100% last year. Country X's main market was up only 2% in 2009. You haven't missed a thing in Country X.

Country X is not an "emerging" market at all. It is a developed country with some of the highest incomes in the world... Income per person is nearly US$40,000.

Stocks are cheap in Country X simply because investors have given up hope. You'd give up, too... Stocks in Country X hit 25-year lows last year!

DailyWealth Country X

Mortgage Bonds - How to Make 19% Dividends from Bonds

Tue, 02 Mar 2010 08:00:00 EST

By Tom Dyson

Last week, I told my 12% Letter readers to invest in mortgage bonds. I can just imagine their reaction when they read my advice...

"Tom, you want me to invest in mortgages?! Are you crazy? Aren't they the terrible investments that have been causing problems for banks and the economy in general?"

Well... Yes, that's true. Between 2002 and 2008, Wall Street's real estate machine cranked out $5 trillion of these mortgage bonds and sold them to investors all around the world. (For perspective, the total market cap of the S and P 500 is only $10 trillion.)

Wall Street firms thought these mortgage bonds were excellent investments too. Firms like AIG, Bear Stearns, Lehman, and Fannie Mae kept billions for themselves. Then the housing bubble popped, homeowners stopped making their mortgage payments, mortgage values collapsed, these bonds crashed, and it wiped out Wall Street.

So what exactly is a mortgage bond?

Specifically, it's a bundle of mortgages Wall Street turned into a financial security during the last real estate boom. If you took out a loan to buy your house, your mortgage is probably inside one of these bundles somewhere. On Wall Street, they call these bonds "residential mortgage-backed securities," or "RMBS."

Here's the thing: When a company goes bankrupt, its stock quickly disappears from the stock exchange. It's different for a mortgage bond. A mortgage bond is a bundle of thousands of loans made by banks against people's houses. Some of these loans might be paying as expected. Others might have defaulted. A few might be in bankruptcy. Some might have been resolved for cash. In short, unwinding these mortgage securities is a nightmare... and it's going to be years before these mortgage bonds are split open, unwound, and liquidated.

In the meantime, these bonds are rotting on Wall Street balance sheets, dragging down earnings and preventing banks from making new loans.

In general, bonds have been fantastic investments over the last 12 months. Junk bonds are up over 50%. Corporate bonds are up almost 20%. Muni bonds are up over 10%. Even the government-guaranteed mortgage bundles issued by Fannie or Freddie... known as "agency" MBS... have rallied back up near their pre-crisis levels.

Mortgage bonds are the only bonds that haven't rallied anywhere near their pre-crisis levels. Because of how complicated they are, the RMBS market remains frozen and the average mortgage bond is still trading near 60 cents on the dollar... a 40% discount.

That's why I advised my readers to buy these bonds.

Unfortunately, individual investors can't buy them directly... only institutions can buy mortgage bonds directly. But you can buy stock in companies that specialize in managing portfolios of these bonds. They call these companies "mortgage REITs." Mortgage REITs buy millions of these bonds, hold them in large portfolios, and then pay out their earnings to shareholders as dividends.

With even modest leverage, the returns can be huge. The one I recently recommended to my readers, for example, pays a 19% dividend right now.

It may take awhile, but eventually the non-agency RMBS market will thaw. When that happens, our bonds will catch up with other types of bonds, and we'll see capital gains and even bigger dividends.

The risks here are that home prices could take another large step lower and millions more homeowners could stop making payments and walk away from their houses.

But I think this is a low probability. As long as the government is printing money, injecting liquidity, and guaranteeing loans, the real estate market isn't likely to fall much farther.

That's not to say I'm bullish on real estate now. It's just that we've already seen a huge crash, and there's a difference between thinking the downside is limited and expecting prices to soar. Prices could fall, but I don't expect another waterfall decline like we've seen over the past few years.

In the meantime, we'll enjoy the massive dividends, and as far as we're concerned, the market can stay frozen forever.

If you don't think this idea is crazy and you want to invest in mortgages, you should start your search with Yahoo Finance's industry browser for the mortgage REITs.

The problem is, most of these companies focus on the mortgages issued by Fannie Mae and Freddie Mac. These "agency" MBS aren't good deals right now. You want to avoid these REITs and focus only on non-agency mortgage REITs.

Good investing,

Tom

Bond Investing - Your Last Opportunity to Make a Fortune from Bonds

Mon, 01 Mar 2010 08:00:00 EST

By Tom Dyson

I called it the "the Golden Age of Bond Investing."

In early 2009, the stock market was collapsing, the economy was contracting, the Fed was pumping money into the markets, and the government was rescuing the banking system.

While everyone else was panicking into gold and cash, I recommended you load up with bonds.

I figured commodities and stocks would be terrible investments as the world economy contracted. But as long as America stayed solvent, bonds would be great investments.

To understand this idea, you have to understand the difference between a bond and a stock...

A stock is ownership. When you buy a stock, you are entitled to whatever dividends it generates until you decide to sell your stock. Profits, revenues, and growth are extremely important to you. Without them, your asset loses its value and your investment declines.

A bond is not ownership. It's a loan. You lend your money, receive interest, and after a certain time, you get your money back. You have no interest in future profits, revenues, or growth at the company you loan to. The borrower's solvency is what matters most to you.

In a contracting economy, revenues and profit shrivel. Stocks get crushed. But as long as America remained solvent and liquid, I knew interest and principal payments would continue. In other words, my subscribers would be safe in bonds. Here's what I wrote:

The important thing is, as long as the government is working hard behind the scenes, printing money, guaranteeing debt, bailing out failed companies, building infrastructure, supplying credit, and buying financial assets, there will be NO more bankruptcies, NO more defaults, and NO more credit crunches. Just a "vegetable" economy.

This vegetable economy will be difficult for most investors, but for bond investors, it couldn't be better.

I called this the Golden Age of Bond Investing. In my 12% Letter, I recommended a fund of corporate bonds yielding 20%. That fund has since gone up 80%, generating 20% in dividends. Over the next few months, I added seven more bond investments into our portfolio.

With the exception of the 20% bond fund, which hit a stop loss, every single one of these bonds is currently showing a profit. The average gain is 20%. We're also earning 9% a year in income.

The Golden Age of Bond Investing still has years left to run, and we'll keep holding these bonds and enjoying the steady income they pay us. But the opportunity to load up with mispriced bonds paying ridiculously high yields passed last year with the credit crunch...

Or so I thought.

Last week, I discovered a new bond investment. These bonds are still trading at crisis levels, selling for about 60 cents on the dollar on average.

It's like cleaning up after a dinner party and finding an unopened bottle of wine.

These bonds are your last opportunity to make a fortune from the Golden Age of Bond investing. I'll tell you about them in tomorrow's column...

Good investing,

Tom Dyson

Federal Reserve - The Recession Is Most Certainly Over

Fri, 26 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

"There are still no jobs here," my friend Lee tells me.

Lee used to work for a beachfront resort on Florida's east coast. Our town was built on tourism and real estate. Both are dead. The resort is on the brink of bankruptcy.

I told you Lee's story a few months ago in DailyWealth. The situation isn't any better today. I lent him some money recently... which I know I might not see again.

Officially, Florida's unemployment rate is 12%. But unofficially, it has to be much worse... When 20% of Palm Beach County residents are 90 days or more behind on their mortgage (as I wrote about in DailyWealth here), something is going terribly wrong.

With all this terrible news in Florida, what I'm about to say might sound crazy to you. But I believe it is true: The recession is most certainly over. In fact, the more likely scenario is a boom.

Let me show you why with one simple indicator...

The indicator is the "yield curve." And it's saying there's definitely no risk of recession now.

The "yield curve" is a simple idea. A "normal" yield curve simply shows that if you want to borrow money for a year, the interest rate is lower than if you want to borrow money for 10 years. That's "normal" because it's riskier to lend someone money for 10 years than one year... so you demand a higher rate of interest for a 10-year loan.

Normally, the difference between long-term interest rates and short-term interest rates is about one percentage point. That's what it's averaged over the last 50 years. So when interest rates on 10-year government bonds are at 4%, as they are now, then interest rates on one-year bonds should be 3%.

So that's normal. But when the government – the Federal Reserve, actually – tries to steer the economy, it makes a mess of "normal." And when it does, recessions ALWAYS follow.

For example, if the Fed wanted to slow the economy down today, it would raise short-term interest rates over 4%. That would upset the natural order of things. It would make it expensive and difficult for banks and businesses to make money. It would lead to recession.

The chart on this page shows it... when the blue line drops below zero, it means the Federal Reserve raised short-term interest rates above long-term interest rates.

In every single instance in the last 50 years (except for one in 1966), a recession follows. (Economic growth fell to zero in the second quarter of 1967, so a stealth recession happened in that case as well.)

No Chance of a Recession Now

DailyWealth Recession Now

$RTP $BHP - The Price of This Commodity MUST Rise. It's Inevitable.

Thu, 25 Feb 2010 08:00:00 EST

By Chris Mayer

In the most recent issue of my Special Situations advisory, I showed my readers the most compelling resource investment around. I've spent the past month digging into this story and looking for the best opportunities. Here's what I've found.

The most compelling thing about uranium is probably best expressed in the chart below...

DailyWealth Reactors

Tax Deeds Sales - Secretly Buying Cheap as Developers Go Bust

Wed, 24 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

I'm investing in properties at cheaper prices than I ever thought possible...

I'm buying "secretly." These properties aren't listed on MLS, and your realtor won't show them to you. But they can be some of the best deals you'll ever see.

Most people will never see them, because they don't know where to look. They're properties sold by the government to collect back taxes.

I've already done this in Florida. Earlier this week, I went to a few county courthouses in Georgia to figure it out there, too...

"Are you the Tax Commissioner?" I asked one lady as I walked into the county courthouse.

"Yes, I am," she replied. She was holding a stack of papers about two inches high and looked to be in a hurry.

"Do you have a minute to chat?" I asked.

She looked at her pile of papers... she sized me up... and then said, "Sure."

(You might not like the South. But I sure do... Here's the busy Tax Commissioner of a county in the State of Georgia. I didn't have an appointment. She had no idea who I was. But she figured I wasn't crazy and wasn't there to waste her time. So we had a meeting in her office.)

"How do tax deeds sales work in this county?" I asked.

"We try to give people every chance possible to pay when they're behind on their property taxes," she said. "We send tons of notices, and we let them stretch things out. If they don't pay, then we let them know that we will be selling their property on the courthouse steps to recoup the back taxes due."

You can't fault the Tax Commissioner... She's doing her job, following Georgia state law. Ultimately, her county needs that property tax revenue. It has to pay for firemen, policemen, and city services. If she doesn't collect that money, the county will have to raise taxes on everyone who does pay what they owe.

Even if the property is sold on the courthouse steps, the previous owner can still get it back. But now the terms get tough... The previous owner has to pay a 20% penalty over what the new owner paid.

That 20% penalty attracts investors... like me. Let me show you how it works...

Let's say there's an empty lot worth $100,000 and the owner hasn't paid taxes. If the county sells that property, you could probably buy it for $50,000 on the courthouse steps... mostly because it was poorly advertised and it has a couple strings attached.

There are three ways the investment can work out for you. 1) The original owner buys the property back from you, including the 20% penalty. So you collect $60,000. 2) After a year, you sell it at a profit. 3) If the owner doesn't buy it back and you don't want to sell it, you just keep it. All three sound like pretty good outcomes to me.

I asked the Tax Commissioner what it looks like for upcoming auctions in her county. She said she has a large number of delinquent properties... and she has no idea how many will actually pay off their taxes in this bad economy. She also pointed out Georgia's high penalty (20%) attracts a lot of competitive bidding on the courthouse steps.

I expect the supply of delinquent properties to be huge in the next few years... and Georgia property developers went just as crazy as Florida developers did. Now those hotshot developers are upside-down, owing more than the property is worth. Somehow, somewhere, choice properties from upside-down developers will end up at fire-sale prices soon.

One of the cheapest places to look is in the sales done by your local county for back taxes due. Every county has a different system. Look for their website online or visit your county courthouse.

I highly recommend you get familiar with the tax liens/tax deeds process in your local county. If you stay on it and watch closely, you have a legitimate chance of ending up with a property you want to own for a truly unbelievable price.

I know... I've done it... I urge you to check it out.

Good investing,

Steve

$NLY, $MFA, $CMO, $HTS, $ANH, $AGNC - These Stocks Are Paying 17% Dividends

Tue, 23 Feb 2010 08:00:00 EST

By Tom Dyson

Some interesting stocks appeared on my stock screener this morning...

As a full-time dividend stock analyst, I screen the market every day for high-yield stocks. I'm looking for the income investor's holy grail: a strong company, with sound finances, paying a sustainable 15% dividend yield.

It's mostly a fool's errand.

Stocks have high yields because no one wants them. The yield climbs because the stock price has collapsed or the dividend payment is about to collapse... or both.

Most of the time, my screens usually return rotten sneakers, soiled diapers, and an occasional rusting supermarket cart... But this morning, I screened the market for stocks paying over 15%... and I found this collection of high-quality companies...

Company Ticker Market Cap($ millions) Price/Book Dividend Yield

Annaly NLY $9,563 1.01 17%
MFA Financial MFA $2,046 0.95 15%
Capstead CMO $1,079 1.04 17%
Hatteras HTS $914 0.97 19%
Anworth ANH $837 0.91 16%
American Agency AGNC $622 1.14 22%
Invesco IVR $368 1.06 19%

All these stocks are mortgage REITs – or, as we call them in DailyWealth, "virtual banks." These are not junk companies...

For one thing, virtual banks are safe investments. They only invest in securities issued by Fannie Mae and Freddie Mac. On Wall Street, they call these investments "agency mortgage backed securities" or "agency MBS." Fannie and Freddie are government agencies, and their MBS are fully backed by the U.S. government.

And right now, the companies that buy agency MBS – these virtual banks – are trading at all-time cheap valuations...

The price-to-book ratio is one of the most important metrics for valuing virtual banks. Any time you pay more than one times book value, you're paying a premium over the liquidation value of the assets. These stocks generate returns on equity of over 12%. You'd expect to pay a large premium over book value for their stocks.

But as you can see above, most virtual banks are trading at tiny – or nonexistent – premiums. Take Annaly as an example. It is the largest and most respected virtual bank in America. Over the past 13 years, Annaly's price-to-book ratio has swung between 0.97 and 1.64. It's at 1.01 right now, only 4% above its all-time low.

Also, virtual banks are generating extraordinary dividends at the moment. Annaly just paid out $0.75 per share. That's the largest quarterly dividend in its 13-year history... And based on yesterday's share price, it adds up to a 17% annual yield.

So should you buy Annaly and its virtual bank peers today? In a word, no...

For one thing, the Fed is about to end its support of the agency MBS market...

In November 2008, the Fed announced it would purchase $1.25 trillion in agency MBS in a program to support the housing market. The Fed has completed 96% of this program. It'll buy another $50 billion in MBS over the next four weeks to complete the program and then stop buying MBS.

Investors are afraid the end of Fed purchases could cause agency MBS prices to fall suddenly. Virtual banks own giant pools of these securities. If MBS prices fall, virtual banks will decline in value. Book values and dividend payments will fall.

This fear is the reason the virtual-bank stocks have all fallen 15%-20% over the last month and are now trading at such attractive valuations. I doubt MBS prices will collapse. The market has had months to anticipate this news. But I don't want to take the risk.

Another concern is the downtrend. Except for Annaly, the charts of virtual banks are all showing nasty drops. Take this chart of Hatteras as an example. Shares haven't yet found a floor.

Steve and I will keep an eye on this situation and let you know when the right time comes to get back in to virtual banks. In the meantime, you should keep away.

Good investing,

Tom

$JYHW - Tiny Oil Stock Making Mysterious 200% Jumps

Mon, 22 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

A stock promotion just landed on my desk...

According to the promotion, the U.S. Geological Survey has just announced an enormous oil discovery. This oil discovery straddles the U.S. and Canadian border above North Dakota in an area called the Williston Basin. The USGS says the discovery contains 503 billion barrels of oil, worth $37.7 trillion at current prices.

"It's a literal ocean of oil," says the copy.

JayHawk Energy is a tiny oil company that owns five oil wells in the center of this discovery. According to the promo, JayHawk bought these wells a year ago, before anyone knew there was an "ocean" of oil there. Then the USGS released their report. JayHawk Energy suddenly finds itself sitting on a fortune...

"Every share of JYHW you buy today could skyrocket as much as 1,200% in the next 24 months," the promo says. "Buy JYHW – don't wait any longer."

Do I think you should put your money in JayHawk? Absolutely not!

Many times, in situations like this, stock promoters have taken a large position in whatever stock they are touting. Now, they want to sell their stake. So they're mailing this aggressive promotion to thousands of investors, hoping to push JayHawk's stock price up.

Here's the chart of JayHawk Energy. You can see they probably started mailing this promo in November 2009. Notice the spikes in January and June 2009. The promoters probably generated those spikes, too.

DailyWealth $JYHW

$EUO - How I'm Betting Against the Euro

Fri, 19 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Two months ago, I recommended betting against the euro...

It was my top idea. The entire issue of my True Wealth newsletter two months ago was dedicated to that idea. And in last month's issue of True Wealth, I said it was my "top recommendation."

Here's exactly what I wrote two months ago:

This type of opportunity doesn't come along very often. It is time to bet against the euro. It is overpriced. The euro is in a horrible situation right now. A mountain of factors is against it. And in just the last three weeks or so, a downtrend has been established – so it's time to make the trade.

My friend, the euro is crashing...

At the beginning of December, it cost $1.50 to buy one euro. Six weeks ago, it was at $1.45. As I write, it is at $1.36. It doesn't sound like much, but a 9%-plus drop for a major currency in two months is big.

And my subscribers have done well... particularly since I recommended a "double-inverse" fund, which is an investment that gains 2% for every 1% fall in the euro. Specifically, we bought shares of the ProShares UltraShort Euro Fund (EUO). Below is a six-month chart. Take a look at how it's done since December...

DailyWealth $EUO

#China - China Could Fall into a Great Depression

Thu, 18 Feb 2010 08:00:00 EST

By Dan Ferris

It's official: Buying the cheapest assets you can find is where you make the biggest, safest, easiest money as an investor.

What made it "official" to me was a just-completed study by one of the greatest living investors. The investor is Jeremy Grantham. His firm Grantham, Mayo, Van Otterloo, manages over $100 billion.

Grantham recently published the results of a 10-year forecast he made for the period from December 31, 1999, to December 31, 2009. In 1999, Grantham predicted the rank and return for 11 different asset classes. The actual rankings wound up correlating 93% with Grantham's forecast. The probability of equaling or besting such a performance is about one in 550,000.

How did he do it? As he wrote in his latest investor letter, "We forecast [back in 1999] that the egregiously overpriced S and P would underperform cash and everything else – what should you expect starting at 33 times earnings? – and we assumed that emerging equities would do extremely well despite a 0.7 correlation with the S and P, because they were cheap." (Italics added.)

Grantham's forecasting feat confirms a thesis I've believed in for a long time: If you wait for asset prices to reach extremes of valuation, you have an excellent chance of outperforming most investors. It's difficult to wait for these extremes to come around, but it's crucial to your success as an investor.

Grantham's track record for spotting valuation extremes goes beyond a single 10-year period. He and his clients successfully avoided every bubble of the last two decades (Japan in the '80s, tech stocks in the '90s, financials and housing in the '00s). He was bearish at the top of the most recent bubble, in 2007, and super bullish at the bottom, in late 2008/early 2009.

Again, Grantham's secret is being bullish on cheap, unpopular assets and avoiding expensive, popular assets.

Today, Grantham says only the higher-quality large-cap stocks are attractive. I say the same and recommend World Dominator stocks like ExxonMobil, Microsoft, and Procter and Gamble. You can read more about this idea here and here.

As for the broader market, Grantham says the S and P 500's fair value is around 850, 20% below its current level.

Grantham expects seven years of "below-average GDP growth" and "more than our share of below-average profit margins and P/E ratios." Falling average price-to-earnings ratios are an important aspect of the sideways market I've been telling people about since November 2009.

Grantham's lessons are powerful and easy to understand. Avoid what's expensive. Buy what's cheap.

Stocks were incredibly popular in 1999, when Grantham made his prediction. They crashed three months later. Emerging markets were very cheap. They produced excellent returns. In both cases, extremes of valuation trumped all else.

If you're buying and selling businesses without knowing how to value them, and how to spot extremes of valuation in them, you can't possibly hope to make a dime in the stock market. If you fancy yourself a "trend follower," be careful you don't follow your beloved trend straight off a cliff.

Grantham's forecasting success proves waiting for extremes of value to arrive makes long-term investing success much, much easier to achieve.

And while I normally don't pay a bit of attention to predictions, it's great to see such a common sense forecast prove the case for value investing once again.

Good investing,

Dan Ferris

#China - China Could Fall into a Great Depression

Wed, 17 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Is it possible? Could China be on the brink of a Great Depression?

Most experts would say, "No way." They would point to China's trillions of U.S. dollars in reserves as their Exhibit A and say, "Case closed."

Countries use reserves to back their liabilities... like their currencies. Think of it like having a huge balance in your savings account. If you've got all that cash, you're not likely going under, right?

But one expert recently made an interesting case for a potential Great Depression in China, even with its trillions of dollars of reserves...

"Twice before in history, a country has, under similar circumstances, run up foreign reserves of the same magnitude," says Michael Pettis, a former Wall Streeter and Columbia professor who now teaches finance in China. "Both cases turned out badly for long investors, and brilliantly for anyone dumb enough to have [bet against the markets]."

The two cases where countries rang up reserves of a similar magnitude to China are the U.S. in the 1920s and Japan in the 1980s.

Pettis says, in both cases, the high reserves "were symptoms of terrible underlying imbalances" in those countries. So those reserves were ultimately "useless" in protecting those countries from a bust.

The U.S. and Japan stories are similar. The U.S. in the 1920s and Japan in the 1980s had "sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity," according to Pettis.

Both of those great booms were followed by massive busts. Stock markets fell 80% from peak to trough. Japan's stock market peaked around 40,000 in 1989. Today, over 20 years later, it hovers around 10,000. The U.S. crashed in 1929, and didn't recover until World War II.

China is seeing the same things the U.S. and Japan saw during their boom years. The booms ended up fueling the creation of too much credit... This led to excess capacity... which then created the "lost decades" for the U.S. and Japan. China could easily end up down the same road.

To be clear, Pettis isn't predicting a depression in China. He says, "The fact that the U.S. and Japan had terrible decades following periods during which they had amassed levels of reserves that China has subsequently matched... does not necessarily mean that China too must have a lost decade or two."

He's simply warning about ignoring "obvious historical precedents."

As an investor, whenever the crowd all believes one thing, I look for the opposite case. If there's a strong argument to be made in the opposite direction, there's usually little downside and significant upside in betting against the crowd.

The consensus opinion is that China is at no risk of collapse because of its great hoard of reserves. But Michael Pettis' story of the imbalances in the U.S. in the 1920s and Japan in the 1980s is thought provoking...

Is a Chinese depression coming? Michael Pettis shows us that it sure is possible...

Good investing,

Steve

The Ultimate System for a Volatile Market

Tue, 12 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

My friend Mebane Faber stumbled onto the ultimate system for a volatile market.

It only takes you two hours a year (10 minutes a month) to implement.

It's only had one losing year since it started in 1973 (a tiny 0.59% loss in 2008).

And it's outperformed the stock market... with substantially less volatility than stocks.

Meb has just updated his numbers for 2009. The results over the last decade are downright extraordinary...

If you had invested $10,000 in Meb's simple system in 2000, you would have gotten back nearly $26,000. Meanwhile, $10,000 invested in the stock market would have shrunk to less than $9,100.

The secret, as you can see, is not losing money in the down years:

S and P 500 Meb's System 2000 -9.1% +13.8% 2001 -11.9% +3.2% 2002 -22.1% +3.4% 2003 +28.7% +20.5% 2004 +10.9% +15.1% 2005 +4.9% +8.2% 2006 +15.8% +14.2% 2007 +5.5% +9.5% 2008 -37.0% -0.6% 2009 +26.5% +14.0% Just looking at the last decade, you can see how much less volatile this system is than the overall stock market...

The stock market's annual return was about -1% per year. But the actual returns were usually way higher or way lower than that.

Compare that to Meb's system, where the average annual return was about 10% a year. You can see the annual returns were always within about 10 percentage points of that average.

Here's how Meb's system works... There are only five holdings. And there are two modes: in and out.

The five asset classes are: U.S. stocks, foreign stocks, bonds, commodities, and real estate stocks. Your only decision each month is whether you own a fund that tracks that investment, or not.

You want to be in when the asset is going up. And you want to be out when the asset is going down. This idea could hardly be dumber... But it actually works.

First, you divide your portfolio into five pieces. You dedicate each piece to one of these five asset classes... and you are either in or out of each fund every month. So you might be only 40% invested one month, with the rest in cash (earning interest at the bank).

To figure out whether you're in or out, you just have to do some simple math. You can keep track of it by hand with a pencil and paper. You don't need a computer – or even a calculator.

Once a month, get the last 10 monthly closing prices of the five funds. You can get them from a service like Yahoo Finance. Then calculate the 10-month average.

If the fund is above its 10-month average, keep 20% of your money in it. If the fund is below its 10-month average, sell the fund and move to cash.

Repeat the next month, rebalancing existing positions back to 20% each if they're buys. Never put more than 20% in a fund. For example, if only three are in buy mode, then you're 60% invested with 40% in cash in.

Remember, with the exception of a tiny loss in 2008, Meb's system has never lost money, and it has delivered double-digit compound annual gains.

It's actually delivered the investment "holy grail" ... 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.

Good investing,

Steve

How to Make Money in South Florida Real Estate

Fri, 09 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Ah... 70 degree weather, with toes in the sand...

While the East Coast was hit with a record snowstorm over the weekend, my wife and I spent a few days away from it all in Palm Beach, Florida.

Palm Beach County is a fantastic place to be in the winter. But I was shocked reading the local papers. Practically everyone in Palm Beach County, it seems, is underwater on their mortgage...

A full 20% of Palm Beach County mortgage holders are 90 or more days late on their payments.

The number of foreclosures in Palm Beach County is up TENFOLD. (The Palm Beach Post reported the number of foreclosures rose from 3,049 in 2005 to 30,227 in 2009.)

The chief judge said the county has a backlog of 55,000 foreclosure cases – in a county with only 1.4 million people!

It's not just Palm Beach County... Homeowners all over the state are seriously underwater. Florida has the worst foreclosure inventory in the nation, estimated at over 450,000 homes as of the end of 2009.

People ask me, "When is real estate going to recover in Florida?"

My answer, in short, is not for a while... not until we burn through all these foreclosures and all this excess inventory.

We have other things to burn through as well... All the guys who are "holding and hoping" must finally give up.

Banks, for example, are holding and hoping... Banks should be liquidating houses they're stuck with. But they don't want to write off the loss, and they're hoping for higher prices. They have to give up.

Also, all the smaller local real estate "tycoons" who got rich from having debt in a bull market have to move on and find another career. Right now, they're still holding on.

It's the basic nature of bubbles... The more excessive the bubble, the longer the hangover is. And the longer the bubble, the longer it takes for the people who need to give up to actually give up. Prices can go down for much longer than people can imagine.

Yes, homes in Florida are incredibly cheap... Home prices in Miami (for example) are down nearly 50% from their 2006 peak. By buying today, you really get a lot of value in relation to income and the standard of living.

But the reality is, there is way more supply than demand. This comes down to basic economics... When supply is greater than demand, prices fall. I don't expect them to fall much farther. But buying and holding for appreciation won't be your best strategy today. That will really only work once the local tycoons have finally thrown in the towel.

While I don't expect a big bounceback in home prices, you can still make money in Florida real estate...

The correct way to buy in Florida now is to try to buy at 50 cents on the dollar – or better. That's 50 cents on the dollar – based on a conservative estimate of today's value, not on its value at the peak.

Then, if you had to sell, you could sell it for 75 cents on the dollar or more... for a 50% return.

That way, you don't need prices to go up... You are simply buying from a desperate seller and selling when you're not desperate.

These deals exist. But you have to look for them. Somebody needs your money right now. You find them by making lowball offers.

Folks in Palm Beach County – and most of South Florida – are underwater in terms of real estate. With the overhang of foreclosures and supply, it will be a while before prices start really climbing again. But you can still make money.

It is an absolutely beautiful place to consider buying... toes in the sand in 70 degree weather sure is nice... particularly in the winter.

Now is the time to start poking around... to start making lowball offers. Just make sure the deals make great sense for you, even without factoring in future price appreciation.

Then you'll have a place to put your toes in the sand in the winter, at a great price, for years to come.

Good investing,

Steve

$C - Even the Best Investors Make This Huge Mistake... Make Sure You Don't!

Fri, 06 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Personally, I have just one rule: Avoid big mistakes.

If I do that, I know I'll be fine. I know I won't "blow myself up" in my investments. Knowing that gives me peace.

I can't believe how many brilliant, successful people fail to do this one simple thing... and lose what they have... or even lose everything.

Look, if you do nothing else, remember this: Avoid big mistakes. And the biggest of the big mistakes is STILL DANCING when the music stops.:

Get the heck out of there, my friend! If you're a little late to realize it, then STILL get out. Better late than never. Let me show you what I mean...

Chuck Prince, the former CEO of Citigroup, is a perfect example of a guy who kept on dancing...

In the summer of 2007, just as the banking crisis was getting underway, Chuck actually told the Financial Times he was "still dancing."

About the banking business, Chuck said, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."

But the music had already stopped when he was speaking. Shares of Citigroup are down 93% since he said that... just a year and a half ago. And Chuck lost his job less than four months later.

I've also seen it close to home...

Most of the wealthy investors where I live made their fortunes in local real estate – that's Florida real estate.

The music stopped in Florida real estate a few years ago... But even today, they're STILL dancing. If they had acknowledged the music stopped early, they might have been able to keep much of their wealth.

I could go on, with examples throughout history... from Sir Isaac Newton in the 18th century South Sea Bubble to George Soros in the 2000 tech bubble.

The message today is incredibly simple...

When the music stops, STOP DANCING.

Get off that dance floor... and do it fast. Do NOT allow small mistakes to become big ones.

It sounds simple. But as I briefly showed, even the smartest people succumb to it.

We are all vulnerable to the risk. So you must make a conscious choice here... you must tell yourself you will never let a small loss become a big one.

You can use whatever "system" works for you to reinforce this idea: stop losses, trailing stops, NOT averaging down a losing position, NOT taking too big a position in anything.

I actually use all of the above.

Whatever works for you, do it. The important thing is, do NOT let a small loss become a big one.

Want to be just fine, forever, in your investments? Then don't forget my one rule... Avoid big mistakes!

Good investing,

Steve

Economic Crisis - When This Crisis Will End

Wed, 03 Feb 2010 08:00:00 EST

By Dr. Steve Sjuggerud

We're out of the woods with this financial crisis...

That's my best guess at least, based on a study of the major financial crises through history.

The recent book This Time is Different: Eight Centuries of Financial Folly, by Kenneth Rogoff and Carmen Reinhart, takes a look at the history of major financial crises...

Boiling the book down to its simplest conclusions, here's what happens after a banking crisis:

Home prices and stock prices collapse dramatically over the course of several years.

The economy tanks and unemployment rises dramatically.

Government debts soar.

The book gives specific timelines based on history... It tells us how far things fall and how long these things last. And it gives us a pretty good idea of what to expect going forward.

Let's look at a few of their conclusions more specifically, starting with stocks...

Stock Prices

The authors found that real stock prices typically fall 56% over three and a half years, on average. In the current financial crisis, stocks already fell a bit more than that, in a much shorter period of time, bottoming in March 2009. Then they rallied dramatically.

Is the worst over in stocks? Or is another leg down coming?

I personally believe the worst is over.

At first, the crisis blindsided us, so the effect was dramatic. Now we're aware... more sober... So I think the lows we saw in March 2009 will be the ultimate lows for this crisis in stocks.

Home Prices

The authors found real home prices typically fall 35% over six years. This time around, home prices (like stocks) fell a bit more than the authors' average in a much shorter period of time.

Like stock prices, home prices have been recovering.

Is the worst over? Or did the recent home-buyer tax credit prop prices up?

I think the worst is over. I think we've seen the lows. But home prices may do basically nothing for many years.

Unemployment

According to the authors, unemployment typically rises by seven percentage points in a banking crisis... and unemployment stays "bad" for four years. So far, unemployment has risen by about five percentage points, and we're two years into this thing. So if the authors are right, unemployment could hit 12% and last two more years.

Government Debt

The authors state that government debt explodes by 86% above pre-crisis levels, on average. In the current crisis, quite frankly, I have no idea how much government debt has REALLY exploded. Nobody can know that answer... with all the creative things going on at the Federal Reserve and the Treasury Department.

So where does that leave us?

This crisis has been worse in magnitude than most, according to the authors' numbers. It's also been devastatingly quick.

The good news here is that we may already be out of the woods... Stock prices and home prices have been recovering for months. And unemployment has leveled off in the 10% range.

The bad news is the government's explosion in debts. But risks associated with that won't likely come home to roost in the next couple of years. That's a topic for another day.

In short, based on past crises, it's easy to make an optimistic case that the worst is behind us in the economy.

Good investing,

Steve

The Great American Liquidation Sale - $FXI

Tue, 02 Feb 2010 08:00:00 EST

By Tom Dyson

I look out my window and see a large bank, built of sandstone. They've carefully landscaped the forecourt and there's a big blue awning over the front door. This bank is four years old, but it looks newer.

Inside, there's a neat row of teller stations set up behind glass windows that reach the ceiling. They have a flat-screen television on the wall, tuned to the Bloomberg channel. There's space for 20 cars in the parking lot. If you don't feel like getting out of your car, there's a four-lane "drive-thru" on one side.

This bank must have cost $10 million to build and probably costs $1 million a year to operate, but it appears to serve fewer than 50 customers a day. No one lives in the area. An airfield and three golf courses surround it. Plus, there's another bank a few hundred yards away.

The problem was, the bank was built when credit was easy and house prices were rising every month. The owners must have made assumptions based on those favorable conditions, but conditions changed and their assumptions turned out to be wrong. Now the bank is costing the owners money every day... and needs to be closed.

All over America, I see the same problem. Billions of dollars worth of bad investments litter the country. These investments aren't generating returns for their owners, and they need to be liquidated.

The liquidation process began in 2008, and it would have been near completion by now. Unfortunately, the government intervened and propped up these bad investments by making even more bad investments and encouraging everyone else to do the same.

So here I sit, watching the bank out of my window, wondering when the great American liquidation sale will resume. It could have already started...

The market is overvalued in every metric I follow. The S and P 500 has fallen six of the last eight sessions and is down 7% since January 19. The major European bourses are all forming downtrends, too. Check out this chart of the Chinese stock market. It looks like a burned out firework returning to Earth...

DailyWealth $FXI

How to "Bank" Dividends Whether or Not the Economy Recovers - $NBD.TO

Mon, 01 Feb 2010 08:00:00 EST

By Tom Dyson

"These are tough times for us..."

Publicly traded companies employ special staff members to put out press releases and communicate with investors. They usually call this staff "Investor Relations." As a stock analyst, I'm often talking to this department. As you'd expect, they're always very careful about what they say to me... and above all, they never mention the weaknesses in their business.

Last week, I spoke to the top investor relations officer at a large company in Canada. This woman told me openly her company was in a deep recession and struggling for survival.

Only after I put the phone down did I realize what was going on. This woman works for a forest products company. Her company has been in recession for so long, she didn't feel the need to sugarcoat the information she gave me.

The Canadian forest industry is one of the most beaten-down industries in the world.

Canadian forest products companies have two large customers: the construction industry and the paper industry. The bear market in real estate has killed demand for lumber. And the Internet has stolen market share from traditional "hardcopy" media like newspapers, telephone directories, and books.

To top it all off, strength in the Canadian dollar has made Canadian forest products feel more expensive to international customers, especially the Americans and the Chinese, and it's hurt sales.

Across the country, hundreds of saw and pulp mills have closed down. Tens of thousands of workers have lost their jobs. Several major companies have gone bankrupt. And the stock market has dragged stock prices of Canadian forestry companies through the mud for several years.

Check out this 15-year chart of Norbord, a Canadian strand-board manufacturer. It tells the story. Strand board is a construction material, similar to plywood, used for roofing and flooring. Norbord is one of the largest strand-board producers in the world...

DailyWealth $NBD.TO

One of the Greatest Secrets to Making Money in Low-Priced Stocks - $TTWO

Thu, 28 Jan 2010 08:00:00 EST

By Frank Curzio

I have an odd "watch list" to find great opportunities in stocks under $10.

It's my favorite stocks trading over $10... and under $15.

Keeping this list handy is one of the best secrets to making money in low-priced stocks.

Why do I watch $15 stocks when my mandate is to analyze stocks under $10? Consider the story of my most recent buy recommendation, small cap Take-Two Interactive...

Take-Two Interactive owns one of the most valuable entertainment franchises ever created: Grand Theft Auto. If you're not a video game player, you can think of the franchise as the "Harry Potter of video games." It's a product that makes its target market go crazy...

To give you an idea of how valuable this game is, consider that on April 29, 2008, the fourth installment of the series sold 3.6 million copies and generated $500 million in revenue in the first week of the release. It was one of the largest one-week entertainment launches in U.S. history. It was bigger than Star Wars, Spider-Man, Harry Potter, or just about any other movie, music, or book launch ever.

Just before the game was launched, a larger game company offered to buy Take-Two for $26 a share. The company wanted control of the Grand Theft Auto franchise, along with some of Take-Two's other successful titles. Take-Two management turned the company down. Then the credit crisis hit... and Take-Two shares were crushed along with every other stock.

Fast-forward to mid-2009. Take-Two had rebounded to over $12 per share. This is too "expensive" for my mandate. But I knew Take-Two had terrific potential to keep the Grand Theft Auto franchise going... and I knew some competitors had enough cash to buy the small cap. So I kept the company on my watch list... and I waited for a slipup.

Take-Two did make a misstep on December 4. The company issued a terrible earnings report. It delayed the launch of new products. It missed estimates. The stock fell 30% to $7.74 per share. Now here's where penny stock traders, armed with their watch lists of stocks trading for $10-$15, step in.

A few trading sessions after the fall, Penny Stock Specialist grabbed the stock. Take-Two jumped like a coiled spring back over $10 in less than a month.

Now, I can't tell you exactly why many industry leaders – like Take-Two – that sink below $10 a share quickly trade back above that level. All I can tell you is that it's one of the greatest trading tools in the stock market.

Below is a list of a few other industry leaders who saw their share price dip under $10 and snap right back. In the past year, these companies not only recovered but also outperformed the S and P 500 two to five times over...

Company Symbol 52-Week Low Current Price Percent Gain

Massey Energy MEE $9.62 $41.46 331%
American Express AXP $9.71 $38.56 297%
Starwood Hotels HOT $8.99 $34.91 288%
Starbucks SBUX $8.12 $22.39 176%
Gap GPS $9.26 $19.20 107%
eBay EBAY $9.91 $23.96 142%

I can't explain this phenomenon. In fact, some of you may say I have too much time on my hands. But my subscribers have cashed in countless times by paying close attention to this trend.

My advice is to make a list of industry leading stocks that trade over $10 and under $15. Monitor them every week. If one has a misstep or reports weaker-than-expected earnings, you may get the opportunity to buy the stock under $10. It's one of the best-kept "penny stock" secrets I've found.

Good investing,

Frank Curzio

My Embarrassing Penny Stock Secret - $MEE

Wed, 27 Jan 2010 08:00:00 EST

By Frank Curzio

I'm a little embarrassed by the penny stock secret I'm about to tell you...

In the past few months, the marketing team at Stansberry and Associates (the publisher of DailyWealth) has frequently mentioned my track record for picking stocks. Over the past 15 months, for example, I made 13 stock recommendations. The average gain is 68%. None of the picks lost money. Four of them rose more than 100%.

I'm embarrassed because I've spent 15 years in the investment industry. I've recommended plenty of losing trades. It's simply part of the game. Fortunes are made even being right 40% of the time, if you let your winners ride and cut your losers short. There's just no way I could recommend another 13 consecutive winning trades.

I'm also embarrassed because my company's marketers don't like to mention the source of my biggest winners. It's not because I'm using inside information like most hedge funds use... or anything illegal. But I wish I could speak and write more about my strategy. It helped me make 190% in Ashland... 125% in Massey Energy... and 140% in McDermott.

Problem is, almost anyone who tries to market this strategy goes broke.

The strategy? Buying "low-expectation stocks," buying value stocks.

It's usually financial suicide to try to sell "contrarian" investment products. For instance, back in 1999, zero television personalities were hawking gold, like Glenn Beck is doing right now. You would have been wasting your time and money doing so. Nobody would have responded.

Back then, people just wanted a tech stock tip. Any money spent on television, newspaper, or Internet ads telling people why gold is a great investment might as well have been flushed down the toilet. Same goes for oil 10 years ago... or real estate in 2002.

It's a shame buying "out of favor" stocks doesn't sell well – because it's the single most profitable stock strategy in the world... and the safest.

I realize this sounds crazy. Everyone believes you should take on lots of risk to make lots of reward. But it's just not so. Let me show you how it worked with Massey Energy...

Massey Energy is one of America's largest coal producers. It's the largest producer in the Central Appalachia region. In 2008, it took the beating of a lifetime. In March 2009, I recommended the stock to my readers. Shares were down from a high of $93.38 to under $10. See the chart below for this huge decline:

DailyWealth $MEE

The First Thing Penny Stock Traders Should Know in 2010 - #ARRA

Mon, 25 Jan 2010 08:00:00 EST

By Frank Curzio

When the editors of DailyWealth asked me to write a series of essays about penny stocks – my beat in the market – I thought my intro would be a no brainer:

Tell people how much money they can make when a stock goes from $5 a share to $30.

After all, the reason I write a penny stock advisory is because of the big moves that are common in low-priced stocks. People love the idea of buying a boatload of shares for under $10 each and watching them climb hundreds of percent.

But before we talk about stocks under $10 and the huge gains we can make, there's one important thing that's going to happen in 2010 I need to tell you...

Stocks are going higher.

And the government will get them there.

In just the past few weeks, several Democratic senators have announced they will not seek reelection. The Democrats already lost a tight race for the Massachusetts senate seat vacated by Ted Kennedy. This is awful news for any political party facing a big election year. Letting the unemployment rate tick up and the stock market tick down would be political suicide for the party... which is losing steam built up by the hugely successful presidential campaign of Barack Obama.

In other words, expect the party in power to throw money into every problem area in the economy in an effort to keep the markets high. Infrastructure, homeland security, health care, you name it... The political stakes are too high for politicians not to do something about all the problems the U.S. faces right now.

You see, life on "Main Street" is the worst I've ever seen it.

Unemployment is at its highest level in 26 years. At least 17% of Americans are out of work or working part-time jobs waiting for a full-time position. That's nearly one in five.

The number of homes in foreclosure is at a record high. And with 25% of homeowners underwater on their loans (owing more on their house than it's really worth), this number will only go up over the next few years.

Health care costs continue to shoot skyward. They're already 16% of the economy, and the government expects them to jump to 20% by 2017. Premiums, co-pays, and deductibles continue to rise.

And now the current administration desperately wants to provide health insurance for 31 million people. Estimates put the cost of a new health care plan at more than $1 trillion. This is going to hit Main Street, too... Taxing just the top earners won't cover this. Middle-class families will help foot the bill. And to throw an ugly cherry on top, gasoline prices are at their highest levels in 15 months.

This is the sort of stuff that makes the average voter start looking for a guy with new promises.

What are the Democrats going to do in this situation? The same thing the Republicans – or anyone looking to stay in office – would do: Everything they can. Many folks are accusing our leaders of not doing enough to stimulate job growth. You can bet our leaders are listening... and they're already on the case.

Here are just two things they're doing to ensure higher stock prices:

They're keeping interest rates low. The last time rates were this low, in 2003 and 2004, the stock market soared for four years.

With the Fed Funds rate so low, money market accounts, CDs, and Treasuries pay next to nothing in interest. And the Fed is telling us rates will remain low for the foreseeable future. I expect a lot more cash will flow into stocks, which offer a better return.

And they're "printing" money and pouring it into the economy through stimulus packages. What you may not realize is: This process has just begun.

Congress passed the largest stimulus package in our country's history in February 2009, the $787 billion American Recovery and Reinvestment Act (ARRA). Only 32% of the stimulus has been spent thus far. Based on the laws of the ARRA, most of the remaining cash must be spent in 2010 and 2011. In other words, there will be a huge amount of government cash flowing onto the order books of all kinds of American businesses.

In the long term, this "fix" should lead to big problems down the road. But a trader who deals in stocks under $10 has to view the world in the short term. And while the current correction will likely take stocks lower for a few months, I think it will present a buying opportunity.

This week, in my "Penny Stock Secrets" series, I'll show you how I plan to trade higher stock prices this year. We'll cover where to look for the most explosive gains... how to find the few sure-fire winners among thousands of microcaps... tips to trade these stocks safely... and a little-used method for buying the world's best businesses for under $10 a share.

There are several opportunities to make at least 50%, 100%, even a 1,000% if we're lucky this year. Check back in tomorrow for more.

Good investing,

Frank Curzio

Get the Hint, Mr. Obama - #Obama #Healthcare

Fri, 22 Jan 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Most people think the loss for the Democrats in Massachusetts this week was about health care.

But that's simple thinking.

The real issue is this: Voters are frustrated that their elected representatives in Washington are willfully ignoring their desires.

This one is easy to see...

According to polls, over half of Americans don't want the government to take control of the health care system. But our elected officials aren't listening. Instead, they are voting the opposite way of their constituents.

The American people can't vote in Congress. So the Massachusetts election was simply the only available outlet to express helplessness and anger with government.

The U.S. government is set up in what seems like a confusing way to outsiders. But it was designed very specifically by the founding fathers... It was designed to prevent any government leader from having too much control. To put it into today's terms, it was designed to prevent politicians like Nancy Pelosi from being able to pass a bill that over half of Americans do not agree with.

Americans are pushing back.

I, for one, am glad. You see, a basic rule of economics is this: The smaller the government, the greater that country's prosperity. We can choose to be more like North Korea (with more government control) or more like Switzerland (with less government control). Which sounds more appealing to you?

The health care system makes up one-sixth of the U.S. economy. With the government trying to take over one-sixth of the economy, our politicians are trying to make us more like North Korea...

That's the extreme, of course. But the relationship between freedom (less government) and prosperity is clear. When you arrange the world's countries in order of freedom (according to the Heritage Foundation's Index of Economic Freedom), then divide them into quintiles, take a look at what you get:

DailyWealth Oil Stocks

The Most Important Thing to Remember as an Investor in Oil - #oil

Thu, 21 Jan 2010 08:00:00 EST

By Chris Mayer

We really don't know as much about the oil market as we think we do.

There are many numbers out there, but most of these involve a lot of guesswork. For example, we really don't know just how much oil the world will need. The U.S. Department of Energy says we'll need 106.6 million barrels a day by 2030, but how does it know? It can't know. It can't know what the world will look like in 2030.

We don't really know how much oil we're discovering or how much will actually come to the market any time soon. We don't really know how much it will cost to get this oil. We can guess, but our guesses are frequently wrong. Goldman Sachs wrote in a research report issued in February of last year (230 Projects to Change the World) that the cost of bringing on additional oil sands project would come to $80-$90 a barrel. It sounds nice, but it's a guess.

We don't know a lot, even though we put decimal points on lots of numbers as if we knew precisely. And there is plenty of room for people to fudge numbers and make up stuff. It happens all the time.

Of course, no one knows what the price of oil will be, but there is no shortage of forecasts. Goldman Sachs says it will be $95 by the end of 2010. Deutsche Bank says $65. They are all guessing.

There is one thing we do know. And fortunately, this is the most important thing to remember as an investor in oil: The market is still pricing proved oil reserves at less than replacement cost.

In other words, it is cheaper in today's market to buy proven reserves in the stock market than to drill for new ones.

I would cite the 2008 reserve and finding cost study published by Howard Weil. It shows the average cost of reserves through the drill bit is about $43 per barrel, with the median (or midpoint) around $25 per barrel. These are hard numbers, not soft guesses. You can do this yourself and find out how much it costs for your favorite oil company to add a barrel of proved oil reserves by drilling for it.

So we have a good idea of what it costs to create a barrel of proved oil reserves today. Figuring out these numbers is easier than guessing what the price of oil will be in the future. Granted, even these cost numbers will change. There are no constants.

But here is the trick. You want to buy oil companies when you can pick up proved oil reserves for a lot less than what it costs to produce them. In the market, that's where we are today. In fact, you can pick up proved reserves for less than $15 a barrel.

Here is a scatter plot by an energy firm I respect a great deal, Lucas Capital Management. It shows you the universe of stocks it follows. EV is enterprise value, which you can think of as the cost to acquire the entire business, both the stock and the debt. So EV/BOE shows you how much you are paying per barrel of oil. It plots this number against reserve life. Take a look:

DailyWealth Oil Stocks

A Big Lesson from Scott's Hard Trade - #Florida

Wed, 20 Jan 2010 08:00:00 EST

By Dr. Steve Sjuggerud

I've done well since March 2009... A few of my accounts are up by triple digits in percentage terms.

But my returns are nothing compared to what my friend Scott did in the last two years...

Earlier this week, my wife and I met up with Scott and his wife for drinks. My wife and I made a point to tell Scott how impressive the trade he made was.

Let me tell you Scott's story...

In 2007, during the heyday of real estate, Scott was a big-shot mortgage broker for a major bank. He was the boss... He had a team of mortgage brokers under him.

Scott probably made a whole lot of money. He built a stunning custom home right on the water and had a deepwater dock for his fancy boat.

Everybody was flying high at the time... On the northeast coast of Florida, nearly everyone who got "rich" made their money from real estate somehow. They were investors, developers, builders, lenders... something. In the wealth race, even the doctors and lawyers got left behind by the guys in real estate.

But right around the peak in Florida real estate, Scott ended up losing his job.

What happened to the rest of the real estate guys when the music stopped? For just about all of them, they acted like the music was still playing.

What else were they going to do? Accept reality? No way...

Reality would mean taking a loss... So they held on and hoped. Just about none of the developers or builders were smart enough to get out at the top. Small paper losses turned into huge paper losses. They still hung on. They preferred to sink with the ship, hoping these once-in-a-lifetime days would return.

Not Scott... He was not "fooled by randomness." He didn't assume the once-in-a-lifetime real estate boom days would return. He didn't confuse genius with a bull market. Through either humility or brilliance (or both), Scott made a dramatic change in his life...

Scott made the hard trade.

When he lost his job, he immediately put his new fancy home up for sale. At a time when everyone around him was living extremely high on the hog, Scott downsized dramatically, buying a significantly smaller inland home – all in cash.

Scott hit the reset button.

He hit the button early. He didn't let his ego or his old high status get in the way. Instead, he started over, regardless of what the "country club" crowd thought.

Scott is now back at work, doing what he knows well... He's a mortgage broker again for a major bank.

"How's business?" I asked him when we met for drinks.

"Well, I'm not making any money. But I don't have a mortgage anymore either."

I complimented him on his bold life decision to downsize dramatically at the height of the boom. He said:

"Well, we just got back to what was important... We decided that STUFF wasn't that important. And stressing over STUFF is wasted energy. Our family is what's important. We made the big change, and life is much different. But it's good. Now, for the first time in my career, I'm able to see my kids at night when I get home from work."

Scott seemed just fine with the whole thing. He's not lying awake at night, wondering how he's going to pay the mortgage.

Scott made the hard trade. He cut his losses early. The worst thing you can do is hold and hope yesterday will return. Are you holding and hoping in real estate? Are you lying awake at night stressing about STUFF?

You can get out of it. You can follow in Scott's footsteps. You can hit the reset button and start over at a much lower level of spending. You can sell the fancy house and rent instead. You can sell the fancy car, or boat, or whatever is keeping you up at night. It's all just stuff.

Sure, I had a decent year in my trades. But my trades pale in comparison to Scott's bold trade... Scott traded stuff for happiness. In his case, the bolder the downsizing, the greater the happiness.

If you're unhappy, if you're stuck holding and hoping, follow Scott's lead. Trade your stuff for peace of mind and happiness.

Good investing,

Tom

Not One Trader in 1,000 Knows This Secret - #gold $XOM

Tue, 19 Jan 2010 08:00:00 EST

By Tom Dyson

The secret I'm going to share with you today is probably the single most important factor in determining the success of stock market traders. If you can master it, you can make millions in the stock market.

This technique is simple, but it requires months of training and dedication to master. The trouble is, it goes against our basic emotional conditioning. Don't worry if you don't get it immediately. Keep practicing...

So what's the secret?

The amateur thinks winning in the market is about predicting the future. The amateur buys some shares and hopes the market rises. He has no idea what to do if something unexpected happens. He wings it completely and ends up trading with his emotions. There's nothing more destructive to wealth than emotional trading.

The market is a game of probability. It has nothing to do with predicting the future. When you treat the market as a game of probability, money management becomes your most important weapon. What I mean is, the stocks you buy become far less important than the position size you use and the decisions you make after you pull the trigger.

This is the secret to beating the stock market. Maybe one speculator in 1,000 knows this. Until you realize this, you have hardly any chance of making money in the market. It boils down into three easy rules...

Trading Rule No. 1: Risk a constant amount of capital in each trade... and keep it small.

Most investors put more money into their favorite ideas than they put into their least favorite ideas. They have no system for figuring out bet size.

Skillful traders know they can't read the future, so they give every bet the same chance. They make thousands of small but profitable trades and accumulate their fortunes slowly but surely. The key is to keep your bets small and constant by putting, say, 2% of your total trading capital in each trade.

Trading Rule No. 2: Cut your losses. You are trading against some of the world's smartest people, armed with incredible research budgets and advanced supercomputers. They don't trade as a side job or as a hobby. These people live, eat, and sleep the market.

The market is a hostile place. It's like a medieval army trying to get into your castle day and night. Your stop losses are the castle gates. A position without a protective stop loss is like an open gate. You're letting the army pour in and take your gold.

To control your losses, use a stop loss. This way you know exactly how much money you stand to lose if your stock falls, before you've even entered the trade. The stop loss applies at all times and can never be overridden.

Trading Rule No. 3: If your trading idea shows a profit, add to your position. If it keeps rising, add more. For example, begin your investment with a purchase of $2,000. Once your stock is up Y%, invest another $2,000. Then, once your stock is up Z%, invest another $2,000, for a total cash investment of $6,000. Decide what Y and Z are before you enter the trade. Write them down so there's no confusion.

In my Penny Trends trading service, I have a mantra that captures the essence of this secret. We call it "doing more of what's working and less of what's not." This mantra drives every decision we make.

By using these three simple money management techniques... that is, push your profits, cut your losses, and keep your positions small and constant... you can beat the market, too. You won't win every trade, but in the long run, you'll generate a positive return in your trading account.

Good investing,

Tom

My Favorite Commodity to Buy Right Now - $XTO $GDX

Fri, 15 Jan 2010 08:00:00 EST

By Porter Stansberry

In yesterday's DailyWealth, I outlined how rising interest rates will depress the stock market's P/E multiple... which will create a giant headwind for stock market investors.

You can protect yourself from this headwind by avoiding high-priced growth stocks. A popular growth stock trading for a P/E of 40 can get cut in half in a matter of months in this kind of environment. For instance, Amazon currently trades for 75 times earnings. Surgical device maker Intuitive Surgical trades for 58 times earnings. Danger ahead.

But what sectors do well when inflation is rising... when the government bond market is correcting... and when earnings multiples in the stock market contract?

Two things in particular: energy and precious metals.

In December 2008, just after witnessing the financial crisis and the government bailout of AIG, the investment banks, and Fannie/Freddie, I knew it was only a matter of time before we entered a market like we have today – one with rising inflation and interest rates. My first – and best advice – was to buy gold bullion.

I also noted how cheap gold stocks were at the time, and recommended buying GDX – the ETF of the unhedged gold producer companies. We bought at $28 per share. It was recently trading at more than $50 per share. I expect it to go much higher, but clearly, our best chance to buy gold stocks is long gone.

On the other hand, various market factors have pushed natural gas down to record low levels – offering us an attractive way to buy a great inflation hedge. It's worth considering what the world's best-managed oil company – ExxonMobil – is doing in this sector right now...

In mid-December of last year, ExxonMobil announced it would buy the largest U.S. natural gas producer, XTO Energy, in an all-stock transaction valued at $41 billion. This will be Exxon's biggest takeover since acquiring Mobil in 1999. The XTO purchase provides Exxon with reserves equivalent to 13.9 trillion cubic feet of gas, or 2.3 billion barrels of oil.

From 2005 to 2008, when most of the other Big Oil companies went on a buying spree, Exxon was selling assets and adding to its massive cash hoard. Just as easy lending led to the real estate crash, high energy prices (especially in natural gas) led oil companies to expand recklessly. They started investing in alternative-energy resources like shale, which cost more to produce.

In December 2005, ConocoPhillips paid $35.6 billion for the independent oil and gas company Burlington Resources. In January 2006, Royal Dutch Shell bought 70,000 acres of the Fayetteville shale property in Arkansas. BP paid nearly $2 billion for 90,000 acres of Chesapeake Energy's Woodford property in July 2008 – right near the top. BP paid another $1.9 billion for a 25% stake in Fayetteville just after the Woodford purchase.

All of these purchases took place while gas was trading near all-time highs. When the economy turned down in mid-2008, natural gas plunged from around $14 per thousand cubic feet (mcf) to less than $3. Big Oil's gas purchases got crushed. That's when Exxon made its move.

The reason Exxon is buying gas is simple... Oil is expensive to find. It's more cost-effective to buy cheap natural gas reserves. Gas has more than doubled from its 2009 low, but it's still down 70% from its 2005 highs.

The chart below shows the 15-year historic ratio of oil to natural gas. When the line peaks, gas is cheap relative to oil. When the line bottoms out, gas is expensive compared to oil. When gas prices bottomed in September 2009, the ratio jumped to more than 24. The current ratio is around 14. While we're not catching the exact bottom, we do have the opportunity to buy gas at one of its cheapest points relative to oil in history.

DailyWealth $WTIC

This Could Crush Stock Market Valuations - $JNJ

Thu, 14 Jan 2010 08:00:00 EST

By Porter Stansberry

By now, most every DailyWealth reader knows the argument for higher interest rates.

Simply put, the U.S. government is facing a staggering amount of unfunded liabilities in 2010... around $3.5 trillion to be exact. As I described in my commentary on the Greenspan/Guidotti rule, the only way the government can make the interest payments on this debt (a good deal of which has been acquired in the past 12 months) is by printing money.

This money printing will continue to debase the dollar... and will drive our creditors to demand higher and higher rates of interest. If you haven't read this piece, please know it's one of the most important things I've ever written. It's imperative that you understand what's happening. You can read it here.

This situation is, without a doubt, the single most important financial trend in the world. It will not only affect the bond market, it will come to greatly affect the stock market, too.

You see, what most people don't understand about the huge bull market in stocks over the last 30 years is that it was mostly funded by debt and powered by falling interest rates.

Earnings were driven by growth in GDP, which was fueled by the greatest expansion in public and private debt in history. Keep in mind, over the last 30 years, America went from being the world's largest creditor to the world's largest debtor. At the same time, the interest on our debts fell every year, nearly in a straight line. This is the best recipe you can script for soaring asset prices.

Consider how these factors worked in your own neighborhood. As interest rates fell, more people could afford a bigger mortgage. And as more credit became available, more people were competing to buy homes. Prices rose. Rising prices allowed more credit to become available. As more credit was available, interest rates fell more. The cycle continued.

In the stock market, falling interest rates increased earnings because companies spent less maintaining their debts. At the same time, consumers had more money to spend. Not only did earnings rise, but more importantly, the value of equities rose in terms of earnings multiples.

When interest rates are very high, fewer investors are interested in stocks. But as interest rates fell, more and more investors had to buy stocks to earn an acceptable rate of return.

Rather than trading for 10 times earnings or less, stocks began to trade at 20 times earnings or more. At the peak of stock valuation in 2000, the S and P 500 was trading at almost 45 times earnings. Today, the valuation is still high – around 20 – because interest rates are still very, very low. If interest rates on U.S. bonds go to more than 10%, stock market valuations will plunge. At the height of the last interest-rate cycle in the early 1980s, the S and P 500 traded at around seven times earnings.

It will happen again. But right now, few people believe it's possible. It's instructive to note who does think this risk is real...

Hedge-fund billionaire John Paulson says he no longer trusts the dollar as his reserve currency and has put a huge amount of his fortune into gold. The world's biggest bond investor, Bill Gross, recently posted this on his website: "We caution that the days of carefree, check-writing leading to debt issuance without limit or interest-rate consequences may be numbered for all countries."

And in August, Warren Buffett himself wrote an op-ed to the New York Times warning about inflation:

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects.

For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself... the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington's printing presses will need to work overtime.

He told CNBC the government's efforts to paper over the banking crisis "are potentially very inflationary... worse than the 1970s inflation."

As a stock investor, what should you do to prepare? I'd avoid conventional growth stocks... the kind that carry P/E multiples in the 20-40 range. Contracting multiples are particularly hard on these sorts of stocks. They have the most value to shed. Make sure to own the best businesses you can find... stalwarts like Verizon and Johnson and Johnson. Ideally, you'll want to buy them for less than 10 times cash flow (a metric similar to earnings).

Also... you'll want to skew your stock holdings toward commodities, like energy and precious metals. These sectors do well when inflation is rising, when the government bond market is correcting, and when earnings multiples in the stock market contract. In tomorrow's essay, I'll show you my favorite commodity sector to buy right now.

Good investing,

Porter Stansberry

A Better-Than-the-Real-Thing Back Door into a Top Hedge Fund - $TPOU.L

Wed, 13 Jan 2010 08:00:00 EST

By Dr. Steve Sjuggerud

Usually, only the super-rich can get into hedge funds...

But I found a "backdoor" way we can invest with one of the best-performing hedge-fund managers out there.

It offers better terms than the real-deal fund and it trades at a big discount. If you're ready to do a little homework, I think it's an enormous deal. Let me show you why...

Meet fund manager Daniel Loeb... Wall Street's "Merchant of Venom."

"Daniel Loeb has positioned himself as Wall Street's merchant of venom, pillorying chief executive officers who don't make him enough money... So far Loeb's gonzo shareholder activism has made him and his investors very rich." – Bloomberg Magazine, October 2005

Daniel Loeb is probably best known for his letters publicly flogging the bosses of companies he owns... "Sometimes a good town hanging is useful to establish my reputation for future dealings with unscrupulous CEOs," he told Bloomberg.

Even though Dan may beat up on corporate CEOs, he actually takes great care of investors. And Dan's interests and his investors' are aligned... He is a major investor in his own fund.

Dan started his private hedge fund in the mid 1990s by rounding up $3.3 million, mostly from people close to him. Today, he manages about $1.5 billion.

Since the inception of Dan's fund in 1996, he has beaten the stock market by an astounding average of 12 percentage points per year. He has underperformed the S and P only two years. (He still brought home positive returns those years: 8.9% and 14.4% after fees.)

Even better, Dan has delivered the investment "Holy Grail." He made these returns with significantly less volatility – significantly less risk – than the stock market.

One of the most important measures to size up in a fund manager is how well he performs in bad times. The stock market lost money from 1999 through 2009. But if you'd invested $10,000 with Daniel Loeb in that time, you'd have over $35,500 today.

He did it with his Third Point Offshore Fund. What most people don't know is, getting into this fund is as easy as buying a stock...

In 2007, Dan listed what's essentially his Third Point Fund on the London Stock Exchange (symbol on Yahoo Finance: TPOU.L).

One of the unique features of hedge funds listed on a stock exchange is they can sell at a premium or a discount to the hedge fund's actual value, based on supply and demand.

When investors panicked in late 2008 and sold everything, shares in Dan's London-listed hedge fund fell to an extraordinary 50% discount to its actual value. Then an interesting thing happened... Daniel Loeb, his employees, and his hedge fund started buying shares on the London Stock Exchange. Dan knows a bargain when he sees it. He could buy his own fund for a 50% discount. So he bought!

I told our lifetime paid subscribers about this opportunity soon after, and the fund has soared 50% since then. But it's still a great opportunity now...

Today, the London-listed shares are trading at about a 20% discount to the actual value of the fund. Said another way, you can invest alongside Dan for 80 cents on the dollar.

And you can make a good argument that buying his fund on the stock market is worth a premium, not a discount... that it's better than buying the real fund.

Chances are, you're limited to exiting Dan's hedge fund only 12 times a year. Yet with this "backdoor" fund trading in London, you can sell your shares whenever the market is open.

With Dan's private hedge fund, you have to be "accredited" (rich) to buy it directly. But through the London Stock Exchange, you can buy shares through your broker, just like a stock. You can invest just a few hundred dollars if you want, instead of the typical million-dollar minimum to invest in a hedge fund.

The super-rich who invest a million dollars today directly with Dan in his private hedge fund don't get the 20% discount AND they must pay a performance fee. But this "backdoor" way through the London-listed shares gets around both of those. Dan won't start earning his regular performance fee on the London-listed fund until it's trading for around $11.50. It's currently trading near $7.

Dan's fund is around $1.5 billion in size. He has small chunks of it listed on the London Stock Exchange, denominated in British pounds, euros, and U.S. dollars. The U.S.-dollar portion has a market value over $300 million. At that size, the shares are liquid enough to trade.

I'm not sure of the legal aspects of owning shares of offshore hedge funds. You can check with your broker. But ideas like this one are worth pursuing...

Dan Loeb's Third Point London listing is a backdoor way to get into one of the world's best- performing hedge funds... minus the big performance fees... and at a 20% discount.

While it will require a bit more work to figure out than buying shares of Microsoft, chances are great it's worth the effort...

Good investing,

Tom

These Are the Only Stocks You Should Ever Buy - #small-caps

Tue, 12 Jan 2010 08:00:00 EST

By Tom Dyson

My younger brother is developing an interest in the stock market. He asked me for advice recently.

"Only buy small companies," I told him.

On Wall Street, brokers and analysts judge the size of a company by its market capitalization. A company's "market cap" is simply the stock market's best estimate of a company's total value.

Generally speaking, brokers call any company with a market cap under $1 billion a "small-cap stock" and any company with a market cap under $250 million a "microcap stock." (It's also common to refer to both groups as "penny stocks" because in the past, these small-cap stocks often traded for less than a dollar per share. These days, very few stocks actually trade for pennies, but they're called penny stocks anyway.)

If you're serious about making a fortune in the stock market, I recommend you only buy small caps and microcaps...

For one thing, Wall Street and big funds cannot invest in small-cap stocks. It's a liquidity problem. Micro investments can't offer meaningful profit opportunities to large investors. There's a practical problem, too. Micro stocks are thinly traded. It's impossible for them to take large positions without pushing the price up.

So in general, the "big money" ignores small-cap stocks. And because the fund managers aren't interested, the investment banks don't bother researching these companies... and the press ignores them, too.

Dozens of analysts and traders follow the large companies. The market for large stocks is efficient. There are rarely pricing anomalies or bargains. But the small-cap market is full of pricing anomalies, undervaluation, and inefficiencies. So you can find true values among small caps.

For another thing, you have mathematics on your side when you buy a small-cap stock. You don't buy stock in a giant company like McDonald's or Coca-Cola and expect to quadruple your money in a few years. These companies are so big, there's simply no way they can grow fast enough to produce 200%, 300%, and 500% gains.

Small-cap stocks generate returns (and losses) of this magnitude all the time. I can list dozens of stocks that have risen more than 1,000% in the past nine months.

But for me, the most compelling reason to own small caps is because we've just pulled out of a recession. At the end of every major market downturn, small stocks rise higher and faster than any other investment in the world on the way back up...

I have What Works on Wall Street by James O'Shaughnessy in front of me. It compares the performances of small-cap stocks with the S and P 500. Following the 1973-74 bear market, small-cap stocks had risen 447% six years later versus only 264% for the S and P 500.

In 2003, as the markets recovered from the bear market of 2001, small stocks outpaced all others by a nearly two-to-one margin. The same story repeated in 2009.

Now, if you're retired and your investment goals are to preserve your capital and make low-risk income, then I wouldn't recommend small-cap stocks. They're too volatile. Small-cap stocks are best suited for aggressive investors... like my younger brother. He's 22 years old and can handle the large dips you get with small-cap stocks.

He didn't ask me for more specific advice on how to pick stocks, but if he had, I would have told him to pick companies that have rising stock prices, always use a trailing stop loss, and favor companies in boring industries that produce lots of cash.

Good investing,

Tom