Recession: What Does It Mean To Investors?

by Investopedia Staff, (Investopedia.com) (Contact Author Biography)

When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.

The Phases of the Business Cycle

In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.

Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.

Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.

Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.

Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.

Recession Versus Expansion

Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation.

The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:

1) Employment 2) Personal income 3) Sales volume in manufacturing and retail sectors

4) Industrial production

By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion.

The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)

What Does this Mean for Investors?

Understanding the business cycle doesn't matter much unless it improves portfolio returns. What's an investor to do during recession? Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)

First, remember that a bear market does not mean there are no ways to make money. Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)

Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.

There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you. For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.

Conclusion

The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.

Bond Yield Curve And The Stock Market

By Hans Wagner on May 25, 2009 More Posts By Hans Wagner Author's Website

Will the steeper yield curve and higher interest rates have a negative affect on stock prices? During the week of May 4, 2009, the U.S. Treasury conducted a record $71 billion May refunding that required higher rates than expected to complete. In fact, the 10-year yield completed its seventh straight weekly rise, a move that has not happened in five years. A steeper yield curve means companies selling longer-term corporate bonds must pay more for the privilege. It shows that interest rates affect investors in the stock market.

Background on the Yield curve One of my first papers I had to write in college was on the “Term Structure of Interest Rates”. The purpose was to discuss how interest rates change over a time and how to interrupt the rates of different maturities at a point in time. I am not sure I understood what I was writing at the time. Since then it has become much clearer and the term “yield curve” provides a much better image in the mind.

The yield curve is a plot of the yield on bonds with the same credit quality across different maturities. The basic assumption is you get more interest on your investment in a bond by holding it longer. The theory states there is more risk for holding a bond for 10 years than for 5 years, or for 5 years than for 90 days. Simply, the yield curve is a graph showing bond yields on the vertical axis and different length maturities of any type of debt instrument such as government bonds and notes on the horizontal axis.

Generally, the longer the maturity of the debt an investor is buying, the greater the yield any given bond will carry. This is because there is more risk to principal the longer the maturity of the debt. The more risk an investor carries, the higher return he should expect.

There are four ways to describe the yield curve at any given time: normal, steep, flat, and inverted. When the economy is growing normally without any fear of inflation or other economic disruptions, the yield curve slopes gently upward. Investors who risk their money for longer periods expect to get a bigger reward in the form of higher interest than those who risk their money for shorter periods. This creates a normal sloping yield curve.

A steep curve occurs when the longer-term bonds have much higher yields than the short-term notes. Investors have a greater fear that inflation is rising, which causes interest rates to be much higher at longer maturities.

The yield curve is flat when there is little difference between the long and short-term securities. This tends to take place when the economy is in transition and the yield curve is forecasting the change. A flat yield curve is normally a temporary situation.

An inverted curve takes place when the rates received on long-term bonds are less than the rates received short-term notes. When the economy is expected to go into a recession, especially a severe one, investors will settle for lower yields now if they think rates and the economy are going even lower in the future. They are betting that this is their last chance to lock in rates before the bottom falls out.

The shape of the yield curve can help tell us the trend in interest rates. Since longer-term rates are much higher, a steep yield curve tells us that the market is expecting rates to increase in the future. Investors want to be protected from loosing current principal value, so the market is generally selling the longer-term bonds. Rates move opposite bond prices. Therefore, when investors sell longer-term bond, rates rise. Rising rates at the long end of the curve hint that inflation is more of a concern.

On the other hand, a flattening or inverted curve, where long-term rates are falling relative to or below the short-term rates, means that the bond market expects interest rates to decline in the near future. This is due to traders bidding up (reducing the yield of) the longer-term bonds because the market expects the higher-yielding bonds to have a higher principal value in the near future. Falling interest rates actually raise the value of the longer-term bonds.

The yield curve only represents the bond market’s expectation of where interest rates and the economy are going, and the bond market, just like the stock market, is never truly efficient. In other words, the yield curve is not exactly perfect in predicting rates and should not be treated as gospel. Nevertheless, the yield curve is as good an indicator as any concerning where interest rates are headed.

Credit Spreads Widening As longer-term interest rates rise, it causes longer-term investment grade credit spreads to widen further. In fact, these credit spreads are currently at or near their widest levels in decades. In some sectors, they are approaching the widest since the Great Depression. This asset class has not been so attractively valued in a very long time. Yields at or around 7% to 8% on investment grade corporate debt are attracting investors who expect equity returns to be low over the next several years. In addition, Treasury yields are now near historical lows, as the Federal Reserve has stepped in to help stimulate the economy with lower rates. Given the current economic environment, corporate profits are likely to grow at roughly the same pace as nominal gross domestic product (GDP). For a variety of reasons, GDP will be below historical trends. In addition, dividends, currently around 3.5% on average, may be cut further to help companies preserve cash. If either or both of these events take place, it will render the equity market far less attractive than investment grade corporate bonds.

The expanding deficits in the U.S. require the Treasury to sell more bonds to provide the money for the government to spend. While still considered a safe investment, investors will require higher rates to meet their return expectations, as we saw in the Treasury auction the week of May 4, 2009. We should expect the treasury yield curve to steepen even further over the next few months. As the Treasury yield curve gets steeper, it will cause the rates of other debt securities to rise, as they must compete for money. Investors should consider what if the ratings on U.S. government securities received less than the best rating.

Affect of Interest Rates on Stock Prices

Bond investors are closely aligned with the economy, as interest rates are a key determinant of economic performance. Stock investors are aware of interest rates, though they focus on companies and their individual performance. As investors, we are very interested in the direction interest rates will go over the next few months and years.

In theory, rising interest rates should be good for stocks. Rates tend to rise when the economy is recovering from a down turn. However, higher rates can also be a determent to an economy that is recovering. That is why the Federal Reserve is keeping short-term rates near zero. However, controlling long-term rates is much more difficult. The hidden hand of Adam Smith steps in and forces all entities to deal with the realities of economics.

When rates go up, many investors seeking safety, who had been buying stocks, opt for bonds to receive their yields tempting. When investors perceive they can get better returns from long-term bonds than from stocks it takes money out of the stock market. This tends to put downward pressure on stocks prices. In addition, companies that sell long-term debt will pay more now that rates are higher. This reduces their earnings power.

As the yield curve gets steeper, it puts downward pressure on stock prices. Like all securities, bond yields do not rise or fall in a direct line. Rather they zig and zag along the way. As the rates for Treasury bonds climbs, they will place downward pressure on stock markets. This is one more factor stock investors need to consider as they make their investment decisions. It does not mean there will not be excellent investing opportunities for equities investors. It just adds to the analysis of the trends for the stock market.

Famous Failures

"Three Choices that Make You Who You Are" and why they matter.

Three Choices that Make You Who You Are By Adam Khoo One power that has given to us by our creator is the power to choose. The power of free will. I believe that the person you are today is the result of all the choices you have made in the past. Ten years from now, you will definitely become 10 years older. if you are 20 today, you will be 30 and if you are 30 today, you will be 40 a decade from now. The question is who would you have become? What would you have achieved? The answer lies in three major choices that you make every single day. It is what I call the three choices that make you who you are. 1) The People You Choose to Spend Time WithAs social beings, we have the tendency of picking up, matching and following the beliefs, attitudes and habits of the people who surround us. If the people you mix with have negative thoughts, complain all the time and lack self-belief, then the chances are that you will become that way as well. If the people around you constantly think positive, are self-motivated and set high standards, then you will become that way as well. Since we were young, we have been subconsciously picking up the thought and behavioral patterns of the people around us. Haven’t you notice times when you spoke just like your friends or your mother? Have you noticed times when you behaved just like your friends? It is common sense that if you surround a positively charged magnet with 10 negative ones, the positive magnet will soon follow the charges of the rest. This is why there are some people who get all motivated and positive after going for a personal development training but soon go back to their disempowered ways? When they leave the seminar, they go back to a negative environment where people tell them all day that life sucks and that things are hopeless. A seminar can immerse you in a powerful environment for 4-5 days, but the wrong friends will immerse you in a damaging environment for the rest of your life! Let me ask you this think about this… Write down the names of 5 people you spend most of your time with. Now look at these names and ask yourself: Do these people bring out the best in me? Do they inspire me? Do they challenge me? Do they uplift me? Or do these people make me feel lousy and bring me down? Think of the beliefs, attitudes, behaviors and standards that these five people have for themselves. Are these the beliefs that I want for myself? Are these the attitudes that will help me succeed? If the answer is yes, then GREAT. If the answer is no, then it is time you change who you spend time with. If you want to succeed, you have to mix with people who are successful (or who aspire to be successful). If you want to be highly motivated, you have to mix with people who are highly motivated. The main reason why many of the participants from my programs (e.g. Patterns of Excellence, wealth Academy etc…) create powerful and long lasting changes is because of the new friendships that are forged during the program. I have developed and implemented a system where program graduates form into success groups where they keep each other in check and develop a powerful new group culture where wealth and success in the norm. 2) What You Choose to Put into Your MindThe second thing that makes you who you are is what you choose to put into your mind! What are the books you choose to read? What are the magazines you choose to read? When you read the newspapers, which section to you focus on? Which websites do you spend time surfing on? What bookmarks are in your web browser? What seminars do you choose to go to? I often find it very funny when someone tells me that they want to increase their wealth. Yet, they read FHM and sports magazines (instead of SmartInvestor, The Edge and Fortune). They spend their time surfing entertainment sites (instead of moneycentral.com, sgx.com, cnn.com). They read Singapore ghost stories (instead of business & financial books). They rather spend their time and money watching a movie or going on holiday than attending financial management and investment seminar. They input negative thoughts like ‘why am I so poor?’ instead of focusing on thoughts like ‘ how can I learn the strategies to become rich?’ So the second lesson is that if you want to excel in something (e.g. health, success and wealth), you have to invest in your education and learn everything you can about it. Fill you mind with knowledge and thoughts of wealth and you become wealthy. 3) The Dreams You Choose to HavePeople who become better and better every day and move towards their goals do so because they have big and inspiring dreams that fill their minds the moment they open their eyes in the morning. If you have big dreams of becoming the best in your field, building a church/mosque/temple, sending your children to the best schools, buying a landed property, building your own business, then you will live each and every day with passion, focus and a sense of purpose. Every decision you take and every action you take will be purposeful. As a result, you will move closer and closer to you goals every day. However, if you have no dreams that inspire you out of bed. If you have no goals that fill your mind every moment, then you will tend to follow the decisions and actions of others blindly. You will tend to go in all directions with little sense of purpose. You will live your life day by day, without much meaning. And where you will end up 10 years from now will not be by YOUR plan, but by the plan that others have set for you.

BYD: Positioning Berkshire Hathaway for the “Chinese Century”

Warren Buffett is a margin of safety investor. That is, Buffet purchases equity stakes in companies only when he is more or less certain that he won’t permanently lose his capital and where the price is such that he believes he will earn an outstanding return on his investment over time. In order to practice this risk averse method of investing, Buffett has often had to pass on investment opportunities where it was not clear to him how the competitive dynamics of the relevant industry would change over time

During the tech bubble of the 90s, for example, Buffett was derided as being a stodgy old man who simply did not understand the new era of business. However, while Buffett did pass on some outstanding opportunities, he did so because it was difficult for him to predict how these “tech” companies would reinvest capital into their businesses in a way that would maintain or grow their earnings such that the prices quoted for their shares provided a margin of safety. Buffett also knew that the “moats” of many of these companies could easily be crossed by new entrants selling the latest and greatest disruptive technologies and so he declined to participate across the board. This led to a general theory among the press that Buffett simply would not invest in tech companies because he did not understand how these companies worked.

So many Buffett followers were perplexed when he saw fit to buy close to 10% of

BYD Company Limited (BYD), a Chinese manufacturer of rechargeable batteries, mobile handset components, and cars, in October of last year. The purchase was largely viewed in the media as a bet on BYD’s batteries playing a large part in the future of personal transport, either through the sale of its batteries to car manufacturers or through the sale of its own cars. The purchase was also cast as an atypical investment for Buffett, since the company was trying to bring to market a new disruptive technology – namely, a low priced, all-electric vehicle. However, when one digs deeper into the investment, one begins to realize that the investment is vintage Buffett and will, in fact, probably turn out to be one of the best investments that Buffett ever makes in his lifetime. Berkshire’s stake in BYD not only has the adequate margin of safety required by Buffett but also represents the future of Berkshire. Buffett and his partner in crime Charlie Munger are beginning to position Berkshire for what they believe will be the “Chinese Century.”

BYD deals with two businesses: IT manufacturing and auto manufacturing. It has production bases in several large Chinese manufacturing centers as well as in Japan, Korea, Taiwan and various emerging markets (such as Hungary and India). It is a public company and is listed on both the Chinese and Hong Kong stock exchanges. According to a Harvard Business School case study on BYD (required reading, in my opinion, if you really wish to understand Buffett’s interest in the company), the company opened up shop in 1995 and by 2002 became the world’s second largest manufacturer of rechargeable batteries. This was considered a remarkable feat because battery manufacturing was traditionally viewed as a capital intensive business that required large expenditures on things like robotic arms and dry rooms. Chinese companies’ comparative advantage was always thought to be their access to a large supply of cheap labor and so it was assumed that no Chinese company would be able to compete in the battery business. However, BYD was able to become a low cost producer of rechargeable batteries by changing the manufacturing process such that labor became a much larger input and capital equipment became a much smaller input.

BYD also had a one-up on most other Chinese manufacturing companies because it spent far more money on R&D focused on both product improvement and, more importantly, on manufacturing process improvement. This focus on both product and production process engineering is what enabled BYD to become the second largest rechargeable battery supplier in the world so quickly, as the company was able to manufacture batteries in a way that maintained quality control even while relying heavily on human resources for its manufacturing lines. It has also enabled the company to jump into other manufacturing businesses and become the low cost producer over time, as with its entry into mobile handset production. And while turnover on the assembly line side of the business is fairly high, turnover on the intellectual resources side of the business (R&D scientists) is quite low. BYD has been able to keep people on board by offering great benefits, including free housing, food, health insurance, access to free education for their children, and the opportunity to interact socially through athletic events, art programs, etc. In other words, BYD offers its employees Google-like benefits in order to keep them happy and working hard. This is just one of the reasons why BYD has been able to recruit from the “‘top of the top’” in China and why BYD will continue to innovate going forward.

Charlie Munger has called Wang Chuan-Fu a combination of Thomas Edison and Jack Welch, but I believe a more apt comparison for Wang Chuan-Fu is with the titan of American business Henry Ford. Like Ford, Wang started out as a skilled engineer and scientist who actually helped create and design new technological innovations (even working at the Edison Illuminating Company at one point). Like Ford, Wang eventually became a successful entrepreneur that excelled not only in creating innovative and value enhancing products, but also in coming up with new ways to optimize the manufacturing process in a way that made his company a low cost producer. Like Ford, Wang has vertically integrated his company so that it has become a one-stop shop for equipment manufacturing, thus capturing the entire value associated with the manufacturing supply chain. And like Ford, Wang has recognized that it is important for his workers – his human resources – to be taken care of both so that they will be more productive and stay at the company, but also because it is important that they themselves be able to buy the products they are manufacturing. Would you buy into a company run by the Chinese Henry Ford given the chance? I would.

By investing in BYD, Buffett has achieved several amazing feats at once. First, he has bought into a company that could potentially be the lowest cost manufacturer of a number of complex goods, not just batteries, handsets, and cars. BYD initially started out in batteries but then expanded into handsets, LCD screens, and automobiles, and it has always been able to generate profits in these growth enterprises by becoming a low cost manufacturer. BYD’s moat, it seems, comes from the company’s incredible ability to tailor the manufacturing process of complex goods in a way that takes advantage of China’s labor supply advantage. Additionally, BYD has done a good job of fending off competitors by vertically integrating the supply chain, thereby controlling the cost and quality of production and protecting its intellectual property and know-how. According to Wang Chuan-Fu, China is a ruthless place in terms of business competition, and its commercial law is relatively underdeveloped and under-enforced, so it is important that companies adapt their business models to deal with this reality. Learning how business works in China will be much easier with Wang Chuan-Fu at Buffett’s disposal.

Second, by investing in BYD Berkshire has gained access to the largest potential market for goods and services in the world. The growth of China in the coming years will be tremendous, and it is likely that the Chinese will be clamoring for products and service from home and abroad. Mobile phones, LCD TVs, and automobiles are all growth areas where the Chinese can supply themselves if they wish (through companies like BYD), but there are areas where the Chinese will want to purchase from foreigners or open up their markets to foreign investors. For example, the rapid industrialization of China will require huge amounts of electricity, and the Chinese would probably love to work with American utility companies who have expertise in supplying electricity using various types of generating technologies in a way that reduces pollutants and CO2 emissions. This presents a perfect opportunity for MidAmerican, the Berkshire utility subsidiary that made the strategic acquisition of shares in BYD. One can also imagine that the Chinese will increasingly see the social benefits of a robust and healthy private insurance market. By getting a toehold in the Chinese market, making business and political connections there, and learning more about the various risks of doing business in China, Berkshire may eventually be able to provide insurance capacity in China in the manner that it does in the U.S. This will give Chinese citizens access to insurance policies from a company that will always be able to make good on its promises due to its responsible underwriting and healthy investment practices.

Third, Buffet’s investment in BYD will better enable Berkshire to access one of the largest pools of talent in the world. China is continually churning out loads of intellectual talent, particularly in the fields of natural science, engineering, and business, and BYD is a top repository of such talent. Berkshire will be able to access China’s top talent both directly through BYD and through the networks of the individuals working for BYD, including Wang Chuan-Fu, thus allowing Berkshire to be more “linked in” to the Chinese business, scientific, and political communities. This in turn will enable Buffett and his successors to capitalize on new technologies that emerge from Chinese industry and to better understand the business climate in China as it changes. For example, if MidAmerican is deciding on investing in battery storage for its renewable energy portfolio, it can turn to BYD for advice on the appropriate technologies or even be directed by BYD to the companies BYD believes has the best technology for MidAmerican’s purposes. Or if Berkshire is interested in being involved in the development of traditional or renewable generation capacity in China, it can tap into BYD’s talent network to figure out what the regulatory outlook is like in China for allowing foreign investment in utilities.

Finally, given BYD’s growth potential, Berkshire has purchased its stake in BYD for what appears to be an outstanding price. Take a look at BYD’s annual report for 2008. Buffett infused about HK$ 1.8 billion worth of capital into BYD for a purchase price of HK$ 8 per share, resulting in a 10% stake in BYD. Last year, BYD earned RMB 0.50 per share, which is currently equivalent to about HK$ 0.57. Assuming that reported earnings are a good approximation of “owner earnings” and that BYD’s owner earnings will merely be maintained over the business’ lifetime, Buffet’s earnings yield for his stake is close to 7%. This is an excellent price for a company that in actuality has huge growth potential, especially when you consider that much of BYD’s income generating assets are intangible in nature (remember: its production process know-how is what helps it to be the low cost manufacturer).

BYD has a legitimate shot at becoming one of the largest suppliers of electric vehicle-related battery technology in the world given its low cost battery manufacturing capabilities. Furthermore, it is possible – though not necessarily probable – that BYD will become the largest automaker in the world. If BYD succeeds in this respect, it will probably be because its cars present a value proposition for emerging market customers rather than its cars being of the best quality. Regardless, BYD will almost certainly become a major auto manufacturer in China if the government subsidizes the purchase of all-electric vehicles. One must also remember that the Japanese were initially derided for manufacturing low quality electronics and vehicles, but now they are fierce competitors that are known for their manufacturing prowess across the globe. Just imagine if BYD is able to start generating valuable intellectual property related to its products in addition to its production processes. Could BYD become the new Sony or the new Toyota? It’s possible, and Buffett has essentially gotten this option value on BYD’s success for free.

Buffett and Munger believe that while the twentieth century was the American Century, the twenty-first will be the Chinese Century. Thus, the BYD investment should be viewed as Berkshire’s stepping stone into China. Those who deride Buffett for having a subpar record over the last decade should take note: if Buffett continues to make investments in companies like BYD, Berkshire will easily outperform the U.S. stock market for years to come. Disclosure: Please note that the author currently owns shares in Berkshire Hathaway (BRK.B). Sumit Shah www.sumitshah.com

Market Cycles and Self-fulfilling Prophecies

By AdamKhoo http://www.ProfitFromThePanic.com ========================================== "How To Make Your Fortune From The Greatest Investment Opportunity Since The Great Depression!" ========================================== The market is a predominantly irrational place filled with many investors who will believe anything and everything. Therefore, it is not a surprise that superstition and self-fulfilling prophecies prevail. That's actually not a bad thing if you realise how you can leverage on knowing when and what will happen. It can help you decide whether to profit take or hedge your position. Here are some interesting events that have been observed to happen. However it is important to note there are exceptions when they do not occur. Pattern 1: January Barometer Often used by analysts as an indication of the year's sentiment. If January ends down, the year to follow will be bearish (downward trend). If it closes up, the year will be bullish (upward trend). During election years when the first five days of January closed down with the month of January also down, the year had always closed negative. Pattern 2: The January Effect Here's a bit of January Effect Trivia: Traditionally in bullish years, the 10 best performing stocks on the S&P 500 will end the year up, while the 10 worst performers will go down. Pattern 3: Sell in May and Go Away A trader's superstition that has more credit than most would like to admit. The months from November to April are often bullish, while May to Halloween (end October) are bearish. September is traditionally one of the worst months of the trading year. Other interesting trivia: ------------------------- 1) The first trading day of the month is reliably a very bullish day - often the month's most bullish. 2) April is the most bullish month of any trading year. 3) Quarter 3 is the worse quarter of the trading year starting with July and ending with September - with September being the worst of those three months. 4) November, December and January make up the best three months of a trading year. 5) The end of October starts the best six months on the S&P500 and the start of the best eight months on the NASDAQ. To your investing success, Adam

Companies with the Biggest Earnings and Losses (2008)

Top 10 Company Earners in 2008 1. Exxon Mobil - $45.22 Billion 2. Chevron - $23.93 Billion 3. Microsoft - $17.68 Billion 4. General Electic - $17.41 Billion 5. Wal-mart - $13.40 Billion 6. Johnson & Johnson - $12.94 Billion 7. A T & T - $12.87 Billion 8. IBM - $12.33 Billion 9. Proctor and Gamble - $12.07 Billion 10. Hewlett Packard - $8.33 Billion- Stock Article Link Top 10 Company Losses in 2008 1. AIG - $99.3 billion 2. Fannie Mae - $58.7 billion 3. Freddie Mac - $50.1 billion 4. General Motors - $30.9 billion 5. Citigroup - $27.7 billion 6. Merril Lynch - $27.6 billion 7. Conoco Phillips - $17 billion 8. Ford Motor - $14.7 billion 9. Time Warner - $13.4 billion 10. CBS - $11.7 billion Stock Article Link

Focus still on America to lead global recovery

By David Caploe IN THE aftermath of the G-20 summit, most observers seem to have missed perhaps the most crucial statement of the entire event, made by United States President Barack Obama at his pre-conference meeting with British Prime Minister Gordon Brown: 'The world has become accustomed to the US being a voracious consumer market, the engine that drives a lot of economic growth worldwide,' he said. 'If there is going to be renewed growth, it just can't be the US as the engine.' While superficially sensible, this view is deeply problematic. To begin with, it ignores the fact that the global economy has in fact been 'America-centred' for more than 60 years. Countries - China, Japan, Canada, Brazil, Korea, Mexico and so on - either sell to the US or they sell to countries that sell to the US. To put it simply, Mr Obama doesn't seem to understand that there is no other engine for the world economy - and hasn't been for the last six decades. If the US does not drive global economic growth, growth is not going to happen. Thus, US policies to deal with the current crisis are critical not just domestically, but also to the entire world. This system has generally been advantageous for all concerned. America gained certain historically unprecedented benefits, but the system also enabled participating countries - first in Western Europe and Japan, and later, many in the Third World - to achieve undreamt-of prosperity. At the same time, this deep inter-connection between the US and the rest of the world also explains how the collapse of a relatively small sector of the US economy - 'sub-prime' housing, logarithmically exponentialised by Wall Street's ingenious chicanery - has cascaded into the worst global economic crisis since the Great Depression. To put it simply, Mr Obama doesn't seem to understand that there is no other engine for the world economy - and hasn't been for the last six decades. If the US does not drive global economic growth, growth is not going to happen. Thus, US policies to deal with the current crisis are critical not just domestically, but also to the entire world. Consequently, it is a matter of global concern that the Obama administration seems to be following Japan's 'model' from the 1990s: allowing major banks to avoid declaring massive losses openly and transparently, and so perpetuating 'zombie' banks - technically alive but in reality dead. As analysts like Nobel laureates Joseph Stiglitz and Paul Krugman have pointed out, the administration's unwillingness to confront US banks is the main reason why they are continuing their increasingly inexplicable credit freeze, thus ravaging the American and global economies. Team Obama seems reluctant to acknowledge the extent to which its policies at home are failing not just there but around the world as well. Which raises the question: If the US can't or won't or doesn't want to be the global economic engine, which country will? The obvious answer is China. But that is unrealistic for three reasons. First, China's economic health is more tied to America's than practically any other country in the world. Indeed, the reason China has so many dollars to invest everywhere - whether in US Treasury bonds or in Africa - is precisely that it has structured its own economy to complement America's. The only way China can serve as the engine of the global economy is if the US starts pulling it first. Second, the US-centred system began at a time when its domestic demand far outstripped that of the rest of the world. The fundamental source of its economic power is its ability to act as the global consumer of last resort. China, however, is a poor country, with low per capita income, even though it will soon pass Japan as the world's second largest economy. There are real possibilities for growth in China's domestic demand. But given its structure as an export-oriented economy, it is doubtful if even a successful Chinese stimulus plan can pull the rest of the world along unless and until China can start selling again to the US on a massive scale. Finally, the key 'system' issue for China - or for the European Union - in thinking about becoming the engine of the world economy - is monetary: What are the implications of having your domestic currency become the global reserve currency? This is an extremely complex issue that the US has struggled with, not always successfully, from 1959 to the present. Without going into detail, it can safely be said that though having the US dollar as the world's medium of exchange has given the US some tremendous advantages, it has also created huge problems, both for America and the global economic system. The Chinese leadership is certainly familiar with this history. It will try to avoid the yuan becoming an international medium of exchange until it feels much more confident in its ability to handle the manifold currency problems that the US has grappled with for decades. Given all this, the US will remain the engine of global economic recovery for the foreseeable future, even though other countries must certainly help. This crisis began in the US - and it is going to have to be solved there too. The writer is the CEO of the Singapore-incorporated American Centre for Applied Liberal Arts and Humanities in Asia.

Big Bank Profits Are Bogus! It’s A Massive Public Deception!

By Martin D. Weiss on April 20, 2009 More Posts By Martin D. Weiss Author's Website A big bank CEO on a mission to deceive the public doesn’t have to tell outright lies. He can con people just as easily by using “perfectly legal” tricks, shams, and accounting ruses. First, I’ll give you the big-picture facts. Then, I’ll show you how big U.S. banks are painting lipstick on some of the fattest pigs ever raised. Six of America’s Largest Banks at Risk of Failure As we have written here so often … as we documented in our recent white paper … as we showed in our presentation to the National Press Club … and as we explained again with new data in our follow-up press conference, the nation’s banking troubles are many times more severe than the authorities are admitting. First, look at the megabanks: The authorities SAY that all of the 14 largest banks have earned a “passing” grade in their just-completed “stress tests.” But just six months ago, the authorities swore that, without a massive injection of taxpayer funds, those same banks would suffer a fatal meltdown. Was the bad-debt disease magically cured? Did the economy miraculously turn around? Not quite. In fact, we have overwhelming evidence that the condition of the nation’s banks has deteriorated massively since then. How can our trusted authorities be so blatantly deceptive and still keep their jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago, for example, he declared that the total losses from the debt crisis would not exceed $100 billion, while conveying the hope that most of those losses could be soon written off. Also around that time, the International Monetary Fund (IMF) estimated the losses would be $1 trillion, with only a small percentage written off. The IMF’s latest estimate: $4 trillion in losses, with only one-third of those written off so far. Bernanke’s error factor: He was 4,000 percent off the mark, in a world where 50 percent errors can be lethal. Meanwhile, based on fourth quarter Fed data, we find that, among the nation’s megabanks, six are at risk of failure in our opinion (seven if you count Wachovia and Wells Fargo (WFC: 16.36 -0.64 -3.76%) as separate institutions). JPMorgan Chase (JPM: 29.05 -0.64 -2.16%) is the nation’s largest, with $1.7 trillion in assets in its primary banking unit. It’s massively exposed to defaults by its trading partners in derivatives - to the tune of 382 percent (almost four times) its risk-based capital. Plus, since it holds HALF of ALL the derivatives in the U.S. banking industry, JPMorgan is at ground zero in the debt crisis.

Citibank (C: 2.65 -0.29 -9.86%) is the nation’s third largest, with assets of $1.2 trillion in its main banking unit. Its total credit exposure to derivatives is a bit lower than Morgan’s, at 278 percent, but still extremely high. Plus, it has other troubles, especially the surging default rates in its sprawling global portfolio of credit cards and other consumer loans. (More on these in a moment.)

Wells Fargo and Wachovia now make up the nation’s fourth largest bank with combined assets of $1.17 trillion. But in the fourth quarter, they still reported separately, which is illuminating: Even without Wachovia’s troubled assets, TheStreet.com Ratings has downgraded Wells Fargo to a D+. Wachovia, meanwhile, got a D. This tells you that Wells Fargo wasn’t exactly the best merger partner, unless you believe in some bizarre math wherein adding two negatives somehow gives you a positive result. SunTrust (STI: 13.80 -0.91 -6.19%), with $185 billion in assets, is getting hit hard by the collapse in the commercial real estate. Its Financial Strength Rating is D+. HSBC Bank USA (HBC: 32.09 -1.36 -4.07%) has massive credit exposure to derivatives that’s even greater than Morgan’s: 550 percent of risk-based capital. We’re not looking at its larger foreign operations. But the U.S. numbers are ugly enough, meriting a rating of D+. Goldman Sachs (GS: 115.01 0.00 0.00%), which reported for the first time as a commercial bank in the fourth quarter, seems to be taking the biggest risks of all in derivatives. Its total credit exposure is 1,056 percent of capital. Bottom line: It debuts as a bank with a rating of D, on par with Wachovia. Regional banks: Banking regulators have been largely mute regarding major regional banks. But several are also at risk of failure, including Compass Bank (Alabama), Fifth Third (Michigan), Huntington (Ohio), and E*Trade Bank (Virginia). Primary reason: Massive losses in commercial real estate loans. Smaller banks: On its “Problem List,” the FDIC reports only 252 institutions with assets of $159 billion. In contrast, our list of at-risk institutions includes 1,816 banks and thrifts with $4.67 trillion in assets. That’s seven times the number of institutions and 29 times more assets at risk than the FDIC admits. What Explains the Huge Gap Between Official Declarations and Our Analysis? We all use essentially the same data. And conceptually, the analytical approach is also similar. The primary difference is that the regulators have an agenda: Instead of protecting the people from bank failures, they’re trying harder than ever to protect failed banks from the people. Specifically … They have forever hidden the names of the banks on the FDIC’s “Problem List,” making it almost impossible for average consumers to get prior warnings of troubles. They have never disclosed their own official ratings of the banks - the CAMELS ratings - making it difficult for the public to find safe institutions they can trust. They have religiously underestimated - or understated - the depth and breadth of the debt crisis. And as I explained a moment ago, they have rigged their recent stress tests to give passing grades to all of the nation’s 14 largest banks, sending the false signal that even the most dangerous among them are somehow “safe.” Legal Cover-Ups, Flim-Flam and Sham In the Big Bank’s “Glowing” First-Quarter Earnings Reports Wall Street is aglow with the latest “better-than-expected” earnings reports by major banks. But take one look below the surface, and you’ll see three of the most egregious accounting gimmicks in recent history. Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away. Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison. Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He’s lost a fortune in his properties. And he’s on the brink of bankruptcy. Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right? But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half. In practice, of course, that’s a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn’t be financially distressed in the first place. And if he weren’t financially distressed, his loans wouldn’t be selling on the market for half price. The reality is that he can’t buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise. That’s why the government would never let real estate developers - or hardly anyone else, for that matter - mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that! It’s the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they’re allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.

Accountants call it a “credit value adjustment.” I call it cheating. Finding all of this hard to believe? Then consider … How Citigroup Mobilized ALL THREE of These Gimmicks to Create One of the Greatest Accounting Shams of All Time in Its First-Quarter Earnings Report I’m outraged. But I’m glad to see that someone besides us is speaking out: Meredith Whitney, one of the few no-nonsense analysts in the industry, says that the banks’ latest reports are, in essence, “a great whitewash.” Jack T. Ciesielski, publisher of an accounting advisory service, calls it “junk income.” And Saturday’s New York Times, picking up from their research, lays out precisely how Citigroup has transformed a massive loss into what appears to be a fat profit … First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million. Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year’s fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion. Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone. So here’s Citigroup’s true math for the first quarter: So-called “profit” $1.6 billion Gimmick #1 $0.4 billion Gimmick #2 $1.0 billion Gimmick #3 $2.7 billion Total gimmicks $4.1 billion Actual result: $2.5 billion LOSS! And all this despite the fact that Citigroup’s loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that: Net credit losses in Citi’s global credit card business surged from $1.67 billion at year-end 2008 to $1.94 billion by March 31. And compared to March 2008, they surged by a whopping 56 percent! (Page 9 of its data supplement.) Foretelling future credit card losses, the delinquency rate (90+ days past due) on those credit cards jumped from 2.62 percent at year-end to 3.16 percent on March 31 (page 10). Credit losses on consumer banking operations jumped from $3.442 billion on December 31 to $3.786 billion on March 31. And compared to the year-earlier period, they surged 66 percent (page 12). By almost every measure, Citigroup’s first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before. My forecast: Citigroup’s effort last week to twist this into an “improvement” will go down in history as one of the greatest banking deceptions of all time. But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis. Bottom line: Rather than the private-public partnership the government has called for to address the nation’s banking woes, we see little more than private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole. My Recommendations In my book, The Ultimate Depression Survival Guide, I give you very detailed, step-by-step instructions on what to do immediately. Here’s a quick summary: Step 1. Get away from risky stocks. Use the recent stock market rally as a selling opportunity - your second chance to get out of danger before it’s too late. Step 2. Get out of sinking real estate. If there’s a temporary improvement in the market, grab it to sell the properties you’ve been wanting to sell all along. Step 3. Raise as much cash as you possibly can - not only by selling stocks and real estate, but also by cutting expenses and selling other things you own. Step 4. Make sure you keep your cash in one of the safe banks on the list we provide on the book’s resource page. Or better yet, follow my instructions on how to buy Treasury bills. They’re safer than any bank, with no limit on the Treasury’s direct guarantee. Step 5. For assets you cannot sell, buy protection using exchange-traded funds that are designed to go UP when stocks fall. The more the market goes down, the more you make; and those profits can offset any losses you suffer in the stocks or real estate that you cannot sell. Step 6. Later, get ready for the big bottom in nearly all markets. That’s when you should be able to lock in relatively safe interest rates of 10 percent or more for years to come … buy shares in our country’s best companies for pennies on the dollar … buy a dream home in a great location that’s practically being given away. 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.

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.