Porter Stansberry explains the forces behind the current rally The Daily Crux

America is running out of rope The Market Ticker

The world financial system’s Achilles’ heel The Daily Reckoning

Roubini on a U shaped recovery Naked Capitalism

Larry Flynt calls for a national strike The Huffington Post

Look for an X shaped recovery Real Clear Markets

The risk of double dip recession rising Financial Times

What the stress tests didn’t predict NYT

“No rally can be sustained with yields and P/Es so poorly valued,” says underground investor Chris Weber, writing for DailyWealth. Chris is a very special kind of investor. When he was 16 years old, he turned just $650 (saved from his paper route) into $1.8 million through a series of remarkably insightful investments. So naturally we’re all ears when Chris gives his opinion on the direction of the market.

Chris is bearish on US stocks. (He’s mainly in cash and precious metals.) Why? Because there’s no value in the US stock market.

As of the end of July, the dividend yield on the S&P 500 has fallen to only 2.13%. When the rally began in March, the yield was over 3.5%. That is a huge fall in a short time.

Then, as stock prices have soared, earnings of companies have just not kept pace. In many cases, they are down sharply. This imbalance in price to earnings is shown in the weird spike in the P/E ratio on the S&P 500. It is now up to 127 times annual earnings, up from less than 20 times earnings at the rally’s start in March.

In other words, the dividend yield and the P/Es were not what you see at real bottoms. In really low markets, investors are shaken so much that years are required for them to regain bullishness.

Instead, I think what we’ve been seeing are the types of violent rallies within bear markets we saw throughout both the 1930s and the 60s-early 70s.

So once again, I’m just watching the stock markets. My position is that if the Dow Industrials and Transports can both better their previous record highs that they reached back in the second half of 2007, then I’ll be interested and ready to say that we are really off to the races again.

What I think is more likely is a repeat of the period of 1966 to 1975, where we’ll see a series of rallies within a bear market. In other words, this will be an easy time to lose money, and a hard time to make it.

Porter Stansberry has another take on stocks. He reckons we’re in the early stages of a “massive inflation.” Porter’s argument is simple. As long as the government keeps printing up trillions of dollars a year and holding short-term rates at nearly 0%, financial stocks are going to rise… And as long as financial stocks rise, the rest of market will follow.

Financial stocks are on a roll, as you can plainly see from the nearby chart of the financial sector ETF (XLF). Now, ask yourself a very simple question: Are investors buying financials because of their strong balance sheets and smart management or are they buying because they know that the government intends to keep pumping money into these boated behemoths?

Say what you like, US stocks are rising. All we know is we don’t like it one little bit. And we wouldn’t touch stocks knowing what we do about the market. As Chris Weber says, “This will be an easy time to lose money, and a hard time to make it.” Amen to that.

So today we turn away from the markets and focus on something more important: basic investment principles. As Alexander Green, investment director of The Oxford Club, puts it over at InvestmentU.com, “It’s not uncommon to run into investors who are knee deep in option trading, currencies, short selling, or sophisticated arbitrage strategies without mastering – or even understanding – basic investment principles.”

Here’s what Alex believes are the six factors that determine the value of your portfolio’s. Only one of these six factors is beyond your control: your assets’ annual compounded return. That means it only makes sense to focus on the other five.

1. The amount of money you save. To put it bluntly you have to start by maximizing your income, minimizing your outgoing and paying yourself first. Why? Because expenses always rise to meet the income available. As soon as you get a raise or a higher paying job, you’ll find that you need a new car, a bigger house, better furniture and a new set of Callaway irons. But you have to draw the line somewhere. You can’t save a pittance and expect your portfolio to perform miracles each year.

2. The length of time your money compounds. The sooner you start investing the better. And the longer you leave it alone the better. If you start too late – or raid your portfolio to redo the kitchen or take the kids to Disney – you’re going to have a lot of catching up to do down the road. The old chestnut is true: Don’t touch your capital. It’s like eating your seed corn.

3. Your asset allocation. Studies consistently show that how you divide your portfolio among non-correlated assets – stocks, bonds, real estate investment trusts, precious metals, etc. – determines 90% of your portfolio’s long-term return. (The rest is due to security selection.) If you’re too conservative – or too aggressive to stick with your program – you simply won’t meet your goals.

4. Your assets’ annual return. This, of course, is the great unknown. Not even Warren Buffett or Ben Bernanke can say what their portfolio will return each year. But the better your security selection and asset allocation decisions, the higher your annual compounded returns.

5. What you pay in expenses. Don’t be oblivious to what all those financial intermediaries are charging you. You can sacrifice far too much in commissions, bid/ask spreads, wrap fees, management expenses and other costs. All things being equal, the lower your expenses the higher your net returns.

6. How much you pay in taxes. Too many investors are oblivious to the tax ramifications of their investment moves. When possible, put your high-yielding investments in your tax-deferred accounts and your tax-efficient funds and individual stocks in your non-retirement accounts. (I call this your asset location strategy.) Hold positions 12 months or more to qualify for the lower long-term capital gains tax rate. Offset your capital gains with capital losses if possible.

You see what most investors don’t understand (and probably never will) is that market timing and stock picking make up only a small part of serious wealth building. It’s a secret the “ultra wealthy” have known for a long time. And they spend a lot of time and money making sure these six factors are right (and others, too, that would be too complicated to explain here). It’s how they hold onto their wealth for generations.

It’s actually what we’ve been working on while here in France. Along with my dad and your Notes co-editor, Chris Hunter, we’ve been researching these wealth preservation secrets. And we’ve discovered that wealthy families nearly always have something called a “family office.”

Most of these require massive amounts of cash to join. (One group in London my dad went to talk to was looking for a $200 million minimum!) So that’s why we decided to set up Bonner & Partners Family Office. It puts all of the money management secrets of the ultra wealthy to work… without the massive price tag.

Partners will enjoy the following benefits:

Access to what my family is doing with its money. Over the years we’ve spent literally hundreds of thousands of dollars on high-level wealth management advice. It’s been distilled into our family portfolio, which partners will have full access to.

Twice-daily market advice from full-time money manager Simon Mellon. The family has spent a lot of money, and considerable time, finding the right investment director for the family office. Simon has a resume as long as your arm. And his insight into the market is the kind that comes only with years in the trenches in New York and London.

Full-time tax planning advice from Raife Nueman. Raife went to university with your editor at St John’s College. And he’s one of the brightest attorneys we ever come across. (He has been elbow deep in the US tax code over the past two months, and he’s identified a way to drastically reduce your tax spend – to as much as 0% in some cases.)

Access to all of Agora trading advice and investment research. Family office partners will have full access to the entire daily output of Agora, the family publishing company. This amounts to 34 trading and investment research services. (A total of over $97,000 worth of subscription services a year.)

We will be sending out an invitation to join us as a family office partner this week. As a Notes reader, you can join the invitation list early by sending an email to info@contrarianprofits.com. Just make sure to put “Family Office” in the subject line so our staff will be able to quickly add you to the list before the invitation goes out…

In fact, in the face of a stagnant world economy unrivaled since the Great Depression, we’re now looking at an era of competitive currency devaluations – where every country tries to keep its own currency from rising too much.

Far too many investors are either unaware of these efforts, or dismiss these currency strategies as bureaucratic wrangling. But I’ve been watching this unfold for the past eight years, and have made a significant amount of money from this insight.

And there’s still a substantial profit to be made – for those who understand just what’s happening.

When Strength Leads to Weakness

Since about 2001, whenever any currency rises too much, the local manufacturers or farmers – or anyone who lives by exporting – start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper – all this in the hope that the domestic economy will become better.

Pick any period so far in this young century and you’ll see that this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months.

Let’s focus on the recent highest-flying currencies. The New Zealand dollar soared 23.6% against the U.S. dollar from mid-March through mid-June. That’s the best three-month performance for the Kiwi dollar since way back in 1971, when currencies began floating against each other.

And over 2009, as a whole so far, the strongest currency has been the South African rand, which has soared 18.3% against the dollar since Jan.1, the best performer of all the 16 major currencies. Other currencies that have been strong have been the Norwegian krone and the Canadian dollar (both
up 13% since 2009 began) and the Australian dollar (up 14.6%).

It should be no surprise that all these countries have been making noises and taking action to try to reverse that trend. Take New Zealand. This is a country that depends on exports, especially agricultural exports. Total export prices have plunged 8.2% from 2008’s last quarter to 2009’s first quarter. This is not an annualized rate, either, but a quarter-to-quarter drop. If continued at that rate, it would mean a 33% fall in export income over the year. According toFonterra Co-operative Group Ltd., the world’s largest dairy exporter, New Zealand farmers have suffered a 12% drop in milk prices over the last few weeks. The dairy industry accounts for 20% of New Zealand’s export earnings.

As The New Zealand Herald stated in an article on June 16: “That (the plunge in income for New Zealand dairy producers) explains why Reserve Bank Governor Alan Bollard (New Zealand’s counterpart to U.S. Federal Reserve Chairman Ben S. Bernanke) last week called the exchange rate rise against the U.S. dollar ‘unhelpful’ and a ‘real risk to us‘ as the country endures the deepest recession in three decades.”

The same article goes on to quote the head of the New Zealand Manufacturers and Exporters Association, John Walley: “We don’t see any green shoots in our markets both at home and abroad. And the high exchange rate is strangling any ’shoots’ that are poking their heads up.”

The New Zealand monetary authorities are doing all they can do cheapen their dollar. That includes slashing interest rates to just 2.5%, which is a shock to those of us who remember Kiwi interest rates as being the highest in the world. They are printing money and talking about actively intervening in the currency markets to sell their dollar short. New Zealand’s finance minister, Bill English, just came right out and said that his government would prefer a weaker currency.

I could go on and on. The Australian treasury secretary, Ken Henry, just announced, in language as radical as finance ministers usually get: “If today’s high exchange rates continue, that would imply downside risk to the economy.”

However, I don’t sense as grave concern at the rise of the Aussie dollar as I do with the people of New Zealand about their currency. Thus, it would not surprise me to see the Kiwi fall versus the Aussie, or, put another way, the Aussie falling less than the Kiwi.

Additional Global Currency Concerns

Moving on to Canada, we see that its central bank just announced that the  ”unprecedentedly rapid rise” of the Canadian dollar may “fully offset” any hope for economic recovery.

South Africa’s central bank has just announced that it has a policy of buying U.S. dollars in order to cheapen the rand. That country’s version of Bernanke, Tito Mboweni, said that although he used to be against intervention in the currency markets, the soaring South African rand has caused him to change his mind.

You can see why. Exports and domestic retail sales are plunging due to the high value of the rand. South Africa’s unemployment rate is now 23.5%, the highest of all 61 countries tracked by Bloomberg. Interest rates have been slashed this year from 7.5% to the current 4.5%, but this is not enough for the Union of Metalworkers, which has threatened to strike if interest rates are not cut more.

Finally, let’s look at Norway. Here is a European country, yet it does not use the euro, preferring instead to keep its own currency. This currency has risen by 13% so far this year against both the euro and the U.S. dollar. So are they happy about it in Oslo? Not very.

The strong currency has hit demand for Norway’s exports hard. In response to this, companies have cut staff, which in turn cuts domestic demand. Also, big companies laying people off is a very un-Norwegian thing to do. The world’s second-largest newsprint maker, Norske Skogindistrier ASA just announced job cutbacks. This has been something of a shock, even though the decline of newspapers should have been a warning. Newspapers just don’t want to pay higher prices for newsprint when the currency these products are denominated in has risen so much this year.

Norwegian Prime Minister Jens Stoltenberg, up for re-election this September, has said that supporting the labor market through this crisis – Norway’s first recession in more than 20 years (the last one coming when oil prices plunged back in the 1980s) – is his very top priority. He has pledged whatever money it takes to try to stimulate spending. And though, as far as I know, no one has publicly said that they want a lower krone, the central bank has cut interest rates fully seven times in the last eight months. It is now down to 1.25%, and stands ready to go lower.

One thing that’s important to remember: This is just a snapshot of those currencies that find themselves the strongest risers so far this year. At any given time in the last few years, whichever currencies have been strongest have screamed about their plight.

A year ago, for instance, with a euro at $1.60, Germany – a huge exporting country – basically said it wanted a cheaper euro. It got what it was seeking: The euro fell to $1.23 within months, but is now drifting back up. The United Kingdom wanted its high-flying pound – then at $2.10 – to fall to boost domestic and foreign demand for its goods. It got its wish: Within months the pound had plunged to $1.45. And on it has gone for a few years now.

A few years ago, Americans were angry that the Chinese had such a cheap currency and forced it to float. In the four years since that happened, China’s yuan has risen about 24% against the dollar and you don’t hear so many American threats. (Of course, this could also be because China owns so much U.S debt and America does not want to antagonize its largest lender).

Source: Global Currency Wars Reveal the World’s Best Money Plays

[Editor's Note: Part I of two installments. Look for Part II tomorrow.]

Chris, who edits the Weber Global Opportunities Report, started investing while in high school and made so much money he hasn’t had a “real” job in his life. He’s an investor’s investor. And that means when he makes a call we listen.

Chris says all the great starts of bull markets have certain things in common. And these can all be summarized with the words “Great Values.” Most important, new bull markets offer investors great dividend yields and low price-to-earnings ratio on most stocks.

Right now, the dividend yield on the S&P 500 is 2.46% — lower than the 3.58% yield the index offered was when this rally started in March.

At every start of a real bull market, dividend yields were much, much higher than just 3%. They were over 6% in 1982, over 7% in 1949, and over 10% in 1932. Those were the beginnings of real bull markets. The kind of markets that if you got in early and just held, and reinvested your great dividends, they made you rich.And that is why I have urged that everyone who participates in this rally use trailing stops. These stops can be staggered: some as low as 3%, others as high as 50%, and every gradation in between.

Yes, if the Dow reaches 10,000 or 12,500, or the S&P goes back to 1,000, or 1,100 or 1,200… there will be great rejoicing and optimism that the worst is over. But I will be looking at both the dividend yield and the price-to-earnings ratio on both indices. And from where I sit, if stocks do indeed go that high, it will only be a signal to tighten my stops. Bull markets begin with stocks trading at great values. And those values are not yet here.

Like we said before, there’s money to be made in the current rally… if you know what you’re doing. The folks at Today’s Financial News just bagged their 26th double-digit gainer since January – 30% on U.S. Geothermal.

They also see opportunity in the coming supply crunch in silver. Already, they’re up 17% on the iShares Silver Trust ETF (NYSE:SLV).

Today’s Financial News have just released a free special report featuring three undervalued silver stocks… and an options play that they think might bag gains of 1,100%. Notes readers can access it here.