Contrarian Profits

Golden Opportunities and Your Options

Contrarian — Fri, 03 Apr 2009 04:52:00 GMT

Our experts have cranked it up to high gear and have dug into some of the most controversial topics Investment U has covered recently. Like investing in gold.

Gold has been an incredibly hot topic over the past few months. On one side, it looks cheap from an inflationary perspective, and on the other, overpriced. Our own Louis Basenese even suggesting that we should consider shorting gold. The debate has ranged on our message boards pro and con…

But regardless of its short-term movement, we recommend holding 5% of any portfolio in precious metals - like gold. So what is the best way to accomplish this? We found a number of ways to do just that.

The Best Ways for Investing in Gold

Rick Rule, Chairman of Global Resource Investments, makes a compelling argument that gold isn’t a commodity in as much as it’s insurance. “Gold is disaster insurance. You shouldn’t want it to go up. Would you want to be paid in life insurance, home insurance, or auto insurance proceeds? That would mean you want to die, have your house burn down, or get seriously injured!”

Rick finds the notion that some people actually want gold to rise to $2,500 an ounce extremely distasteful. He believes the only thing gold has going for it right now is its volatility. It’s why he owns gold stocks.

There’s a few other ways for investors to own gold…

Physical Gold: Rick holds his physical gold in a bank safe deposit box. His is located at his half-year residence of Canada in the bank of Nova Scotia.
Paper Gold: The SPDR Gold Trust ETF (NYSE: GLD) is a good option for investors who need liquidity with their gold assets. You can buy and sell this ETF like any stock on the market. Which also means you can sell it short, if you believe it will fall.
Gold Coins: Gold coins are an easy way to own gold in your portfolio. Unfortunately, because of the demand, you’ll be paying a hefty premium to purchase them. This was discussed a little in our Panel Discussion, and we’ll have more for you on that dialogue tomorrow.
Gold Futures: Gold futures may be an excellent option for some. However, he stays out of gold futures because he believes it’s too volatile. Rick believes silver futures are even worse, like gold futures on steroids.
Gold Stocks: Gold producers trade between 1.7 and 2 times the net present value of their cash flows they could generate. It’s called the warrant on the gold price. Basically the market has assigned a large “growth” premium to a mining business - where the business gets smaller every day. There’s less and less gold to mine.

It also means that if gold went to $1,200 or $1,500, the cash flow these producers could generate would increase exponentially. However, this also works in the opposite direction. It’s why gold stocks are so volatile.

The second problem is that the gold industry as a whole has become greatly inefficient. Since the 1970s, when Nixon broke down the Bretton Woods monetary system to pay for the Vietnam War, gold prices have fluctuated from speculation from its controlled price of $35 to well over $800.

Rick explains it another reason why things are wacky with gold stocks. In a word, leverage. Imagine a $300 per ounce gold market where an inefficient producer mines gold at a cost of $320. That’s a negative 6% margin. If gold goes to $400 or above, there’s an infinite increase in profit, and better efficiencies on increases in price.

So ironically, Wall Street has wanted to see leverage in gold stocks to increase efficiency and make it easier to post stellar profits on gold rallies. It’s this leverage that’s also increased the risks and the volatility.

We had a considerable amount of interest in “profit generators” from Rick’s talk yesterday. People asked for more. So I talked with a few of the other experts to get their suggestions:

Out of Eurasian Minerals investment director, Scott Close suggested Esperanza Silver Corporation (CVE: EPZ).
Then Patrick Moodie of Rimfire Minerals was kind enough to recommend a few more: Riverside Resources Inc. (CVE: RRI), Almaden Minerals Ltd. (NYSE: AAU) and Cornerstone Capital Resources (CVE: CGP).

The Truth About Options

Karim Rahemtulla, Investment Director for Mt. Vernon Research, emphasizes that options have become much more popular because they are a tool to enhance returns. They are not just a way to go long or short. They are a way to use less money, protect, go long, OR go short.

Karim never thought he would see companies like GE fall into the single digits, and sees tremendous opportunity around him, “You can look at this market as a way to set yourself up for high profits, yet, with a degree of safety.”

LEAPs allow you to put very little of your capital at risk. These are long-term options, which are known as calls in shorter maturities. They let you go long - profit from increases in stocks - while putting only 15% to 20% of your capital on the line.

Then you get one, two, or three years of time to work on your side. In fact, there was one stock Karim suggested attendees look at (specifically, its 2011 LEAP) for that exact reason. Our audio recordings will have all the details. You can find out more, here.

He really emphasized that it’s easy to get confused with the complexity of options. It’s unfortunate, but it can be solved by focusing on a few simple option strategies:

Covered Calls - allow investors to receive a premium on the stock you own. When you sell a call you give someone the right to buy your stock at a specified price, called the strike price. If the cost of the stock never goes above that price, you keep the premium they paid you and you don’t have to sell.
Long Puts and Calls - Here you can use options to control fast moving stocks for a fraction of what it would cost to buy them outright. By buying a call, you have the right to purchase that stock at its strike price for a long time horizon. By buying a put, you have the right to sell at a particular price.
LEAPs - These are long calls with extremely long times to expiration. This allows you to control the stock for a fraction of the cost of outright purchase. You can also do these in your retirement account.
Put Selling - Here you sell an out of the money put on a stock that you don’t expect to weaken. If the stock doesn’t drop you keep the premium you take in.

Karim wrapped up with the three best strategies to use for the market right now: selling calls, selling puts and LEAPs.

Put Options: Getting Paid to Buy Your Favorite Stocks

Lee Lowell, from The Instant Money Trader, explained why so many investors on the sidelines are looking at put options as a way to buy back into this market.

The advantage of selling put options is that you get paid up front in cash from the put option buyer, which obligates you to potentially buy these quality stocks at below their current market prices.

There is a margin requirement involved. But it’s significantly less than what it would cost to buy the stock outright. And the total risks involved are no more than what it would take to purchase the stock outright.

Lee recommends selling put options that are either $5 or $10 out of the money that have three months until in expiration. There were three stocks in particular he recommended for this strategy right now: General Electric (NYSE: GE), Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC).

Racing Away…

Time has just been flying by over the past few days. Good people, great food and phenomenal market intelligence. We’ve hardly had time to catch our breath, so to speak. And just as I was thinking that, I ran into Keith Fitz-Gerald, Investment Director for Money Map Press.

Or more correctly, he ran by me. It seemed he was trying to catch a ride on one of the cigar racing boats in the harbor that I’ve been telling you about. As he stopped I asked him a little about the “Geiger Index” I’d heard so much about.

Apparently, it’s an algorithm he’s developed to monitor the market’s movements. It tips him off before big moves happen. I didn’t even have time to get more information out of him before he trotted off in search of cigar racing glory.

I didn’t have the heart to tell him the gusting winds we were receiving had cancelled most of the races. I will have my Editor in Chief, Alexander Wissel, send you some more information on The Geiger Index in the next day or so.

In many ways, this conference couldn’t have come at a more important point: With our new President, the markets recent plunge, the global upheaval and domestic economic disarray. As our last day closes out, the impression I get from many is that they’re more confident in what to expect based off of what they’ve heard over the past week.

And they aren’t the only ones. Even as an accredited finance professor, I’ve greatly expanded my knowledge this week.

Stay tuned for my wrap-up tomorrow, where in addition to touching on some of the biggest ideas and strategies from this week, I’ll give you an earful of the heated conversations from our panel discussions - which included green energy and gold coins…

Source: “Golden Opportunities and Your Options”

Three Tools for Picking Penny Stocks

Contrarian — Mon, 30 Mar 2009 19:44:00 GMT

The small-cap universe is packed with thousands of stocks. And we know it can be a daunting task to find just two or three solid names… In fact, readers e-mail us every single day to ask how to search for the best penny stocks.

With that in mind, here are three tools to help you find the best small-cap and penny stocks for your portfolio:

No. 1: Stock Screeners

A stock screen is one of the most effective ways to pick up on the best stock plays the market has to offer. Brokers and analysts on Wall Street use screens to cut through the noise and find some of the best investment opportunities available.

Stock screeners are applications that look through a list of every stock on the market, and find you the ones that meet your specific criteria. For example, when you ask for a stock with a price-to-earnings (P/E) ratio of less than 14, the screener searches the database and only returns the stocks whose P/E ratio is less than 14.

Once you get comfortable with some financial terminology, you can combine metrics to have your stock screen whittle down the broader market to just a few stocks that you think are worth checking out…

You don’t have to be a Wall Street hotshot to run a screen. There are tons of free stock screeners out there that anyone can use. You can find screeners online at financial sites like Google Finance or Morningstar, or you can download desktop screeners like the aptly named Stock Screener Lite.

No. 2: The SEC Database

The Securities and Exchange Commission is the first resource you should tap when you’re ready to research a specific stock. Almost all public companies — large and small alike — are required to file quarterly and annual reports, financials, insider trading information, and more with the SEC.

All of this information is available to anyone with an internet connection. Just go to http://www.sec.gov and click “search for company filings” under the Filings & Forms section. From there, you will navigate to a user-friendly database. It’s completely searchable by company name and/or ticker symbol.

No. 3: What’s everyone else saying?

So you’ve run a screen. Then you have picked out what you believe to be the best stocks to research. You’ve checked with the SEC database — and printed out the companies’ most recent 10-Qs. Now, it’s time to find out what everyone else is saying.

Search the web to see what analysts and other investors think of the stock. Don’t just read message board posts written by cheerleaders who only want to boost the share price. Gather a variety of opinions and forecasts.

One great way to do this is through the social networking site Twitter. Traders and investors alike use Twitter to communicate market information to anyone who wants to follow them. On the Penny Sleuth Twitter feed, we post daily stock updates on big movers and other helpful market information you won’t find in our daily columns.

You can sign up for a free account and follow us here.

Source: Three Tools for Picking Penny Stocks

Five Wall Street Whoppers And Why You Need To Know Them

Contrarian — Fri, 20 Mar 2009 22:10:00 GMT

If you’re like many investors, you are probably sitting on the sidelines right now, unsure of what to do. If you want to buy, you may be thinking “let’s wait a little longer.” If you want to sell, you might be concerned about “missing out.”

Either way (and even if you don’t plan on making either move anytime soon), having a sense of what got us here can keep you from repeating the same mistakes and even help you make smarter financial decisions - particularly when it comes to repairing your portfolio and even growing it in the years ahead.

When it comes to understanding exactly “what got us here,” I find it helpful to review some of the key bits of advice that Wall Street kept pitching to retail investors, a series of widely accepted investment adages that somehow became gospel and that I refer to as “Wall Street’s Biggest Whoppers.”

Let’s take a couple of minutes to look at the Big Five - the five worst offenders from a list that I assure you is actually quite a bit longer:

Wall Street Whopper No. 1: Buy and Hold - It was supposed be a simple proposition. Consistently put money to work in the markets, let it ride - and laugh all the way to the bank. The thinking was that you couldn’t go wrong because the markets would go up 10% to 12% a year - each and every year (It’s actually more like 4% to 6% - on average - but that’s another story for another time.

What’s important to understand is that “Buy and Hope” is the greatest myth foisted upon the American public in the last 200 years - the need for American International Group Inc.’s (AIG) retention bonuses, notwithstanding. As millions of investors have found out the hard way, the markets can - and do - frequently go through tremendous periods of readjustment.

This means that timing, as they say, really is everything. And “they” - the brokerage firms, hedge funds, ratings agencies and others that together make up “Wall Street” - don’t want you to know that. Wall Street wants you all the way into the game all the time. It doesn’t care whether you win or lose, just as long as you keep playing. So the collective “they” work together to pitch you whatever’s hot, and then move on when that investment has run its course.

And don’t even get me started about the conflicts of interest. The supposedly independent ratings agencies that rubber stamped everything from derivatives to high-grade debt have been in bed with the companies they’re supposed to be regulating for years. Consequently, millions of investors thought they had the “green light” to invest in supposedly safe institutions that have proven to be anything but during the past 24 months.

Where the rubber meets the road - especially during the down years like we’re living through now - is that the risks of outliving your money go up dramatically if you have to get out. In fact, if you achieve annualized returns of zero or less for the first five years after you retire, your odds of running out of money in the next 30 years more than double from 26% to 57%, a study from T. Rowe Price Group Inc. (TROW) reported recently.

And that’s proving to be a tough reality for millions of investors who thought they had this handled. Which is why I was not surprised to see data from the Employee Benefit Research Institute quoted in Money Magazine showing that more than 30% of near-retirees, or those in the early years of their retirement, had more than 80% of their money invested in stocks at the onset of this crisis.

Many of those investors have undoubtedly sold off assets to finance living expenses while waiting for the market to reverse. And that’s created a “double whammy” of sorts: Not only did they lose money on the way down; but those losses and the subsequent forced sales could well mean that their portfolios won’t be big enough to benefit from the next upturn when it does arrive.

What to Do Now: As I have long espoused, the notion of being able to take on more risk simply because you have more time isn’t what it’s cracked up to be. Instead, it is far more appropriate to make choices based on the certainty of returns, especially now.

And that should start with how you think about dividends and reinvestment. In short: Boring never looked so good. Data from Wharton’s Jeremy Siegel and Yale’s Robert J. Shiller - not to mention from my own research - shows that dividends and reinvestment can be far more stable contributors to overall wealth creation than capital appreciation.

Looking ahead in uncertain times, the best choices remain those businesses with solid management, plenty of free cash flow, and an increasing dividends that are backed up by unstoppable global trends. Not overpaid, arrogant Wall Street executives who engineer risk under the guise of safer returns.

There are still plenty of choices available if you do your homework. And it’s not too late to begin buying them selectively right now. In fact, as I wrote recently, history suggests we’re nearing a once in a lifetime buying opportunity so the odds of an upside move could arguably outweigh additional downside…even if you don’t quite get the bottom right.

Wall Street Whopper No. 2: Some Debt is Good (aka: The Careful use of Debt is an Appropriate Wealth-Building Tool) - This is one of Wall Street’s biggest and most dangerous whoppers, and yet I almost hesitate to include it because of the e-mail I know it’s going to generate. But at the risk of sounding like a broken record, if you owe somebody money, you’ve still got to pay it off one day. That means any growth you attribute to debt until it’s paid off in full exists only in fantasyland. Ask General Motors Corp. (GM), Lehman Brothers Holdings Inc. (OTC: LEHMQ), or any one of the dozens of world banks that are now coping with the aftereffects of growth through the supposedly “intelligent” use of debt.

And this is just as true on a personal level as it is on a professional and governmental level. I wish our leaders understood this, although - in their defense - they finally seem to be getting the picture in recent weeks. Better late than never, although I would just as soon not have seen millions of investors taken on a white-knuckle ride to begin with.

Perhaps the saddest thing of all - and one of the most important lessons we can learn - is that the lessons we grew up with no longer seem to apply. We were taught that if we worked hard and acted responsibly, we would flourish. But now, even if we were responsible, we’re finding out that we’re now liable for the “other” guys’ debts, too.

What To Do Now: From an investing standpoint, confine your choices to those companies with little or no debt. Steer clear of the ones that are on the U.S. Federal Reserve’s IV drip. Yes, those companies probably have upside, but the real test will be what happens when they are forced to wean themselves off their Fed-administered drugs and operate without the crutch of government financing. History suggests that many will fail - despite the government’s unprecedented efforts to save them.

On a personal note, borrow conservatively and only if you have to. Pay off your credit cards each month or shift to a cash-only, “pay-as-you-go” spending plan if you can’t keep that spending under control. Refinance your house before interest rates begin rising dramatically to cope with the almost-certain after-effects of current stimulus spending. And by all means make sure that whatever debt you take on is debt you can afford to pay off.

Wall Street Whopper No. 3: It Pays to Diversify - The conventional wisdom used to be that if you spread your money around, you’d somehow be safer. This is no more effective than rearranging the deck chairs on the Titanic. It’s better to get off the boat.

In uncertain times, it’s how you concentrate your money that matters. This is an important adjunct to “investing with certainty in uncertain times,” and I’ve long advocated the benefits of stability and consistency as a means of getting ahead of the game - and staying there.

The proprietary 50/40/10 (Base Builders/Global Growth & Income/Rocket Riders) portfolio structure we utilize in our monthly newsletter, The Money Map Report, is a terrific example of what I mean. Not only does this portfolio strategy instill a discipline that forces investors to adhere to a “safety-first” philosophy, it has also proved itself to be far more stable than the broader markets since the credit crisis began. It kicks off higher-than-average income, demonstrates lower-than-average volatility - and still generates all the upside you can handle.

This safety-first discipline, with its dual emphasis on high current income and long-term appreciation, has generated some truly impressive returns.

And t his brings me to a key point: Far too many investors don’t understand how the game must be played right now. They think that investing in rocky times is an all-or-nothing equation.

It’s not.

Instead, it’s about the continual adjustment of positions to reflect changing assumptions related to risk - especially now that the risks of stock ownership have changed.

What To Do Now: In an era of simultaneous collapse, when then stock, bond, housing and credit markets have cratered at the same time, there’s simply no excuse for not hedging your portfolio at all times, not just when it’s popular to do so. Nor is there any reason why you shouldn’t be thinking safety first. That way you have the freedom to screw up on speculative bets instead of being dependent upon them to regain what you lost on foolish moves made during the downturn.

And by all means, learn how to use any of half a dozen specialized tools - like inverse funds, or options - to make low-risk, but-often-spectacularly-profitable choices, even under current market conditions. That way you can plan for the worst , yet still obtain the best of what’s out there.

Wall Street Whopper No. 4: Your Home is an Investment - No, it’s not. At best, it’s a roof over your head that keeps you from being priced out of the local rental markets. At worst, it’s a money pit that provides you with the illusion that you’re doing something sensible with your hard-earned money - despite the fact that an entire industry would have you believe otherwise.

Research from Shiller, the Yale economist, shows that, since 1900, home prices have run sideways or even declined for long periods of time. That means that - except for two steep run-ups - one after WWII and the other as part of the late 1990s lending binge - real estate hasn’t been the winning investment everyone claims it to be. And millions of people are learning the hard way that real estate can, and does, lose value. Seems they’ve conveniently forgotten the lessons Texans in the oil patch learned in the early 1980s or that Japan experienced in the 1990s.

Wall Street Whopper No. 5: Shop ’till You Drop and Save the Economy - The U.S. government wants you to spend money. And Wall Street, together with the credit card companies, want you to save their sorry hides by helping you do just that. That’s why so much of the stimulus planning - if you can call it that - revolves around tax cuts and handouts. It’s all window dressing.

Nothing - and I mean nothing - will matter until the banks start lending again.

Period.

What To Do Now: Keep your powder dry. History shows that the ebb and flow of money has never been smooth. Ever.

So to talk as if what’s happening now is an enigma is to ignore the past. We’ve been here before. There was the Panic of 1873 (sometimes called the “real” Great Depression), the Great Financial Crisis of 1914, and the Banking C risis of 1931, for example. The reason what we’re living through now feels different now is that those events are simply beyond the living memory all but a precious few people.

But take heart, for there are some bright spots to look to.

America’s safe-haven mantra - misguided though our policies may be - is an important indicator that savvy investors should plan for an eventual rebound - even if we’re destined to test new lows in the months ahead, and even if we have to look outside our own borders as a part of that process.

Source: Five Wall Street Whoppers And Why You Need To Know Them

As Resurgent U.S. Banks Shift Into Profit Mode, Hitch a Ride With These Two for Gangbuster Returns

Contrarian — Wed, 18 Mar 2009 18:15:00 GMT

Although we’re still in the middle of the worst financial crisis in decades, a few select banks are positioned to make a boatload of profits. And if you pick the right ones, gains of 100% or more are easily within reach.

The U.S. Federal Reserve’s actions in cutting short-term interest rates to almost zero - together with a gentle rise in U.S. Treasury bond yields since the start of the year - have given us a steeply sloping yield curve, where long-term rates are about 3% above short-term rates.

What’s more, lending rates to corporate and personal borrowers are way up, far more than Treasury bond rates. That means one thing: In their new lending - particularly to small businesses - banks are making money like gangbusters.

At least, some of the banks are…

Let me explain.

The “steeply sloping yield curve” is bond-market jargon for a situation where long-term bond rates are far above short-term money market rates. In this case, the Fed has forced money market rates down to nearly zero, but has had much less effect on long-term bond rates, which have shown a tendency to rise, both because of the escalating budget deficit and because of the possibility of recurrent inflation arising from the Fed’s rapid expansion of the money supply.

Since banks generally borrow short-term money - in the form of demand deposits and short-term time deposits - and generally lend medium-term and long-term money, in the form of industrial loans and leases, automobile loans and home mortgages, a steeply sloping yield curve makes the banking business exceptionally profitable. Borrowing short-term at 1% and lending on a prime home mortgage at 5.5% or 6%, often with a “government” guarantee from Fannie Mae (FNM) or Freddie Mac (FRE), is good business however you look at it, for as long as the steep yield curve lasts.

In addition, the premium that industrial borrowers pay above U.S. Treasury bond rates has sharply widened, so banks can make much more money on their commercial loan and lease business.

That doesn’t mean we should all rush out and buy shares in Citigroup Inc. (C). For one thing, Citigroup is involved in all sorts of investment banking, and in a variety of trading businesses, most of which are either down sharply due to the recession or that have disappeared altogether. For another, we still don’t know how large and how toxic are the assets on Citigroup’s balance sheet.

Whereas regional banks have been coping quite well with their impaired-value assets, Citigroup has been forced to get a $300 billion guarantee on its assets from the Fed, and nobody knows if even that will be enough. The bank is now controlled by the government, and may be nationalized entirely.

Even at their nadir of 97 cents last week, Citi’s shares are nothing less than a lottery ticket. That ticket would have paid off if you’d bought last week, with a gain of 130% in a week, but neither I nor anyone else can give you accurate odds on whether it will pay off in the weeks to come.

Of the big banks with assets of more than $1 trillion, only one is attractive. Apart from Citigroup, Bank of America Corp. (BAC) made two foolish acquisitions in 2008, and is now struggling with the dodgy housing assets of Countrywide Financial Corp. and the huge investment banking problems of Merrill Lynch & Co. Inc. (which is likely to make much less money in a deep recession than it could in a boom).

J.P. Morgan Chase & Co. (JPM), similarly, has huge investment banking businesses and large trading businesses; its businesses in consumer and small business lending are relatively modest. And the other two behemoths that now have conventional banking licenses, Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS), still are primarily investment banks, with almost no consumer and small business banking operations.

Of the trillion-dollar guys, that leaves Wells Fargo & Co. (WFC). Wells Fargo needed money in 2008 - it got a $25 billion capital infusion from the Troubled Assets Relief Program (TARP) - because it bought the retail bank Wachovia Corp., which was struggling with its own problems.

Wachovia was in difficulty because of its foolish top-of-the-market purchase of housing lender Golden West Financial in 2006. However, the combined Wells Fargo/Wachovia unit remains primarily a consumer- and small-business-banking operation, with a huge nationwide branch network and a relatively small investment-banking business. What’s more, there are clearly costs that can come out of the merged group because of their overlap.

Wells Fargo Chairman Richard M. Kovacevich has made snotty comments about the “asinine” federal bank stress test, wants to repay the TARP money, and recently cut WFC’s dividend by 85% to conserve capital. However, if the combined bank is as profitable as it should be, Kovacevich may well be able to repay TARP and restore the bank’s dividend payout surprisingly quickly.

The current dividend yield at 1.5% is nothing to write home about, but at around 85% of tangible net asset value, Wells Fargo is a “Buy” - and don’t forget, if and when Kovacevich restores the dividend, that yield will jump to 9.8%.

Once you leave the trillion-dollar guys, there’s a big gap - the next-largest banks are The PNC Financial Services Group Inc. (PNC) and U.S. Bancorp (USB) at around $290 billion. These regional banks are generally more attractive currently - provided that their bad assets are under control and that they operate in an economically attractive part of the country.

These banks have little or no involvement in investment banking, and those banks that concentrate on mid-market corporate customers and high-quality consumers should have huge current earning capacity - a multiple of that before the meltdown. That will enable them to take care of further nasty surprises in their asset book and leave a lot over for investors.

Of the Top 12 U.S. banks I surveyed in a special Money Morning story a few weeks ago [actually 13, if you include a separate report I did on Fifth Third Bancorp (FITB)], PNC was among the riskier institutions because of its acquisition of National City Bank - an operation as large as itself and based primarily in troubled Ohio and Michigan.

Bank of New York Mellon Corp. (BK) and State Street Corp. (STT) are both oriented toward investment institutions and larger corporate and commercial clients, with perhaps less upside potential from the current steep yield curve. Other banks appear to be having more difficulty with their loan portfolios, or - as is the case with Capital One Financial Corp. (COF) - are have oriented themselves toward high-risk credit card lending, which may still show further problems.

Thus, my favorite profit play to emanate from this banking-ranking exercise is the Minneapolis-based U.S. Bancorp, which operates in the upper Midwest and Northwest from its home market of Minneapolis all the way through to Seattle, an area with neither huge industrial problems, nor the remnants of a huge housing bubble. USB has also cut its dividend and wants to repay its $6.6 billion TARP funding: U.S. Bancorp Chief Executive Officer Richard K. Davis has been as rude as Wells Fargo’s Kovacevich on that topic, calling it a “giant bait and switch.”

U.S. Bancorp is currently selling at 130% of tangible net asset value, with a current dividend yield of only 1.5%, but a potential yield of 14% if and when Davis manages to repay TARP and restore the dividend.

Remember, too: Banks traditionally sold at 250% to 300% of net asset value. Once their dividends are restored, Wells Fargo and U.S. Bancorp should have every chance of reaching that level again - they will deserve to on the basis of the dividend yield and earnings power alone.

It may take two years - or even three - but a capital gain of 100% or so, on top of a juicy dividend yield, will make it well worth the wait.

Source: As Resurgent U.S. Banks Shift Into Profit Mode, Hitch a Ride With These Two for Gangbuster Returns

Simple Timing Tool That Will Help You Protect Your Assets

Contrarian — Wed, 18 Mar 2009 08:12:00 GMT

One of the things I have been asked, and have seen in headlines over the last week, is whether or not this rally is for real. My answer? It’s too early to tell.

A few weeks ago in the State of the Market special report, I cautioned the bears to look out for a sharp rally. The market was just looking for an excuse to rally. Enter Citigroup (NYSE:C) (which I suggested was worth taking a flier on in last week’s article) with word that they made money in the first two months of the year.

Here is what I would suggest. First, if you are looking at the short-term, I would look for the market to continue to rally over the next few weeks. Getting the indices out of the historic oversold level we reached a few weeks ago. Second, if I am looking at the long-term, I might be wading in at this point, but I would not be diving in headfirst will all my money allocated to stocks.

I know many investment professionals say you shouldn’t try to time the market, but I have to disagree with them. You don’t have to time the tops and the bottoms, but you certainly should be adjusting your asset allocation based on whether or not we are in a bear market or a bull market.

How do you know which one we are in? There are hundreds of answers for that, but a simple one that I have been using and testing is a crossover of the 6-month and 12-month moving averages for the S&P 500.

Look at the chart below. Over the last 20 years, had you loaded up on stocks when the 6-month crossed above the 12-month, you would have been heavily allocated to stocks from late 1994 until late 2000, heavily allocated to bonds from 2000 until early 2003, back into stocks from 2003 until early 2008, and then back to bonds. Is it perfect? Of course not. It doesn’t get you in at the exact bottom and it doesn’t get you out at the exact top. But it does have you in for the bulk of the move.

How effective would this S&P timing signal have been over the last six years? Well I looked at three portfolio scenarios after the last bullish signal in early 2003 until the end of 2008.

Scenario 1- all money was put into four equity ETFs- the Diamonds (NYSE:DIA) (the Dow), the Spyders (the S&P 500), the QQQQ (the Nasdaq 100, and the IWM (the Russell 2000). There was no timing used in this scenario, it was strictly buy and hold.

Scenario 2- 80% of the money was put into the four equity ETFs in scenario 1 and the remaining 20% was put into three different bond ETFs. This scenario also used a buy-and-hold strategy.

Scenario 3- using the simple timing mechanism mentioned above, 80% of the portfolio was in the four equity ETFs and 20% in the bond ETFs until March 2008. At that time, the funds were reallocated to 30% in the four equity ETFs and 70% went into the three bond ETFs.

So how would you have fared using this strategy? Look at the chart below. Assuming a starting value of $1,000,000, at the end of 2008, your buy and hold strategy for stocks would have produced an overall gain of 14% and the buy and hold strategy with bonds and equities would have gained 19%. The clear winner was the one that used the timing mechanism. This strategy would have produced an overall gain of 52%.

Notice on the chart how Scenario 3 trails the other two ever so slightly for the first four years, loses ground in 2007, but saves you massive pain in 2008.

Getting back to the original theme, as a short-term trader, I would be playing the long side of this market for the next few weeks with an eye on the earnings season that will start in approximately three weeks. As a long-term investor, I would be dipping my toes in the water for now, but I would wait for confirmation of the 6-month moving average crossing back above the 12-month moving average before changing my asset allocation back to mostly equities.

Source: Simple Timing Tool That Will Help You Protect Your Assets

A Safe 15% Per Year, No Sweat

Contrarian — Fri, 13 Mar 2009 23:18:00 GMT

The markets don’t get any tougher than the last few weeks. Nothing seems to be working, except for the toughest of the tough- bonds.

While we have been getting roughed up to the tune of almost a 50% drop in the stock indices, corporate bonds have been as solid as stone, with a few exceptions.

Right now, you can earn as much as 15-17% per year on investment grade corporate bonds with very short maturities. So why are we taking risks in the stock market and getting killed?

Simple, most people know less about bonds than any other investment. Too many moving parts, too many new terms to understand, so they stay within their comfort zone.

Yield to maturity, current yield, yield to call, mandatory calls, sinking funds, coupon, treasury spreads, accrued interest, it’s enough to drive anyone mad. Just when you thought you had stocks mastered.

Here is an idea that will help get you out of the line of fire of the stock market and into a safer, saner investment that will beat the stock market’s long-term return. I can’t explain it any simpler.

Alcoa has a bond that is really cheap right now. All bonds are offered at $1000 each, or there about, and all mature at $1000, but you can buy them on the secondary market cheaper if the business has a slow down, as Alcoa has.

You can buy this particular bond for about $830, which means you get a capital gain at maturity of $170 in addition to the interest it pays which is 6.5%.

The bond matures in June 1, 2011, that’s a holding time of 27 months. That’s considered an ultra short maturity. On June 1, 2011, you will receive your last interest payment of $32.50 and $1000 at maturity, even though you only paid $830 for the bond.

Here’s how to figure your annual return. Most people really have trouble with this part of bonds.

You will receive interest payments on or about June 1, 2009 and 2010, and on January 1, 2009, 2010, and 2011. That’s five interest payments of $32.50 (half of 6.5% annually or $65.00/2).

You get $162.50 in interest and capital gains of $170 at maturity, for a total of $332.50 for an $830 investment.

You have something called accrued interest, which deducts about $10 from your total. Don’t ask, it’s one of those bond things that I don’t have time to explain, which leaves you with $322.50.

You divide your total of $322.50 by your purchase price of $830. Your total return for a 27-month hold is 38.85%.

To get your annual return divide your total return, 38.85% by 27, the number of months you held it, for .014, and multiply that by 12, because there are twelve months in a year, or 17.2% per year.

Alcoa is an investment grade bond, not a junk bond. Investment grade bonds, according to Moody’s records, have a 99% success ratio for an 80-year period. That means they pay off 99% of the time.

Many investment grade bonds will pay you this much per year and more. The question you should be asking yourself is, “why am I getting killed in the stock market when I could be doing this?”

A return of 15% per year and a 99% success ratio for an 80-year period. Think about it and take a look at the Bond Trader. We do this every week.

Source: A Safe 15% Per Year, No Sweat

Brazil’s Hydropower Advantage

Contrarian — Thu, 12 Mar 2009 20:02:00 GMT

Last week, the stock market fell by more than 6%. That’s a return of -24.5% for the year. While we equities here in the U.S. continue to struggle, emerging nations have been hit even harder… especially commodity-based economies.

Brazil is certainly in this basket of falling markets. Fortunately for you, it shouldn’t be.

Sure, more than half of Brazil’s exports are commodities like soybeans and iron ore. But there’s a very good reason why Brazil is a safer investment than most — stability. Before you get started, let me explain…

Over the past two decades, Brazil has gone through many crises. Each one taught the country how to handle poor economic situations. But it was the most recent one that puts us in a tremendous advantage.

After so many years of falling on its face, Brazil elected President Luiz Inacio Lula da Silva. Leaving our opinions aside, Lula has done something to put the country in the driver’s seat this time around.

At the beginning of this decade, the world punished Brazil for its high debt levels. Its market crashed, erasing years of growth. Since this pseudo crisis, the Lula administration has stabilized the country’s economy and paid down debt. On top of these moves, it’s also put tough regulations in place across many industries. Most investors thought these regulations limited growth, which they did. But now investors - or, at least, smart ones - see the regulations as necessary evils.

By regulating industries like energy and finance, Brazil kept a steady, stable growth rate of about 4% in recent boom years. The rest of the emerging nations of the world were getting used to a 7% rate. These other “emergers” were funding their growth by leveraging their assets and creating massive debts. Brazil was paying its down, while accruing next to no new debt.

The overall stock market hasn’t noted this major difference, however. Brazil’s major index, the Bovespa, is down 40% over the last 12 months - alongside the rest of the world.

While others struggle with “bad assets” and massive debts, Brazil will be ready to strike.

Energy is our favorite way to play Brazil. Without energy, you can’t expand. Just look at what China is doing these days. As it continues to come online, it burns through more coal and oil than anyone could have imagined. Brazil, while it’s no China, is still demanding an enormous amount of energy.

The largest difference between Brazil and China is the regulations. There are many more aggressive mandates in the Brazilian energy industry than most Chinese, or Americans for that matter, can even fathom.

For instance, there’s been a lot of talk in recent years here in the U.S. about switching regular gasoline for ethanol to power our light vehicles. Brazil has been doing this since 1975. That’s over 30 years of mandates, which require all light vehicles to use at least 25% ethanol blends. The country is the world leader in ethanol efficiency. That came from strategic mandates.

The rest of the Brazil’s energy situation is no different. In recent years, hydroelectricity became the country’s energy solution. Now 80% of Brazil’s electricity comes from hydropower. This energy revolution places Brazil 42nd in CO2 emissions worldwide. It produces less CO2 than countries like Israel and the Philippines, which are just fractions of Brazil’s size and population.

Early investors in Brazil’s booming hydropower industry stand to make massive gains, while the rest of the world’s nations are trying to put their own economies back together. That’s where you need to be looking.

Source: Brazil’s Hydropower Advantage

Using Exchange-Traded Funds: How to Put Your Index Mutual Fund on Steroids

Contrarian — Wed, 11 Mar 2009 18:22:00 GMT

Dr. Scott Brown of Investment U says. “It seems we’ve been talking about bottoms and whether we reached it yet for quite some time.”
He goes on to say, “But this talk will shift soon to the ‘now what’ questions of what to buy when we do reach that magical point.” Here Scott discusses the Mutual Fund’s cousin, the ETF, and how to take advantage of investing in one.

Many will shun individual stocks for the safety of mutual funds. And with the explosion of index funds, we’ve never had a larger variety of options to help us diversify. These index funds are designed to yield a return equal to that of a particular index. They allow you to purchase a variety of assets as a low-cost, passive-investment strategy. And there are a number of indexes that specify sectors, stock indexes and international markets.

It’s a powerful strategy that allows you to slice and dice the global economy in a risk-managed approach. But we don’t like to stop simply at reducing risk and diversification.

There’s another cousin to the mutual fund and index fund families that many investors have heard of but haven’t taken advantage of. If you own mutual funds, indexed or otherwise, you need to know if using exchange-traded funds (ETFs) makes more sense for you. Here’s what you need to know about ETFs, the close relative to your mutual funds…

Exchange-Traded Funds - Index Mutual Funds on Steroids

Exchange-traded funds (ETFs) were first introduced in 1993, and are based on index mutual funds. They use similar principles, but have fewer management and transaction costs associated with them.

Unlike mutual funds, which can be bought or sold only at the end of the day when NAV is calculated, you can trade ETFs throughout the day, just like a share of stock.

Exchange-Traded Funds are a portfolio of shares that can be bought of sold as a single unit.

You own a proportionate amount of the shares held, with some ETFs even allowing transfers-in-kind.

They can range from portfolios that track broad global market indexes all the way down to very narrow industry indexes.

Exchange-Traded Funds are becoming a preferred way for investors to get all of a mutual fund’s benefits, with none of the downsides.

Think of ETFs as mutual funds on steroids.

Exchange-Traded Funds Becoming More Popular

While exchange-traded funds are becoming more popular by the day, they weren’t always so highly regarded. In fact, the creator of The Vanguard 500 Index Fund was against them and vigorously attacked the possibility of their success. In the end, John Bogle ended up adding a whole series of ETFs to the Vanguard family.

ETF investments quickly competed against indexed mutual funds. By early 2007, over $400 billion was invested in over 300 ETFs in three general classes:

Broad U.S. market indexes,

Narrow industry or “sector” portfolios,

And international indexes.

The first ETF, like the first indexed mutual fund, matched the S&P 500 index and was given the symbol SPDR for Standard and Poor’s Depository Receipt. Many know it by its nickname, the “spider.”

Spiders spawned many new exchange-traded fund products like “Diamonds” that are based on the Dow Jones Industrial Index DJIA, Qubes based on the Nasdaq 100 index, and WEBS based on the World Equity Benchmark Shares of a portfolio of foreign stock market indexes.

The Advantages of Exchange-Traded Funds Over Indexed Funds

A big advantage of an exchange-traded funds over a conventional index fund is that they trade continuously throughout the day. You can buy and sell ETF shares just like a share of stock, while with an indexed mutual fund - where the net asset value is quoted - you have to place an order to buy or sell but that doesn’t transact until after the market.

This can be frustrating if your technical analysis indicates a buy or sell trigger at some point during a trading session but the market moves too far for you to take advantage of it by the end of the trading day.

And unlike mutual funds, exchange traded funds can be sold short of purchased on margin like a share of stock.

When you analyze these factors in light of the fact that options also trade on exchange-traded funds you can place positions in the general market, global market, or industry sectors, where you can:

Employ protective hedges with puts or calls on your long or short ETF portfolio.

Use combined buy-write options strategies where you collect premium from the short sell of an option to compensate for the cost the long options - bull and bear spreads, calendar spreads, diagonal spreads, butterflies, iron condors and so on, are all available to you trading ETFs but NOT with indexed mutual funds.

Exchange-traded funds also have tax advantages over mutual funds:

When large numbers of mutual fund investors redeeming their shares - but you don’t - the fund has to sell securities to meet the redemptions. This creates a capital gains tax that is passed on to the remaining shareholders.

Which means you end up paying the other guy’s tax obligation!

In an exchange-traded fund, when somebody else sells, they have to pay the tax, not you.

And when very large trades redeem their positions in the ETF, the transactions is settled with shares of stock in the underlying portfolio - not triggering a stock sale by the fund sponsor and no bogus tax bill to you.

Using Exchange-Traded Funds: How to Put Your Index Mutual Fund on Steroids

Contrarian Companies Expanding During Gloomy Economy

Contrarian — Tue, 10 Mar 2009 01:38:00 GMT

Massive unemployment? No problem! Adam Lass of the Taipan Publishing Group says that no one is buying luxury goods right now but he gives us two puts in the retail sector that are playing out well during the crisis.

He also shares a British health care conglomerate that provides aid for troubled times and “sells even better when folks are broke.”

This from Adam:

Buy into Eastern Europe’s depression or just make 114% on ours: It’s your shot to call.

In case you hadn’t noticed, retail is in a bit of a pickle these days. The Conference Board’s latest consumer poll puts their Confidence Index down another 12.4 points, to yet another all-time low at 25.

Keeping in mind that anything below 50 is considered bad, I’d have to say that a score of half that ought to be considered really bad.

No shock there, I suppose, since we are looking at massive unemployment right about now. As of late last week, the official figure had us at 8.1%, a 25-year high water mark for folks who are slowly sinking under water.

And that’s only looking at it percentage-wise. Our population has grown roughly 45% since 1985, and 140% since 1930, so it’s safe to say that there are probably more folks hanging around the corner wasting time then ever before in the history of the country, including the dark days of the Great Depression.

Depressing indeed, but before you start thinking this is another one of Lass’ loads of unalloyed dreck, I actually have found another one of those oddball companies looking to expand during this dismal episode.

But First… More Dreck!

There is an odd thing about the current wreckage. Back in 2000, the majority of American households were involved in the stock market in one way or another. This was the dawn of online investing, when most any shmoe who could type their name with two fingers could get a trading account. Inside the biz, many still refer to the tech boom and ensuing crash as the “March of the Morons.”

Not very nice, but there it is. But don’t fret too much, because this most recent crash was in many ways the exact opposite. This time around, it was the wise guys themselves who sank trillions into unfathomable, unvaluable, and in the end, valueless debt arbitrage. The very folks who should have known better fell deepest into the briar patch.

As a result, mega-discounters like Wal-Mart (WMT:NYSE) are actually reporting modest but significant increases in sales, while high-end outfits Saks (SKS:NYSE), Nordstrom (JWN:NYSE), and Ann Taylor (ANN:NYSE) are reporting withering sales declines.

The folks in the Ann Taylor corner suite at 7 Times Square (one wonders how long they will be able to afford THAT address eh?) are specifically blaming the 20% plunge in Q4 on the fact that a remarkable number of women no longer require the “business attire” that is ANN’s stock in trade. The future is so “volatile” right now (that’s biz slang for “god-awful”) the team at ANN won’t even put out a forecast for next quarter.

If you didn’t turn every $1000 you invested last year into 113 GRAND, you really need to give me the next five minutes of your time…

As the Dow lost 40% of its value in 2008, one unorthodox analyst steered his readers to optimized one-year gains of 6,635%, 10,838%, and 11,359%.

Here’s how to get eight months worth of his biggest gainers for 2009 FREE…

The Two Fashion Items That Sell Even Better When Folks Are Broke

But there is one “wearable” shop that is not pulling in its horns. In fact, it is looking to expand its offerings into Eastern Europe. And yes, they know that the once-and-future Eastern Bloc is melting down as fast as (if not faster than) we are here in the States. In fact, they are counting on it.

I am referring to SSL International PLC (SSL:LN). This Brit healthcare conglomerate has the rights to distribute Dr. Scholl’s foot aids overseas. Just imagine all those sore, tired guys pounding the pavement looking for jobs! But SSL’s real winner in these troubled times is their Durex condoms line.

As per Chief Executive Officer Garry Watts, SSL intends on using the downturn to bump its stake 50% in a unit that distributes contraceptives to Russia and nine other eastern European countries. And that’s just the first kiss, as it were: By 2010 they hope to buy up the entire operation.

Blunt and to the Point

In a recent interview with Bloomberg’s Kari Lundgren and Howard Mustoe, Watts put it rather succinctly: “Russian people aren’t going to stop having sex any more than British people are. We’re not immune from the downturn, but it’s a bit like Pizza Hut: If you’re not going out, then you might be willing to drop a five-pound vibrator ring into your trolley.”

Hey, he said it, not me, folks. Okay, stinky feet and Russian condoms are slightly unsettling thoughts (especially around lunchtime). But Watt’s got a point and he’s grinning when he makes it, which makes him different than 95% of the CEOs I speak with these days, who can barely manage a forced rictus smile.

If this is just too much for you to wrap your mind around, and you still want to grab a piece of the action in the “Retail Space,” you can always pick up some of the puts we are recommending in my own WaveStrength Options Weekly column.

Like I mentioned earlier, no one is buying luxury goods. Thus, our Best Buy (BBY:NYSE) play is up some 40% as I sit to write, while our Disney (DIS:NYSE) play is up 114%.

Source: Pick Me Up a Three-Pack When You Go Out, Dear

Stock Investment in a Crisis, Two Early Indicators

Contrarian — Sat, 07 Mar 2009 00:04:00 GMT

Have we hit bottom? The U.S. unemployment crisis has changed the purchasing habits for the American consumer. The Investment U Research Team gives us two stocks that are benefiting from the recession and this new way of life .

These stocks act as an early warning for what is to come and you don’t need the data from the U.S. Labor Department to give you the figures or warning.

This from the Team:

During most recessions, the auto sector has traditionally taken it on the chin. This week, we found out some interesting news that gives us some new insight into the changing buying habits of American consumers, and perhaps, new insight on investing.

AutoZone (NYSE: AZO) reported increased sales and profits as customers lined up to fix old vehicles instead of purchasing new ones. It’s a logical and expected result of consumers saving more and splurging less.

Another lesser-known indicator, this time on jobs and joblessness, are the numbers coming from payroll heavy Automatic Data Processing (Nasdaq: ADP). From the ADP Employer Service gauge we know that 697,000 jobs were cut from payrolls in February.

What these data streams tell us is that we can find investment information outside sources like the U.S. Labor Department and industry sales figures. And for astute investors, these “canaries” can give us fair warning before the official data is released.

For example, if we find out how severely some of the biggest online advertisers are cutting back, wouldn’t that information be important to know before online advertising juggernaut Google (Nasdaq: GOOG) reported it’s numbers? I would think so.

So keep your eyes and ears peeled and maybe you’ll stumble across the Holy Grail for today’s market… The sign we’ve hit bottom.

Three Sectors And Two Stocks That Could Benefit From “Hope And Change”

Contrarian — Fri, 06 Mar 2009 09:32:00 GMT

Marc Lichtenfeld from the Smart Profits Report believes that energy projects would receive nearly $40 billion worth of federal funds under the Obama Stimulus Plan. A good chunk of this will go towards renewable energy - a big part of Obama’s energy plan.One company that offers a healthy 3.5% dividend and is the largest solar and wind energy provider in the U.S. stands to see share prices climb the most.

This from the Smart Profits Report:

“It’s all the same… Only the names will change”
– Bon Jovi

Ah, “politics as usual” - I knew it wouldn’t take too long before this age-old scenario reared its ugly head once again.

Having swept into office on a tsunami-like wave of goodwill, President Obama saw it evaporate this week after the House of Representatives passed the $819 billion spending bill along traditional party lines.

Partisan politics as usual.

With a mandate from a highly expectant American public to back them, it was hoped that Obama and his Democrat-controlled Congress would enact some meaningful changes on Capitol Hill.

Alas, the bill appears filled with more pork than the dumplings at the House of Nanking.

The fact that House Republicans did not support the bill and that their counterparts in the Senate will likely do the same is bad for investors.

Wait a minute! You just said the bill is pork laden. How could opposing it be bad for investors? I’ll tell you why…

Washington Loves Whine With Its Cheese

Thanks to the large majority that the Democrats hold in Congress, the bill or one very similar is going to pass. No issues there.

But by having a divided Congress, Washington is basically telling the American people that, despite Obama’s warm, uplifting rhetoric, nothing has actually changed. The two political parties are still sniping away at each other with gusto, blaming each other for the nation’s problems - past, present and future.

But in order for the economy and the markets to stabilize and get healthy again, we need some darn consensus. You know, the idea that everyone is actually on the same page and are working to fix things.

I know… what a terribly old-fashioned, optimistic notion.

But make no mistake… this is critical to the fragile public psyche.

Confidence Breeds Cash

The market - and to some degree, the economy - is the product of emotion and sentiment. Yes, there are certainly structural issues and flaws that cannot be ignored, but the fact is that if people feel hopeful that change is coming and that progress is being made, they will start to open their wallets. And what will start with a trickle will eventually snowball and will get the economy moving again.

That obviously doesn’t hide the fact that we also need large fixes to the economy and financial system. But consumer and investor sentiment is an integral element.

So that said, I’ll hop down off the soapbox now and get to the meat of the situation - discussing some stocks that could be beneficiaries of the government’s largesse over the next few years…

*********

Forget Oil… This Is The World’s Most Critical Commodity

For all the talk about oil, there’s another critical commodity that the world simply can’t live without. In fact, it may be even more important than oil.

Water.

Under the government’s spending plan, water projects will receive $8.4 billion. I believe this is one industry that will receive a major boost from the increased infrastructure spending, with governments around the world expected to shell out hundreds of billions of dollars over the coming years.

This is why recently added one of the financially stable, fast-growing companies in the industry to the Xcelerated Profits Report portfolio - one that enables water desalination plants to save significant amounts of money by capturing wasted energy and recycling it back into the system. Desalination will be a critical component if the world’s water needs are going to be met.

I can’t reveal the name of the stock to you here, but what you can do is check out how you can become a member yourself and start profiting from this and our other recommendations right away. We’ve got all the details here.

Here are some more potential winners…

These Two Sectors Are Set For Huge Cash Injections… And Here Are Two Firms That Could Benefit

Energy: Energy projects will receive nearly $40 billion worth of federal funds. A good chunk of this will go towards renewable energy - a big part of Obama’s energy plan.

FPL Group (NYSE: FPL) is the largest solar and wind energy provider in the U.S., and is the electric company for most of Florida.

It’s no secret that the real estate collapse has crippled south Florida’s economy. And Miami is the metropolitan area that will receive the most federal dollars for infrastructure projects. Any rebound in south Florida economic activity should bode well for FPL. The stock also currently boasts a 3.5% dividend yield.

Healthcare Information Technology: This sector will receive $17 billion. Even without the government cheese, I like this area, as it’s a necessary component for streamlining the healthcare system.

Consider a stock like Quality Systems (Nasdaq: QSII). Its earnings are projected to grow by 18% per year over the next five years, yet the stock is trading at 19 times forward earnings. QSII has plenty of cash, no debt, is cash flow positive and sports a 3% yield.

As we’ve said numerous times before here, there are quality companies that will not only survive, but thrive during the economic malaise. And although it may seem far off now, we will eventually return to an environment where many more companies have the opportunity to grow and reward their shareholders and employees.

In the meantime, our elected officials seem to be telling us (with half-hearted apologies to John Bon Jovi) that, “Bad medicine is what you need.”

Note to Washington: No, it isn’t.

5 Water Stocks to Quench your Thirst

Contrarian — Wed, 04 Mar 2009 18:07:00 GMT

Martin Denholm from the Smart Profits Report is drinking on the job again. But it’s the kind of drink that you can profit from, the “critical commodity” water. Here, he gives us 5 water stocks to quench your thirst for profit.

This from Martin:

I’m drinking on the job again.

No, not that kind of drinking. I’m swigging away from a one liter bottle of fresh water. Like most folks, I thought nothing of it when I bought it. I took its availability for granted, even though it’s that cool Voss stuff all the way from Norway.

But sadly, that’s not the case for approximately 40% of the world’s population, which lacks adequate fresh water supplies. What’s more, the United Nations says that two out of three people will be living in areas under “water-stressed” conditions by 2025.

Water shortages currently affect 80 countries and within 50 years, more than half the global population will be living with water shortages.

But hang on a minute… isn’t 71% of the Earth’s surface made up of water?

Yes, that’s true. But 97.5% of it is seawater, leaving just 2.5% that is drinkable. And only about 0.1% of all water is readily available. Most of it is locked up in glaciers, groundwater, and soil.

And water supply problems are only going to get worse… which opens up some very good investment opportunities.

Here’s the deal…

More People = More Pollution = Less Water

In 1900, there were about 1.6 billion people on Earth. Today, there are 6.5 billion. By 2025, the world population is expected to rise to 9 billion.

But here’s the problem: During the 20th century, human water consumption swelled six-fold and global water demand already exceeds supplies by 17%, according to the Population Institute.
And World Bank figures show that demand is doubling every 21 years. By 2020, the two billion extra people will require 20% more water than is currently available, according to the International Food Policy Research Institute.

And speaking of food, global population growth leads to increased industrialization and pollution. U.S. energy production requires about 40% of fresh water withdrawals. And the fact that people are also living longer means not only less drinking water, but also less water available for food production.

Crop production already claims 65% of fresh water, compared to 25% for industry and 10% for households. There is 7,000 liters (1,900 gallons) of water used for one kilogram of grain-fed beef… 5,000 liters (1,300 gallons) for one kilo of rice… and 1,500 liters (400 gallons) for one kilo of corn, according to the U.S. Geological Survey.

The point is… when it comes to water needs, it doesn’t matter one iota what the economy or stock market is doing. Every single person on the planet needs water… period. And with H2O in shorter supply, the world is set to invest approximately $800 billion over the next decade in order to improve the situation. This is the time for smart investors to run with this opportunity…

The China Problem

For all the talk of federal budget plans, economic bailouts, stimulus packages and all the other dizzying (and often demoralizing numbers), money is no object when it comes to satisfying the world’s water needs.

Put bluntly, no water = no people. Certainly no need to worry about the economy, unemployment, the real estate and auto industry debacles, or anything else if you’re not actually alive!

Of that $800 billion number I just mentioned, China has set aside $200 billion for its water infrastructure over the next decade. It makes the U.S. government’s $8.4 billion look like small potatoes in comparison - and woefully inadequate. The Environmental Protection Agency forecasts that the U.S. will have to spend $277 billion on water infrastructure by 2019. Nevertheless, China has some serious problems…

Two-thirds of the country already faces water shortages. Its annual water shortage is 40 billion cubic meters and it uses 30 more cubic kilometers of water than is replaced by rain.

Of its 1.3 billion people, 300 million don’t have access to clean drinking water.

According to Summit Global Management, “75% of China’s drinking water is unsuitable for drinking and cooking, and 80% of China’s seven major river systems no longer support fish.”
What’s worse is that at the current growth rate, China’s population is doubling every 12 years. More people = more food/drink needs = more agriculture development and industrialization = more pressure on water supply and demand.

So what’s the solution?

Thirsty For Profits? Try These Water Stocks…

Let’s kick off with a broad investment option. Because of their increased flexibility, lower costs, and the fact that they trade like stocks, I like ETFs (exchange-traded funds). With water, you can go for…

~ PowerShares Water Resources (NYSE: PHO), which tracks the price and yield performance of the Palisades Water Index. The fund includes big water companies like Veolia Environnement (NYSE: VE) and Ameron International Corp. (NYSE: AMN)

~ Claymore S&P Global Water Index Fund (NYSE: CGW), whose results aim to replicate the performance of the S&P Global Water Index. Like PHO, it holds Veolia and Aqua America Inc. (NYSE: WTR), plus Danaher Corp. (NYSE: DHR) and Severn Trent in England.

Breaking it down, Paris-based Veolia is one of the biggest water infrastructure stocks and is split into four groups: Water, Environmental Services, Energy Services, and Transportation. Click this link for a more detailed company profile and rundown of its water management operations - it has a very broad reach in the industry. With a P/E ratio of just 9, it’s trading at a hefty discount and coughs up a fat 15.8% dividend yield ($3.12 per share annually), too.

Aqua America’s fourth quarter revenues rose 7%, resulting in 3% earnings growth. With an aggressive acquisition policy that has seen the firm tie up more than 100 buyout deals over the past few years, it has boosted its customer base from 245,000 in 1992 to 950,000 today. It applied for $80 million worth of price increases last year, with $61 million approved. This resulted in a 10% revenue increase in 2008 and a 15.7% profit margin. It pays a 2.8% dividend.

There’s another option, too…

Salty Solutions

The National Academy of Sciences recently stated, “Desalination is a realistic option for increasing water supplies.”

In fact, global spending on desalination is set to more than double in four years in an attempt to boost the 11 billion gallons of drinking water that the process currently creates every day. That’s because even that hefty-sounding number still only represents 1% of water usage.

But desalination capacity is about to surge by 45% over the next seven years, producing an extra five billion gallons of water per day. And with 1,200 desalination plants worldwide, the cities of Las Vegas and San Diego (based in two states suffering some of the most severe water shortages in the U.S.) are discussing plans to build new plants themselves.

Yes, desalination is an expensive, energy-intensive process. But there’s one company that is attempting to solve it by not only producing clean water, but also recovering and recycling as much energy and waste as possible. It just signed a deal with China’s largest plant, too.

My colleague Marc Lichtenfeld, who’s as bullish as I am on the water industry and water stocks, added this small-cap, fast-growing company to the Xcelerated Profits Report portfolio last month. And just this week, he added another water-based company, whose shares are up around 230% over the past 18 months. Sales are continuing to rise - and demand for its products is red hot. It’s also active in China.

Boy, after all that, I’m really thirsty now. So while I find some more water, here’s what I’d like you to do. While I can’t reveal the names of those two water stocks that Marc recently added to our portfolio, what you can do is check out how you can become a member yourself. Go here for full details on the Xcelerated Profits Report. And if you like what you see, click this link to start profiting right away.

Water is critical. We can’t live without it. But with population growth, pollution, industrial expansion, and climate change resulting in shorter supplies as demand continues to rise, it’s no wonder governments around the world are pumping billions into the industry for infrastructure improvements. And water stocks could be one few areas that could truly benefit in this wretched global economy.

Green Investing is the New Black

Contrarian — Wed, 04 Mar 2009 17:37:00 GMT

Going green may be fashionable among some investors right now, but Lou Baseness of Investment U points out you need to be a cautious investor when shopping for stocks in the green sector.

Here he distinguishes the pros, the cons and how you could profit on the “largest speculative bubble” he has ever seen.

This from Lou:

A few months ago I warned you about the bubble in U.S. Treasuries. And sure enough, it’s popping.

Treasuries have already plummeted 20% from their December peak. By my estimates, they’ve still got another 20% to go.

But regardless of how far price falls, it’ll be a pittance compared to the losses from the next bubble - one that could be $21-trillion large when the air comes rushing out…

In what, you ask?

Green energy… but first let me provide you with a brief historical and psychological perspective. Otherwise, I’m afraid you’ll be too quick to dismiss my prediction. And that could lead to disastrous results.

Speculative Bubbles Dot The Free-Market Landscape

Instances of speculative bubbles dot the free-market landscape…

The 17th century brought us the Tulip Mania bubble, which like every bubble, was fueled by the social contagion of boom thinking. Tulips were the most-coveted flowers on the planet, different from every other flower known to horticulturists. As such, the incredible demand sent prices through the roof. The madness reached its peak during the winter of 1636-37, when tulip bulbs were changing hands ten times in a day. Soon after, however, the market crashed in spectacular fashion.

In 1720, it was the South Sea Bubble, where massive over-speculation in Britain’s South Sea Company - which was granted a monopoly to trade in Spain’s South American colonies as part of a treaty during the War of Spanish Succession - caused financial ruin for many. (Incidentally, the bursting of this bubble led to a Bubble Act - talk about a useless and ineffective piece of legislation.)

Fast-forward a couple hundred years and we endured the Japanese asset price bubble of 1990 and, of course, the infamous dot-com bubble of 2000.

Lately, we’ve stepped it up even more. Three bubbles - the housing bubble, the commodity bubble and the U.S. Treasury bubble - have been crammed into a ridiculously short time span of less than eight years.

The Green Energy Super-Bubble

And unless our pattern of behavior suddenly changes, the ominous green energy super-bubble that’s forming will burst before the prior three have ample time to deflate.

We’ve ordained a bubble economy because favorable speculative conditions constantly exist. The ever-shrinking gap between bubbles serves as all the proof we need.

Cash is the fuel.

Legislation is the accelerant, providing extra incentives via tax credits or subsidies.

And popular culture is the explosive kicker.

Together, they comprise the primary ingredients for a first-rate asset bubble.

And right now, there’s only one industry that rests squarely at the intersection of public policy, investing and popular culture - alternative energy.

That’s right. I believe “going green” will lead to lots of red for unprepared investors. As much as $21 trillion, based on former venture capitalist, Eric Janszen’s estimates. And here’s why…

1. The legislation is in place. And more is on the way. Under the Bush administration we got the ridiculous ethanol mandates. And solar and wind credits were routinely extended. Now, President Obama is making the environment and green-collar jobs the cornerstones of his economic recovery plan.

2. Money is already pouring into the sector. More than $200 billion was invested in clean energy and clean technology markets in the last two years. And yet, record amounts of cash are still waiting to be deployed. According to Bloomberg, speculators are sitting on $8.85 trillion in cash, desperate for an outlet.

3. Tough credit conditions actually encourage more speculation. Wayne Woo, director of Good Energies, reports that green start-ups will now give up to 75% ownership (up from 50%) to get their projects off the ground. Getting a bigger piece of the potential profit pie, for the same perceived level of risk, is bound to encourage more speculation.

4. Green is the new black. Forget fashionable. Going green resembles a religious movement nowadays. This alone has people ignoring economics in the name of social responsibility.

Unmistakably, the ingredients are all there.

What Will Burst This Green Energy Bubble?

The only question left is, “What will burst this green energy bubble?” Plenty of scenarios exist…

Government spending could fail to create sustainable jobs, which would, in effect, cause green investment to grind to a halt. Or, the lack of focus toward one be-all, end-all alternative-energy solution, whether it be wind, solar, biofuel, or something else, could frustrate investors and force them to bail.

Likewise, too many so-called green innovations still reside in the laboratory. Many will never make it to market, which is another surefire way to hand investors 100% losses and sap enthusiasm and future investment.

In the end, the economics just don’t add up. Without tax breaks and government subsidies, not a single alternative energy will be able to compete. So no matter how popular or fashionable alternative energy becomes, if it remains economically stupid, it’s destined to fail.

No doubt, the run-up and profits will be historic. Just be forewarned that the green euphoria will ultimately be replaced with despair and massive losses.

It’s hard to gauge exactly when it will occur, however. I estimate we’ve got another two to three years before we hit the peak. That’s why, given the capital still rushing in, I don’t recommend avoiding the sector altogether.

Just be smart and buy proven (not probable) green energy companies. You don’t want to own companies that are stuck in the lab with loads of potential. Instead, pick the ones with bona fide products and loads of sales. And religiously use trailing stops. It’s the only way to make sure you don’t bail too early… or worse, too late.

Invest in Gold, the Crisis Commodity

Contrarian — Thu, 19 Feb 2009 18:49:00 GMT

Gold investing - Gold Bug Ted Peroulakis of Investors Daily Edge suggests that “you should own some gold in your portfolio as an insurance policy…” He recommends this Gold EFT as a safe haven during the global financial crisis, because no matter what happens with the markets, gold will always shine.

This from Ted:

As you know, I’m a gold bug. I’m quite bullish on the yellow metal. I have been recommending gold since 2001 and I expect gold to run much higher. You should own some gold in your portfolio as an insurance policy, just in case the economy gets worse.

Gold is a safe haven in times of financial and geopolitical instability. Gold has often been nicknamed the “crisis commodity” since it tends to outperform other investments during periods of market distress and world tensions.

I mentioned in previous articles that a great way to own gold in your portfolio is to buy the SPDR Gold Shares (GLD).

You can even generate some income on your holdings in GLD by selling covered calls against it.

This simply means selling the right for someone else to buy your GLD shares at a specific price (strike price) until an exact date (expiration date).

Therefore, if GLD were to go up in price – exceeding the specific price (strike) and the buyer of the call exercises their option, you have to hand over your GLD, but you still make a nice profit.

The investor pays you money (premium) upfront no matter what happens with GLD.

If your GLD shares never trade for more than the strike price, then you keep the premium and your shares in GLD.

You want to get lots of cash (premium) upfront and still be able to profit if gold heads higher. So I suggest selling covered calls with a strike price about 15 to 20 percent above the current price of GLD. I also suggest options that expire 4 to 6 months out.

The drawbacks are that you cap the amount you can make in the position, but you can buy GLD back if your position is taken away from you, allowing you to maintain your exposure to gold. Also, if gold goes lower you will lose money but you will still keep the premium that you received by selling the covered calls. Please consult with your broker before acting on this strategy to see if it’s right for your financial situation. I want you to fully understand how covered calls work before you proceed.

Covered call selling can be a great way to reduce the average cost for your GLD position and boost your overall performance.

You can even earn more income using this strategy than from some of the highest dividend paying stocks around. This strategy is very attractive because option premiums are high right now.

How the Stimulus Will Drive Bond Profits To New Highs

Contrarian — Wed, 18 Feb 2009 15:25:00 GMT

Financial advice - Steve McDonald of Investors Daily Edge says, “A simple corporate bond strategy can make you a ton of money in the next few years, with almost no risk to your principal. And it’s so simple it’s almost unbelievable.”

Here he explains how the recently signed U.S. government bailout “will make corporate bonds the place to be for a very long time.”

As the stimulus and banking packages unfold, there is one thing that we know for certain, there will be one hell of a lot of money printed and pumped into the system. The success, or degree of success of these programs is still up in the air, but we know for certain that we will have a lot of new money out there.

These bailouts will result in a series of events that will make corporate bonds the place to be for a very long time. In fact, bonds may be the only place you will make money in the next few years.

The first event is already in progress, printing lots of new money to finance the bailouts. Let’s ignore the cost of financing these bailouts and just look at the effect it will have on inflation.

Unavoidably, inflation will be primed to take off. It’s like pouring gasoline on a fire. You pour enough money on the economy and the flames will get bigger. This is the second event.

As we all know, too much inflation is death for our economy and the stock market. It’s like not being able to get your in-laws to go home. Life is awful. You have to have lived through the late ’70s and early ’80s to appreciate this fact.

Are double-digit interest rates like the early eighties possible? Considering the amount of new money being pumped into the economy, it is more likely than most can imagine right now.

The third event, the Fed will have to raise interest rates to control inflation or hopefully stop it before it can do its damage to the economy and the stock market.

Look back to 1994 and see what multiple interest rate increases did to the stock market in a normal economic environment. The average stock was down at least 30%. I can’t imagine what will happen in the already challenged economic environment we have now.

The fourth event will be for bond prices to drop as the Fed increases rates. How the Fed’s actions affect bond prices is not a complex relationship, but it would require too much space for me to explain here, so you’ll have to take my word for it.

These interest rate increases will create one of the best buying opportunities in bond history. Using a simple strategy, you will be in a position to buy up discounted bonds at higher current yields than they were paying last year.

Discounted bonds not only pay you a higher current yield than the coupon of a bond, it also pays you capital gains at maturity. In the past six months, I have taken capital gains on these same types of bonds as high as 97% in less than two months.

If you are a person that buys long maturity bonds to get the highest interest rate you can, you may want to pay particular attention to the rest of this article. Long maturity bonds will be crushed in what appears to be all but a guaranteed high interest rate, high inflation environment.

Here is a simple and safe method for beating the market for the next five years. Invest in ultra short term, investment grade corporate bonds on an averaged and staggered basis. Here are the particulars.

Investment grade only. Junk bonds have earned their name. Does this mean you can never have a BB bond, investment grade are BBB to AAA, no. There are some exceptions, but staying in investment grade bonds gives you an 80-year documented success ratio of 99%. That means 99% of the time investment grade bonds pay off. Junk bond payouts are significantly lower.

No matter what is happening in the economy, quality is always your safest bet in investments.

Short term, staggered maturities of three years or less. This is the key to the success of this approach. It will sound very foreign to most bond investors, but give it a chance.

Long maturity bond prices are crushed by interest rate increases. Short maturity bonds, in this strategy that means six months to three years, will drop in price but much less. Since they mature sooner they also allow you to buy back into a rising interest rate market and take advantage of the price drops.

In long bonds, you’re stuck. The ultra short maturities give you as much protection as possible from getting stuck in bonds that you will have to take a loss on to get out of in the coming inflation.

There are two more techniques you need to use to add a little more security to this method: staggering and averaging in.

Staggering your maturities will give you an extra edge. It’s accomplished by buying into the market in small amounts, five or ten bonds at a time and plan on having 10 to 25 different bond positions added to your portfolio over a 12 to 18 month period.

This does two things. It averages you into a market over time, which will typically give you a better average cost, and it staggers your maturities so you will have several bonds coming due every year. This gives you fresh money to reinvest as bond yields go up and prices come down with the rate increases. Staggering and averaging in will also give you better diversification, which is always a good thing.

No matter what you choose to do, never load up on a few bonds because the coupons look to be good at the time. This is the oldest trap in the money business for conservative investors. It will end up costing you.

Don’t let your lack of familiarity with bonds keep you from using this technique. Take a look at the Bond Trader, it does everything I have described here and uses a few additional techniques to give its investors the long-term returns of the stock market without stock market risk. To date it has not had a single loss.