Is Copper Poised For A New Secular Bull Market Run? Probably Not

By Guy Lerner on April 14, 2009 More Posts By Guy Lerner Author's Website Over the last 4 months, copper has bounced about 70% from its lows. Yet it is only recently that such a significant price move is beginning to attract attention as pundits try to explain what is going on. With stocks roaring back over the past 5 weeks, the obvious (and wrong) connection is that the global recession is ending. To me, copper’s price rise is more technical after a deeply oversold condition, and it appears that the pundits are only crafting a good story to explain its recent price movements. It is often stated that copper is more like Dr. Copper, the base metal with a PH. D. in economics. If copper, which is used in commercial and residential building, electronics and automobiles, is surging, then all must be right in the world and in the economy too. Copper knows all (sic). But there appears to be a disconnect from reality as strength in copper generally occurs late in the economic cycle, and there is little or no relationship between price rises in copper and the beginning of a new economic cycle. This can be seen in figure 1 a monthly chart of copper. The indicator in the lower panel is an analogue representation of economic expansions and contractions from the National Bureau of Economic Research; recessionary periods are noted with the vertical gray bars across the graph. Figure 1. Copper v. NBER Expansions/ Contractions

Of the six recessions since 1974, the current recession would be the only one that would see copper prices acting as a leading indicator. In fact, the most bullish price moves for copper occur late in the economic cycle not at the beginning. These bull markets in copper are noted by the maroon colored vertical lines. Another explanation tossed about to explain copper’s rise is that the easy monetary policies of the Federal Reserve will lead to inflation, and copper is only anticipating these coming changes. While higher copper prices would be expected as inflation rises, the fact remains that there is a very poor correlation between higher copper prices and inflationary expectations. Of the 5 bull runs in copper since 1974, only 2 were associated with any real significant inflationary pressures, and these were in the 1970’s. This can be seen in figure 2 a monthly chart of copper; in the lower panel is the inflation rate as measured by a year over year change in the CPI. As before, the vertical gray lines note recessionary periods. Recessions by definition are deflationary, and we should not expect copper prices to rise during the current de-leveraging, deflationary environment. Figure 2. Copper v. Inflation So why is copper rising? Brent Cook at explorationinsights.com has written a very balanced commentary on copper. He states the following: “What’s behind the current price increase? Both China and South Korea have been adding to strategic reserves and restocking at what they consider to be much better prices. Copper producers and marketers all down the supply chain are keeping some supply out of the market due to low prices or a complete lack of buyers. The desire by Asian buyers to turn US dollars into hard assets-a phenomenon we are seeing across the entire hard asset class. Short covering as the copper price stabilized. A favorable arbitrage between the London Metal Exchange (LME) and Shanghai Exchange that made it cheaper to import copper cathode into China. Scrap supplies having dwindled due to the lack of credit, low prices and slowing manufacturing activity. With the exception of Asia’s desire to convert their substantial holdings of US dollars into something of value, I believe all the factors listed above are temporary. Going forward inflation may also play a role. “ If you note, none of Mr. Cook’s observations as to what is driving the price of copper have anything to do increasing copper consumption. In fact, he goes on to state that in all likelihood copper utilization will be down for 2009: “To come to some sort of understanding of underlying fundamentals of the copper market we need to look at where copper actually goes. The retail and commercial construction markets use about 46% of all copper. Another 12% goes into vehicles. These two industries were trashed, to say the least, in 2008; they are not likely to do too well this year either. Without a global recovery in both industries to past levels I don’t see how copper consumption can possibly increase significantly. “ The serial bottom callers and those pointing to the magic, predictive powers of copper can always point to China. But haven’t we been down this road before? Wasn’t decoupling disproved in the summer of 2008? Yes, the Chinese economy might be the world’s economic engine, but they don’t live in isolation. According to Cook, global demand and Chinese consumption of copper will remain weak: “Can China save the day? Most copper imported into China is then reprocessed and extruded as copper wire. When the copper wire is manufactured into tubing, refrigerators and batteries for export it still shows up as internal Chinese copper consumption. There is no way of knowing how much of China’s copper consumption actually stays internal and how much goes back out in other export products. If China is going to save the day for copper we have to approach usage from the perspective of China’s total economy. China’s GPD in 2007 and 2008 was approximately 6% of global GDP-Europe and USA account for nearly half of global GDP. Based on the most recent World Bank statistics, China’s 2007 total GDP was $3.3 trillion, a full 55% of which was attributable to exports. In 2008 China’s exports were down 28%. This year is not getting off to a roaring start as the Shanghai Daily reports that industrial output is down 12.7% for the first two months of 2009. China’s building boom is not fairing very well either. Post Beijing Olympics, China’s real estate market has collapsed. According to Jack Rodman, a China real estate expert, in Beijing alone approximately 500 million square feet of commercial real estate was developed over the past few years; this is more than all the office space in Manhattan. Rodman estimates 20% of that now stands vacant. Similar stories are being reported across Asia as documented by the Asia Property Report which estimates that real estate transactions were down 70% in Q-4, 2008. With Asia and the world’s building boom gone bust or at least slowed significantly, and China’s export markets in a severe and prolonged recession, demand for their products and the copper within is unlikely to recover soon. In the near term at least, increased copper consumption would require a global recovery approaching the levels of a few years ago. Confirming the obvious: true internal Chinese consumption is much less than many analysts believe and is unlikely to take up the slack in global copper consumption. “ My Take From a technical perspective I do not believe copper is in a bull market or even poised to enter into a new bull market. In addition and as explained above, I attach no significance to the price movements of copper as they relate to economic growth. What we do know is this: 1) over 7 months copper dropped 70% from high to low; 2) over the last 4 months, copper has bounced 70%; 3) copper still stands 50% below its all time highs. Figure 3 is a monthly chart of a continuous copper futures contract. The indicator in the lower channel is our “next big thing” indicator, and the purpose of this indicator is to identify those assets that have the potential for secular trend change. Figure 3. Copper/ monthly The first thing we notice is that copper bounced at support or the breakout point (labeled with a “1″) of the previous bull run. In other words, copper made a round tripper over the past 4 years. The bounce has carried 70% higher but right into the down sloping 10 month moving average. In other words, copper prices are behaving as they should. There was a breakout of historic proportions. Why did this breakout lead to such monstrous gains in 2005 and 2006? Because the breakout of historic proportions was 12 years in the making. In other words, the breakout was from a 12 year trading range. The current 70% move has the makings of a snapback or countertrend rally. So the question I want to answer is this: Is copper poised for a new sustainable, secular bull market run? Based upon the “next big thing” indicator, the answer is no. Based upon the technical setup, the answer is no. Going back to the 1970’s, every major move in copper was heralded by the “next big thing” indicator signaling the possibility of a secular trend change. Even though copper has moved 70% off its low, I attach no significance to such a move. From my technical perspective, this is a bounce off of support and into resistance. Copper will need more sideways action and time before another new bull market is launched.

My Top Inflation-Fighting Stock Ideas

By DailyWealth on April 18, 2009 More Posts By DailyWealth Author's Website “What marks our Great Recession for greatness is neither the loss of jobs nor the shrinkage in GDP, but the immensity of the federal response to those afflictions. The scale of the government’s intervention is much more than unprecedented. Before 2008, it was unimaginable.”- Grant’s Interest Rate Observer, April 3, 2009 Earlier this month, I was at Grant’s Spring Investment Conference in Manhattan. This is one of the elite investment conferences in the world. It draws a who’s who of brilliant investors… people like investment master Jeremy Grantham… real estate legend Sam Zell… and short selling guru Jim Chanos. I try to attend this conference each year. The amount of intellectual “firepower” is just incredible. I met several of my advisory readers there. At our lunch table, the big topic of discussion was the inflation-deflation debate. Inflation, for our purposes, means prices and interest rates are rising, and the purchasing power of money is falling. Deflation is the opposite: Prices for most things fall, interest rates fall, and the purchasing power of money rises. Over the last year, deflationary forces prevailed. The price of homes, commodities, shipping rates, gasoline - even wages - generally fell. Interest rates keep going lower. I just redid my mortgage for 4.25%, no points, over 15 years. The dollar - perversely, given how our government treats it - has gained strength. This will be a huge decision for investors over the coming years. If inflation prevails, then commodities, for instance, will do very well. Bonds will do horribly. If we have deflation, commodities will likely suffer, and bonds will do well. Making the right decision will mean the difference between a large and growing retirement portfolio and a tiny, inflation-ravaged portfolio. “I think there has to be inflation,” said the lady to my left. “With all the spending and what the Fed is doing… there is no way around it.” I agreed that inflation will be the ultimate result. But the question is how long between now and then? If we have deflation for the next two years, for example, that will be very painful for many investment ideas. “Yes,” the guy on my right said. “If you knew we were going to have another year of deflation, then you would do some things differently.” I can’t resolve this debate here. But I can tell you I’ve given it a great deal of thought. As a result, I fall in the inflation camp. Much of the reasoning behind that has to do with the government’s response to this crisis. It has been more than unprecedented, as Jim Grant recently noted in his newsletter. Grant goes on to note that the combination of fiscal and monetary stimulus comes to about one-quarter of the size of the U.S. economy (as measured by GDP). And that does not take into account all of the guarantees - of bank deposits, money market accounts, bank bonds, and other liabilities. Currencies don’t react well to being treated like this. Right now, the dollar is holding up because people are fearful… and debts need repaying. Cash is dear. But that will not persist for long - especially with stimulus as great as it has been. Never in the history of paper currencies has a single currency consistently appreciated in value over time. Never. That’s why I recommend you fall on the side of owning “real assets” through the stock market in order to protect yourself from inflation. I like owning energy fields, gold mines, water rights, and the producers of agricultural fertilizer. After suffering a big correction in 2008, these assets are cheap right now. They’ll hold their value much better than your bank CDs during inflationary times. Don’t worry about not having physical possession of these assets. As Jean-Marie Eveillard, the great money manager at First Eagle, reminded conference attendees: “Stocks are claims on real assets; they are not just paper.” The kinds of stocks I just listed - which deal in tangible goods that cannot be easily reproduced - will do very well in the coming years. If you come down on the side of inflation, start your “wealth protection” strategy here.

The Market Is At A Crossroads

Posted Fri Apr 03, 05:37 pm ETPosted By: Weekend Wisdom by Kevin Matras There are signs of both a potential market recovery (the beginning of a larger bull rally), and signs that this recent 20%+ run-up was nothing more than a bear market rally. The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out. Bull Market Rally Scenario The move that we have recently seen, i.e., 24.82% in the Dow Jones Industrial Average ($DJI), 26.82% in the S&P 500 (SPX), and 28.26% in the Nasdaq (COMP), from the lows made in early March to the highs made just 4 weeks later, suggests a larger move could be in store. For one, it's generally believed that a 20% rise in the stock market, marks the beginning of a bull market. Likewise, a -20% decline in the stock market, signals the start of a bear market. Secondly, the market had become terribly oversold (by Mar 6). You can see this on many technical oscillators such as the Relative Strength Index. (See the chart below.)

S&P 500 Index

It can also be quantified by the sheer number of new 52-week lows that were made in individual stocks while the market indexes were making new lows. In fact, each successive major new low made in the market (S&P 500: 839.80 on Mar 10, 2008, 741.02 on Nov 21, 2008 and 666.76 on Mar 6, 2009), brought with it fewer new individual 52-week lows each time, with the difference being in the thousands between the last lows in March 2009 and the 'first lows' in October 2008. This shows the market has either gotten ahead of itself or that perhaps too much value has been stripped out of the market. Either way, the market indexes are simply a composite of individual stocks. And if fewer and fewer stocks are able to make new lows, an upside test ultimately has to take place. Thirdly, the major indexes are all trading above their shorter-term moving averages (10- and 20-day) and medium-term moving average (50-day). This clearly shows the market's recent momentum has turned positive.

S&P 500 Index

And fourthly, on the fundamental front, there has been a steady stream of massive initiatives aimed at getting the financial sector and the broader economy moving again. The markets have reacted to these new developments, such as the second stimulus, the buying up of toxic assets and the purchase of US Treasuries. In addition, the Financial Accounting Standards Board (FASB) also made their long awaited decision on mark-to-market accounting for mortgage backed assets to something closer to "significant judgment" when valuing these assets. Combine this massive action from the U.S. with other significant steps taken from countries all around the world, and the market seems to be in a 'let's see if this will work' mode. Plus, recent earnings have come out better than expected on many companies (not necessarily stellar, but not as bad as feared) suggesting that maybe things have stopped getting worse, or at least the pace at which thing have been getting worse has slowed. Who knows if this is THE BOTTOM or just a bottom. If it is THE BOTTOM, then statistics show that a much larger move is in store. In fact, in a study of the Top 10 Worst Bear Markets since 1929 (using the Dow Jones), the average increase within one year of the lows was +55.62%. I don't want to get ahead of myself, but the 3-year increase is +77.56%. And the 5-year increase is +103.41%.

Dow Jones Industrial Average

Bear Market Rally Scenario The case for this being just a bear market rally, is just as compelling, and sadly, maybe even more so. But this does not mean it is and in fact, may even work against it being so.

First, let's address the 20%+ upswing we've seen in the market. While it's true, a bull market won't officially be called until there's been a 20% increase, not all 20% increases turn out to be bull markets. In fact, as the below chart illustrates, while the market was collapsing between 1929 and 1932, there were six 20%+ rallies that ultimately fizzled. And the market ultimately made new lows in 5 of those 6 instances. Of course, the 6th time turned out to be the charm, culminating in a 172.17% rise within the next 12 months.

Dow Jones Industrial Average

So while the 20% increase is a hopeful sign of life, it's far from being a done deal. This is already our second 20%+ rally (low to highs) within just the last six months. (Three, if you count the +24.25% jump within just 3 days in October 2008.) Aside from that, we saw a 22% rally between December 2008 and January 2009. In the current rally, we're up 24.82% so far. Of course the previous rallies failed, so we'll just have to wait and see.

Dow Jones Industrial Average- close as of Thursday, Apr 2, 2009

Second, while the market had recently been oversold, thus precipitating the rally, the oversold conditions have indeed been relieved, with conditions now reversing themselves and getting close to being potentially overbought. It's also ironic and worth pointing out, that even though the market has been charging higher, the last part of this rally (except for this past Thursday) has been made on declining volumes. Is the rally running out of buyers or believers already?

S&P 500 Index

- close as of Thursday, Apr 2, 2009

Note: the market's recent rally has bounced back to the underside of its bearish Descending Triangle that foreshadowed the recent downside breakout. And meaningful pullback from these levels could signal more downside to come. But an upside breakout would nullify this pattern's bearishness and remove a technical negative to the market. (See the chart below.)

S&P 500 Index

- close as of Thursday, Apr 2, 2009

There have also been some spectacular gains made in many individual stocks. Far greater than the averages reflect. And quite large for arguably one of the worst economic and business environments since the great depression.

This has led to an increase in valuations as well. The P/E ratio for the S&P 500 on Mar 6, 2009 when the last lows were made, was 11.16x 2009 estimates. Within a few short weeks, the P/E surged to 13.33. That's a 2.17-point increase or 19.44%. The run-up in the P/E ratio essentially mirrors the price increase without any real increase in projected earnings. Third, it's true the short-term moving averages (10-day and 20-day) and medium-term moving averages (50-day) are reading positive, but the longer-term moving average (the 200-day) is still negative (above the market and trending lower still). The bright spot is that it's quite a ways away from current levels. And since the 200-day moving average often acts as a long-term moving trendline (markets usually test and retest trendlines as the move up and down), a test of this important moving average, even if it gets turned away, could mean higher prices are still in the offing.

Dow Jones Industrial Average

- close as of Thursday, Apr 2, 2009

And fourth, while there has been a tremendous amount of action to get the banks and the economy rolling again, none of this is guaranteed to work. There have been some great ideas put forth. But sadly, there's a lot of politics involved and we have all seen how irresponsible some in Congress can be. This is important to note because the administration has said that it needs the private sector to be a partner in this. But the recent fiasco over bonuses from the first TARP funding, and the resulting hysterics that followed in Congress, has made the private sector very leery about 'doing business' with the government. This is evidenced by several big recipients of bailout funds, pledging to give it back as fast as they can to decouple themselves from the long and intrusive hand of the government. Conclusion So what does one do? There are clearly cases to be made for this being the beginning of a bull market rally or just another bear market rally. Whatever it turns out to be, there are plenty of opportunities to make money. For one, in October, when the market completely fell apart, it was almost impossible to make money on the long side of the market. The metaphor I like to use for that time is that it was like raining knives. Hard to not get hurt in that kind of market. But as we outlined earlier, each successive new low in the market witnessed fewer stocks making new lows, which shows that many stocks are starting to trade based on their own individual merits. This of course can be both good and bad. But it allows for the reward of individual stock analysis, and that's what we're all in the market for in the first place. To be rewarded for finding the right stocks to invest in and make money. And with billions of dollars of stimulus getting pumped into the economy, there will be plenty of winners in the months ahead. Focus on companies with the best Zacks Rank that also have real earnings growth, in the present year and in the future. Pay attention to the earnings estimate revisions, as they can be your first warning sign of trouble or good times ahead. I would also look at the technicals, especially chart patterns, as I believe they give clues as to when a stock will breakout and in what direction. Omniture, Inc. (OMTR) and Vertex Pharmaceuticals (VRTX) are 2 great examples and they are both stocks I picked for the Chart Patterns Trader service. Both of these stocks have just broken out: Omniture to the upside (we are long based on a bullish Inverted Head and Shoulders pattern) and Vertex to the downside (we are short based on a Bear Flag pattern). OMTR is a leading provider of online business optimization software, allowing customers to capture, store and analyze information from web sites and other sources, including social networking sites like Twitter for instance. This is an exciting company with dramatic increases in earnings projections. The numbers are small, but the projected gains are impressive. In 2008, OMTR posted 2 cents. In 2009, the company is projecting 12 cents. And in 2010, they're expecting 25 cents. Big growth, in a dynamic industry. VRTX discovers, develops and markets small molecule drugs that address major unmet needs. The company has several drug candidates in development including teleprevir, a drug for HCV infection, i.e., Hepatitus C, the most common form of liver disease. However, data from phase III trials for teleprevir won't be submitted to the FDA and the EU's EMEA until the second half of 2010 with the company then expecting approval in 2011 if all goes well. In the meantime, VRTX lost $3.25 per share in 2008. Is expected to lose $3.27 in 2009. And $3.07 in 2010. Hence our short position. Regardless of the market, there's opportunity no matter what and in either direction. Great Trading,Kevin Matras During today's crossroads market, Kevin and his team comb through hundreds of stock charts. No matter which way the market turns, they're finding companies poised to make sharp price moves. Certain chart patterns have proven to be uncanny predictors – with success rates up to 70%. Kevin's analysis indicates that something big is about to happen in the overall market. So Zacks is extending the special Chart Patterns Trader discount that had expired Friday. You now have until Monday, April 6, to take advantage of this substantial savings at a critical time. - close as of Thursday, Apr 2, 2009

Alarming News: Bank Losses Are Spreading!

By Martin D. Weiss on March 30, 2009 More Posts By Martin D. Weiss Author's Website For the first time in history, U.S. banks have suffered large, ominous losses in a giant sector that, until now, they thought was solid: bets on interest rates. In a moment, I’ll explain what this means for your savings and your stocks. But first, here’s the alarming news: According to the fourth quarter report just released this past Friday by the Comptroller of the Currency (OCC), commercial banks lost a record $3.4 billion in interest rate derivatives, or more than seven times their worst previous quarterly loss in that category.1 And here’s why the losses are so ominous: Until the third quarter of last year, the banks’ losses in derivatives were almost entirely confined to credit default swaps - bets on failing companies and sinking investments. But credit default swaps are actually a much smaller sector, representing only 7.8 percent of the total derivatives market. Now, with these new losses in interest rate derivatives, the disease has begun to infect a sector that encompasses a whopping 82 percent of the derivatives market.2 Thus, considering their far larger volume, any threat to interest rate derivatives could be far more serious than anything we’ve seen so far. Meanwhile, time bombs continue to explode in the credit default swaps as well, delivering another massive loss of nearly $9 billion in the fourth quarter. And remember: These represent the aggregate total for the entire banking industry, after netting out the results of banks with profitable trading. Why This Crisis Could Be Nearly as Bad as the Banking Crisis of 1929-31 Yes, I know the standard argument: In 1929, bank regulation and depositor protection was primarily run by state governments. Now, with the FDIC, the OCC, and more direct Federal Reserve intervention, it’s far more centralized. But offsetting that strength are serious weaknesses in the banking system that did not exist in the 1930s:

• In 1929, there were fewer giant banks. They controlled a smaller share of the total market. And they were generally stronger than the thousands of community banks around the country. Today, by contrast, the nation’s high-roller megabanks dominate the market.
• In 1929, derivatives were virtually nonexistent. Not today! U.S. banks alone control $200.4 trillion; and it’s precisely in this dangerous sector that the megabanks dominate the most.

According to the OCC’s Q4 2008 report, America’s top five commercial banks control 96 percent of the industry’s total derivatives, while the top 25 control 99.78 percent. In other words, for every $100 dollar of derivatives, the big banks have $99.78 … while the rest of the nation’s 7,000-plus banking institutions control a meager 22 cents!3

This is a massively dangerous concentration of risk. The large banks are exposed to the danger that buyers will vanish, markets will suddenly become illiquid, and they’ll be unable to unload their positions without accepting wipe-out losses. Has this ever happened? Unfortunately, yes. In fact, it’s the primary reason they lost a record $3.4 billion in the last three months of 2008.

The large banks are exposed to the danger that, with exploding federal deficits and new fears of inflation, interest rates will suddenly surge, delivering a whole new round of even bigger losses in the months ahead.

Worst of all, the five biggest banks are exposed to breathtaking default risk - the danger that their trading partners could fail to make good on their gambling debts, transforming even the best winning trades into some of the worst losers.

Here’s our chart on these risks, updated to reflect the new data just released on Friday: Specifically, at year-end 2008,

• Bank of America’s (BAC: 6.82 0.00 0.00%) total credit exposure to derivatives was 179 percent of its risk-based capital;
• Citibank’s (C: 2.53 0.00 0.00%) was 278 percent;
• JPMorgan Chase’s (JPM: 26.58 0.00 0.00%), 382 percent; and
• HSBC America’s (HBC: 28.22 0.00 0.00%), 550 percent.4

What’s excessive? The banking regulators won’t tell us. But as a rule, exposure of more than 25 percent in any one major risk area is too much, in my view.

And if you think these four banks are overexposed, wait till you see the super-high roller that the OCC has just added to its quarterly reports: Goldman Sachs (GS: 106.02 0.00 0.00%).

According to the OCC, Goldman Sachs’ total credit exposure at year-end was 1,056 percent, or over ten times more than its capital. The folks at Goldman think they’re smart, and they are. They say they can handle large risks, and usually they can. But not in a sinking global economy! And not when the exposure reaches such stratospheric extremes! Major Impact on the Stock Market In the 1930s, the banking crisis helped drive the economy into depression and the stock market into its worst decline of the century. The same is happening today. Whether the nation’s big banks are bailed out by the federal government or not, the fact remains that they’re jacking up credit standards, squeezing off credit lines, and even shutting down major segments of their lending operations. And regardless of how much lawmakers try to arm-twist banks to lend more, it’s rarely happening. With scant exceptions, bank capital has been reduced, sometimes decimated. The risk of lending has gone through the roof. And many of the more prudent borrowers don’t even want bank loans to begin with. Those credit shortages, both acute and chronic, have a big impact on the economy and the stock market. Moreover, unlike the 1930s, banks themselves are publicly traded companies whose shares make up a substantial portion of the S&P 500 (^GSPC: 797.87 0.00 0.00%). The big lesson to be learned: Don’t pooh-pooh comparisons between today’s bear market and the deep bear market of 1929-32. From its peak in 1929, the Dow Jones Industrials Average (^DJI: 7608.92 +86.90 +1.16%) fell 89 percent. Compared to the Dow’s peak in 2007, that would be tantamount to a plunge of more than 12,600 points - to a low of approximately 1500, or an additional 81 percent decline from the Friday’s 7776. Even a decline of half that magnitude would still leave the Dow well below the 5000 level, which remains our current target. Does this preclude sharp rallies? Absolutely not! From its recent March 6 bottom to last week’s peak, the Dow has already jumped a resounding 21 percent in just 20 short days. And the rally may still not be over. But this is nothing unusual. In the 1929-32 period, the Dow enjoyed even sharper rallies, and those rallies did nothing to end the great bear market. My father, who made a fortune shorting stocks in that period, explains it this way: “In the 1930s, at each step down the slippery slope of the market’s decline, Washington would periodically announce some new initiative to turn things around. “President Hoover would give a new pep talk promising ‘prosperity around the corner.’ And often, the Dow staged dramatic rallies - up 30 percent on the first round, 48 percent on the second, 23 percent on the third, and more. “Each time, I sought to use the rallies as selling opportunities. I persuaded more of my clients to get rid of their stocks and pile up cash. I even told them to take their money out of shaky banks.”

Your approach today should be similar. Specifically, Step 1. Keep as much as 90 percent of your money SAFE, as follows:

• For your banking needs, seek to use only institutions with a Financial Strength Rating of B+ or better. For a list, click here. Then, in the index, scroll down to item 13, “Strongest Banks and Thrifts in the U.S.”
• Make sure your deposits remain comfortably under the old FDIC insurance coverage limits of $100,000. The new $250,000 per account limit is temporary and, in my view, not something to rely on long term.
• Move the bulk of your money to Treasury bills or equivalent. You can buy them (a) directly from the U.S. Treasury Department by opening an account at TreasuryDirect, (b) through your broker, or (c) via a Treasury-only money market fund.

Important: You may have seen some commentary from experts that “Treasuries are not safe.” But when you review their comments more carefully, you’ll probably see they’re not referring to Treasury bills, which have virtually zero price risk. They’re talking strictly about Treasury notes or bonds, which can - and probably will - suffer serious declines in their market value

Step 2. If you missed the opportunity to greatly reduce your exposure to the stock market in 2007 or 2008, you now have another chance. And the more the market rises from here, the more you should sell. Step 3. If you are still exposed to stock market declines, seriously consider inverse ETFs, ideal for helping you hedge against that risk. (For more background information, see my 2007 report, How to Protect Your Stock Portfolio From the Spreading Credit Crunch.) Step 4. If you have funds you can afford to risk, seriously consider two major profit opportunities in the months ahead:

• To profit handsomely from the market’s next decline. The best time to start: When Wall Street pundits begin declaring “the bear is dead.” They’ll be wrong. But their enthusiasm can be one of the telltale signs that the latest rally is probably ending.
• To profit even more when the market hits rock bottom and you can buy some of the nation’s best companies for pennies on the dollar. The ideal time to buy: When Wall Street is convinced the world is virtually “coming to an end.” They will be wrong, again. But that kind of extreme pessimism could be one of your signals that a real recovery is about to begin.

------------------------------------------------------------------------------------------------- 1 For the banks’ $3.42 billion loss in interest rate derivatives, see OCC’s Quarterly Report on Bank Trading and Derivatives Activities Fourth Quarter 2008, table at the bottom of pdf page 17, “Cash & Derivative Revenue,” line 1. As you can see, that was 7.2 times larger than the previous record - the fourth quarter of 2004, when the nation’s banks lost $472 million in interest rate derivatives. 2 See OCC table at the bottom of pdf page 11, “Derivative Contracts by Type.” In it, the OCC reports total U.S. bank-held derivatives of $200,382 billion at year-end 2008. Among these, the single largest category is interest rate derivatives, representing $164,404 billion, or 82 percent of the total. In contrast, credit derivatives are only $15,897 billion, or 7.93 percent of the total. Within the credit derivative category, the OCC reports (page 1, fourth bullet) that nearly all - 98 percent - are credit default swaps, which have proven to be the most toxic and damaging category of derivatives so far. But they represent only 7.77 percent of all derivatives (7.93 percent x 98 percent). 3 OCC. In Table 1, pdf page 22, “Notional Amount of Derivatives Contracts.” 4 OCC, table at bottom of pdf page 13. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive.

Mastercard And Visa Will Outperform The Credit Card Industry In The Long Run

By Taylor DeStefano on March 30, 2009 More Posts By Taylor DeStefano Author's Website Despite all of the problems surrounding consumer credit, the credit card industry is in a position to benefit over the long run, as the public continues to make the transition from paper to plastic. Additionally, consumer spending, although it has hit a speed bump, will rise over time. Indeed, late payments on credit cards hit a record high in January and defaults are likely to worsen until the economy makes a turn around. Although the commercial banks, such as J.P Morgan (JPM: 26.58 0.00 0.00%) and Bank of America (BAC: 6.82 0.00 0.00%), saw net losses in their credit card divisions last quarter, credit card companies like MasterCard (MA: 167.48 0.00 0.00%) and Visa (V: 55.60 0.00 0.00%) fared better. Visa and MasterCard are unique in that they operate the electronic payments networks the cards are processed on but do not have direct credit risk due to lending. The following is a run down of companies that are part of the credit card industry and how consumer spending is going to affect the industry in the future. Visa & MasterCard Visa and MasterCard are the two companies that I believe will outperform the industry in the long run. Don’t be fooled; the next two quarters still pose risk for a their stock prices as the economy continues to contract and consumers spend less money. However, that could present a more attractive buy-in point. Many trends that these companies will be able to capitalize on are the same, as their business models are extremely similar. For example, both will want to concentrate on their debit -card businesses, as this is seen as the quickest growing electronic payment option going forward. It makes sense that debit will be more likely to beat out cash and checks than credit, especially in these economic times as consumers try to borrow less. Visa, which operates the world’s largest electronic payments network, makes money from serving, processing, and transactions fees rather than issuing credit cards, which is one reason why it is poised to excel. Payment volume and transactions are the drivers for Visa’s revenue, as it benefits every time a card is swiped, and more cards are being swiped every year. Operating in over 170 countries, Visa is also in a great place to expand abroad. Visa may seek to acquire Visa Europe in the coming years to geographically diversify their revenues. The company will rely primarily on growth in emerging markets to offset some of the slowdown in developed countries. Many investors might think expanding abroad is not smart during a global financials crisis, however, this is a great opportunity for the company to grow in countries with large populations and very low penetration of credit and debit cards. This means the relative growth rate in these nations is much better than in more mature and currently struggling economies. The company recently launched its first global marketing campaign, entitled “More people go with Visa,” which perpetuates the idea of a single global company. MasterCard generates its revenues from operations fees and assessments. Furthermore, not only does the company processes payment transactions but it also offers consulting services to customers. Similar to Visa, I expect transactions volumes to increase for MA due to a shift toward greater credit usage, despite a slowdown in consumer spending in the near term. The other positive to MA’s business model, just like Visa’s, is that it does not have the same credit risks that lenders like commercial banks have. Increasing its debit card business has been a priority for MA, and it recently launched a new debit card program with KeyBank, which is a unit of KeyCorp (KEY: 7.87 0.00 0.00%). What hurts MasterCard is that Visa has more of the U.S. market share in the debit business, with over 53 percent of its total volume in debit cards and the rest in credit. MasterCard only has about 30 percent of its transactions coming from debit cards in terms of gross dollar volume. To put it in perspective, total debit card volume last year grew 13 percent versus a 2 percent decline in credit cards in the U.S. With many Americans avoiding excessive borrowing now, debit card use is likely to increase as people stick to their budgets. MasterCard is also seeking to capture emerging markets growth in the future, particularly in China and Brazil. MA reported that emerging countries in Asia and Latin America have had double-digit growth in gross dollar volume in credit and debit transactions in the fourth quarter of 2008; they fell 5 percent in the U.S. for the same period. One way that Visa and MasterCard will boost their bottom lines is charging banks that issue cards higher fees to offset lower consumer spending. The new transaction fees planned are just under 2 cents per transaction but could mean over $600 million in added revenues for the networks. The new fees will most likely be passed on to merchants. American Express American Express (AXP: 13.63 0.00 0.00%) is a leading global payments and travel company. While Visa and MasterCard are embracing their current business models and positioning for more growth, American Express has recently decided to go back to its roots. The company ramped up its credit card business just before the financial crisis, which was bad timing to say the least. Now, it plans to return to its policy of issuing charge cards to more affluent customers with healthy credit. However, in the process of the transition the company is cutting lines of credit to long time customers which does not bode well for its reputation for customer service. If the company would not have handed out credit so freely prior to the housing bubble, it would not be experiencing this problem to this extent in the first place. Historically, AXP has performed well in prior economic recessions due to the focus on charge cards. Charge cards differ from credit cards in that the user must pay off his or her balance in full each month. One reason this downturn has hit AXP the hardest is that many of its customers come from the U.S. coasts, meaning more exposure to California and Florida. These two states are among the worst suffering in terms of the real estate market. AXP’s major transition away from its original reputation as an exclusive brand began in 2003, as the company was attempting to get a bigger piece of the credit card market. With 2003 being the first year that total annual use of cards exceeded cash and checks, it seemed like the right strategic choice at the time. The problem is that as it expanded its customer base, the company kept giving out more and more cards and increasing limits to promote spending. After all, AXP collects fees from merchants every time a card owner makes a purchase, so it wants the number of purchases to be as high as possible. Now, the company is thinking about returning to its typical affluent customer base. So, the real questions is, can American Express hold onto the loyalty of its customers after all of these strategic changes, or will the company be bought out by a competitor? Although many potential buyers for American Express are laden with their own issues, AXP would be a great target for a buyout. Lately, many analysts have been revising their earnings estimates for American Express for the next two years, even noting a significant possibility that AmEx will post a loss. Standard & Poor’s has placed the company on review for possible downgrade as its credit quality worsens at a pace that exceeds average levels for the industry. One possibility for the credit card company is to cut its dividend to help conserve capital; it currently stands at 18 cents per quarter. One thing is for sure, this is definitely a credit card company to stay away from in 2009. Discover Financial Services Discover (DFS: 6.31 0.00 0.00%) is one of the largest card issuers in the U.S. and also offers different loans and savings products to customers. DFS currently operates through two business segments: U.S. Card and Third-Party Payments. In the Third-Party Payments segment, Discover is looking to increase the number of financial institutions that issue credit and debit cards to be used on the Discover Network; the company just entered the debit card business in 2006. While the company has solid fundamentals, weakening credit quality and this type of economic environment mean industry charge-off rates will continue to increase. Increased charge-offs prompt companies to bulk up their reserves, which is what you are currently seeing at the big banks. This will definitely hurt DFS as a credit card issuer, which is why I still favor V and MA going forward. Credit, Saving, and Spending Consumer spending is extremely important as it contributes to 2/3 of the U.S. economy. However, as Meredith Whitney from Oppenheimer notes, what is under-appreciated is the role of credit card availability in that spending. She estimates that over $ 2 trillion of credit card lines will be cut this year; this is relative to the $ 5 trillion of lines outstanding now in the U.S. This could potentially be detrimental to consumer confidence and the economy. Currently, five lenders comprise 2/3 of the market. The problem is that none of them want to be the last one holding an open line of credit to a customer. As lines are cut, since people have more than one relationship with credit card providers, risk exposure shoots up for the lender with the largest remaining line outstanding. A major reversal in how credit is obtained and used in the U.S. is necessary and will result from the current crisis. It cannot be argued that savings can always be relied on, although it was the reliance on credit that got our economy into this mess in the first place. As consumers de-leverage, their savings rate will have to rise. However, a dangerous result of banks cutting lines of credit is taking credit away from people who have the ability to pay their bills. If credit is taken away from a typically able borrower, that borrower’s financial position weakens considerably, which does not bode well for consumer spending or the economy. In order to try to ease the pain on consumers, regulators have outlined new rules for card issuers that restricts them from raising interest rates on existing card balances except under certain circumstances. The banking industry has until July 2010 to comply, and this plan will cause card issuers to reconstruct their lending practices which increases costs. Naturally, the banks are looking into ways to combat the new rule or strategies for other types of fees to pass onto customers. Either way, consumers are guaranteed to see rates hiked up. As default rates continue to surge and banks pull lines of credit, consumer credit problems are going to get more serious, and it’s possible that this will have to be the government’s next big focus. Disclosure: The Fund the author is associated with is long JPM.

Keeping hope alive - Bear market rallies can be violent and exciting

MARK HULBERT Keeping hope alive Commentary: Bear market rallies can be violent and exciting By Mark Hulbert, MarketWatch Last update: 12:01 a.m. EDT March 24, 2009

ANNANDALE, Va. (MarketWatch) -- Is it possible to have too much of a good thing? Mae West didn't think so, though I have it on reliable authority that she wasn't talking about the stock market.

And when it comes to rallies off of market lows, it is indeed possible for stocks to overdo it. That at least is the argument being made by at some of the investment newsletter editors I monitor. According to them, bear market rallies are almost by their very nature powerful and impressive. If we were to endow the bear market with intent, we would say that the very purpose of a rally is to draw as many gullible investors back into the market before the next leg down commences. Richard Russell, editor of Dow Theory Letters, puts it this way: "In bear markets, corrections against the primary direction tend to arrive without warning and are very rapid, often recovering in a week the bear market damage of a few months. Part of the attraction of a bear market rally [correction] is the speed of the advance. This makes the rally doubly attractive and allows those still in the market the fantasy of recouping their losses in short order."

It's probably not an accident that Russell would make a statement like this, given that he is a close follower of the Dow Theory. Of any of the major stock market theories, it is the one that perhaps pays the most attention to the distinction between primary and secondary trends. It traces its roots back to William Peter Hamilton, who introduced it in a series of editorials in The Wall Street Journal over the first three decades of the past century.

Robert Rhea in the 1930s took up the task of codifying Hamilton's editorials into a coherent theory. Russell recently quoted Rhea as saying the following about secondary reactions: "One definite characteristic of secondary reactions is that the movement counter to the primary trend is always much faster than that which occurred during the preceding primary movement. Hamilton noticed that 'in a primary bear market, the rallies are apt to be violent and erratic, and always occupy less time than the decline which they partially recover'." Rhea also wrote, according to Russell, that "secondary reactions may occur with amazing rapidity."

Russell's and Rhea's comments caught my attention because, whatever else you say about the rally that began two weeks ago, it has indeed been "violent" and has occurred with "amazing rapidity."

To gauge just how violent and rapid it has been, I compared the rally since March 9 to a composite of the stock market's behavior over the first two weeks of all bull markets since 1900.

To come up with a list of those bull markets, I followed the lead of Ned Davis Research, the institutional research firm. For them, a bull market requires one of three conditions to hold: (1) at least a 30% rise in the Dow Jones Industrial Average ($INDU: Dow Jones Industrial Average 7,806.36, +146.39, +1.9%) in 50 calendar days, (2) at least a 13% rise in the Dow in 155 calendar days, or (3) at least a 30% reversal in the Value Line Geometric index (92040210) . Since the beginning of 1900, according to the research firm, there have been by this set of criteria no fewer than 34 bull markets.

It turns out that the recent rally has been markedly more powerful than the average beginning of prior bull markets. Over the last two weeks, for example, the Dow has gained 18.8%. The Dow's average gain over the first two weeks of past bull markets, in contrast, has been 8.4%, or less than half as much.

In fact, of the 34 bull markets identified by Ned Davis Research, only one of them produced a greater gain in its first two weeks than in the recent rally. That was the one that began on November 13, 1929, and is hardly one that the bulls would want to brag about. That bull market lasted just five months and led to an increase of just 48% in the Dow -- making it one of the most modest of bull markets in the sample, despite have one of the most impressive returns in its first two weeks.

These historical comparisons don't automatically mean that the market's strength over the last two weeks is just a bear market rally, of course. But those comparisons do highlight the possibility that the recent rally, impressive as it otherwise is, will in the end prove to be just a bear market rally.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

Another Look Inside AIG

By Markham Lee on February 7, 2009 More Posts By Markham Lee Author's Website For the most part AIG’s (AIG: 1.04 +0.04 +4.00%) collapse has focused on the derivatives trades inside their Financial Products division, but it appears that their investment unit was a major culprit as well: From the WSJ: Accounts of AIG’s near collapse have largely focused on soured trades entered into by the company’s Financial Products division. But a close look at the 2,000-employee AIG Investments unit shows how this part of the conglomerate made gambles that helped cripple the firm. n running the securities-lending business, AIG Investments bought tens of billions of dollars in subprime-mortgage bonds. That turned out to be a riskier approach than some rivals’, who parked cash from securities lending mostly in low-risk or short-term investments such as Treasury securities and commercial paper, according to analysts. The idea behind securities lending is to take advantage of large numbers. Insurers like AIG accumulate large quantities of long-term corporate bonds and other securities, earmarked to pay claims down the road. They can goose that return by lending out the securities to banks and brokers in exchange for cash collateral. The insurers then invest that cash to squeeze out a bit more yield for themselves and the securities borrowers. They usually achieve this by parking the cash in other fixed-income investments, such as Treasury bonds or short-term corporate debt. The extra profits can be just hundredths of a percentage point. But when applied to tens of billions of dollars of securities, the returns can be significant. At one point, AIG Investments was putting about $70 billion into subprime-mortgage bonds and other higher-risk assets, said people familiar with the matter. These choices helped AIG squeeze an additional 0.2 percentage point in yield, or roughly $150 million in revenue. AIG’s spokeswoman said the firm “invested counterparty cash in highly liquid, floating rate, triple-A-rated” residential mortgage-backed securities. The approach backfired, exacerbating the liquidity crunch that forced the U.S. government’s initial $85 billion bailout of AIG in September. The losses didn’t stop then: Besides a $60 billion credit line to AIG, the Federal Reserve last December provided $19 billion to wall off losses purchased by AIG Investments’ securities-lending program. In all, the total rescue package now sits at $150 billion. Graphic Courtesy of the WSJ Isn’t it hard to not view CDOs (and other debt securities) as some sort of Ivy League scam? What else do you call it when you mix in a bunch of highly suspect mortgages in with a bunch of good ones, and call the whole thing “Triple A Rated”. Like I said before there are criminals in jail for running Ponzi schemes who are looking at some of the shenanigans on Wall St and wondering why they’re in jail, while the clowns who destroyed Wall St and crushed the American economy are running around free. Reading this article also makes me think that our entire financial system was being run on the assumption that nothing would ever go wrong, or that chances for things to go wrong was so small as to be all together irrelevant. I suppose it’s like leaving your door unlocked if you live in a safe and relatively crime free neighborhood, yes, chances are nothing will happen, but if some random meth head tries your door and finds it unlocked… You can read more here. Source: The WSJ: “An AIG Unit’s Quest to Juice Profit” — Serena NG, Liam Pleven, February 5, 2009

Beyond Positive Thinking

Investing WisdomBy Mario Cavolo on February 2, 2009 More Posts By Mario Cavolo Author's Website 


We begin with our confusion: Unemployment and job cuts are reaching historically high levels with 15,000 more job cuts announced yesterday after the historic Black Monday job cut meltdown. And so, what does the Dow Jones stock market index (^DJI: 8129.81 +51.45 +0.64%) do? It rallies 200 points!! 


For investors who don’t realize the importance of shorter term trends in all of the investment markets, it is daunting but there are key nuggets of knowledge which make it much clearer and they are vital before you begin investing. Of course I know people need inspiration and better communication skills to improve their lives. But as a professional speaker and motivator and coach, I am going to set those personal and business development areas aside in this article and help you focus on how to make money in the world of market investing. Facing hard times and big changes, we need answers. 


How can I make money? 
How should I invest? 
How can I position myself for the future? 
How am I going to face my retirement? 
How can I grow my assets while minimizing my risk?
Should I start my own business?
Should I invest in the markets?
What if I lose my money? 
How can I invest in oil or gold or stocks with minimum risk?


SOME ANSWERS Activity in the world’s markets appears to tell us that the “smart money” is out there, staying in the market, and thinking along these lines of thought:

1. Yes, the stock market, historically, could still go lower but at current levels it is not that high. It has already declined 50% from its 2008 high. Indeed it is true that intelligent money/investment magazines/websites like Fortune and Money and many other investing-related publications and websites are issuing countless articles listing many excellent stocks that can be purchased now at bargain levels. This statement is absolutely true and reasonable. So unless the world economy gets decidedly worse and starts melting like an ice-cream cone in the Arizona desert, then yes, stocks like Pfizer (PFE: 15.035 +0.155 +1.04%) at $15 and GE (GE: 11.50 +0.13 +1.14%) at $12 and Whole Foods (WFMI: 10.3284 +0.0784 +0.76%) at $12 and and Home Inns (HMIN: 8.09 -0.10 -1.22%) at $8 and Altria (MO: 16.91 -0.02 -0.12%) at $16 and McGraw Hill (MHP: 23.46 +0.15 +0.64%) at $23 and dozens of others are smart long-term business investments right now which millions of other shareholders paid over $50/share for last year. If you buy stocks in these well-analyzed companies at these price levels, you own a piece of these companies and you paid a nice low price. That makes you intelligent, not a gambler chasing market tops. I am not saying there is no further downside risk, but to buy low and sell high is the right way to invest and keeps your risk at the lowest possible level. So stop following the crowd which buys when everyone else is buying. That’s when prices are already too high.

2. What About All the Horrible News? The economic meltdown? Yes it is real and it is serious and we can thank the greed of the Wall Street banking industry. However, we could suggest that the “smart money” has already discounted the bad news, including the bad news which will be coming for the next six months. Earnings reports are terrible as expected. Layoffs are a big problem, orders for goods are way down, and the Baltic Dry Shipping Index indicator is historically low. By the way, that index shows us the level of shipping going on which tells us how active the world economy is. Makes sense, right? All these things point downward and confirm the banking crisis has acted as a catalyst propelling us into a very bad recession that was cyclically overdue. You need to realize that the market knows this already and the market, as usual, is anticipating the upturn and healing that will begin starting in about six months. Did you know that stock market prices usually lead the actual economic recovery by about six months? Call them optimists or call them greedy. They believe and are assuming that everything will start improving by mid to late 2009 and so therefore the market has bottomed now and so they are focused on the present day opportunities. They might be right or we may still see further declines, which by the way does seem quite likely. The swings of the market, argues George Soros are mostly emotional not logical, just short term thinking in the trading markets which leads us again to understand that if you’re trading in this market, you need to realize the short term nature of the market rallies and declines. This applies to stocks, oil, commodities and gold/silver. For example, within a wider trading range, the market will spend two weeks rallying up, then two weeks working its way back down for profit taking. These are called short to midterm rallies and should be ignored by long term investors and those with money they cannot afford to lose. Short term traders and midterm investors look more closely at moving averages and other technical indicators to identify where they should enter or exit a position, ie., buy or sell a particular stock or ETF which represents an index, sector or commodity such as gold or oil. 


3. Government Interventions Are Enough and Will Help. People in the market are praying for and assuming a positive result from government efforts; that the combination of worldwide bailout packages, economic stimulus packages, improvement in credit markets, lower priced oil and commodities and low interest rates will be the positive factors which will, in combination, prevail over the combination of negative factors. In addition, the professional trading and institutional money continues willing to assume some risk in the market rather than have their money just sitting in the bank earning next to nothing at close to zero interest. So the U.S. stock market, which is the worlwide leader and indicator, by showing any strength at all, is assuming that all the other incredibly bad news such as an unprecedented level of job cuts and company meltdowns will not ultimately drag us down too much further. Investors conclude the circumstances will most likely not get worse and drag us into a much more serious depression for the next 2-5 years. And so, they continue willing to invest in the stock market for lack of alternative places to put their cash. Real estate is not liquid. Banks offer tiny interest rates. Low interest rates are historically good for the economy and the stock markets. We just need to give it a few months to heal the evils that have occurred and the economy and markets will start to turn back up. This point of view is middle of the road and not so unreasonable. 


4. Inflation and the Money Supply. The market in the near term is currently ignoring the worries related to the dramatic increase in money supply with the U.S.government printing trillions in bailout and stimulus package dollars to support the economy. Starting with the trillions of the United States’s plus the trillions of other major countries, there will definitely be a price to pay later on in the form of inflation and pressure for currencies to fall. If this becomes a serious problem, then it’s called hyper-inflation. Even Warren Buffet acknowledged in his recent Nightly Business Report 30th Anniversary TV interview that the excess money supply is going to have to be addressed later. And so, you can see how the “smart money” is thinking on this point; it is not a current problem nor influence on the table today. Today we see and respond to what the market is doing, not what we think it ought to be doing. 


5. Buy Oil. Yes there is a short term glut of inventory which could last a few months, but the overall demand for oil worldwide (and basic commodities) is still increasing while supply is decreasing. Smart money analysis worldwide says oil should and needs to be trading in the $50 to $80/barrel range for a number of reasons and is currently at an oversold low price. See recommended strategies below. 


6. Sell Gold in the Short Term. It might break out from it’s recent upside rally, but other factors on that rise say it will go back down and continue to trade in its current range. Again, with inflation nowhere insight in the near term and the dollar holding in it’s range, gold is most likely going to bounce down again off its resistance level and trade in its current chart zone. Ditto for silver. 


7. Be a Renaissance Global Thinker. Look at the investment markets as a whole together and as a global whole, not just the “stock market”. The market is a much more interesting and diverse animal than just company stocks. The supply and demand for stocks, commodities, oil, gold/silver, currencies, and even shipping are all connected indicators and influences to one another. Even more so, they are now connected globally, which offers unprecedented opportunities to make money investing. Stop thinking narrowly like a citizen of your own country. You must consider the global worldwide impact of these developments and respond like a citizen of the world, not as an American or Brit or Chinese or German. For example, I recently read that the Singapore index (^STI: 1707.39 -4.53 -0.26%) fell through key support, the DOW Transports (^DJT: 3061.72 +37.11 +1.23%) are very close to breaking weaker, while the S&P500 (^GSPC: 848.21 +9.70 +1.16%) is not as weak. So, perhaps there’s a nice Singapore bear market trade. 


8. China. This country is going to continue its rise of global power and influence. Meanwhile, be extra careful about Chinese stocks. I am a successful entrepreneur, speaker and investor based in China since 1999. More so, I am surrounded by other smart, successful business people who have also been here in China and Asia doing business for just as long. We have all personally witnessed and are part of China’s amazing and scary economic and cultural development. We also know that the lack of financial transparency often leads to your money disappearing into thin air in wonderfully mysterious ways. Misappropriation of funds is rampant without scruples in Chinese business. Only play Chinese stocks that have already been thoroughly researched and are transparent such as: Home Inns, Petrochina, Hainan Air, China Mobile, and Ctrip. Otherwise, you are much more likely to be buying stocks in companies which are grossly misusing their funds. Because of the lack of transparency and style of doing business, you will never know it or you will know it too late. Better yet, just play the ETF’s that focus on China/Emerging Markets. (More on ETFs later)


Meanwhile, keep in mind a couple of other key points regarding China’s economy.
1)Yes it is greatly suffering in this economic downturn. Don’t believe otherwise.
2) In spite of #1, remember that even Chinese lower middle and middle class are relatively cash rich. They buy almost everything cash and have lots of it in the bank thanks to their thrifty habit of saving more than 30% of what they earn, more than any other country. So unlike Americans who are cash broke, the Chinese citizenry can survive a 2-3 economic downturn without as much relative misery to their personal lives. 
3) Besides the obvious impact on corporate business, the downside of the economic impact in China is that there are still somewhere around 800 million farmers and migrant workers who are going to suffer increased unemployment and there is a concern about related growing social unrest. 


 9. India is booming. There are not alot of ways to play the market there but relative to the world’s economies, their internal economic structure is much more solid and stable than even China’s. What To Do Now? So, what should you do to invest, to get smarter, to position yourself for the future? In the flat information world with Google at your fingertips you can become an intelligent, informed investor that does not make foolish investments and realizes that, for example, 30 year mortgages are a very bad idea. In the booming real estate market of China, there is no such thing as a 30 year mortgage. When I arranged a mortgage with Bank of China 4 years ago, I had to beg for a 15 year mortage because they only wanted to give me 10 years! You can quickly learn more online about every item mentioned in this article. ETFs The individual investor has opportunities to take positions in markets never before available without huge amounts of risk and capital because of the availability of ETFs and options on ETFs. They trade just like stocks and have tax advantages and much lower expenses compared to mutual funds. So: Research and Learn 


The following websites not only have financial and statistical information; they are packed with intelligent articles to quickly educate yourself about the world of investing and most everything mentioned in this article. www.cnnmoney.com www.motleyfool.com www.thestreet.com www.seekingalpha.com www.dailymarkets.com Even better, these sites have various free services that send news/alerts to your email box everyday. So first of all, plug yourself in, research and THINK. Do some research and then you’re ready to ask yourself basic, straightforward questions such as: 


1. Investing In Oil. Will oil stay at $30-$40/barrel? If you think not, then you can buy oil by buying share of the USO (USO: 29.10 +0.23 +0.80%) or DBE (DBE: 18.86 +0.10 +0.53%) oil ETFs. They trade like stocks and you don’t need to be in much more dangerous futures contracts. That’s kind of amazing if you think about it. You the individual investor with less money can buy oil just like the big guys and professional traders. 


 2. Investing In The Dollar Or Other Currencies. Did you decide the dollar will decline as many say? Do you believe it is going to decline, maybe even severely? Are you confident of that? Ok, then buy UDN (UDN: 25.0692 -0.2308 -0.91%). It is a U.S.$ currency ETF ($25 per share) which seeks to track the price and yield of the Deutsche Bank Short US Dollars Futures Index. Which means simply; if the dollar goes down, it goes up and you make money.  


3. Gold Play. You think gold will breakout above its recent rally and still go up? You can buy DGL (DGL: 33.03 +0.28 +0.85%), now trading around $33. If gold goes up, you make money. Or do you conclude gold will go back down from its recent highs and stay down for awhile? Buy DGZ (DGZ: 25.03 -0.25 -0.99%), now trading around $25. If gold goes down $1, you make $1. For example, gold recently peaked, but with no inflation and as long as the dollar stays strong in the next few months, there’s no reason for gold to breakout to the upside. If that’s the strategy you research and agree with for yourself, expect a price correction in the next few weeks. The trading range is $750 to $900 and gold has recently had a swing to the upside with next resistance in the mid 900’s. Same for silver strategies. You can position yourself long in silver with SVL (SVL: 0.00 N/A N/A). If you think silver is going down instead of up, then buy ZSL (ZSL: 13.40 -0.34 -2.47%) which is an ETF whose shares go up when silver goes down. That’s all you need to know. 


MAKE MONEY WHETHER THE MARKETS GO UP OR DOWN 
Because of ETFs, you can make money in both directions of the markets with the same risk levels as regular stocks and mutual funds. I like to say you are taking intelligent, active investment risks, same as you would investing in any new business or project. You are weighing the factors, analyzing knowledge, statistics and trends and then taking intelligent risks with your money, using stop loss orders to minimize your risk. That’s what investors do.  


4. U.S. and Global Stocks: Big Bargain Priced Defensive Stocks. Shares in these companies will go back up in price as usual when the market rises again. From the Fortune Top 40 list of stocks, there’s Johnson & Johnson (JNJ: 58.89 +0.31 +0.53%), Proctor & Gamble (PG: 53.96 +0.05 +0.09%), Walgreens (WAG: 27.61 -0.14 -0.50%), 3M (MMM: 52.27 +0.63 +1.22%), Pfizer, Carlisle (CSL: 18.87 +0.21 +1.13%), Philips, Unilever (UL: 21.83 -0.64 -2.85%), Vodafone (VOD: 19.80 -0.11 -0.55%), just to name a few. By the way, the last three stocks named plus Diageo are not U.S. stocks, so you’re actually investing globally. And stocks like GE give you global investment exposure too. These are stocks that have already been deeply researched and are recommended without bias by respected research sources including Fortune, Money, MSNBC and others. To that degree, you can genuinely relax. For example, while some risk concern exists about GE, you can buy it around $12/share now and the company is committed to maintaining the current 8% dividend unless more economic trouble forces them to cut it. That’s an opportunity in the eyes of many investors as an amazing longterm investment. 


5. Smokers & Drinkers. Did you know that when times are bad, smokers smoke more and drinkers drink more? Buy the big tobacco stock Altria (MO). The stock is a bargain at $16/share and it pays dividend over 7%. Or you could buy Diageo (DEO) which, by the way is a UK corporation, one of the world’s largest liquor companies. 


6. Health Care. With the aging of the world’s population, health care stocks are considered a safe, smart play and most of them are holding billions of dolars in cash. For example, Pfizer (PFE) recently had over 25 billion dollars in CASH and was trading at only $16/share. They just confirmed to buy Wyeth in a $68 billion dollar deal. You can own shares in Pfizer for only $15 and get a 4% dividend too. Or you can simply buy IXJ (IXJ: 43.965 -0.175 -0.40%), which is a healthcare/pharmaceutical industry ETF that holds Johnson & Johnson, Merck (MRK: 30.13 -0.11 -0.36%), Pfizer, Abbott Labs (ABT: 56.945 -0.035 -0.06%) amongst its holdings. Again, prices in this sector are at historically excellent values so invest in the future of healthcare instead of just paying through the nose for your medical insurance and expenses. 


7. Low Priced Consumer Goods and Fast Foods. In economic downturns, people buy less luxury and shop at Walmart more. Its simple to understand that! Stocks like Walmart (WMT: 47.42 -0.39 -0.82%), Kraft (KFT: 26.11 -2.63 -9.15%), YUM (YUM: 28.23 -0.04 -0.14%), Dollar General stay stronger during recessions. McDonalds (MCD: 58.74 -0.14 -0.24%) too. Cramer likes Walmart. Check them out. 


8. Conservative Risk With A Twist: Buy Longer Term Call & Put Options Instead of the Stock. Are you confident about the direction of a stock or index but don’t want to put up as much capital? Then consider conservative Call and Put Options. Think of it as a coupon for a $10 meal at a restaurant which expires a couple of months later. Options are similar. For example, if you think Microsoft (MSFT: 18.70 +0.20 +1.08%) is going up, then instead of investing $1800 to buy 100 shares of Microsoft at today’s price of $18/share, you can spend $210 today to buy a July call option at $20. So you know control the 100 shares of Microsoft. You are risking only $210, but you receive the gain or loss as the price of the 100 shares moves in the money. So if by May, Microsoft is priced at $23, your gain will be over $300. 


In Conclusion As Warren Buffet recently said during his Nightly Business Report interview, you would go to the store to buy things when they are on sale, not when the price is going up, right? It is important to position yourself for the future, for the longterm, not just think short term. Yes, there may be more downside risk because the bear market is not over. It may last three more months or even much longer. As of now, the global economy needs the American economy to lead the global recovery and the American stock market will typically anticipate the economic recovery by six months or so. There is even the possibility that the situation could become much much worse. But today, with intelligent research, one can find reasonable, smart opportunities to invest for the future while keeping risk at a minimum. Here’s a final list of tips: 


1. Remember to think global and remember that the diverse markets are connected together in today’s flat world. You are a citizen of the world. Do some research and get confident. 
2. Stay liquid. Reasonably protect your cash. In a downturn, cash is king. Limit the amounts of money you are willing to risk by using stop loss orders on your trades. Do not risk money you cannot afford to lose because you will not be able to think clearly as you are investing it. For example, if you have $15,000, then use $5000 to invest. Further consider how to allocate the $5000 toward safer or riskier investments. Do not risk the other $10,000 cash. That is your survival and peace of mind. 
3. Take foundational positions in defensive longterm stocks that pay dividends. 
4. Take a position in oil and commodities at today’s prices. 
5. Identify values and bargains. There is plenty of research already at your fingertips identifying those companies for you. 
6. If you are going to make shorter term trades, have a strategy which includes stop losses, economic analysis, technical analysis and stick to it without emotions. If you can’t do that, DON”T TRADE. For example, if you are going to make ten trades, use stop loss orders in place. You will possibly lose $200 on half of the trades while earning $500 on the other half which were good trades. That’s following a trading strategy that makes money, not haphazardly gambling. You can do this by opening an account at www.ameritrade.com or other brokerage companies. And the final big tip and needed disclaimer. Do not jump off the bridge because Mario said it was an adventurous thing to do to get over your fears and then send him the bill for your broken leg. This is an educational article. Do your own research and make your own choices. This is article is not to be considered investment advice nor recommendation to buy any investment. This article includes overviews and explanations of what other investors and companies might do. Options trading is much riskier because you don’t own anything and could lose all the money you invest. You must learn and understand and read and agree to all policies offered by brokerage firms before investing. They and I are not responsible for any gains or losses you experience.