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

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?

But the revelation of the week among financial bloggers belongs to the King of Bears, Dr. Roubini, an economist at New York University. He’s also known as Dr. Doom.

He’s been predicting for years that the economy was headed for a hard fall and that the market would get crushed.

The revelation isn’t that he’s changed his mind. He thinks there’s much more unwinding to do. He’s as bearish as ever…

The surprising revelation is that 100 percent of his savings is in stocks. Why is Roubini saying one thing and doing another?

First off, Roubini’s odd investment choice was first revealed last year in the Financial Times. So it’s not really breaking news. But the issue it raises is very timely…

Is buying and holding stocks just plain stupid? How can you be a bear and still invest?

Nobody is as bearish as Roubini. Does he know something you should know?

Let’s start peeling off the layers of the onion and see what it reveals…

First layer. The most basic fact of stock markets is that over time they go up. The caveat here is that they can be flat for a decade or more.

Second layer. The investments which are killing you are the ones you made while the market was peaking in 2005 through 2007 and you were buying stocks at their peak.

Your more recent stock investments have been much less damaging. In fact, if you’ve been investing during the last two weeks, you caught the market while it was making a 20 percent rise. Your returns should be pretty good.

Third layer. The money you put into stocks tomorrow may see a rise or a dip. Nobody can say for sure.

But, as an investor, you should always take into account the probabilities – including downside risks and upside benefits.

As for the downside, the S&P 500 lost 40 percent in the last year. The chances of it losing another 40-50 percent are remote, especially compared to this time last year.

As for the upside, the lower the stocks go, the grater the chance of a rally. There’s a name for this. It’s called the law of small numbers.

As stock prices get smaller, there comes a point where the probabilities point to rallies. And once they start to rally from their low base, it doesn’t take much to accumulate big gains.

For example, let’s say you bought 1,000 shares of a stock which has sunk from $10 to $4. It doesn’t need to make up all or even a majority of its recent loss to generate sizable gains.

The stock lost $6. If it just makes up a third of that, you’ve made another $2,000 (or 50 percent) on your $4,000 investment.

By plugging into the law of small numbers, you increase the likelihood of participating in big money-making rallies.

Is that why Roubini is in stocks? He doesn’t say. He only explains that a lot of his income is in cash, while his savings are in stocks.

But Roubini is a very smart guy. And I don’t believe he’s a hypocrite. As a bear, he obviously thinks stock investing is a compelling strategy.

I agree. But I don’t think you have to rush into stocks. I think the market still has another major down leg to go, and once that happens, the law of small numbers should begin to work its magic.

Source: Why the Most Famous Bear Invests in Stocks

Banks got us into this mess, so it’s banks that will have to get us out.

From the President on down, nobody is disputing such a self-evident premise.

And that includes Wall Street. Here’s a typical statement – from RDQ Economics LLC in NY, “They [the Obama administration] should be focused on stabilization” of financial firms “and stimulus — and that should not only be ‘Job 1,’ that should be the only job right now.”

Of course, the financial crisis has killed Wall Street. So the statement might seem a little self-serving, except for the fact – once again – that everybody agrees with it. I don’t buy it.

Maybe banks were the problem a lifetime ago – when Bear Stearns was taken over and Lehman went under.  When nobody knew which were the good banks and which were the bad banks and interest rates shot up as a result.

But it just takes one stupid question to realize we’re so past that now…

Who will the banks lend to?

To you and me? Wait a minute. We’re saving more. From a negative savings rate, we’re now saving about five percent of what we earn.

It’s about time. We couldn’t go on forever spending more than we make. It was bankrupting us.

Do you really want to buy a new car? Richard Wagoner, CEO of GM, wants you to. So does Ben Bernanke. And, let me go out on a limb and submit that President Obama also wants you to.

But what’s good for the economy isn’t necessarily good for you and me.

But surely companies need more loans from banks? If companies weren’t running so low on cash, why are so many of them cutting their dividends (37 so far this year)?

Aren’t the auto companies strapped for cash? Aren’t many banks scraping the bottom of the cash barrel? Couldn’t they use loans from other banks?

Yes, yes, and yes, BUT…

Fewer sales mean a smaller cash flow. When you’re earning less cash, the last thing you want to do is get a loan and go deeper into debt. Ask any responsible CEO: Higher interest payments and lower earnings aren’t a good combination.

Then there are the irresponsible CEOs, who have made a ton of bad decisions and are now forced to take out loans. Just ask Vikram Pandit of Citigroup (NYSE:C) and Bob Nardelli of Chrysler how it feels to put their companies into deeper debt?

No self-respecting bank would give these companies a loan. They’re getting them from the government.

Responsible companies – especially those in cyclical industries – are paring down debt right now, not increasing it.

In other words, we’re way past the point where banks are holding back the economy. In fact, there are very good reasons why the government shouldn’t spend hundreds of billions of dollars to a trillion dollars more to save banks…

• Throwing good money after bad. The so-called stress test isn’t nearly tough enough. Many of the banks getting government money won’t survive.
• The adrenaline shot is diluted. When banks were leveraged 30 and 40 to one, these banks might have been able to kick start a lagging economy. Not anymore.
• Inflated pay scale. A reality check is long overdue. Without the lucrative derivative market and with lower leverage, banks can’t afford to pay their 20-something employees millions of dollars anymore.
• Where’s the accountability? On a scale of 1 to 10, remorse gets 0 and a sense of entitlement gets 11. Dozens of banks were engaged in reckless behavior. They bullied Freddie and Fannie. They gave out billions of dumb loans. They infected other banks all over the world. Has any banker said, “I’m sorry?” Not that I know of.

We shouldn’t be asking our banks to go back to the bad ol’ days of dumb lending and dumber borrowing. It’s not fair to lenders or borrowers.

But even if banks wanted to return to their loosy-goosy lending ways (which they don’t), they wouldn’t find enough pent-up demand for credit to lift the economy out of its current doldrums.

Banks are a problem. But they aren’t the answer. Their festering issues are hurting the market because Wall Street thinks that banks are more important than they are.

It’s the ultimate lose-lose situation…

Save the banks and the economy still drops like a rock.

Don’t save the banks and the markets drop like a rock.

I’m bearish. And you should be too. There’s no easy way out of this dilemma.

Source: Saving Banks Accomplishes Nothing