This has been a tough quarter for companies. Compared to last year’s second quarter, profit is down roughly 31 percent and revenue is down even more. Wall Street thought it was going to be even worse. So in one of the worst quarters ever, the market has rallied.

Investors learn all the wrong lessons from a rally like this. Nothing about it makes sense. The smallest companies are outgunning the biggest one. The most heavily shorted stocks are doing better than the least shorted stocks. The companies with the worst analyst ratings are outshining the ones with the best ratings. Everything about this rally is backwards.

Over the past 37 years – from 1972 to 2009 – these “best of breed” companies have made shareholders 2.3 times more money than the stock market as a whole. For every $100 you made from the stock market, you would have made $230 from these “best of breed” companies.

That’s not just slightly outperforming the market. That’s lapping the market and then some. And it’s even more impressive when you take into account everything this period covered. It’s been an eventful 37 years of embargoes, stagflation, a savings & loan crisis, an Asian economic crisis, a Russian national debt default, a near collapse of the Mexican peso, 9/11, two gulf wars, the bankruptcy of the Long-Term Capital Management hedge fund, the dotcom rise and fall, a bursting of the housing bubble, credit bubble and spending bubble. Forgive me if I’ve left some “minor stuff” out like the fall of the “Iron Curtain” and the rise of China.

Through all this, these companies gave their shareholders a steady and rising stream of revenue and a return that, as I’ve said, was more than 2.3 times what the markets gave. Who wouldn’t want that?

Everybody would. And that’s a big problem for all those mutual funds which don’t touch these companies … and for the hyper-active Wall Street press which makes a fuss over a dozen things every day but somehow misses the biggest story of all…

The existence of a class of companies which know how to put ever-increasing amounts of cash into the pockets of their shareholders, year in and year out, decade in and decade out.

Almost as bizarre as our junk rally are dividend-paying companies that can do no wrong. The ones strong enough and confident enough to raise dividends are going up in price. And the ones that are cutting dividends? Many of them are going up too.

Shareholders have recently been accepting smaller checks without protest and without selling their shares. They are evidently willing to take the hit today so the company can grow profits tomorrow. It’s easier to do when investors think that some kind of recovery is around the corner. If that recovery doesn’t materialize, these shareholders will be showing much less forgiveness to dividend cutters. I don’t want to own these companies when that happens.

If I were an investor in any of those companies, I’d sell my shares right away. The whole point of investing in the “best of breed” companies is that you get paid no matter what.

Everybody is cutting costs, the strong and weak companies alike. But not all dividend companies are cutting their dividends. Just slightly more than half are these days. It pays to invest in the dividend hikers, not so with the cutters. Let other investors be forced to rely on a recovery to reverse their portfolio losses.

You should be and can be making money even if the economy remains weak. As long as there are “best of breed” companies still raising their dividends, there’s no reason why you should sacrifice your pay “for the good of the company.”

The scary thing (for us and the Fed) is that low-interest rates aren’t speeding up the recovery. People aren’t willing to borrow. And banks aren’t willing to lend. The amount of money floating around the economy is pretty stagnant. The Fed should be pretty discouraged. They have $2 trillion on their balance sheet. And all they have to show for it are some banks which should have gone under but are instead giving its employees million-dollar bonuses.

Dividend companies are getting a little respect again. They may even have become the “new fad” according to the UK’s Telegraph. Here’s the money quote…

Few professional investors are banking on a return to the super-charged capital gains we have seen from equities in the past. Rather, the new fad is for companies capable of delivering reliable sources of income. Historically, dividends have been responsible for more than half the return on equities. In the more risk-averse environment which is the new norm it may be rather more than that.

But why be satisfied with just a “reliable source of income” when you could get income which is both reliable and growing. Perhaps the Telegraph doesn’t realize that with “best of breed” companies, you can have your cake and eat it too. But the Telegraph isn’t the only newspaper or media outlet that doesn’t “get it.”

Nobody is talking about these companies providing reliable revenue to shareholders for decades (yes, I said decades) and increasing their dividends at rates of 25-40 percent every year. Yes, I said 25-40 percent every year.

Do the math. A company raising its cash payments to you by 25 percent every year will double the money it pays you every three years! If you’re getting $10,000 in cash every year from a company now, in six years you’ll be getting $40,000.

These aren’t junk bonds. They’re not risky derivatives. They don’t depend on a bull market. These payments come from some of the safest and strongest companies in the market. When companies provide rising cash payments for decades and generate plenty of cash with above average profit margins, they qualify for “best of breed” status.

Actually, some people out there do “get it.” One of them is Hersh Cohen. He has managed the Legg Mason Partners Appreciation fund for the past 30 years. Over these three decades, his fund has done better than the S&P 500, the dividend-company benchmark index and the average return for large-capitalization stock funds. Cohen, who holds a doctorate in psychology, says he focuses on companies with “superior balance sheets and rising dividends.”

Cohen says his academic training helps him when the market goes to extremes. During such times he likes to go against the flow, cutting back when the market is euphoric and increasing his bets when others panic “and stuff is being given away.”

I’m not a fan of mutual funds. I think they’re terrible instruments, trapping investors into very narrow styles of investment long past the time when those styles made a buck. And I don’t think mutual fund managers are the sharpest tools in the investment shed. So when I see an exception, I try to point him out. Cohen is an exception.

If you’re interested in doubling your money every three years with very little risk, there’s only one way to do it. Invest in “best of breed” companies.

To your investing success,
Andrew

Source: Why ‘Best of Breed’ Investing Is No Passing Fad

Several countries have seen their markets surge in the past three months: India’s market shot up 50.3 percent, Indonesia’s 39.5 percent, Singapore’s 32.8 percent, Russia’s 32.5 percent, Hong Kong’s 31.7 percent, and Chile’s 29.6 percent. But the world’s most expensive major market rose a relatively modest 24 percent. Take a look at the chart…

Taiwan’s market is outrageously expensive. In terms of price-to-earnings (P/E), it’s going for almost twice the P/E ratio of the UK’s – the next most expensive market.

Things are beginning to look up in Taiwan. Its big chip sector is seeing light at the end of the tunnel according to industry watchers. They say that equipment spending by the major chip makers will bottom out in the second quarter.

But Taiwan’s market is priced as if it’s all blue skies ahead and that’s not the case. Taiwan’s Central Bank Governor Perng Fai-nan told reporters last week that the pace of recovery in Taiwan is “relatively tepid.”

Mega Securities Co. in Taipei predicts that “The recovery will be slow, so interest rates will stay low for a long time.”

And Gartner Research says that capital spending across the semiconductor industry is expected to fall nearly 45 percent this year.

Taiwan’s market has already begun to slip and it should drop much further. The best way to play this market dip is shorting the iShares MSCI Taiwan Index (NYSE:EWT).

Source: What’s Next for the Fastest-Growing Foreign Markets?

Assets like iron ore and copper would suddenly look bullish. Countries like Australia, Brazil and Canada would suddenly have brighter prospects. Asia as a whole would be more attractive to investors.

Prices hit $136 in 2007 and then began a long pullback to around $40. They bottomed in April and have since rebounded to where they are right now – at the $50 per pound level.

Can they go up from here? Take another look at the chart. You can see that the highs are still getting lower, and the lows are also dropping. In other words, the downward trend is still intact.

Based on market fundamentals, the price of uranium should be going up soon. Nuclear power contributes 16 percent of world energy demand. In the US, it contributes 20 percent. And with 30 nuclear plants under construction and another 38 in the pre-construction stages with dozens more planned, nuclear’s contribution is sure to rise.

And there won’t be enough uranium to go around. The Atomic Energy Agency recently said that Russia and the U.S.  may cover only five percent of world demand by 2015.

The current shortage in uranium production is covered by the uranium from dismantled weapons the U.S. gets from Russia. The government-created company, USEC, down-blends this uranium for use in nuclear power plants. But that agreement goes away in 2013.

But the global nuclear power plant construction program isn’t going anywhere. With China and India leading the way, nuclear’s resurrection shouldn’t be ignored by investors.

The entire nuclear industry is revving up, including uranium exploration and mining. It takes 8-12 years to build a mine and get the stuff out of the ground.

One of the bigger companies which has been mining uranium for a long time is Cameco (NYSE:CCJ). Its stock should grow right along with the sector itself.

Source: A Sure Way to Play Uranium

If Fed chief Bernanke can figure out a way to ratchet down interest rates, these bonds could begin to rise again. But he’s painted himself into a corner.

Bernanke could tell the Fed to extend its $1.75 trillion policy of buying government and mortgage bonds. That would lower rates in the short term.

But a policy of the government lending trillions to itself puts the government’s printing press into overdrive and practically guarantees hyperinflation in the future. That, of course, would make these bonds much less desirable and drive prices lower.

And if the Fed doesn’t step in as a major buyer of bonds? The supply of bonds the U.S. government will be issuing could easily overwhelm demand – pushing up interest rates (and thus lowering the price of bonds).

So, longer term, prices will fall. But look at the chart. In the shorter term, these bonds will be getting strong support at the 85-mark. Combined with a government decision to continue to buy them and a pullback in the market (driving investors into bonds), prices should bounce up.

But it’s only a matter of time that long-term government bond prices begin another major leg down.  And you can play both directions by buying long or shorting the TLT ETF.

Source: The Bernanke Conundrum Guarantees Hyperinflation

When the S&P 500 topped in early 2009, it quickly broke through its 20-day moving average on its way down to lows realized in March. The current rally is showing more strength. It hit an intra-day high of 930.2 on May 8 and then proceeded down. But it subsequently found support on its 20-day moving average (the blue line).

Is the market now consolidating for a big rise or drop? The technicals could go either way.

It could hit 930 again and bounce back down. That would be bearish.  The market has been doing a great job of surging on the good news and ignoring the bad. But that can only go on for so long. Yet, it’s not out of the question that the market can continue its irrational climb and break through the 930 barrier.

I believe it’ll drop sooner rather than later and not move significantly beyond its intra-day high of 944 back on January 6. When it does begin to drop, it could revisit the lows of January when it hit 800. But I think it’ll go much lower and test the lows of this past March.

And that will remind people that we’re still in a bear market with lots of unwinding to do before the economy truly bottoms.

Source: The End of the Bear Rally?