The second group consists of investors who believe they can outsmart the market. They’ve stayed on the sidelines, planning to buy in and make their fortunes when the markets break down a second time. But they may never get their chance.

Both strategies are flawed. And both ignore the single strategy that investors need to employ to profit in the later stages of a recovery rally.

The first group of investors – the indexers – have a unique problem. Broad-based investments such as indices are really only favored in the early stages of any recovery rally, when there’s plenty of easy money to be made.

These investors either don’t know – or choose to ignore – the reality that long rallies tend to change character: Broad-based choices are super when the rising tide is lifting all boats early in the game. But then the game itself changes.

Early on, index investors reap the lion’s share of the market-rally profits. But as rallies mature and capital continues to flow, successful investing becomes more of a stock-picker’s game. This means that specific stocks – not the indices – become vastly higher probability bets.

There are many reasons why this shift occurs, but it really comes down to two key factors: Where the money is going, and where the money is flowing.

This means there’s plenty of fuel to keep the rally alive both here and abroad, and we’re not alone in our opinion.

Beware of the “Golden Period”

Jack Ablin, who helps oversee $60 billion as chief investment officer for Harris Private Bank (NYSE: BMO), says there is still  “an enormous stockpile of liquidity on the sidelines [and] the reinvestment of [that] cash could help fuel the market.”

Unfortunately, this is well-known to investors, which actually makes it a problem. As hedge-fund manager Kyle Bass noted: “We are today in the midst of what economists often refer to as the ‘Golden’ period, where everything feels good and the long-term effects of deficit spending and money printing have not yet been realized.”

This is something I’ve talked about time and again during investor presentations all around the world. People who are already numb from having been pummeled on the way down, have once again become intoxicated with the rally over the 12 – 18 months that such advances typically last. They see a chance to recoup all their losses and be made whole. This makes them more prone to poor timing decisions, or poor investments choices.

Another problem with long rallies like the one we’re experiencing now is that you have be “in” from the get-go or you won’t “go” at all.  Today’s algorithmic trading simply doesn’t allow for the kinds of market pullbacks and corrections we used to see as recently as 10 years ago. I know – I’ve written several of these trading programs. Today, if you’re not in when the money starts moving, you might as well hang it up.

At the same time, you just can’t sit and wait until things get better, either. If you do, you are likely to miss most of the gains.

And don’t bother trying to “time” the market. That’s a recipe for disaster, as reflected by numerous Dalbar studies. The Dalbar data repeatedly demonstrates that investors who try to time the markets not only fail miserably in the near term, over a period of years they tend to fall dramatically behind the market averages.

How much behind? Try 40%-60%, depending on what data period is examined.

Winning Markets – Big and Small

That brings me back to today’s key point. In the early stages of a rally, it’s best to invest using broad, sweeping choices like index funds or exchange-traded funds (ETFs), which are tied to the major indices. Believe it or not, picking the “right” stocks is essentially irrelevant. Sure you always want to have some zoomers in your portfolio, but when the rally really begins, it’s far more important to have broad-based stock-market exposure. It’s a shotgun approach. And it works.

Over the past 118 years, there have been 19 bear-market events in the Dow Jones Industrial Average. The average bear-market drop was 37%. The rally into the next year generated an average gain of 40% from the market bottom – with 70% of the gains coming within the first half of the rally’s duration.

That’s why, for example, I’ve repeatedly told Money Morning readers, as well as subscribers to our affiliated publications, to employ such broad choices as the Vanguard Wellington (Nasdaq: VWELX) or the SPDR S&P 500 ETF (NYSE: SPY).

Today, with the Standard & Poor’s 500 Index having zoomed 57% from its March 9 low, the rebound is 1.5 times bigger than the typical post-recessionary rally.

That means the best choices are now the companies that are backed by trillions of dollars in stimulus spending and that operate in growth markets that support real earnings, real cash flow and real purchasing power.

That makes a lot of sense if you think about it. Fully 78% of the world’s total economic activity now takes place outside U .S. borders, which means that if you really want to “follow the money,” you’ve got to look in areas that you might traditionally have considered as “off limits.” In fact, you may find that you are looking at companies whose names you can’t easily pronounce. But many of those companies not only have double- or even triple-digit growth, they are still viewed as compelling values – because of the torrid growth rates of the markets they sell to.

Take Iceland. After its financial travails, the country once again has positive gross domestic product (GDP) growth. It’s unemployment rate of 7.7% is not only dropping, it’s now well below the U.S. jobless rate of 9.8%.

Iceland was the first nation to have its currency destroyed and its finances and political government replaced.  It embraced its pain, and focused on doing what was necessary to fix its issues. Now its exports are booming, and its outlook is much better than it was just a few months ago.

Iceland has turned into an example of growth following a situation that most people thought was unfixable. From September 2008 to August 2009 – a period in which most economies were shrinking –the Icelandic economy actually expanded 2.4%. For global investors, economic growth – in the face of some of the toughest economic issues in generations – is the Holy Grail in surviving an economic crisis.

Tourism is flourishing in Iceland, as international citizens flock to that country’s shores to enjoy having a strong currency to spend.

Icelandic vocalist Bjork, 32, a former fashion model wearing silver snakeskin leggings, black boots and blond ponytail, recently told a journalist that “business is growing.” Thanks to the utsala – “SALE” – signs that were everywhere, “tourists are buying a lot these days, and even Icelanders are buying more at home.’

Granted, shopping for designer duds in Iceland with a snake-skinned model may not be your notion of a conservative-economic recovery play, but don’t miss the real point here: What Bjork was shrewdly observing was that consumers in her part of the world are no longer panicking. They’re back from the brink of almost-total collapse and have now come to terms with their nation’s economic recovery.
This demonstrates just why investors need to be looking at markets where there is real growth – from the smallest economies like Iceland, to some of the largest – such as China.

Speaking of which, with a population of 1.3 billion, a personal savings rate of 35%, and a government that isn’t suffering from a fiscal hangover, it’s no wonder the world’s leading companies are beating a path to the Red Dragon’s doorstep.

In China, the government’s focus is growth, and banks are looking for projects to invest in.  Those in positions of power and authority understand the need for balancing savings, growth and long-term investments. China’s stimulus plan focuses on infrastructure development, which will generate long-term growth, while the United States had had to use its balance sheet to prop up “zombie banks” – just to keep things from getting worse than they already are.

If this sounds a bit complex, the reality is that it’s actually quite basic. Limiting yourself to index investments at this stage of the market cycle is not your best bet. We’re now at the stage where the world’s stock markets have already delivered the broad, indiscriminate gains that benefit index-investors to more specific opportunities that require more-careful analysis and some specialization. Follow that game plan and you’ll be a long-term winner.

Source: The Two Investing Mistakes to Avoid at all Costs

Here are four tightly regulated stocks Mark recommends that are selling at “incredible bargains. ”

The U.S. financial system is a mess – according to the World Economic Forum, the United States ranks 40th among banking systems around the world. Without federal bailouts, the two largest banks in the country, Citibank (NYSE: C) and Bank of America (NYSE: BAC), would be in bankruptcy, and the good ol’ USA would be headed for the Greater Depression, as my friend Doug Casey likes to call it.

But you’ll never guess where the world’s No. 1 banking system is. No, it’s not fabled Switzerland nor booming Hong Kong.

While the central banks around the world are desperately trying to stem the flow of red ink, this country’s red is emblazoned on its iconic mounted police force.

It’s right next door: Canada. The land of hockey and moose has the world’s soundest banking system. While European and Asian banks are collapsing, Canada stands out as an oasis of financial calm.

Canadian Banks Receive Highest Rankings

According to the Global Competitiveness Report, Canadian banks received the highest ranking, 6.8, out of a possible 7.0 (healthy, with sound balance sheets). The lowest ranking of 1 means insolvent and possible government bailout.

Canada’s stock has been rising quietly – the Canadians are known for their modesty and self-restraint – as American financiers and media are astonished to find that their northern neighbors have somehow avoided the subprime lending scandal and the housing market mess.

What’s Canada’s secret? With the exception of oil-rich Alberta, Canada did not have a strong construction surge as the United States did during the boom years. And mortgage interest is not tax deductible in Canada.

Canadian banks are national in scope; the top five banks have branches in all 10 Canadian provinces, making them less susceptible to downturns. They have large numbers of loyal depositors and a more solid base of capital. They are more tightly regulated than their U.S. counterparts, more liquid and less leveraged.

Canadian Banks – 4 of The Top 10 Largest North American Banks

Among the top 10 largest banks in North America, 4 are Canadian banks:

• Royal Bank of Canada (NYSE: RY),
• Bank of Nova Scotia (NYSE: BNS),
• Bank of Montreal (NYSE: BMO),
• and Toronto Dominion (NYSE: TD), which bought Commerce Bank last year.

Canadian bank executives don’t have to be excoriated by Parliament before taking a pay cut. The CEOs of Canada’s three-largest banks have all voluntarily cut their own pay in response to the global economic crisis.

Canada has its share of problems – being linked to commodity prices – but financially it’s done a better job than its southern neighbor. While the Bush administration ran up massive deficits year after year, Canadian officials finally pushed through a stimulus package that resulted in the government’s first deficit in a decade!

Right now, the Canadian banks are selling at incredible bargains. With operating margins exceeding 30%, and dividend yields between 6% and 8%, Canadian banks are selling at only around eight times earnings. Bank of Montreal is my favorite – it’s selling for only six times this year’s expected earnings and is yielding 10%.

During a crisis, the good investments get hit like the bad ones. But when the markets recover, the good bank stocks will skyrocket, especially those across the border.

Source: Canadian Banks: An Oasis of Financial Calm

The analysts were confident about valuations going forward, especially long term. Company execs swore their deals didn’t need any money, while brokers and bankers alike had a gleam in their eye about the financing opportunities amid the debris — even a sense of urgency. One broker — my former business partner, actually — wondered whether the fundamentals for gold have ever been as bullish in our lives.

The answer was unambiguous. The market has answered too.

Newmont and Freeport this week filed documents in conjunction with potential underwritings by J.P. Morgan (NYSE:JPM) and Citigroup (NYSE:C), in the amounts of $1.2 billion and $750 million, respectively, totaling just under $2 billion. Kinross sold UBS about $400 million worth of stock last week. Lundin’s Red Back also negotiated a bought deal worth about $150 million with a group of underwriters led by Cormark Securities and BMO last week. Earlier this month, Yamana (NYSE:AUY) closed a $135 million share offer and borrowed $200 million, while in December, Agnico-Eagle (NYSE:AEM) raised some $300 million from stock issuances after borrowing $300 million a few months earlier (in September). Where’s the deflation?!

The money is coming into the gold sector. The Canadian National Post reported last week that gold miners are “raising cash with ease… many generalist funds have jumped onto the precious metals bandwagon.”

Many juniors have also reported financings where needed. Some are turning them away. Share issues are just too dilutive down here, and any company that doesn’t need money to survive 2009 is prudent to refuse.

Asked about the ability of miners to raise cash in this environment, the analysts at the podium at the Cambridge House investment conference in Vancouver all agreed there is always funding for assets that have sound economic fundamentals. They finance themselves. In fact, in my experience, it is often better to buy the shares of companies with good assets that need cash than companies with cash and no assets, even if the latter are trading at a discount to cash breakup, and even if funding is relatively scarce. Companies with a lot of cash can sometimes get lazy and put up their feet, or insiders waste it — or even steal it, if they lack integrity. Cash itself yields nothing. It’s a depreciating good, as you know. It’s one thing to buy a company at below cash breakup and then break it up and keep the extra cash. It is another thing to invest in a company at cash breakup or less. We invest to earn profits.

If you want to buy cash at a discount, buy a T-bill or term deposit. Or else, you’re just sharing in potential losses due to debasement, negligence, debauchery or theft. That doesn’t mean you should avoid the deals that have a lot of cash — just that’s not what you’re investing in. You are investing either in the underlying asset, which yields profit (i.e., more cash in the future) or management’s abilities.

Ultimately, sound “assets” will hold their value better than idle cash in an inflationary environment.

It is obvious that through this crisis, despite some turbulence, gold prices have held up better than just about any other asset, commodity or currency (other than dollars and yen) we may imagine. From the point of view of a gold miner, this is a very good thing. Even better is that the price of oil, a significant cost input for miners, has fallen a lot relative to gold. This is bullish for margins. Also bullish for gold miners is that the slump may have freed up capital and labor for the development of gold assets, where previous scarcity drove up capex estimates so much that some projects had to be abandoned.

The combination of strong investment demand for gold and lower input costs makes gold stocks one of the only sectors poised for any growth in operating results (i.e., earnings and cash flows) in 2009.

On the other hand, the ratio of gold prices to many of the commodities, and the averages, is at more than a 10-year extreme, and it is not sustainable. As a matter of fact, I think it could be a drag on gold prices. Gold is the only commodity challenging the resistance point in its post-March 2008 downtrend.

It looks poised to break out, and the other commodities appear to be bottoming.

However, while the extremity lasts, it could cap gold prices.

My feeling is that the gold ratios (i.e., gold prices relative to other assets, commodities and currencies) are going to ebb in the short term while commodity prices catch up a little. I continue to think that this catch-up phase will include a rally in stock prices, and a general recovery in risk appetite, even if short-lived. While it lasts, it is likely to shave a few safe-haven points off gold. It hasn’t started yet.

I’m not looking for new lows in gold on this… just some backfilling and consolidation while the other commodities and assets catch up some. This could happen over the next few months. Then look out.

Regardless, however, I expect gold shares to benefit from the general return of risk appetite too.

That is, but for some ebb and flow, I expect gold shares to do well whether gold goes up or not — so long as it doesn’t go down too much. As long as it holds the $800-850 level, gold shares are a buy.

It is still a buyer’s market. Many gold shares are still factoring in a gold price of less than $800. But don’t be hasty.

Rather, be deliberate, which means don’t waver from the plan or your conviction on dips. Buy them. Try not to buy on days when everyone else is, like today, but make sure you have a shopping list and just pick away at it when you get the dip.

Investors should always wade in (and out) of their positions, rather than jumping in and out — as ole Jesse Livermore used to do. They called him the “Boy Plunger.” He made big on the way up and lost big on the way down. There are lots of folks like that on Wall Street. They’re big gamblers. You could say the Fed made them. They don’t care about the black swan, because they believe that should they lose, they will just win again tomorrow.

Keep in mind, though, you’re not buying blue chips here. Small-cap miners (and options) are extremely volatile and risky.

Remember this is for 10-20% of your financial assets — whatever you can sleep at night with. Some people can sleep with more — some can’t sleep anyway. I guess the analogy doesn’t apply to insomniacs, but you get the gist.

Good trading,

Ed Bugos
for The Daily Reckoning

Source: Gold Ratios: Bearish for Gold Prices, Bullish for Gold Shares

The stunner of the day was administered by the report from the Labor Department showing that the unemployment rate in May rose to 5.5%, the highest since October 2004. The 0.5% jump was the steepest in seasonally adjusted unemployment in 33½ years, and far exceeded economists’ projections for rise to just 5.1%.

Nonfarm payrolls fell by 49,000 last month. It was the fifth consecutive decline and was in line with expectations. Of course, even that negative number may be optimistic, as the Bureau of Labor Statistics net birth/death adjustment added 217,000 phantom jobs to May’s data.

Those trying desperately to spin the data, such as commentators on CNBC, argued that the huge jump in unemployment was seasonal, and due to teenagers and students entering the job market for summer work. But realists pointed out that the same thing happens every year, and that this spike was singularly big.

The implications are clear.

As Sal Guatieri, an economist at BMO Capital Markets, wrote: “The U.S. is in recession. Job losses, along with a plethora of other headwinds, should ensure that the rebate boost to spending is short-lived, and that the Fed refrains from tightening in ‘08.”

Source: Jobs Report Stuns Market

The economic news of the day was mostly negative.

The New York Fed’s Empire State Manufacturing index fell to a reading of negative 3.2 in May from a positive 0.6 in April. In Philadelphia, factory activity rose to negative 15.6 in May from 24.9 in April. New York’s data was worse than projected, but Philly’s was better.

The Fed also reported that industrial output of the nation’s factories, mines and utilities dropped 0.7% in April in a broad-based decline led by falling production of motor vehicles. That was worse than a predicted 0.6% decline.

And the Labor Department reported that the number of people filing for the first time for unemployment benefits rose 6,000 to a total of 371,000 on a seasonally adjusted basis in the week ended May 10.

“The recent downward tilt in industrial production and ongoing moderate job losses suggest the U.S. economy is in a mild recession,” wrote Sal Guatieri, economist at BMO Capital Markets.

It’s mild, of course, unless you’re directly affected.

Source: Dollar Makes Small Gains

Nickel blasted back over $13.10 in the late morning, but then fell sharply to close at $12.8374/lb., down almost 5 cents. Zinc was up and down with little change, ending at $1.0024/lb., down less than a quarter of a cent. Aluminum sagged to $1.307/lb., down 1 2/3 cents, while lead was marginally higher at $1.2228/lb., up two-tenths of a cent.

The Fed’s action had little effect on the industrial metals, with copper rising slightly on what analysts tabbed as primarily short covering.

Volume was light, as most of the trading came before the Fed weighed in.

Also factoring in was the slight rise in GDP, as expected, with speculators hoping that that signals a rise in future demand.

The strike against state-owned Codelco in Chile continued, but even down there, “All eyes are on the Fed,” said Bart Melek, global commodity strategist with BMO Capital Markets.

Melek went on to say that strike participants were mostly “keeping their powder dry” ahead of the interest rate announcement.

Supply data came in slightly bearish yesterday. Inventories monitored by the LME rose 875 metric tons, to 110,525 tons.

Had the Fed’s rhetoric indicated a more hawkish stance on inflation is coming down the road, “we wouldn’t be surprised to see a bit of a correction here in copper,” said Michael Gross, of OptionSellers.com. Gross added that over the next month the metal could pull back to the $3 to $3.25 range.

But with no clear signal given, prices are likely to “continue to move sideways” within a $3.85 to just over $4 range, said Eric Wittenauer, analyst with Wachovia Securities.

In company news, Grupo Mexico said on Monday that its plans to ramp up output at its giant Cananea copper pit have been delayed indefinitely after a labor board declared a 9-month-long strike there legal.

Grupo Mexico hoped to have significant production by May but plans were stifled by new worker blockades this month. “At this point, we are unable to provide a revised copper production guidance for the remainder of the year and the date at which we will resume operations is not currently foreseeable,” said CFO Daniel Muniz.

Fed, Fed, Fed was all anyone wanted to talk about yesterday, as the Committee, although there had been speculation to the contrary, surprised few by shaving another quarter-point off of interest rates, to 2%.

Those scrutinizing the accompanying rhetoric for a sense of future direction were left wanting.

“During the last several sessions currency traders have begun to question whether the Fed might serve up a warning that monetary policy is on hold. However, there was little in today’s … statement to signal that they are definitely on hold,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

“They were decidedly quite rightly concerned with the ongoing weakness in the economy, especially labor and housing. The takeaway feeling I get after this is that the Fed is reserving the right to deliver more stimulus at a later date if it’s warranted,” Wilkinson added.

Among the day’s numbers, the Commerce Department said that growth in real gross domestic product for the first quarter was estimated at 0.6% for the second straight quarter. That was grim, but actually higher than the 0.2% growth rate projected by economists.

Despite the higher-than-expected reading, “No one would confuse this with a healthy economy,” wrote Douglas Porter, of BMO Capital Markets.

In fact, as Dow Jones Marketwatch wrote: “With inventory building adding 0.8 percentage points to growth, the headline GDP figure was stronger than the details of the report. Final sales of domestic product fell 0.2%, while final domestic sales dropped 0.4% — the first decline since the recession of 1991.

“The economy produced more goods and services, but the extra output went into warehouses and on ships, not into current consumption or investment. With inventories building up, output in the second quarter could be much softer.”

Earlier in the day, the euro breached the psychologically significant $1.60 mark for the first time, before yielding it to some late selling. So now what?

It could well get worse, says Kathy Lien, chief strategist at Forex Capital Markets. Noting that the skyrocketing price of oil will affect everything, “This continual rise in inflationary pressures raises the risk of a rate hike from the European Central Bank,” Lien says. And that of course is even more dollar-negative.

Playing into that fear, Bank of France Governor Christian Noyer, who is also a member of the ECB’s rate-setting Governing Council, said Tuesday that the ECB would do whatever is necessary, including moving interest rates, to ensure that inflation returns to the central bank’s target of just below 2% by 2009.

Yesterday’s data included a report from the National Association of Realtors showing that resales of U.S. homes and condos dropped 2% in March. Resales have now sunk 19.3% in the past year, and are down 33% from the peak in 2005.

“There is still little evidence of stabilization in U.S. housing markets, though the recent pace of decline in sales has slowed,” wrote Sal Guatieri, of BMO Capital Markets.

“Sales will eventually benefit from improved affordability, but the near-term picture remains clouded by ongoing job losses and more discriminating lenders,” Guatieri said.