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I jumped in the taxi and told the driver to take me to my hotel. He waved at me and told me to be patient. He was watching television.

The flat-screen TV was on the passenger side of his cab, near the glove compartment. The Olympics was on. He was watching a ping-pong game. I sat back and watched the final points with him. The South Korean team won. He clapped his hands in celebration and then pulled away from the curb…

South Korea is the most “wired” country in the world. It has Internet on trains, on buses, and in taxis. It’s always free. Hotels put computers in every room. And 93% of South Korean households receive broadband… the highest penetration in the world. I visited South Korea this summer. I saw people watching the Olympics on their cell phones.

Infrastructure in South Korea is excellent. The trains and buses run so frequently, you never have to wait. The roads are smooth and fast. Buildings are modern. The streets are clean.

South Korea is already the world leader in semiconductors, digital displays, and consumer electronics. Now it wants to rule the robotics industry. I took a tour of a massive planned city near Seoul. It’s the largest continuous real estate development in the world. Robot Land is one of the large “neighborhoods” the developers are building in this city. They want to entice robotics factories to locate there.

South Korea is a developed country. Thirty years ago, South Korea was poor. Newsletter writer Marc Faber tells the story of his early career in Asia in the most recent issue of the Gloom Boom & Doom Report. South Korea was one of his first investments. “In the 1970s, South Korea was still ruled by the military and was extremely poor. Curfews were in place and there were no foreign investors.”

South Korea’s economy has come a long way since the 1970s. The average South Korean has more wealth, freedom, and education. But what about South Korea’s stock market? The South Korean headline stock index is called the KOSPI. The KOSPI was at 1,000 in April 1989. It was still at 1,000 in November 2008… before falling below 900.

I prefer to look at long-term charts that have been adjusted for inflation. When you adjust for inflation, you strip out the general rise in prices and see the true returns attributable to the stock market. When you adjust South Korea’s stock market for inflation, you see that an investor who bought stocks in the 1970s still hasn’t made a penny of return today.

It’s the same way with Japan and Taiwan. Taiwan’s stock market recently touched 1987 levels. And Japan’s stock market recently touched 1981 levels. These countries are all far richer, more developed, and more sophisticated… But their stock markets haven’t made any money for investors in over 30 years.

I don’t like most mainstream U.S. stock market investments. They don’t pay big enough dividend yields. And with all the regulation and government intervention, America’s productivity will decline. The “Obama rally” could last a year or more, but sooner or later, we’re going to break 800 on the S&P again.

If I had to invest in stocks, I’d buy Taiwan and South Korean stocks. Their economies may be in recession and they may depend on the rest of the world to buy their technology, but at least their stock markets are wickedly cheap.

What Happens When There’s No One Left to Sell… You Should Consider North Korea as an Investment

The South Korean stock market sells for 11 times earnings and trades at a discount to book value. The Taiwan stock market sells for nine times earnings and trades for only 1.3 times book. Plus, the Korean won has depreciated by 35% in the last six months and the Taiwan dollar by 10%… so American investors get an even better deal.

I particularly like Taiwan stocks. They pay an 8% dividend yield, and all the top Taiwanese companies have billions in cash and no net debt. The next bull market in Asian stocks may take a few years to materialize, but at least you’ll be paid while you wait…

The easiest way to invest in South Korea and Taiwan is through the exchange-traded funds (ETFs). The South Korea Index ETF symbol is EWY. The Taiwan Index ETF symbol is EWT.

Good investing,

Tom

THE STOCK MARKET HAS SOME CONVINCING TO DO

We’re putting the stock market on “volume watch” this week.

When you have bullish bets on stocks, you want to see lots of trading volume on days of big market gains. Heavy “buying interest” supports your thesis that the market is due to rise.

Although stocks are a bit higher than November levels, today’s chart shows the “big money” isn’t interested in stocks just yet. The bars at the bottom mark trading volume in SPY, a fund that tracks the S&P 500. Red bars are the volume on down days. Black bars are the volume on up days. The taller the bar, the greater the trading volume.

As you can see from the area marked A, selling volume was huge during October’s big decline. Volume tailed off during the holiday break (marked B). But now, even though Wall Street has returned to work, volume in January (marked C) is weak and unconvincing.

If stocks are going to rebound in 2009, they’re not going to do it on the backs of a few bullish investors with $20,000 portfolios. They’re going to rebound if pension-fund managers and mutual-fund managers put their $20 billion portfolios to work. If these “elephants” return as big buyers of stocks, we’ll see it in rising stock prices and robust trading volume. Until we see those tall black bars, this rally remains unconvincing.

January 12, 2008

Before you read today’s investment idea, look at the chart below. It’s Toyota’s worst nightmare.

In the last five months, the yen has moved from 110 to 90 against the dollar, making it 2008′s strongest currency. The yen is the highest it’s been in 14 years… and it’s only a few points away from its highest level ever.

Toyota sells cars all over the world. When the yen rises against other currencies, Toyota’s cars are more expensive to foreigners. They don’t buy so many. They choose American, European, or Korean cars instead. Toyota loses money.

According to the Wall Street Journal, every point the yen rises against the dollar costs Toyota $433 million in annual operating profit. In other words, over the last five months, Toyota saw $8.6 billion in annual profits disappear… That’s about a quarter of its annual operating profit.

This chart shows the Yen Trust. When this fund rises, it means the yen is getting stronger.

Japan’s entire economy is a large version of Toyota. Japan is an export economy. Its strategy for prosperity is producing goods and selling them to foreigners. Every point the yen rises costs Japan billions of dollars in profits for its companies, billions of dollars in tax revenues for the government, and thousands of jobs in the economy.

In the past, when the yen rose too high, Japanese authorities intervened in the markets to make the yen fall. One tool they use is cutting interest rates. Low interest rates discourage people from storing their money in yen and encourage them to save their money in other currencies with higher interest rates.

Right now, the Japanese yen has the world’s second-lowest official interest rate, after the U.S. The official central bank rate in Japan is 0.3%.

The second tool Japanese officials use to devalue their currency is direct intervention in the foreign exchange markets. The Bank of Japan prints money and then exchanges the yen for dollars in the foreign exchange market, pushing down its price.

The last time the Japanese got worried about the yen being too high was in 2003 and 2004. The yen was around 105 at the time. They spent $2.5 billion pushing their currency down about 20% against the dollar.

The Japanese yen is now around 15% higher than it was in 2003-04. And Japan’s economy is much sicker than it was back then. The stock market is close to 20-year lows and GDP is shrinking. There’s no room to keep cutting interest rates. I’m certain the Japanese authorities are going to start intervention again soon. It may be happening already. Last week, the head of Japan’s central bank told the press he was looking at ways to devalue the yen.

The Next Big Bubble to Burst The Best Speculation in the World Right Now

Japan’s currency pays no interest. Japan’s economy is in tatters. But debt is the big reason I expect the yen to fall. Japan’s government is the most indebted in the world… with a government debt-to-GDP ratio expected to hit 150% next year. (It averages between 70% and 75% for the six largest economies in the world.)

To devalue its currency, Japan’s going to have to print money using the same “quantitative easing” techniques Bernanke is using right now. These techniques are highly inflationary… and guarantee the yen will fall against other currencies.

You won’t hear any other writer in the world predicting inflation and currency devaluation in Japan right now. That’s why it’s such a good bet. Plus, as you can see from the chart above, we’ve got the trend in our favor.

FXY is the symbol of the Japanese Yen Trust. When the yen falls against the dollar, this fund falls. The easiest way to bet on a fall in yen is to short this fund or buy put options on it.

Good investing,

Tom

NEW HIGHS OF NOTE LAST WEEK

JetBlue (JBLU)… airline
VSE Corp (VSEC)… military systems
Apollo Group (APOL)… secondary education
Brink’s Home Security (CFL)… home security
Force Protection (FRPT)… military vehicles
Applied Signal Technology (APSG)… terrorist surveillance
Answers Corporation (ANSW)… answers… duh
Emergent Group (LZR)… surgical equipment
Crucell (CRXL)… biotechnology
Repros Therapeutics (RPRX)… biotechnology
Ecology & Environment (EEI)… environmental consulting
Aceto Corporation (ACET)… drug materials and distribution
Tiens Biotech Group USA (TBV)… nutritional supplements

NEW LOWS OF NOTE LAST WEEK

Steelcase (SCS)… furniture
Hill-Rom (HRC)… hospital beds
M&T Bank Corp (MTB)… bank
United Bancshares (UBOH)… bank
Lloyds TSB Group (LYG)… bank
Texas Capital Bancshares (TCBI)… bank
Lions Gate Entertainment (LGF)… movie studio
CurrencyShares Russian Ruble (XRU)… Russian ruble ETF

Thanks to an Enron-style fraud at one Indian company, stocks in India have never been as cheap as they are today.

The chairman of Satyam, a huge software company, gave himself up this week, saying he’d been “cooking the books” for years. He’d overstated profits and overstated the cash balance… at this point by a billion dollars.

When he gave himself up, shares of his own company fell some 78% in a day. Other major Indian stocks fell by double-digit percentages. Investors are worried about which company is next.

Now, on a price-to-earnings basis, India is as cheap as it’s ever been in the 20 years of data I have. It’s trading at about nine times this year’s earnings.

As my friend and Indian hedge-fund manager Rahul Saraogi says, “We have crisis prices here with no crisis.” At some point, one by one, the big brokerage firms will recommend India again. Each recommendation will mean new buyers. Foreign investors will return.

I prefer to buy when everyone who wants to sell has sold. I prefer to buy when everyone is bearish. The biggest gains in investing come when things go from bad to less bad. I think India is on the brink of that now.

What’s the best way to play it? I like the PowerShares India Portfolio (PIN). It’s widely diversified across 50 Indian stocks. It did hold Satyam, but now Satyam makes up only 0.03% of the portfolio (essentially nothing). The rest of the companies in this portfolio are making serious money – with an average return on equity of 28.5%.

PIN holds the major companies of India… and those were hit hard when the accounting scandal was announced – some fell by double-digit percentages. I suggest using the scandal as a cheap entry point. There may be another one or two scandals… or not. But this is too cheap to pass up.

I think you can enter this trade without much downside risk. The low for shares of PIN was $9.58, about $2 below where it’s trading now. If it falls below that recent low, I’ll consider myself wrong.
So you have about $2 of downside risk – for the potential of triple-digit returns in as soon as a year. If 2003 repeats, you’ll see 750% in less than five years… or better.

Yes, I’m aware there could be more frauds. WorldCom followed Enron. But this is a heck of an opportunity… The last time Indian stocks were close to this cheap (mid-2003), they rose roughly 750% in U.S. dollar terms until they peaked at the end of 2007.

Most investors are scared. The foreign investors who hadn’t fled already have surely left by now. Hardly any major international brokerage firms have a “buy” recommendation on India. Call me crazy, but that’s something I LIKE to see.

I see it as an opportunity – there’s nobody left to sell.

Everyone points out the warts on India these days. But nobody points to the beauty, from an investor’s perspective… India doesn’t have a credit bubble, a real estate bubble, or a debt problem. And India has a domestic market, so it doesn’t rely on exports nearly as much as China does.

On the Ground in Asia’s Once-in-a-Lifetime Market The Indian Stock Market Is Loaded With Fantastic Investments

A few months ago, I traveled to India with fellow DailyWealth editor Tom Dyson. I urge you to go back and read what we wrote about our trip in DailyWealth (see Related Articles). If you’re a subscriber, you can read my True Wealth issues. And if you’re a lifetime member, take a look at my last Partners Letter, which featured a guest essay by Rahul.

Downside of $2, upside of potentially hundreds of percent, in an investment where there’s nobody left to sell. I like those odds… Buy India!Good investing,

Steve

THE INFRASTRUCTURE REBOUND IS GOING GREAT GUNS

It’s been another big week for our “rebound trades.”Gold-mining stocks, emerging-market stocks, and infrastructure stocks. Since these assets suffered the most during the market crisis, our take was that they’d rebound the most when the crisis cleared. And rebounding they are. Take our infrastructure play, Shaw Group (SGR).

In early December, we identified three assets that would soar when the inevitable market rebound showed up:

Yesterday, power-plant builder Shaw reported a small quarterly loss on an 11% increase in revenue. The report was a “things aren’t great, but they aren’t terrible” kind of thing. Since Shaw was sold to such a depressed level last fall, the “not terrible” news shot the stock up 22% on the day… and up an incredible 70% since we marked it for rebound.

The action in Shaw is a good sign for the infrastructure sector, but more importantly it’s a timeless lesson for speculators. When folks get scared to death of an asset – whether it’s land, oil, bonds, or stocks – they often sell it down so far that it gets “priced for Armageddon.” When Armageddon doesn’t arrive, and the clouds clear just a little bit, the asset can easily double or triple your money in just a few months.

January 8, 2008

It might be the best buy signal you’ll ever see for the gold-mining sector.

Since October, demand for gold coins and bars has soared so much that dealers can hardly find any to sell right now. If they can find it, the premium can run as high as 60% to 100% over the published spot price of gold.

When you can’t buy gold… that’s your signal to buy gold miners. And recently, it’s been nearly impossible to buy gold, at least at anything resembling the alleged “spot” price.

One guy with a truly front row seat to this situation is Van Simmons of David Hall Rare Coins. Van is an expert in a lot of things. One of his specialties is rare, collectible coins. He’s been in the business for decades, so he has a great feel for the precious-metals market. Over the last three months, I’ve spoken to him almost weekly.

According to Van, in October, dealers were actually marking up by 60%-100% bullion coins that commanded a 10%-15% premium just weeks prior.

By late November, the spot price of gold started to reflect that demand. The price rose 12% in November and 14% in December.

This is huge for the gold-mining industry. Gold miners had a brutal year in 2008… but the swelling demand for gold is doing wonders for their profit margins.

So now we have the best setup for profiting on gold mining in decades. The price of gold is up and going higher over the long term. Today, mining companies can make a lot of money mining gold because the cost of supplies, like fuel and explosives, is cheap.

The gold price rose from $799 per ounce in early December 2007 to $923 per ounce by the end of January 2008. It looked like a great time to buy gold miners. But if you jumped in then, you lost money. That happened even though the price of gold rose to more than $1,000 per ounce. The reason is simple. Miners could sell their gold for a lot, but mining it cost them every penny they earned.

That situation is completely reversed today, and we stand to make a lot of money from it. Let me explain…

In 2007, gold miners’ margins were terrible. It cost Newmont Mining (one of the largest gold miners in the world) $697 to produce an ounce of gold that it could only sell for $701. Similarly, Barrick Gold, another major gold miner, needs the gold price at $700 per ounce to make ends meet. But in 2007, gold averaged $697 per ounce.

The good news began for the sector in July 2008, when the costs of mining peaked. Since then, nearly all mining staples – oil, natural gas, iron, copper – fell by more than half. Meanwhile, the price of gold is up 25% this year. That tells me the earnings trend is now on our side.

That is, in part, why gold-mining companies’ stocks are rising while all the other commodity companies are falling. Below is a chart of the AMEX Gold Bug Index. The index tracks the value of the 15 largest gold producers. You can see that the index hit a low in October 2008 and has not looked back.

Many of the best gold-mining companies already trade for more than twice the recent low price. But after one of the sector’s worst-ever bear markets, there’s plenty of room to go.

This Trade Is Better Than Gold Why Gold Bullion Premiums are High and Going Higher

To get started in gold miners, you can be conservative and buy a gold-miner mutual fund or ETF. Mutual funds worth checking out are the U.S. Global Gold and Precious Metals Fund (USERX) and the First Eagle Gold Fund (SGGDX).

Good investing,Matt

However, not all gold-mining companies are worthy investments. A basket fund scoops up the bad with the good.
While this uptrend will lift the whole sector, picking only the best producing miners and the best small exploration outfits will be much more profitable.

For producers, focus on a few simple criteria to pick the best companies. They must have low debt, low costs, and low risk. The companies that meet those criteria will outperform any sector fund.

A HISTORIC OPPORTUNITY IN CORPORATE BONDS

Today’s chart is one of the most important charts you’ll see this year… one that will help you make spectacular returns in boring corporate bonds.

Our chart shows the difference between the yields you can earn in U.S. Treasury bonds versus the yields you can earn in corporate bonds. Most investors are scared to death of the economy right now… so they’ve run away from corporate bonds and piled into government bonds. This widespread fear has sent the “spread” between the two bond classes to a historic high. Corporate bonds are yielding just under 8%, while Treasuries are rising from 2%.

Investing and trading are all about finding extremes in sentiment and valuation. Right now, folks are extremely bearish on corporate America. They’ve sold so heavily that bonds are now priced not just for depression, but for apocalypse. But the world has a way of not ending… which means buying corporate bonds right now will result in big interest payments now and big capital gains later when the crowd returns to its senses.

December 30, 2008

When you meet someone from Florida, please, DON’T ask how he or she is doing…

Don’t ask how business is. And don’t ask about family either. Don’t ask what they’ve been up to. Pretty much don’t ask about anything. This is a lesson I learned over the holidays.

People are hurting here, big time. I’m sorry to suggest this. But it is the reality of Florida today. I heard it over and over again. A simple “How’s it going?” leads to a terrible story about how folks have lost everything. And that’s just from the people who are open about it…

I’m afraid to say more, because friends and acquaintances will think I’m talking about them. They don’t realize it’s not just them… The stories are everywhere. It is scary. “We have $1,000,000 in rental properties with $750,000 in mortgages. So we have a net worth of $250,000 in our rental properties.” But now, their Florida rental properties may have fallen as much as 50%. The properties are worth $500,000. But the mortgages total $750,000. These smart people are caught… They’re “upside down” by a quarter-million dollars.

Along the way, they may have bought a bigger house for themselves… Now they could be upside down on that by $250,000, too.

To add insult to injury, their stock portfolios are down 50%. All told, the typical upper-class Florida 60-something who dabbled in real estate probably lost a million dollars in net worth last year. That is why you don’t ask a Floridian how he’s doing… Talk about college football in Florida. Or the Orlando Magic basketball team. Ask about where he’s from, because nobody’s actually from Florida. Heck, talk politics or religion! Anything but “How are you doing?”

Over the holidays, I heard a lot of answers to “How are you doing?” It makes me wonder if real estate problems will linger longer than I expect. The supply of properties for sale is incredibly high, and more supply is coming…

You see, the upper-class Floriday 60-something apparently has “two or three” or even “eight or nine” properties they plan to put on the market “when things get better.” It sounds like most people are holding and hoping – which is one of the worst strategies possible with a losing investment, especially one you pay interest on.

Some people have accepted reality. They’ve taken their lumps just to get out. They’re honest with themselves, and they’re making changes. Their wives are going back to work, and they’re scaling back their expenses in a big way.

The real estate market will finally bottom when the “hold and hope” crowd joins the “take your lumps” folks, puts their properties up for sale, and gets another job. They’re not there yet.

I always try to find the silver lining here in DailyWealth. And the points I made last week in DailyWealth are still true: U.S. homes are actually affordable again, as mortgage rates are falling and home prices have dropped dramatically.

The people in trouble aren’t dummies. They took what they thought was a calculated risk. But they’re probably down a million dollars in 2008. It went something like this…

A year ago they said:

An Unbelievable Opportunity Is Arriving Quicker Than I Imagined At These Levels, Investors in This Market Have Always Made Money

But from the sound of it, the supply of real estate coming on the market in the next year should be extraordinary. Only once that’s “sopped up” can a new real estate bull market can begin. Hopefully, that won’t take more than a year.

Until then, remember: Unless you’re ready for a sob story… don’t ask “How ya doin?” in Florida.

Good investing,

Steve

BEFORE YOU BUY GOLD STOCKS, READ THIS

If you’re thinking about buying one of our top “rebound” trades this week, please think again. gold stocks are one of the world’s most volatile trades… the kind of asset that can boom 300% in a year. They also bust like crazy. Consider their 66% decline from July to October this year. Wild moves like this make the “golds” a terrific trading vehicle. If you bought ‘em three weeks ago, you’re up around 40%. Readers of our colleague Jeff Clark’s Short Report made more than 80% on his “leveraged” trades in the sector.

As we mentioned earlier this month, Gold stocks are still one of our top long-term ideas. But after such huge rise in such a short amount of time, they’re due for a break. Expect the latecomers to the rebound party to get “shaken out” soon.

December 29, 2008

Last summer, I went to visit Iowa Telecom.

Iowa Telecom serves 417 communities in the countryside – 90% have fewer than 2,000 people. It avoids towns. The largest town it operates in is Newton, Iowa… population 15,000.

It has no competition… and it never will. There is simply no scenario where it would be worthwhile for a competitor to build a network to serve towns with three farmhouses. This is Iowa Telecom’s “moat.” Plus, only 28% of Iowa Telecom customers are businesses, so the company doesn’t have much exposure to business downturns.

Iowa Telecom has all the qualities of a safe dividend stock. It cannot expand, it pays almost no taxes, and it cranks out the same cash-flow numbers every quarter. Management pays out almost all its cash flow in dividends. When I first went to visit the company, it was paying a 9% dividend.

But here’s the kicker. After I’d toured the premises, met management, and studied the company finances in the boardroom, I got into a casual conversation with the chief financial officer. He gave me the best indication that Iowa Telecom would make a good dividend investment…

He said to me, “You know I just bought a farm. And I overpaid for it. Well, if you want to know what I think of our dividend, put it this way: I’m depending on the cash flow from our dividend to pay for my farm.”

Over the last six months, Iowa Telecom’s stock price has fallen 23%. And it’s still paying the same 40-cent dividend payment. The yield is now 12%.

Now, even though the stock is down 23%, my readers have only lost 9% on the position. That’s because we’ve made 7% by collecting dividends and another 8% by selling call options against our position. That’s 15% income in seven months… during the worst bear market in 30 years.

When you sell call options against a stock, you’re running what the pros call a “covered call” strategy. You sell the potential future upside in the stock price to another investor in return for a large fee. They call this fee an “option premium.” By collecting this option premium, it’s easy to double or triple the income you receive from your stock positions. Your downside hasn’t changed, except now you have the option premiums to pad your returns.

If you believe your stock has huge upside potential, you wouldn’t want to sell the upside potential to another investor. But with Iowa Telecom, I couldn’t see any reason for its stock price to rise. It pays out all its profits and has no expansion plans. It’s like a bond, in other words. I was happy to sell the upside potential.

The current market is perfect for using a covered call strategy. Option premiums are extremely high thanks to the volatility (although they are falling), and America’s strongest blue-chip stocks are selling at generational lows, paying the highest dividend yields since the 1980s.

The Only Safe Way to Generate Income in Today’s Market The Single Best Income Strategy Ever Created Just Got Better

These companies are safe. But as long as we’re mired in recession, I don’t believe they have much short-term upside. So I’m happy to sell this upside away to eager option buyers for high premiums.

I call this strategy the double-digit bear market income secret.

If you’d like to learn more about covered calls, give your broker a call and ask him to explain the trade. It’s the only way to earn safe income in a bear market…

Good investing,

Tom

NEW HIGHS OF NOTE LAST WEEKRoyal Gold (RGLD)… gold royalties
Maxygen (MAXY)… biotechnology
Emergent BioSolutions (EBS)… biotechnologyNEW LOWS OF NOTE LAST WEEKTransocean (RIG)… offshore drilling
Schlumberger (SLB)… oil services
Harvest Natural Resources (HNR)… Venezuelan oil
American Apparel (APP)… clothing
Campbell Soup (CPB)… soup
Thor Industries (THO)… RV maker
Kenneth Cole Productions (KCP)… apparel
Take Two Interactive (TTWO)… video games
Collectors Universe (CLCT)… collectible grading
Hitachi (HIT)… industrial goods and electronics
Martha Stewart Living (MSO)… media and home furnishing
Odyssey Marine (OMEX)… treasure hunters
TheStreet (TSCM)… financial publishing
U.S. Gasoline Fund (UGA)… gas ETF
Russian Ruble Trust (XRU)… ruble ETF