More from David at The Sovereign Society:

Dividend-paying stocks used to offer a way to “play it safe.” Especially during bear markets, the regular paychecks could help “soften the blow.” But not anymore.  The truth is; dividend investors are getting hammered.

The Wall Street Journal calculated that 36 companies in the Standard & Poor’s 500-stock index have cut or suspended dividends this year, removing $33.3 billion from investors’ pockets.

And of the 7,000 or so publicly traded companies that report dividend information to the S&P, 138 decreased their dividends during the third quarter… a 15-fold increase from the same period last year.

And since these floodgates have been flung wide-open, many more companies will now join the trend and feel it’s alright to cut their dividends. Remember, stock dividends are not contractually guaranteed. So with a wave of a CEO’s hand, they can disappear.

The Secret of “Guaranteed Dividends”

But today I’m going to teach you how you could get those same companies to “guarantee” to pay you a dividend. And not just 4% or 5%… but 10%, 15% even 30%.

Better yet these “dividends” will be paid to you not quarterly or semi-annually but monthly. Cash will be delivered to your account on the same day every month, month after month… “Guaranteed”.

What I’m talking about are Structured Investments and specifically a widely used product in the financial industry known as Reverse Convertible Notes.

For those of you not familiar with Reverse Convertible Notes (RCN’s), they’ve been around for years. Widely used in Europe but usually offered to only the wealthiest of U.S. investors, RCN’s are now finally available to the retail investor.

Reverse Convertible Notes are securities that offer individuals a predictable, steady stream of income. They pay a high coupon – much higher than the return you would receive on fixed income securities.

Here’s an example…

Let us suppose you like General Electric (NYSE:GE). The stock is currently trading at about $15.00 per share, which you think is a steal. Even if the stock market drops further and pulls GE down with it, you’re OK with a $15 purchase price plus its 8.2% dividend yield.

But what if I told you I could get you a better deal on GE? I can offer you a “cash dividend yield” of 19.3%… and if the stock falls all the way back to $9.75… you could care less. You didn’t own the shares anyway.

Well that’s the power of Reverse Convertible Notes.

Here’s another great example:

Goldcorp (GG) – You want yield, you need cash every month and you’re a gold bug. We’ll there’s an RCN currently being offered that will pay you a 20.80% annualized cash “dividend check” for the next three months. Worst case… you’ll own the shares of Goldcorp at this incredibly depressed price and still get the dividend.

That’s pretty much a win-win deal if you ask me.

The Disclaimer

Now before you get excited and rush out to buy the first RCN you can get your hands on, I must tell you that these products can sometimes be complicated. You have to be careful with your issuers, and I’ve seen a 60-page prospectus on a single RCN before. So you always want to do your homework, and – most of all – make sure you get some good advice on which of these RCNs is the best investment for you.

For example, it’s taken me a solid 14 months of research to get to the bottom of this little-known income-boosting market. But it’s starting to pay off. Just last week, I found a way to squeeze a fat 10% return out of Wal-Mart – without buying a single share of stock. And that’s the lowest return I’ve encountered so far!

And if you want to be able to capture this kind of profit without all the time and energy leafing through prospectuses and talking to brokers, then I’ve got something for you. It’s called Accelerated Income, and it’s a service that I started to make the whole process easier on you the investor.

In Accelerated Income I tell you about some of the best values in the marketplace and how you can get them. I cut through all the finance-speak and tell you about the product’s advantages and disadvantages in plain English. Despite their best efforts, these investments aren’t rocket science… and they don’t have to seem like it.

Source: Don’t Get Burned by Wall Street’s “Cut-and-Run” Routine

This from Money Morning:

Apple Inc. (Nasdaq: AAPL) used to rule its niche world and will continue to do so, with lots of room to grow.

As Coldplay’s “I used to rule the world…” played softly on the outside stereo speakers of my sailboat “Southern Cross” as my family and I pleasantly glided by Execution Rock on a gorgeous Sunday afternoon in the Long Island Sound, I could not stop myself from thinking how the song got there.  It was coming out of my daughters’ Apple iPod, interfacing with the boat’s new iPod-ready stereo system.  And I was wondering whether it was time to get into Apple’s stock.  Yes … even on a weekend sail.

Strong Results

A few days after my family’s sailboat outing, I saw that Apple had posted its strongest results ever. The Cupertino, Calif.-based company said that it’s launching its next generation of Apple computers at higher prices – justified, as usual, by the uniqueness and hard-earned “coolness” factor that’s inherent in Apple machines.

Additionally, Apple just got Best Buy Co. Inc. (NYSE: BBY) to start selling its popular Apple iPhone in its chain of Best Buy electronics stores. And with Apple currently sitting on a $25 billion cash hoard, and having no debt, the speculation now is that Apple will launch a huge stock buyback.  After all, given Apple’s uniqueness and innovation excellence, there is little out there that could complement the company and it has a history of eschewing acquisitions.

At Friday’s closing price of $98.24, Apple shares are down about 52% from their 12-month high of $202.96. The stock is trading at 20 times earnings, but with its consistent high earnings growth, the company’s Price/Earnings/Growth Rate (PEG) ratio is less than 1.0, meaning the shares are right now priced at bargain levels.

If those consistent, predictable earnings continue, this stock is an absolute steal. But that raises the question: Will those predictable earnings continue?

For now, at least, the company seems to have all its “ducks in a row.”

While Dell Inc. (Nasdaq: DELL) and other PC makers are suffering, Apple is on a roll.  The iPod continues to rule the MP3 player market and has given birth to an entirely new, higher-end, higher-margin product, the iPhone.  The iPhone – and to a lesser, but still-important extent, Apple computers – have each been a tremendous success.

In the last quarter, Apple sold nearly 7 million units, more than five times the number of phones than in the same quarter last year.  This points to major market share gains from the estimates as recent as May. For a look at these market-share estimates, let’s take a look at Chart I:

Chart I: Wireless Phone Market Shares (By Brand)

56% Symbian (primarily Nokia)
13% Windows Mobile
12% RIMM Blackberry
9% LINUX
7% MAC (iPhone)
2% Palm
1% other
Source: Industry statistics, Money Morning Staff Research.

More importantly, Apple has recently been selling more units than the king of the enterprise-mobile phone segment, Research in Motion Ltd. (Nasdaq: RIMM) lately.  The mobile phone market is huge and has been almost doubling in size year after year.  And although growth is expected to slow a bit in the future, the profit possibilities remain huge.  Could these market growth numbers and Apple’s share gains be maintained?

To get a better idea, I started by studying the worldwide market-share sales projections for the “smartphone” market. Admittedly, these statistics harken back from before the current financial crisis really took hold in the past month or so. Still, it’s a good starting point. Let’s take a look at Chart II:

Chart II: Projected Global “Smartphone” Sales

The year-by-year and projected annual breakdown of global smartphone sales between both the high-end consumer and conventional corporate users (in millions of units).

Year Corporate          High End Consumer
2006 :                     12            +              39
2007                       21            +              77
2008                       40            +            134
2009                       74            +            219
2010                     111            +            300
Sources: Industry Statistics, Money Morning staff research.

The Competitive Landscape

To make some sense of the competitive landscape the Apple iPhone is facing, I called my friend Brenda Lewis, principal in Transactions Marketing, Inc., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.  I wanted to validate the industry forecasts for growth in “smartphones” – both for high-end consumers and for enterprise users.  I shared my forecasts and what I heard from Brenda was eye opening. “These forecasts for the high-end consumer are far too high now, especially given the lack of personal discretionary income in most markets,” she told me.

Of course, she is right.  Personal discretionary income has likely gone negative in the U.S. market because of high household debt and the need to replace lost retirement savings. But it’s also severely reduced in Europe and Japan, because of lower trade flows and job losses due to the global downturn.

Even so, there are roughly $5 trillion worth of stimulus packages that have been committed to the overall global economy by various governments around the world.  And we can expect to start seeing the benefits of those liquidity infusions very soon.

So the picture and slowdown we are feeling right now will “surprisingly” improve in about six months. In the meantime, economic numbers will be very tough, since the financial freeze brought the economy to an abrupt stop and unemployment is likely to spike – even from the already-increased levels we’re seeing right now.

Economic inertia is hard to shift quickly.

So until the economy turns around, it’s wise to consider other possible catalysts. For instance, what about the possibility that corporate users could adopt the Apple iPhone?  My hopes for being the discoverer of that as-yet-unknown-by-Wall Street catalyst were likely dimmed by Brenda, who said that corporate chief information officers (CIOs) “will likely use the downturn as a reason to reduce the number of devices permitted for enterprise use and to consolidate central CIO control of current business unit devices, a continuation of a trend of the past five years.”

Again, the enterprise-market segment, which she knows intimately, has two main concerns:

• Total cost of ownership, which includes the initial price for the phone, as well as the service and, very importantly the maintenance.

• Data security.

The latter one is a killer for the iPhone in the enterprise market, since corporate IT departments cannot remotely shut down iPhones that are lost or are stolen as they are able to do with Research in Motion-made Blackberries. In addition, the locked nature of the iPhone makes it very difficult for IT departments to customize solutions for company use.

So, while the iPhone is superb from the consumer standpoint for its “coolness” factor and functionality, and for the fashion statement they make for those who wear them in visible locations, Blackberries actually accomplishes many more business-critical functions for corporations, and at a lower cost. This means that Apple’s traditional consumer focus – a niche that it dominates – is shrewdly placed.

Competitive Threats for the iPhone

What about risks to the Apple iPhone’s success in its own turf – the high-end consumer?

Well, for starters, Apple faces many brewing challenges: For instance, Wal-Mart Stores Inc. (NYSE: WMT) is starting its own online music-download service, and will undercut the Apple iTunes prices by about 25%.

Wireless phone heavyweight Nokia Corp. (ADR: NOK) is operating a similar story overseas, and it is unclear how long it will take them to come to the U.S. market. More ominous is the ultra-secret plans of Internet-search behemoth Google Inc. (Nasdaq: GOOG), which has launched its own branded Google Phone, which will be sold by Walmart at a discounted price of  $148 (compared with a price of $199.99 for the Apple iPhone at Best Buy, for example).

The Google Phone is revolutionary and appeals to the spirit of the U.S. “techie” crowd: freedom.  It is designed with an operating system, called Android, that’s been tagged with the marketing slogan – “apps (applications) without walls.” The whole goal of the device is to speed up users’ ability to access and surf the Web via a mobile phone – all too often a very slow process, right now.

The Google phone also emphasizes the hottest trend in phones today, with the ability to provide “location services,” such as customized weather forecasts, directions and listings of nearby businesses and attractions.  Finally, the operating system is, unlike Apple’s, is “open source.” This means that it will be extremely easy for anyone to develop new applications for the phone and for corporate IT departments to create customized applications for their employees to use on the phones. There’s even an alliance of software developers – called the “Open Handset Alliance” – whose chief goal is to encourage such custom developments.

As if this new threat were not enough, Nokia, the king of the mobile consumer market, announced its Nokia Tube (5800). Research in Motion is adding to its Blackberry lineup with a newly launched iPhone competitor called Bold. And Samsung Electronics Ltd. is coming out with its entrant, Instinct, a touch-screen phone with some features that are not available in the iPhone, like streaming TV.

And even Garmin Ltd. (Nasdaq: GRMN), the ruler of the GPS device world – and the topic of a recent, well-read “Buy, Sell or Hold” feature here in Money Morning, has launched its nüvifone, that, unlike the iPhone, gives you turn-by-turn directions.

My conclusion is that Apple’s iPhone business will continue its strong growth, but that the growth won’t be as strong as Wall Street recently projected. There will be market growth concerns in the near future, and with rivals ganging up on the successful iPhone, some of the market-share-gain momentum that we’ve recently seen will be blunted a bit in the future, although Apple will keep gaining absolute market share.

What about their computers?  Enjoying the synergistic “halo effect” from its iPod, iPhone and iTunes strategy, Apple keeps gaining market share in the computer market. Another Apple hit was its adoption of Intel chips that can run the Mac OS X, Leopard, and Windows Vista operating systems in the same machine, even simultaneously, with virtualization software.

I am encouraged by these machines, but not exuberantly so. Apple now faces very serious price competition from Windows-only systems.  But on the other hand, the segmentation of the market is critical and the ease of use, maintenance, fast recovery from hibernation, advantage in graphic-intensive tasks, intuitive use and virus-free environment make a Mac irresistible for its traditional constituents, provided they will keep paying the very steep Mac premium pricing.

The conclusion is that, moving forward, with 41% of sales coming from abroad and very small absolute market shares in its key iPhone and Mac businesses, Apple is very likely to be able to continue to gain market share, albeit at lesser pace. Also, given its consumer-centric focus, as the consumer gets hit in developed countries, sales growth will wither, while growth in emerging markets actually can accelerate.

Apple is not a pure computer company any longer, but is instead a consumer products company – and one that possesses a very cohesive strategy. That’s what will allow it to continue to survive and thrive.

The stock – with a PEG ratio of less than 1.0, is a bargain right here. But in the highly volatile environment, wait for weakness to start accumulating it, and take your time.  Apple’s results are much less dependent on the iPod today, and thus the soon-to-be revealed disappointing Christmas season is nowhere as important as it used to be.  So I would buy two-thirds of my position prior to year-end and the remaining third over the subsequent three months in the first quarter, as the bad news over the economy keep trickling in.

ACTION TO TAKE: BUY Apple Inc. (Nasdaq: AAPL), but do so with some care. Purchase two-thirds of your position between now and year-end, and the final third during the first quarter of the New Year.

Source: Buy, Sell or Hold: Apple Inc.

In honor of this historic day – not to mention the risks of an unchecked majority in the senate – we’ll start things off with a little humor.

The inspiring message above is brought to you by despair.com, a tongue in cheek purveyor of de-motivational goods. If you’re getting ready to draw up your Christmas list, one of despair.com’s “government” plaques might be just the thing for the cranky libertarian in your life. (Nothing wrong with being cranky I might add.) Or if you work in a “progressive” office environment, one of these babies on your desk could be quite the conversation starter. (Hee hee.)

Mailbag!

There were some excellent comments (as usual) on Friday’s “Signs of a Tradable Bottom” piece. As usual you sent in way too many emails to highlight even a fraction – but I’m grateful for them all.

So now let’s dig into a few…

Excellent article! I agree the market is very tradeable now (excepting my beaten down 401K mutuals). With the money I’ve made on your WOW puts, I bought a lot of shares of Ford and RBS. Prior to that I bought AMD & NVDIA, although they continued down afterwards. I believe good buys now will bear fruit next year if not in the near future. Who was it that said, “Why are stocks the only thing in the world that no one wants to buy on sale?”

Do you know of any other severely beaten down good companies with stock price below $10?

~ TD Reader Kevin C.

Thanks Kevin. Glad to hear that WaveStrength Options Weekly (WOW) is keeping you in clover. I knew we kept that crusty old bear around for a reason. (Just kidding Adam.)

Seriously though, WOW has been a lifesaver in the environment we’ve just lived through. I’ve heard comments on similar lines from many other grateful readers: WOW subscribers who have used big profits from outsized options gains to fund attractive buying opportunities.

Make 146% in 12 Weeks Without Touching a Single Stock.

Here’s a safe, simple way to turn the market crash into a 146% gain in 12 weeks or less.
Read on now for detailed trading instructions…

In a trader’s market – and a market like this one especially – it’s good to have access to long and short opportunities. WOW has been a veritable cash machine in that regard.

And while the shorts cleaned up the longs got killed, of course… but things change. The market moves in cycles. Trends breathe in and out. As Robert Bacon, author of the 50-year-old tome Secrets of Professional Turf Betting, says, “The form always moves away from the public.” Just when the majority of folks feel they have the market pegged, things shift. Thus it has been, and thus it shall always be.

The Aggressive Value Portfolio

Regarding the question about stocks below $10: Funny you should ask. I’m actually working on a new special report of sorts for Safe Haven Investor readers. Here is an excerpt from what I wrote to them last week:

It’s fascinating wading through all the beaten-down hard asset stocks out there. Many of the miners in particular have loads of cash, low share prices, and little to no long-term debt… making them ideal candidates for snapping up shares.

I’m thinking of creating a special “Aggressive Value” portfolio for names like these – low-priced shares rich in assets and light on debt that we can just scoop up and hang onto.

The challenge is a lot of these “cash boxes” are too speculative on the business side of things. Multiple times now, I’ve come across a candidate whose balance sheet looked top notch… only to find that their cash pile came entirely from an equity funding round, and the actual mining properties aren’t producing yet.

So I’ll keep digging there. We want cash boxes that have money coming in the door too – not just a pile of equity proceeds with no firm sense of how the company will make money.

The most promising candidate I’ve found so far will be hosting an earnings call next week. I’d rather listen in on that earnings call – getting the “lay of the land” you might say – before jumping in. I’ll report back to you soon.

If you’d like to see what I come up with in the “stocks below ten bucks” department, sign up for Safe Haven Investor and you’ll get the goods – probably at least two picks by the end of this week, with more likely to come. As you might have guessed, I’m excited about the compelling values out there now.

Stocks Revisit the Disco Era

I won’t try to kid you: As far as long only portfolios go, there were no true ports in a storm during the months of September and October. The panic selling hit everything. In order for value to provide a haven, markets have to function. Normally the assigned market value of a strong company is like a rubber band attached to a peg. The rubber band can be stretched high and low, but the peg (intrinsic value) acts as a stabilizer.

In October the rubber band snapped. The peg was abandoned completely.

But that’s why the markets are littered with eye-popping values now, and why stocks are trading below 1970s valuations by some estimates. “Blacktober” wiped off $9.5 TRILLION in market value according to Barron’s. Total carnage so far has been estimated at something like $16 trillion. That’s more than a quarter of the world’s wealth!

The government bungling and mass bloodletting brought a hidden silver lining, though: Due to the white-knuckled nature of credit market cardiac arrest, it took mere weeks and months for stocks to fall to levels that it might have taken years to reach under less harrowing conditions. We have compressed the brutality of past grizzly-bear markets into a much shorter timeframe.

C-notes on the Sidewalk

I was telling a friend, too, how different this environment feels with so many hedgies (hedge fund managers) having been blown up or carried out.

As J. Carlo Cannell observes, at one point there were more hedge funds than Taco Bells in the United States. If a ten-dollar bill landed on the sidewalk, a dozen hedgies would simultaneously swoop down to try and snatch it up.

Now the sidewalks have twenties, fifties, and even hundred dollar bills scattered around with abandon. The pool of opportunistic survivors with cash to deploy has shrunk dramatically. (Good news for survivors.)

Let’s hear another optimistic vote, and then we’ll turn to some skeptics.

Since I’ve discovered that I’m a better trader than investor, I love the volatility here at the bottom. I’ve been gradually building large positions in good companies that have had the stuffing kicked out of them and making money on the swings at the same time. My advice is to buy strongly when the market is at its weakest and sell lightly as it climbs. This leaves me with plenty of capital when I see a stock selling at what I like to call an “are you on crack?” price. I’m up 7% in the past 2 weeks alone. It is beginning to look very much like all the bad news is already priced in however. I may regret not jumping in with both feet here, but since I seldom spend more than an hour a day playing the market I’m pretty happy with the returns thus far. The imminent drop of the USD will only increase my profits.

~ TD reader George

Sounds like a good plan George. I like the mental visual of the “are you on crack?” price. When I was in high school the operative term was smoking plastic, as in “Dude, are you smoking plastic or what?”

A lot of CEOs seemed to be smoking plastic as they dumped tens of millions or even hundreds of millions worth of shares in October. A few poor souls, like Aubrey McClendon of Chesapeake Energy (CHK:NYSE), may well have lost billions. But that, too, was a function of the market panic. Margin calls forced these executives to sell at valuations that probably made them cry. (And I mean literally cry.) More good news for survivors with cash to deploy.

George makes an interesting point, too, about discovering he is a better trader than investor. One thing that I have heard confirmed over and over again in markets, from a wide a variety of sources over the years, is that market success ultimately depends on having a style and a methodology that works for you personally. As traders and investors we always want to be working on our weaknesses, but we need to remember to play to our strengths, too. We address weaknesses to keep from being held back, but the strengths carry us home.

“Dumb First Class?”

Buffett or no Buffett, not everyone is excited about opportunity levels here…

I personally believe the market continues to trade in a “lunatic ” fashion . Buying stocks at this time may be Economics 101, but to me it’s “dumb first class.” The economy is tanking with consumers pulling back from their spending-without-money ways. Since the economy is 70% consumer driven and the housing market not even close to fixed and companies reporting poor earnings and laying off workers, to me it’s idiotic to be buying stocks thinking that everything will be great in 6 months.

~ TD reader Robert T.

Robert, I agree it would be “idiotic” to think that “everything will be great in 6 months.” But who is saying that exactly?

When you buy a stock, you’re basically buying a stream of future cash flows. If the stock pays a dividend, that means you get some of that cash flow back in the short term. If the stock doesn’t pay a dividend, it means the cash flows are being re-invested for growth in the longer term. It’s still all about cash flows either way.

The point is, stocks are priced based on long-term cash flows – that is to say, cash flows over a period of time much longer than six months. This is why the stock market can turn upward while the economy is still in the dumps. The stock market (when functioning properly) acts as a cash flow forecast extending years and years into the future.

Remember, too, that outlook varies widely from industry to industry. There are some industries you wouldn’t want to touch with a ten foot pole… other industries that have come down so far and fast there’s almost no compression left in the coiled spring… and still other industries and companies that could benefit handsomely from what’s ahead.

Expect the Unexpected

What’s more, don’t forget that the market is often driven by factors that investors don’t anticipate.

In the period before World War I, for example – 1890 to 1914 – there was a doubling of the world’s gold stock. The gold mines were going at full steam ahead back then, and there were enough huge new finds in the Americas to expand the supply of gold dramatically. This outpouring of gold had a massive inflationary impact on all kinds of prices, including share prices. In effect it was like Mother Nature imitating the Fed, flooding the system with new money. Starting with a street-level view of the economy, who could have predicted such a thing?

Point being, markets can move (and can stocks can rally) for reasons wholly off the radar screen of most investors. Some of this has to do with basic “plumbing” principles – money moving through markets like water and steam moving through pipes. Between the U.S. dollar, the paper currency outlook and a few other high level “macro” factors, there is more than enough potential for things to get weird.

Macro factors and money flows are too big a topic to wade into here, but just remember too that multi-month rallies in times when few expect them – like in the middle of dark bear markets – are far from unprecedented. It would be more accurate to say they are common place, given the right set of prevailing conditions.

If you’re a trader who can do a little shucking and jiving, this is great news. If you’re an investor with an eye for carefully selected bargains in the right industries – not the toxic ones – you can do alright too.

The Heavy Hand of Uncle Sam

The market will not be the ultimate money-maker, as it was in years past, because of government intrusion. It will ultimately lead to permanent over-regulation, which is never good for the free market. Also we have environmental realities, eg. diminishing fresh water supplies, global warming [etc.] that will prompt more and more conscientious citizens to demand government(s) get involved – meaning even more government demands on the evil-doer companies that supply our creature-comforts. Thanks for the articles…

~ TD reader Julia L.

Thanks for that perspective Julia. (I like your initials by the way.)

Interesting thoughts… Government intrusion is a funny thing. Going back through history, it’s useful to note how perspectives have changed.

Take Federal Deposit insurance for example. FDIC insurance is an unalloyed good, right? Would anyone disagree it’s comforting to know you can deposit funds at your local bank without worrying (too much) about getting that money back? And yet, when blanket deposit insurance was floated a century or so ago, the idea was denounced as an awful socialist sop. There was widespread fear that laxity on the part of depositors would punish good banks and reward bad ones. Funny how attitudes can change…

Also re “years past,” want to hear something really crazy? When JFK took office in 1963, the top tax rate was an incredible 91 percent! JFK shaped himself as a tax-cutting hero by lowering taxes his first two years in office – down to a mere 70 percent!

Talk about socialism… in the late 50’s and early 60’s, a supposed golden time for America, tax policy really was socialist, even as the McCarthy era kicked into gear. And yet we came back from it, and tax levels fell to the “merely confiscatory” levels we’re now accustomed to.

My takeaway is that if top tax rates in the United States can range from 91 percent to zero percent as they have in the last century, over the long run they can go anywhere. (And so can I, courtesy of my trusty passport.)

Surprising huh? History is full of surprises like that… in fact the more I study history, the less convinced I become that anything is permanent, except for the laws of physics and some basic laws of human nature. I agree that regulation trends can expand in frightening directions and stay entrenched for a very long time. But when opportunity is pressed downward in one area, it often pops up in another area – and it’s hard to say what kind of short- to intermediate-term effects all this stuff has.

As far as the problems you listed (fresh water etc.), we’ll have to address those problems. But that’s good news, not bad news, for a capitalist-driven technology sector that focuses on solving pressing problems to earn profits. Not to mention that the heavy hand of Uncle Sam can sometimes lift up entire sectors and industries, sending rivers of cash their way for years. Just look at the past boom years of military defense spending for example. Morality of government aside, there is opportunity to be found in sussing out the winners and losers.

Always enjoy and appreciate your thoughts and commentary. I believe that you gave us some good rule of thumb principles to follow and look for in [Friday’s Taipan Daily piece]. What would be interesting and valuable is to identify the events/data that were the triggers that started the next slide down during the early thirties follow through on the downside from the ‘29 crash. I’ve never read anything specific on what were the events or data that investors realized that the economy and market weren’t out of the woods yet and it was going to be worse. What should we look for to trigger the next leg down or the start of a meaningful sustaining recovery? Any thoughts or insight on this would be much appreciated.

~ TD reader Don S.

You’re right Don – that would be an interesting and valuable area to explore. I will roll up my sleeves on just the topics you propose!

Tomorrow, in fact, I’ll write to you about some surprising market parallels from years past… not in regard to how the roaring twenties ended, but how they began.

Source: Opportunity Extraordinaire or “Dumb First Class?” Responses from the Mailbag

More from Bill:

What MUST happen DOES happen. Sometime it takes longer than you expect. And often it doesn’t happen exactly the way you expect. But it is a relief to know that gravity still works… what goes up still comes down. ‘Regression to the mean’ is another old law still in force; when things become extraordinary, you can bet they will go back to normal sooner or later.

But what does this mean for stocks? And what about gold? The dollar?

Hey, you’re asking a lot from a free publication. But what the heck… we’ll make some guesses and remind the reader that he is likely to get no more than he paid for:

Stocks typically regress to the mean, along with everything else. The ‘mean,’ depending on how you measure it, would put the Dow between 6,000 and 9,000. But Mr. Market can be a devilish fellow. He usually causes stock prices to regress beyond the mean, before he lets go of them. This could take the Dow down to 5,000… perhaps to 3,000… before it finally reaches a bottom.

And before we make guesses about gold and the dollar, we will tell you another thing that MUST happen.

Fish gotta swim. Birds gotta fly. And the feds gotta try to pump more liquidity into the system. All over the world, government officials are taking command of the situation. Well, they are taking command of banks… of trillions of dollars worth of bailout funds… interest rates… and financial rules.

Yesterday [Thursday], for example, Japan announced that it would spend 5 trillion yen, about $273 billion, in a “stimulus” package. Also, the Bank of Japan told the world that it, too, was cutting rates. This news came as a surprise to us. We didn’t think Japan had any rates left to cut. But the BOJ nevertheless announced that it would shave the short stump of its main rate down to 0.3% and that henceforth it would make commercial loans at 0.5%.

By contrast, the US Fed still has 100 basis points to work with. And the US Congress is said to be planning another stimulus package of its own – surely wrapped in bright Christmas paper. The price tag might be another $400 billion, according to our sources.

Not only are the feds trying to bail out the US economy, they’re also lending $120 billion to a group of foreign countries in order to help them swap their currencies for dollars. At least, that’s what it says in the paper… the actual transaction is a mystery to us.

The Russians are bailing out their own rich people. At least they’ve got some real money to work with – a fund of $200 billion. And the IMF has pledged to lend $100 billion to wherever it is needed.

You can also count on more rate cuts… trillion-dollar deficits… show trials… giveaways… and grandstanding. There will no doubt also be a “jubilee” movement – demanding forgiveness of debt.

The big questions are when and how will these things affect the feds’ ability to borrow? We don’t know the answer… but we have watched Treasury yields rising ominously over the last few days. That could be a sign that the worst is over for the economy. Or, it could be a sign that lenders are worried about US public finances.

If the world economy continues to weaken… and turns into the FWD (First World Depression), as we think it will… none of these measures will do any good. Finally, the US government will run out of credit, out of money, out of time, and out of luck.

Then, the Bank of Ben Bernanke will do what it has promised to do: it will print money. And when that happens… or even when investors begin to suspect that it might happen… the dollar will collapse and gold will rise.

Source: Everything Is Happening As It Should

More from Smart Profits Report:

Amid the market’s mess, many pundits have touted the benefits of dividend paying stocks.

While it’s true that dividends bring you a form of income, does it really put a floor under a stock? The argument is pretty simple. Many companies have products that are such an integral part of day-to-day life that they are…

1. Very unlikely to disappear.
2. They’ve built up balance sheets that are strong enough to survive a multi-year downturn.

So instead of high share price appreciation, they repay their shareholders by passing along the profits in the form of dividends.

However, as cash flows dry up, companies cannot always support their dividends and investors can suffer a second whammy as the dividend gets cut and the stock finds a new level at the same yield.

Here’s the way to do it…

Follow The Cash

You have to be tactical. Buying dividend stocks in this type of prolonged downturn does provide a good return if the stock remains stable. But if a cash flow shock occurs, dividends could suffer and the stocks that were supported at the beginning of the bear market substantially underperform later on.

You can avoid this trap by looking at the key driver of dividends – cash flow.

In the heat of a bear market, investors will always be concerned about how far top-line growth can drop, but good management teams can handle this by cutting expenses.

However, the fixed depreciation of hard assets that are stuck to the balance sheet can make profit look worse than cash flow. While profit may look bad in the short-term, I have never seen a company cut a dividend that was 50% of free cash flow (or less).

The bottom line is that as long as free cash flow holds up, the management team has options and the dividend will be safe.

The last thing a company with a historically stable dividend will do is cut its dividend, as it would entirely change the shareholder base by boxing out value investors that have a yield hurdle.

So when it comes to dividend-paying stocks, while revenue and earnings growth are obviously important, be more concerned with the money on the cash flow statement.

Source: Beware The Dividend Trap… Here’s The Most Important Number You Should Consider

This from the Sovereign Society:

Lunacy dominates world stock markets, as a tug of war ensues between fear and greed. For two wildly fluctuating months, stock and real estate markets bounced down the stairway that easy credit built. Then on Tuesday, greed was king for a day. The market exploded into one of its biggest rallies in half a century, with the Dow Jones industrial average closing up 10.9%.

Does the rally signal a bottom in this schizophrenic market? Well, unfortunately there’s no way to know except in hindsight.

Sowing the Wind & Reaping the Whirlwind

We don’t need hindsight to know that the current meltdown was inevitable. It is the consequence of events that began a century ago with the birth of the engine of 20th century boom and bust: the Federal Reserve. Nor were the effects of the new central bank immediately apparent.

The effects of credit expansion didn’t show up the next day or the next month. It took more than a decade for the credit creation to result in the Roaring Twenties and the Crash of 1929. Again, the famous October 29 market selloff didn’t cause an economic catastrophe the next day…or the day after that, or even the year after that.

It took three years for the Great Depression to truly grip the nation, triggering more government action – the abandonment of the gold standard and massive federal bailouts. Again, the results weren’t instantaneous. It took decades to inflate another boom, and reach the monetary crises of the 1970s.

Economic theory can predict the consequences of credit expansion, but only in hindsight can we see the timing as the consequences unfold. Today’s economic storms are the consequences of seeds first planted a century ago. And once again – as the credit bubble collapses – new seeds are being sown.

The official budget deficit for the fiscal year that ended September 30, 2008, was $455 billion, but most private analysts say the current fiscal year will end with a gap of one trillion dollars. How are the presidential contenders planning to deal with rising deficits?

Both John McCain and Barak Obama promise tax cuts and increases in government spending. It won’t show up tomorrow, but vast government deficits ahead guarantee that price inflation will demolish the purchasing power of the dollars that fearful investors are so eager to lend to the U.S. government.

When will the market bottom, and when will price inflation roar? We won’t know that except in hindsight, but both will happen.

Buy When Blood is Running in the Streets

But how deep should the blood be? Only value investing can provide the clue.
As markets are gripped by fear or euphoria – plunging one day and soaring the next – it’s clear that very few are following the advice of the most successful long-term investors of the past century. Money masters like John Templeton, Benjamin Graham, Peter Lynch and Warren Buffett piled up enormous profits throughout one of the most tumultuous centuries in history, and their advice is there for all to follow.

Benjamin Graham, said it clearly in The Intelligent Investor, “Don’t get carried away by enthusiasm. Don’t get carried away by despondency. …Know in advance that you are going to have to live through bear markets.”

Let me re-tell Graham’s parable from his book, The Intelligent Investor.

Imagine owning shares of a small business that cost $1,000, and every day your partner named Mr. Market knocks at your door and announces what he thinks those shares are worth that day. He offers either to buy your shares or sell you more at that price. Even though the business is trudging along without significant change, each day his opinion is wildly different. Frequently Mr. Market’s enthusiasm or his fear seems completely divorced from anything happening in the business and his valuation seems ridiculous. One day he offers to buy or sell you shares for $2,000 each, and a week later he makes the same offer for $500. Should you let Mr. Market’s wild enthusiasm or shaking fear determine your view of the intrinsic value of the business?

That’s obviously irrational. As Graham puts it:

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

Since we can never know in advance whether shares will be higher or lower tomorrow, the only rule to follow is to accumulate them when they are significantly underpriced by value analysis. Mr. Market is definitely letting his fear override his reason, and is making us offers that become increasingly difficult to refuse. As was the case after 1929, there are great opportunities being born out of the chaos. Don’t let Mr. Market’s trembling hands cause you to lose sight of the outstanding values he’s offering.

A sound and lasting investment strategy requires searching for assets that have true value and will retain it – those include all types of commodities that will rise in price as money falls in value, currencies that are not being debased, and ownership of profit-making companies that have not fallen into the trap of trying to leverage profits through debt.

Source: Blood in the Streets: How to Profit from Stock Market Schizophrenia

This from Penny Sleuth:

How many times have you read that before? Several, I imagine. But this is not just my headline writer suffering from a crisis of creative confidence. It is, with a slight variation, lifted from the agenda of next week’s AIM conference, to which the London Stock Exchange has graciously offered me a free ticket thus saving me from having to fork out £650 for this one day event. It will be interesting to hear what the presenters at this conference make of the state of AIM today and I will relay this to you at a later date.

It will also be interesting to hear the panel discussion on ‘Cleantech – the next big sector’. Especially, perhaps, on how Cleantech can be prevented from following previous ‘big sectors’ such as dot-com and mining by becoming wildly over-hyped, with the inevitable consequence of a nasty crash.

Anyway in preparation I have been doing a little research into Cleantech. In the November issue of Red Hot Penny Shares – if you’re a member, you’ll receive it this Saturday – I’ve identified three companies quoted on the Stock Exchange that are firmly in this exciting category. As you’ll read, this sector could be a huge opportunity and although it may be a little early to invest just now, these are three shares I’ll be watching closely.

In the issue, I have also found two top quality small companies that are ideally placed to prosper even in the current economic climate. And I explain why the world’s greatest investor says that now is the time to be buying shares. I’m on his wavelength, as I’ll explain.

Leading-edge technologies for a cleaner, brighter future

But let’s get back to Cleantech. It’s defined on Wikipedia as ‘knowledge-based products or services that improve operational performance, productivity, or efficiency while reducing costs, inputs, energy consumption, waste or pollution.’

That could pretty much cover anything really, couldn’t it? The definition provided by investment group 3i gets a little closer to the mark. ‘Cleantech’, it explains, ‘embraces a cluster of leading-edge technologies that are addressing many of the world’s key concerns by making better use of resources and finding cleaner, greener ways to build prosperity.’

Are you getting the gist of it now? Basically, Cleantech is where the wicked world of commerce meets our environmental conscience. It is all about getting richer without destroying the planet. And where an investment theme has a ring of goodness and virtue about it as well as an opportunity for profit, you can be sure that the world’s financiers will have their feet firmly in the trough.

$187bn investment headed for Cleantech

This is indeed the case. $23bn was invested into Cleantech projects in 2000 and if that sounds big, it is nothing compared to the $187bn forecast for 2012.

The credit crunch does not seem to be doing much to stem the enthusiasm. ‘There are clear signs that the Cleantech sector is proving more resilient than others,’ said Michael Liebreich of New Energy Finance. ‘We saw 60% growth in 2007 and the overall expectation for this year is that the numbers will move sideways or slightly up.’ And to illustrate the point, last week saw Intel’s venture capital arm buy a $20m stake in a Chinese solar energy firm.

China, that big dirty villain of the global economy, belching its clouds of black smoke upon us all, is one target for Cleantech. The Chinese government has at least made noises about the state of the environment. It seems prepared to seek help from abroad. But Cleantech is not just about China or clean energy. It includes all sorts of other things as well.

The main themes are agriculture and resource management; biofuels and bioenergy; carbon; energy efficiency; energy storage; fuel cells; low carbon buildings; renewable and alternative energy; transport; waste and water treatment. So all over the world money is being invested into wind farms, carbon capture, fuel cells, electric cars, desalination, recycling, into the capture of methane gas from rotting waste – and much, much more.

The majority of this money is going into private companies, many of which will be floated on stock markets over the coming years. Should investors be excited or wary?

The experience so far – because there are already several Cleantech companies on the stock market – is that we should be wary. It is one thing to come up with a bright idea for getting rich without doing any collateral harm but it can take an awful lot of money and an awfully long time before it becomes a commercial proposition.

A sector to learn about, get to know and understand…

The sector is encouraged by government regulation and supported by public money. It is solving problems such as the shortage of energy and water. It is giving the world what the world wants. It is attracting investment from some of the biggest private equity funds. And yet none of this means that Cleantech is necessarily a good bet for stock exchange investors.

It is right to be wary. If you don’t believe me then listen to the words of Achim Steiner, the head of the UN’s environment program. ‘Just as thousands were drawn to California and the Klondike in the late 1800s, the green energy gold rush is attracting legions of modern day prospectors in all parts of the globe.’

You have been warned. For me, this is a sector to watch carefully for now. It could well be that there will be huge opportunities to profit from Cleantech in the future. Now is the time to learn a bit about it… and to get to know and understand some of the companies involved.

PS. Like the sound of Cleantech? You can invest in the broad sector with the Powershares Cleantech Portfolio ETF (AMEX:PZD).

Source: The Next Big Thing

More from Investor’s Daily Edge:

Years ago, my friend Bob Meier told me that bears start every bull market. Sounded strange. But it’s true.

Bulls push rallies farther and higher on big hopes, but they’re not the ones to start them. But bulls are like adolescents. They don’t handle adversity well. And just about the time the bulls are upset because they aren’t going to make 40% a year, the bears are smelling honey in those trees. They are seeing stocks that should go up 15% to 20% and priced at half to two-thirds of their fair value.

But how does a bear know what the fair value is?

Because the market has standards and traditions. Bears are the ones who know them.

For instance, you have heard that the normal historical P/E for the stock market in the United States is 15. Good research shows that it is actually around 16 (Jeremy Siegel) to 17 (Ned Davis). It swings around those numbers, not often much lower, but in recent years a lot higher.

And today the P/E ratio for the S&P based on the last four quarters’ earnings (the trailing 12 months or ttm) is only 10. It hasn’t been this low since the early 1980s. Right before the last great bull market.

Things are just as deeply discounted on other valuation scales. The price to sales ratios for the NYSE and Nasdaq average 0.85 today. That implies almost everything is a great bargain because a ratio of 1.0 is considered a strong value. Most of the time, this ratio is closer to 1.2 to 1.5 and it sometimes goes much higher.

Price to book value? It is actually 1.0 for Nasdaq and 1.5 for the S&P 500. The implies that most companies are now selling for the replacement cost of their assets or exactly what shareholders have invested in the company. The S&P’s price to book ratio is usually over 2.0, and a ratio of 4.0 is not uncommon because a business is much more than a package of assets.

Finally, there’s price to cash flow. I like to see a ratio of 10.0 or lower, and it can be a challenge to find strong companies going for less that 15 in many years. Today the market average is 8.5 and the S&P is 9.9.

Now why would that make a bear happy? Because if he buys a stock that’s at a P/E of 10 today, and it usually goes for a P/E of 18, he’s already got one paw in the honey jar. The stock should appreciate by 80% simply if it can get back to its normal valuation. Then add any growth on top of that and you are seeing triple digit gains.

But don’t expect that these bargains mean the market “must” turn around immediately and sharply. The real bears are cool value hunters, typically cautious and experienced investors. They are likely to average in carefully.

Still, if you want a reason for the stock market to take off—turn on the Bernanke-Greenspan show and simply look at the stock market. The reasons for the next bull market are already in place.

Source: Sweet Honey in the Rock?

More from Taipan Daily:

Pay no attention to the Fed announcement: Durable Goods is where the real news is hiding!

I have a confession to make: As I sit to write to you today, I don’t know what the Fed will do regarding rates. And, quite frankly, I don’t really care.

The reason I don’t know is because the deadline to send this missive in to all the fine folks who convert my barely legible scrawling replete with misspellings and grammatical errors into beautiful typeset columns is right about the same time that Mr. Bernanke will be stepping up to the podium.

I could make some educated guesses. The Fed will most probably cut either a quarter point or a half point. And the market will either go up or go down a couple of hundred points. Probably both, actually.

But so what? Quite honestly, I am not even watching my newswire. By the time you read this, we will both know the answer to that question.

The Real Deal

And like I said, it’s not even the most important bit of news floating about out there this week. After all, Washington has been pouring billions of dollars into the economy almost every day. What’s a few billion more between friends?

Rather than focusing on such ephemera, I’d like to draw your attention to something really important… buried deep inside the body of the latest Durable Goods report, fresh off the government printing presses.

Let’s be careful here though. As with most government documents these days, the top-line items are rather deceptive. They speak in glowing terms of September’s 0.8% month-over-month increase in items lasting more than two or three years sold here in the U.S.

How to Turn Wall Street’s Pain Into a Quick 146% Gain!

While current market conditions are treacherous for naive “buy and hold” investors, a small group of smart folks are converting the market slide into gains of 251%… 307%… even 387%… week in and week out… no matter how far the Dow falls. Here’s how you can join them — free — for a full six months!

Put Away the Champagne (at Least For Now)

Now, in normal times, a wan increase such as this wouldn’t even be worth announcing. Heck, we don’t even know for a fact that it happened, as it is so small as to be within the margin of error for most studies of this nature.

But when one places this 0.8% gain against the background of August’s devastating 5.5% decline, one might be inclined to share in the Commerce Department’s joy.

I hate to be the one who is always telling you to put away the champagne. But someone has to be the designated driver, as it were, and more and more these days, I find myself in that role (both in my business and personal life).

Digging Down to the Truth

When one digs beyond the headlines, one discovers that the vast majority of these Durable Goods gains are neither durable nor gains, nor are they really good.

Rather, they are almost entirely in the transport column of the report. Demand for commercial aircraft shot up some 29.7% in September. This is bad for two reasons.

The increase is accounted for by a relatively few number of actual orders received by Boeing, et al, not planes delivered. No wrenches have spun, nor have any welding torches been lit. No checks have been written, let alone deposited.

And it is quite possible that none ever will be. These are promises against the future, a request to get into the queue – as easy to cancel as to make.

The Real Danger…

However, the real danger here is that a spike one month in aircraft orders is almost never matched the following month. This means that the same report, which is supposed to lift spirits today, is likely to crush them in some thirty days.

It’s really best if we just ignore this volatile sector entirely. Unfortunately, when you take transports out of the equation, Durable Goods actually fell 1.1% in September.

To make things worse, the most genuine “leading indicator” to be found in the report – orders for non-defense capital goods – fell some 1.4%. This is the second month in a row where this category came in washed in red.

Which leads me to the most genuinely germane fact we can possibly uncover this week…

My One Real Hope!

On Thursday (the day you read this), we will receive Washington’s official summation of the overall economy for July through September. Now, you and I already know that we are in a recession. The real question is, will Washington finally accept the truth of the matter?

Will Washington finally stop cheerleading for the fiscally defunct and philosophically debunked “permanent boom” and, instead, man up and accept the reality of the facts on the ground?

If they actually give up the fantasy and move on, cut off the dead limbs, allow bad companies to fail and good ones to gobble up their cash and customers, etc., etc., then – and only then – would we have a genuine buying opportunity for beaten-down stocks.

Quit Crossing Your Fingers and Roll Up Your Sleeves

In the meantime, you are faced with some choices.

You can sit and wait for the Fed to bail you out by cutting rates to nothing, so you can use worthless dollars to buy worthless shares of worthless companies.

Or you can conserve your capital against the day when cold hard reality is finally accepted in Washington (and on Wall Street) by buying puts against the most worthless of these companies.

Okay, those of you who are not interested in hearing about the gains you could have made should stop reading now! Because in Tuesday’s issue of WaveStrength Options Weekly, I announced another nine fresh new max highs:

1. MET Puts: 297%
2. PX Puts: 486%
3. SHLD Puts: 281%
4. WHR Puts: 388%
5. QCOM Puts: 186%
6. FDX Puts: 97%
7. AVY Puts: 23%
8. CTAS Puts: 39%
9. RHI Puts: 60%

Normally, I would not tip my hand as to what my subscribers are playing. But I really want you to understand the power of this technique in dark times like these. And I am willing to give away a look at our cards IF it helps you to that realization.

Someday, stocks will go back up. Maybe even someday soon. And when they do start to climb, many new fortunes will be made. But in the meantime, whether you pay me to show you how or figure it out on your own, you simply must add this tool to your arsenal if you wish to arrive at that critical moment with your cash intact.

Source: The Government’s Latest Sucker Punch

This from the Sovereign Society:

Yesterday’s [Tuesday] spectacular 889 point rally for the Dow ranked as the sixth largest daily percentage gain in history for the world’s most widely followed benchmark. The Dow surged 10.9% on Tuesday and other international markets also followed suit with huge double-digit gains.

But again, don’t get too cocky thinking we’re at the cusp of a new bull market. It won’t happen. The economic backdrop does not portend profit recovery any time soon. Domestic consumption is still declining in the United States as Americans start saving again. A higher savings rate is bearish for earnings.

A big stock market recovery like Tuesday’s probably has many investors itching to get back into the market to recover losses – but that’s a major mistake if you’re unhedged.

Joining Ranks with the Great Depression

Yesterday’s price action joins the dubious list of other extraordinary Dow rallies in history. According to The Wall Street Journal, the Dow’s 889 point rise on Tuesday and its 936 point gain on October 13 are dwarfed by Great Depression rallies of similar magnitude.

Of the top 10 stock market rallies in history, seven occurred during the 1930s, one in October 1987 and two this month. Unfortunately for investors, Tuesday’s 889 point rally was preceded by a 15.3% gain in March 1933, a 14.9% surge in October 1931 and a 12.3% gain in October 1929. That’s not exactly in good company when it comes to impressive rallies.

Global stock markets; however, remain oversold and are likely to extend their first bear market rally since the Fed’s bailout of Bear Stearns in mid-March. All sentiment indicators I follow are extremely bearish, suggesting we’re going to see more gains, however short-lived. The VIX Index – which plunged 16% on Tuesday – is still heavily elevated at 67.

Don’t Jump the Gun

In my view there’s no point chasing this short-term bounce.

The Presidential elections next Tuesday might also provide a jolt to stocks as renewed investor confidence is celebrated once McCain is sent packing his bags. Yet any celebration is unlikely to last beyond several weeks because corporate earnings are still rapidly deteriorating and consensus estimates are too optimistic, meaning more downgrades are coming.

There’s also the big risk surrounding unsettled CDO and credit swaps. There’s about US$60 trillion worth of these things floating around the world. And you can bet that most counter-parties probably can’t honor more defaults should they occur. Credit derivatives need a clearing house and hopefully, they’ll get just that in 2009.

Meanwhile, the credit markets are slowly improving. LIBOR rates are coming off their highs and commercial paper is flowing again, courtesy of the Fed.

I think it’s a good time to nibble – not bite – at your favorite blue-chip stocks and non-Treasury bonds, including investment-grade corporate bonds, intermediate tax-free municipals and TIPs, or Treasury Inflation Protected Securities.

I’d also bet against Treasury’s because long-term yields look awfully low this morning at 4.2% compared to the monster level of Treasury issuance coming our way over the next 12-18 months.

Source: October 28 Up-Crash Joins 1930s Bear Market Action in the Record Books